Item 1A.
Risk Factors
Risks
Related to our Business
There is substantial doubt
about our ability to continue as a going concern.
We are a development stage
company with no commercial products. Our primary product candidate is in the process of being developed, and will require
additional investment before it could potentially be commercialized. As a result, we have not generated any revenue from
operations since inception, and we have incurred substantial net losses to date. While as of May 14, 2019, we believe that
our current cash on hand will meet our anticipated cash requirements into the first quarter of fiscal 2020, depending upon
additional input from EU and US regulatory authorities, we do not expect to generate revenues from operations before we need
to raise additional capital. For example, on December 18, 2017, we voluntarily withdrew a 510(k) notification for AC5 Topical
Gel after receiving questions from the FDA for which an adequately comprehensive response could not be provided within the
FDA’s congressionally-mandated 90-day review period. While on October 1, 2018, we announced that we both completed the
necessary steps required to re-file our 510(k) submission for our AC5™ Topical Gel, and filed a 510(k) submission
during the third calendar quarter, the resubmission process required us to expend a minimum of $100,000 that we had not
previously anticipated spending.
During the third quarter of Fiscal 2019, we obtained additional
cash to continue operations and fund our planned future operations, which include research and development of our primary product
candidate, seeking regulatory approval for that product candidate, and pursuing its commercialization in the U.S., Europe and
other markets. Even with the additional funds received from the 2019 SPA there exists substantial doubt about our ability to continue
as a going concern.
We have incurred significant
losses since inception. We expect to continue to incur losses for the foreseeable future, and we may never generate revenue or
achieve or maintain profitability.
As noted above under the risk factor
entitled “
There is substantial doubt about our ability to continue as a going concern
,
”
we
are a development stage company with no commercial products. Consequently, we have incurred losses in each year since our inception
and we expect that losses will continue to be incurred in the foreseeable future in the operation of our business. To date, we
have financed our operations entirely through equity and debt investments by founders, other investors and third parties, and
we expect to continue to rely on these sources of funding, to the extent available in the foreseeable future. Losses from operations
have resulted principally from costs incurred in research and development programs and from general and administrative expenses,
including significant costs associated with establishing and maintaining intellectual property rights, significant legal and accounting
costs incurred in connection with both the closing of the Merger and complying with public company reporting and control obligations,
and personnel expenses. We have devoted much of our operations to date to the research and development of our core technology,
including selecting our initial product composition, conducting initial safety and other related tests, generating scale-up, reproducibility
and manufacturing and formulation methods, conducting our initial clinical trial for AC5, and developing and protecting the intellectual
property rights underlying our technology platform.
We expect to continue to incur significant
expenses and we anticipate that those expenses and losses may increase in the foreseeable future as we seek to:
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develop
our principal product candidate, AC5, and the underlying technology, including advancing applications and conducting biocompatibility
and other preclinical studies;
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raise capital
needed to fund our operations;
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build and enhance
investor relations and corporate communications capabilities;
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conduct additional
clinical trials relating to AC5 and any other product candidate we seek to develop;
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attempt to
gain regulatory approvals for product candidates;
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build relationships
with contract manufacturing partners, and invest in product and process development through such partners;
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maintain, expand
and protect our intellectual property portfolio;
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advance additional
product candidates and technologies through our research and development pipeline;
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seek to commercialize
selected product candidates which may require regulatory approval; and
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hire additional
regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.
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To become and remain profitable,
we must succeed in developing and eventually commercializing product candidates with significant market potential. This will require
us to be successful in a number of challenging activities, including successfully completing preclinical testing and clinical
trials of product candidates, obtaining regulatory approval for our product candidates and manufacturing, marketing and selling
any products for which we may obtain regulatory approval. We are only in the preliminary stages of many of those activities. We
may never succeed in those activities and may never generate operating revenues or achieve profitability. Even if we do generate
operating revenues sufficient to achieve profitability, we may not be able to sustain or increase profitability. Our failure to
generate operating revenues or become and remain profitable would impair our ability to raise capital, expand our business or
continue our operations, all of which would depress the price of our Common Stock. A further decline or lack of increase in the
prices of our Common Stock could cause our stockholders to lose all or a part of their investment in the Company.
We will need substantial additional
funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development
programs or commercialization efforts and could cause our business to fail.
Based on our current
operating expenses and working capital requirements, as of May 14, 2019, we believe that our current cash on hand will meet
our anticipated cash requirements into the first quarter of fiscal 2020. Notwithstanding that, depending upon additional input
from EU and US regulatory authorities, we do not expect to generate revenues from operations before we need to raise
additional capital. For example, on December 18, 2017, we voluntarily withdrew a 510(k) notification for AC5 Topical Gel
after receiving questions from the FDA for which an adequately comprehensive response could not be provided within
the FDA’s congressionally-mandated 90-day review period. While on October 1, 2018, we announced that we both completed
the necessary steps required to re-file our 510(k) submission for our AC5™ Topical Gel, and filed a 510(k)
submission during the third calendar quarter, the resubmission process required us to expend a minimum of $100,000 that we
had not anticipated spending and delayed the clearance of our 510(k) submission.
During the third quarter of Fiscal 2019, we obtained
additional cash to continue operations and fund our planned future operations, including the continuation of our ongoing
research and development efforts, the licensing or acquisition of new assets, and researching and developing any potential
patents, the related compounds and any further intellectual property that we may acquire. In addition, our plans may change
and/or we may use our capital resources more rapidly than we currently anticipate. We presently expect that our expenses will
increase in connection with our ongoing activities to support our business operations inclusive of regulatory applications
and approval of AC5 in the U.S. and Europe and therefore we will require additional funding. Our future capital requirements
will depend on many factors, including:
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the scope,
progress and results of our research and development collaborations;
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the extent
of potential direct or indirect grant funding for our research and development activities;
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the scope,
progress, results, costs, timing and outcomes of any regulatory process and clinical trials conducted for any of our product
candidates;
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the timing
of entering into, and the terms of, any collaboration agreements with third parties relating to any of our product candidates;
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the timing
of and the costs involved in obtaining regulatory approvals for our product candidates;
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the costs of
operating, expanding and enhancing our operations to support our clinical activities and, if our product candidates are approved,
commercialization activities;
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the costs of
maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
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the costs associated
with maintaining and expanding our product pipeline;
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the costs associated
with expanding our geographic focus;
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operating revenues,
if any, received from sales of our product candidates, if any are approved by the FDA or other applicable regulatory agencies;
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the cost associated
with being a public company, including obligations to regulatory agencies, and increased investor relations and corporate
communications expenses; and
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the costs of
additional general and administrative personnel, including accounting and finance, legal and human resources employees.
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We intend to obtain additional financing
for our business through public or private securities offerings, the incurrence of additional indebtedness, or some combination
of those sources. We have obtained research and development support through collaborative arrangements, such as the Project Agreement
that we entered into with the National University of Ireland Galway (“NUIG”) on May 28, 2015 and which concluded in
the third quarter of fiscal 2018, and we may continue to seek funding through additional collaborative arrangements with strategic
partners if we determine them to be necessary or appropriate, although these arrangements could require us to relinquish rights
to our technology or product candidates and could result in our receipt of only a portion of any revenues associated with the
partnered product. We cannot provide any assurance that additional financing from these sources will be available on favorable
terms, if at all.
In addition, we are bound
by certain contractual terms and obligations that may limit or otherwise impact our ability to raise additional funding in
the near-term including, but not limited to, provisions in the Securities Purchase Agreements that we entered into on
February 20, 2017 (“2017 SPA”) and June 28, 2018 (the “2018 SPA”) in connection with the registered
direct financings that closed on February 24, 2017 (“2017 Financing”) and July 2, 2018 (the “2018
Financing”), respectively, in each case as described in greater detail in the risk factor entitled “
The
terms of the 2017 Financing and 2018 Financing could impose additional challenges on our ability to raise
funding in the future
” below.
These restrictions and provisions
could make it more challenging for us to raise capital through the incurrence of additional debt or through future equity issuances.
Further, if we do raise capital through the sale of equity, or securities convertible into equity, the ownership of our then existing
stockholders would be diluted, which dilution could be significant depending on the price at which we may be able to sell our
securities. Also, if we raise additional capital through the incurrence of indebtedness, we may become subject to covenants restricting
our business activities, and the holders of debt instruments may have rights and privileges senior to those of our equity investors.
Finally, servicing the interest and principal repayment obligations under any debt facilities that we may enter into in the future
could divert funds that would otherwise be available to support research and development, clinical or commercialization activities.
If we are unable to obtain adequate
financing on a timely basis or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one
or more of our product development activities, which could cause our business to fail.
The terms of the 2017
Financing and 2018 Financing could impose additional challenges on our ability to raise funding in the
future.
In particular, both the 2017
SPA and 2018 SPA contain provisions that provide that until such time as the three lead investors in the 2017 Financing and
2018 Financing, respectively, collectively own less than 20% of the Series F Warrants or Series G Warrants as applicable,
purchased by them pursuant to the 2017 SPA or 2018 SPA, as applicable, the Company is prohibited from effecting or entering
into an agreement to effect any issuance by the Company or any of its subsidiaries of Common Stock or securities convertible,
exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction
including, but not limited to, an equity line of credit or “At-the-Market” financing facility.
As of May 14, 2019, none of the
lead investors for either the 2017 Financing or 2018 Financing have exercised or transferred any of their
Series F Warrants and Series G Warrants. As defined in the 2017 SPA and 2018 SPA, Variable Rate
Transaction means a transaction in which the Company (a) issues or sells any debt or equity securities that are convertible
into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a
conversion price, exercise price or exchange rate or other price that is based upon and/or varies with the trading prices of
or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or
(B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial
issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock (excluding adjustments under customary
anti-dilution provisions) or (b) enters into, or effects a transaction under, any agreement, including, but not limited to,
an equity line of credit, whereby the Company may issue securities at a future determined price. These provisions could make
our securities less attractive to investors and could limit our ability to obtain adequate financing on a timely basis or on
acceptable terms in the future, which could have significant harmful effects on our financial condition and business and
could include substantial limitations on our ability to continue to conduct operations.
Our short operating history
may hinder our ability to successfully meet our objectives.
We are a development stage company
subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets. Our
operations to date have been primarily limited to organizing and staffing, developing and securing our technology and undertaking
funding preclinical studies of our lead product candidates, and funding one clinical trial. We have not demonstrated our ability
to successfully complete large-scale, pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product
or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful product
commercialization.
Because of our limited operating
history, we have limited insight into trends that may emerge and affect our business, and errors may be made in developing an
approach to address those trends and the other challenges faced by development stage companies. Failure to adequately respond
to such trends and challenges could cause our business, results of operations and financial condition to suffer or fail. Further,
our limited operating history may make it difficult for our stockholders to make any predictions about our likelihood of future
success or viability.
If we are not able to attract
and retain qualified management and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a
significant degree on the skills, experience and efforts of the principal members of our scientific and management personnel.
These members include Terrence Norchi, MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other
key personnel could harm our business and might significantly delay or prevent the achievement of research, development or business
objectives. Further, our operation as a public company will require that we attract additional personnel to support the establishment
of appropriate financial reporting and internal controls systems. Competition for personnel is intense. We may not be able to
attract, retain and/or successfully integrate qualified scientific, financial and other management personnel, which could materially
harm our business.
If we fail to properly manage
any growth we may experience, our business could be adversely affected.
We anticipate increasing the scale
of our operations as we seek to develop our product candidates, including hiring and training additional personnel and establishing
appropriate systems for a company with larger operations. The management of any growth we may experience will depend, among other
things, upon our ability to develop and improve our operational, financial and management controls, reporting systems and procedures.
If we are unable to manage any growth effectively, our operations and financial condition could be adversely affected.
If we fail to maintain appropriate
internal controls in the future, we may not be able to report our financial results accurately, which may adversely affect our
stock price and our business.
Our efforts to comply with Section
404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over
financial reporting requires the commitment of significant financial and managerial resources. Internal control over financial
reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate
because of changed conditions, and fraud. If we are unable to maintain effective internal controls, we may not have adequate,
accurate or timely financial information, and we may be unable to meet our reporting obligations as a publicly traded company
or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial
statements, the imposition of sanctions, including the inability of registered broker dealers to make a market in our stock, or
investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting
requirements or comply with legal and regulatory requirements or by disclosure of an accounting, reporting or control issue could
adversely affect the trading price of our stock and our business.
We rely significantly on information
technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents,
could harm our ability to operate our business effectively.
We maintain sensitive data pertaining
to our Company on our computer networks, including information about our research and development activities, our intellectual
property and other proprietary business information. Our internal computer systems and those of third parties with which we contract
may be vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication
and electrical failures, despite the implementation of security measures. System failures, accidents or security breaches could
cause interruptions to our operations, including material disruption of our research and development activities, result in significant
data losses or theft of our intellectual property or proprietary business information, and could require substantial expenditures
to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications
or inappropriate disclosure of confidential or proprietary information, we could incur liability and our research and development
programs could be delayed, any of which would harm our business and operations.
The United Kingdom’s
vote to leave the European Union will have uncertain effects and could adversely affect us.
On June 23, 2016, eligible
members of the electorate in the United Kingdom (U.K.) decided by referendum to leave the E.U., commonly referred to as "Brexit".
On March 29, 2017, the U.K. formally notified the E.U. of its intention to withdraw pursuant to the Treaty on the E.U. The withdrawal
of the U.K. from the E.U. will take effect either when agreed upon or, in the absence of such an agreement, two years after the
U.K. provided its notice of withdrawal. It appears likely that this withdrawal will continue to involve a process of lengthy negotiations
between the U.K. and the E.U. member states to determine the terms of the withdrawal as well as the U.K.’s relationship
with the E.U. going forward. The effects of Brexit will depend on any agreements the U.K. makes to retain access to
the E.U. markets either during a transitional period or more permanently. Since a significant proportion of the regulatory framework
in the U.K. is derived from the E.U. directives and regulations, the referendum could materially change the regulatory regime
applicable to the approval of any product candidates in the U.K.
Further, Brexit could
adversely affect European and worldwide economic or market conditions and could contribute to instability in global financial
markets. Brexit is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the
U.K. determines which E.U. laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate,
could adversely affect our business and financial condition.
Risks
Related to the Development and Commercialization of our Product Candidates
Applications for regulatory
approval, clearance or certification for commercialization of our products may not be accepted, or if accepted, may be voluntarily
withdrawn or eventually rejected, and the future success of our business is significantly dependent on the success of our being
able to obtain regulatory approval, clearance or certification for our development stage candidates.
On July 17, 2017, we filed a 510(k)
notification with the FDA for our AC5™ Topical Gel. As previously announced on December 18, 2017, we voluntarily withdrew
the submission after receiving a communication from FDA near the end of the agency’s 90-day review period for a final decision
on 510(k) notifications. The communication contained questions for which a comprehensive response could not be provided in the
limited review time remaining on the submission. Given that it was not possible to respond in the time available, the Company
made the decision to withdraw the 510(k) notification, but noted at the time that it remained committed to continued collaboration
with FDA to appropriately address the outstanding questions and planned to submit a new 510(k) notification as soon as possible
following further discussion with the agency. On March 12, 2018, we announced that we were utilizing the FDA’s pre-submission
process to submit a proposed development strategy to the FDA to address the agency’s comments on our 510(k) notification.
As indicated in that March 12, 2018 announcement, we determined that providing additional data to the FDA would be the most expeditious
path forward for addressing the FDA’s comments, subject to any further comments that we may receive from the FDA.
On May 8, 2018, the Company announced
that it would initiate the previously disclosed study designed to address FDA comments on Arch’s previous 510(k) notification
for its AC5 ™ Topical Gel. The agency provided feedback via the pre-submission process and indicated that the proposed study
design was acceptable to support the Company’s future marketing application. On June 15, 2018, the Company further announced
that it completed enrollment for its human skin sensitization study and that applications of the Company’s AC5™ Topical
Gel were underway for all subjects.
On October 1, 2018 the Company announced
that it submitted a 510(k) notification to the FDA for its AC5 ™ Topical Gel (AC5) and received acknowledgement from the
FDA that the submission has been received. On December 17, 2018, we announced that the 510(k) premarket notification for
AC5 ™ Topical Gel has been reviewed and cleared by the FDA, allowing for the product to be marketed.
In addition to our
510(k) notification, we filed our first CE Mark application in Europe in December 2018, and we currently anticipate seeking regulatory
approval for expanded indications, and to pursue internal use commercial opportunities for other AC5-related products through
the premarket authorization process.
Our business plan is dependent
on the success of our development stage product candidates.
Our business is currently focused
almost entirely on the development and commercialization of our flagship development stage product candidates, known collectively
as the AC5 devices. Our reliance on the AC5 devices means that, if we are not able to obtain regulatory approvals and market acceptance
of at least one of those product candidates, our chances for success will be significantly reduced. We are also less likely to
withstand competitive pressures if any of our competitors develops and obtains regulatory approval or certification for similar
products faster than we can or that is otherwise more attractive to the market than the AC5 devices. Our current dependence on
the AC5 devices increases the risk that our business will fail if our development efforts for the AC5 devices experience delays
or other obstacles or are otherwise not successful.
The Chemistry, Manufacturing
and Control (“CMC”) process may be challenging.
Because of the complexity of our
lead product candidates, the CMC process, including but not limited to product scale-up activities and cGMP manufacturing for
human use, may be difficult to complete successfully within the parameters required by the FDA or its foreign counterparts. Peptide
formulation optimization is particularly challenging, and any delays could negatively impact our ability to conduct clinical trials
and our subsequent commercialization timeline. Furthermore, we have, and the third parties with whom we may establish relationships
may also have, limited experience with attempting to commercialize a self-assembling peptide as a medical device, which increases
the risks associated with completing the CMC process successfully, on time, or within the projected budget. Failure to complete
the CMC process successfully would impact our ability to complete product development activities, such as conducting clinical
trials and submitting applications for regulatory approval, which could affect the long-term viability of our business.
Our principal product candidates
are inherently risky because they are based on novel technologies.
We are subject to the risks of failure
inherent in the development of products based on new technologies. The novel nature of the AC5 devices creates significant challenges
with respect to product development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro
and in vivo testing, government regulation and approval, third-party reimbursement and market acceptance. Our failure to overcome
any one of those challenges could harm our operations, ability to complete additional clinical trials, and overall chances for
success.
If we are required or voluntarily
decide to change manufacturers for commercial or other reasons, the FDA and any other applicable regulatory bodies would also
require that we demonstrate structural and functional comparability between the same products manufactured by our current and
any new manufacturer and may require comparability studies to be performed before qualifying such new manufacturer.
As noted above, we are dependent
on third-party manufacturers, and this dependence exposes us to increased risks associated with delivery schedules, manufacturing
capability, quality control, quality assurance and costs. Our contract manufacturers may not perform as agreed. If we are required
to or voluntarily decide to find a new contract manufacturer, qualifying such new contract manufacturer may be expensive and time
consuming since, among other things, the FDA and any other applicable regulatory bodies would also require that we demonstrate
structural and functional comparability between the same products manufactured by our current and any new manufacturer and may
require comparability studies to be performed before qualifying such new manufacturer. This qualification process may affect product
availability, which may in turn adversely affect our business.
The manufacturing, production,
and sterilization methods that we intend to be utilized are detailed and complex and are a difficult process to manage.
We intend to utilize third-party
manufacturers to manufacture and sterilize our products. We believe that our proposed manufacturing methods make our choice of
manufacturer and sterilizer critical, as they must possess sufficient expertise in synthetic organic chemistry and device manufacturing.
If such manufacturers are unable to properly manufacture to product specifications or sterilize our products adequately, that
could severely limit our ability to market our products.
Compliance with governmental
regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect
the commercialization of our technology.
The Animal Welfare Act (“AWA”)
is the federal law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of
specific regulations that govern the humane handling, care, treatment and transportation of certain animals by producers and users
of research animals, most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping
conditions. Third parties with whom we contract are subject to registration, inspections and reporting requirements under the
AWA. Furthermore, some states have their own regulations, including general anti-cruelty legislation, which establish certain
standards in handling animals. Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If our contractors
or we fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties
and adverse publicity, and our operations could be adversely affected.
If the FDA or similar foreign
agencies or intermediaries impose requirements or an alternative product classification more onerous than we anticipate, our business
could be adversely affected.
The development plan for our lead
product candidates is based on our anticipation of pursuing the medical device regulatory pathway, and in February 2015 we received
confirmation from The British Standards Institution (“BSI”), a Notified Body (which is a private commercial entity
designated by the national government of a European Union (“EU”) member state as being competent to make independent
judgments about whether a medical device complies with applicable regulatory requirements) in the EU, confirmed that AC5 fulfills
the definition of a medical device within the EU and will be classified as such in consideration for CE mark designation. The
FDA and other regulatory authorities or related bodies separately determine the classification of AC5. The FDA also determined
our current product to be a medical device. If the FDA or similar foreign agencies or intermediaries deem our product to be a
member of a category other than a medical device, such as a drug or biologic, or impose additional requirements on our pre-clinical
and clinical development than we presently anticipate, financing needs would increase, the timeline for product approval would
lengthen, the program complexity and resource requirements world increase, and the probability of successfully commercializing
a product would decrease. Any or all of those circumstances would materially adversely affect our business.
We are subject to extensive
and dynamic medical device regulations outside of the United States, which may impede or hinder the approval or sale of our products
and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or
seizure of previously approved products.
In the European Union, we are required
to comply with applicable medical device directives, including the Medical Devices Directive, and obtain CE Marking in order to
market medical device products. The CE Mark is applied following approval from an independent notified body or declaration of
conformity. As is the case in the United States, the process of obtaining marketing approval or clearance from comparable agencies
in foreign countries for new products, or with respect to enhancements or modifications to existing products, could:
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take a significant
period of time;
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require the
expenditure of substantial resources;
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involve rigorous
pre-clinical and clinical testing;
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require extensive
post-marketing surveillance;
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require changes
to products; and
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result in limitations
on the indicated uses of products.
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In addition, exported devices are
subject to the regulatory requirements of each country to which the device is exported. Most foreign countries possess medical
devices regulations and require that they be applied to medical devices before they can be commercialized. There can be no assurance
that we will receive the required approvals for our products on a timely basis or that any approval will not be subsequently withdrawn
or conditioned upon extensive post-market study requirements.
Our global regulatory environment
is becoming increasingly stringent and unpredictable, which could increase the time, cost and complexity of obtaining regulatory
approvals for our products, as well as the clinical and regulatory costs of supporting those approvals. Several countries that
did not have regulatory requirements for medical devices have established such requirements in recent years and other countries
have expanded existing regulations. Certain regulators are exhibiting less flexibility by requiring, for example, the collection
of local preclinical and/or clinical data prior to approval. While harmonization of global regulations has been pursued, requirements
continue to differ significantly among countries. We expect the global regulatory environment to continue to evolve, which could
impact our ability to obtain future approvals for our products and increase the cost and time to obtain such approvals. By way
of example, the European Union regulatory bodies recently finalized a new Medical Device Regulation (“MDR”). The MDR
changes several aspects of the existing regulatory framework, such as clinical data requirements, and introduces new ones, such
as Unique Device Identification (“UDI”). We, and the Notified Bodies who will oversee compliance to the new MDR, face
uncertainties in the upcoming years as the MDR is rolled out and enforced, creating risks in several areas, including the CE Marking
process, data transparency and application review timetables.
If we are not able to secure
and maintain relationships with third parties that are capable of conducting clinical trials on our product candidates and support
our regulatory submissions, our product development efforts, and subsequent regulatory approvals could be adversely impacted.
Our management has limited experience
in conducting preclinical development activities and clinical trials. As a result, we have relied and will need to continue to
rely on third-party research institutions, organizations and clinical investigators to conduct our preclinical and clinical trials
and support our regulatory submissions. If we are unable to reach agreement with qualified research institutions, organizations
and clinical investigators on acceptable terms, or if any resulting agreement is terminated prior to the completion of our clinical
trials, then our product development efforts could be materially delayed or otherwise harmed. Further, our reliance on third parties
to conduct our clinical trials and support our regulatory submissions will provide us with less control over the timing and cost
of those trials, the ability to recruit suitable subjects to participate in the trials, and the timing, cost, and probability
of success for the regulatory submissions. Moreover, the FDA and other regulatory authorities require that we comply with standards,
commonly referred to as good clinical practices (“GCP”), for conducting, recording and reporting the results of our
preclinical development activities and our clinical trials, to assure that data and reported results are credible and accurate
and that the rights, safety and confidentiality of trial participants are protected. Additionally, both we and any third-party
contractor performing preclinical and clinical studies are subject to regulations governing the treatment of human and animal
subjects in performing those studies. Our reliance on third parties that we do not control does not relieve us of those responsibilities
and requirements. If those third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct
our preclinical development activities or clinical trials in accordance with regulatory requirements or stated protocols, we may
not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to,
or may be delayed in our efforts to, successfully commercialize our product candidates. Any of those circumstances would materially
harm our business and prospects.
Any clinical trials that are
planned or are conducted on our product candidates may not start or may fail.
Clinical trials are lengthy, complex
and extremely expensive processes with uncertain expenditures and results and frequent failures. While the Company has completed
its first clinical trial in Western Europe, clinical trials that are planned or which have or shall commence for any of our product
candidates could be delayed or fail for a number of reasons, including if:
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the FDA or
other regulatory authorities, or other relevant decision-making bodies do not grant permission to proceed or place a trial
on clinical hold due to safety concerns or other reasons;
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sufficient
suitable subjects do not enroll, enroll more slowly than anticipated or remain in our trials;
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we fail to
produce necessary amounts of product candidate;
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subjects experience
an unacceptable rate of efficacy of the product candidate;
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subjects experience
an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product candidate;
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any portion
of the trial or related studies produces negative or inconclusive results or other adverse events;
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reports from
preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;
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third-party
clinical investigators lose their licenses or permits necessary to perform our clinical trials, do not perform their clinical
trials on the anticipated schedule or consistent with the clinical trial protocol, GCP or regulatory requirements, or other
third parties do not perform data collection and analysis in a timely or accurate manner;
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inspections
of clinical trial sites by the FDA or an institutional review board (“IRB”) or other applicable regulatory authorities
find violations that require us to undertake corrective action, suspend or terminate one or more testing sites, or prohibit
us from using some or all of the resulting data in support of our marketing applications with the FDA or other applicable
agencies;
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manufacturing
facilities of our third-party manufacturers are ordered by the FDA or other government or regulatory authorities to temporarily
or permanently shut down due to violations of current good manufacturing practices (“cGMP”) or other applicable
requirements;
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third-party
contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for
violations of regulatory requirements;
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the FDA or
other regulatory authorities impose requirements on the design, structure or other features of the clinical trials for our
product candidates that we and/or our third-party contractors are unable to satisfy;
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one or more
IRB refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional subjects,
or withdraws its approval of the trial;
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the FDA or
other regulatory authorities seek the advice of an advisory committee of physician and patient representatives that may view
the risks of our product candidates as outweighing the benefits;
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the FDA or
other regulatory authorities require us to expand the size and scope of the clinical trials, which we may not be able to do;
or
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the FDA or
other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that attain regulatory
approval.
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Any delay or failure of one or more
of our clinical trials may occur at any stage of testing. Any such delay could cause our development costs to materially increase,
and any such failure could significantly impair our business plans, which would materially harm our financial condition and operations.
We cannot market and sell
any product candidate in the U.S. or in any other country or region if we fail to obtain the necessary regulatory approvals, clearances
or certifications from applicable government agencies.
We cannot sell our product candidates
in any country until regulatory agencies grant marketing approval, clearance or other required certification. The process of obtaining
such approval is lengthy, expensive and uncertain. If we are able to obtain such approvals for our lead product candidate or any
other product candidate we may pursue, which we may never be able to do, it would likely be a process that takes many years to
achieve.
To obtain marketing approvals in
the U.S. for our product candidates, we believe that we must, among other requirements, complete carefully controlled and well-designed
clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective for each indication for
which we seek approval. As described above, many factors could cause those trials to be delayed or to fail.
We believe that the pathway to marketing
approval in the U.S. for our lead product candidate for internal use will likely require the process of FDA Premarket Approval
(“PMA“) for the product, which is based on novel technologies and likely will be classified as a Class III medical
device. This approval pathway can be lengthy and expensive, and is estimated to take from one to three years or longer from the
time the PMA application is submitted to the FDA until approval is obtained, if approval can be obtained at all.
Similarly, to obtain approval to
market our product candidates outside of the U.S., we will need to submit clinical data concerning our product candidates to and
receive marketing approval or other required certifications from governmental or other agencies in those countries, which in certain
countries includes approval of the price we intend to charge for a product. For instance, in order to obtain the certification
needed to market our lead product candidate in the EU, we believe that we will need to obtain a CE mark for the product, which
entails scrutiny by applicable regulatory agencies and bears some similarity to the PMA process, including completion of one or
more successful clinical trials.
We may encounter delays or rejections
if changes occur in regulatory agency policies, if difficulties arise within regulatory or related agencies such as, for instance,
any delays in their review time, or if reports from preclinical and clinical testing on similar technology or products raise safety
and/or efficacy concerns during the period in which we develop a product candidate or during the period required for review of
any application for marketing approval or certification.
Any difficulties we encounter during
the approval or certification process for any of our product candidates would have a substantial adverse impact on our operations
and financial condition and could cause our business to fail.
We cannot guarantee that we
will be able to effectively market our product candidates.
A significant part of our success
depends on the various marketing strategies we plan to implement. Our business model has historically focused solely on product
development, and we have never attempted to commercialize any product. There can be no assurance as to the success of any such
marketing strategy that we develop or that we will be able to build a successful sales and marketing organization. If we cannot
effectively market those products we seek to commercialize directly, such products’ prospects will be harmed.
Any product for which we obtain
required regulatory approvals could be subject to post-approval regulation, and we may be subject to penalties if we fail to comply
with such post-approval requirements.
Any product for which we are able
to obtain marketing approval or other required certifications, and for which we are able to obtain approval of the manufacturing
processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to
continual requirements of and review by the FDA and comparable foreign regulatory authorities, including through periodic inspections.
These requirements include, without limitation, submissions of safety and other post-marketing information and reports, registration
requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents.
Maintaining compliance with any such regulations that may be applicable to us or our product candidates in the future would require
significant time, attention and expense. Even if marketing approval of a product is granted, the approval may be subject to limitations
on the indicated uses for which the product may be marketed or other conditions of approval, or may contain requirements for costly
and time consuming post-marketing approval testing and surveillance to monitor the safety or efficacy of the product. Discovery
after approval of previously unknown problems with any approved product candidate or related manufacturing processes, or failure
to comply with regulatory requirements, may result in consequences to us such as:
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restrictions
on the marketing or distribution of a product, including refusals to permit the import or export of the product;
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the requirement
to include warning labels on the products;
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withdrawal
or recall of the products from the market;
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refusal by
the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that we may submit;
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suspension
of any ongoing clinical trials;
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fines, restitution
or disgorgement of profits or revenue;
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suspension
or withdrawal of marketing approvals or certifications; or
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civil or criminal
penalties.
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If any of our product candidates
achieves required regulatory marketing approvals or certifications in the future, the subsequent occurrence of any such post-approval
consequences would materially adversely affect our business and operations.
Current or future legislation
may make it more difficult and costly for us to obtain marketing approval or other certifications of our product candidates.
In 2007, the Food and Drug Administration
Amendments Act of 2007 (“FDAAA”) was adopted. This legislation grants significant powers to the FDA, many of which
are aimed at assuring the safety of medical products after approval. For example, the FDAAA grants the FDA authority to impose
post-approval clinical study requirements, require safety-related changes to product labeling and require the adoption of complex
risk management plans. Pursuant to the FDAAA, the FDA may require that a new product be used only by physicians with specialized
training, only in specified health care settings, or only in conjunction with special patient testing and monitoring. The legislation
also includes requirements for disclosing clinical study results to the public through a clinical study registry, and renewed
requirements for conducting clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA,
companies that violate these laws are subject to substantial civil monetary penalties. The requirements and changes imposed by
the FDAAA, or any other new legislation, regulations or policies that grant the FDA or other regulatory agencies additional authority
that further complicates the process for obtaining marketing approval and/or further restricts or regulates post-marketing approval
activities, could make it more difficult and more costly for us to obtain and maintain approval of any of our product candidates.
Public perception of ethical
and social issues may limit or discourage the type of research we conduct.
Our clinical trials will involve
human subjects, and third parties with whom we contract also conduct research involving animal subjects. Governmental authorities
could, for public health or other purposes, limit the use of human or animal research or prohibit the practice of our technology.
Further, ethical and other concerns about our or our third-party contractors’ methods, particularly the use of human subjects
in clinical trials or the use of animal testing, could delay our research and preclinical and clinical trials, which would adversely
affect our business and financial condition.
Use of third parties to manufacture
our product candidates may increase the risk that preclinical development, clinical development and potential commercialization
of our product candidates could be delayed, prevented or impaired.
We have limited personnel with experience
in medical device development and manufacturing, do not own or operate manufacturing facilities, and generally lack the resources
and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We currently intend to outsource
all or most of the clinical and commercial manufacturing and packaging of our product candidates to third parties. However, we
have not established long-term agreements with any third-party manufacturers for the supply of any of our product candidates.
There are a limited number of manufacturers that operate under cGMP regulations and that are capable of and willing to manufacture
our lead product candidates utilizing the manufacturing methods that are required to produce our product candidates, and our product
candidates will compete with other product candidates for access to qualified manufacturing facilities. If we have difficulty
locating third-party manufacturers to develop our product candidates for preclinical and clinical work, then our product development
programs will experience delays and otherwise suffer. We may also be unable to enter into agreements for the commercial supply
of products with third-party manufacturers in the future, or may be unable to do so when needed or on acceptable terms. Any such
events could materially harm our business.
Reliance on third-party manufacturers
entails risks to our business, including without limitation:
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the failure
of the third-party to maintain regulatory compliance, quality assurance, and general expertise in advanced manufacturing techniques
and processes that may be necessary for the manufacture of our product candidates;
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limitations
on supply availability resulting from capacity and scheduling constraints of the third parties;
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failure of
the third-party manufacturers to meet the demand for the product candidate, either from future customers or for preclinical
or clinical trial needs;
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the possible
breach of the manufacturing agreement by the third-party; and
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the possible
termination or non-renewal of the agreement by the third-party at a time that is costly or inconvenient for us.
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The failure of any of our contract
manufacturers to maintain high manufacturing standards could result in harm to clinical trial, participants or patients using
the products. Such failure could also result in product liability claims, product recalls, product seizures or withdrawals, delays
or failures in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability. Further,
our contract manufacturers will be required to adhere to FDA and other applicable regulations relating to manufacturing practices.
Those regulations cover all aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates
and any products that we may commercialize in the future. The failure of our third-party manufacturers to comply with applicable
regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory
authorities to grant marketing approval or other required certifications of our product candidates, delays, suspension or withdrawal
of approvals, license revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions,
any of which could significantly and adversely affect our business, financial condition and operations.
Materials necessary to manufacture
our product candidates may not be available on time, on commercially reasonable terms, or at all, which may delay or otherwise
hinder the development and commercialization of those product candidates.
We will rely on the manufacturers
of our product candidates to purchase from third-party suppliers the materials necessary to produce the compounds for preclinical
and clinical studies, and may continue to rely on those suppliers for commercial distribution if we obtain marketing approval
or other required certifications for any of our product candidates. The materials to produce our products may not be available
when needed or on commercially reasonable terms, and the prices for such materials may be susceptible to fluctuations. We do not
have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently
do not have any agreements relating to the commercial production of any of these materials. If these materials cannot be obtained
for our preclinical and clinical studies, product testing and potential regulatory approval of our product candidates would be
delayed, which would significantly impact our ability to develop our product candidates and materially adversely affect our ability
to meet our objectives and obtain operations success.
We may not be successful in
maintaining or establishing collaborations, which could adversely affect our ability to develop and, if required regulatory approvals
are obtained, commercialize our product candidates.
As demonstrated by the Project Agreement
that we entered into with NUIG on May 28, 2015, we are interested in collaborating with physicians, patient advocacy groups, foundations,
government agencies, and/or other third parties to assist with the development of our product candidates. If required regulatory
approvals are obtained for any of our product candidates, then we may consider entering into additional collaboration arrangements
with medical technology, pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing
partners for the development, sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to
expand our current relationship with NUIG and/or seek additional collaborators in the future but are unable to reach agreements
with NUIG and/or such other collaborators, as applicable, then we may fail to meet our business objectives for the affected product
or program. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement, and we may
not be successful in our efforts, if any, to establish and implement additional collaborations or other alternative arrangements.
The terms of any collaboration or other arrangements that we establish may not be favorable to us, and the success of any such
collaboration will depend heavily on the efforts and activities of our collaborators. Any failure to engage successful collaborators
could cause delays in our product development and/or commercialization efforts, which could harm our financial condition and operational
results.
We compete with other pharmaceutical
and medical device companies, including companies that may develop products that make our product candidates less attractive or
obsolete.
The medical device, pharmaceutical
and biotechnology industries are highly competitive. If our product candidates become available for commercial sale, we will compete
in that competitive marketplace. There are several products on the market or in development that could be competitors with our
lead product candidates. Further, most of our competitors have greater resources or capabilities and greater experience in the
development, approval and commercialization of medical devices or other products than we do. We may not be able to compete successfully
against them. We also compete for funding with other companies in our industry that are focused on discovering and developing
novel improvements in surgical bleeding prevention.
We anticipate that competition in
our industry will increase. In addition, the healthcare industry is characterized by rapid technological change, resulting in
new product introductions and other technological advancements. Our competitors may develop and market products that render our
lead product candidate or any future product candidate we may seek to develop non-competitive or otherwise obsolete. Any such
circumstances could cause our operations to suffer.
If we fail to generate market
acceptance of our product candidates and establish programs to educate and train surgeons as to the distinctive characteristics
of our product candidates, we will not be able to generate revenues on our product candidates.
Acceptance in the marketplace of
our lead product candidates depends in part on our and our third-party contractors’ ability to establish programs for the
training of surgeons in the proper usage of those product candidates, which will require significant expenditure of resources.
Convincing surgeons to dedicate the time and energy necessary to properly train to use new products and techniques is challenging,
and we may not be successful in those efforts. If surgeons are not properly trained, they may ineffectively use our product candidates.
Such misuse could result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly,
even if our product candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain
market acceptance for those product candidates among certain select groups of the population and develop programs to effectively
train them to use those products. If we fail to do so, we will not be able to generate revenue from product sales and our business,
financial condition and results of operations will be adversely affected.
We face uncertainty related
to pricing, reimbursement and healthcare reform, which could reduce our potential revenues.
If our product candidates are approved
for commercialization, any sales will depend in part on the availability of direct or indirect coverage and reimbursement from
third-party payers such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance
organizations and other healthcare related organizations. If our product candidates obtain marketing approval, pricing and reimbursement
may be uncertain. Both the federal and state governments in the U.S. and foreign governments continue to propose and pass new
legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of healthcare. Further,
federal, state and foreign healthcare proposals and reforms could limit the prices that can be charged for the product candidates
that we may develop, which may limit our commercial opportunity. Adoption of our product candidates by the medical community may
be limited if doctors and hospitals do not receive adequate partial or full reimbursement for use of our products or procedures
in which our products are used, if any are commercialized. In some foreign jurisdictions, marketing approval or allowance could
be dependent upon pre-marketing price negotiations. As a result, any denial of private or government payer coverage or inadequate
reimbursement for procedures performed using our products, before or upon commercialization, could harm our business and reduce
our prospects for generating revenue.
In addition, the U.S. Congress recently
adopted legislation regarding health insurance. As a result of this new legislation, substantial changes could be made to the
current system for paying for healthcare in the U.S., including modifications to the existing system of private payers and government
programs, such as Medicare, Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare
insurance source, or some combination of those, as well as other changes. Restructuring the coverage of medical care in the U.S.
could impact reimbursement for medical devices such as our product candidates. If reimbursement for our approved product candidates,
if any, is substantially less than we expect, or rebate obligations associated with them are substantially increased, our business
could be materially and adversely impacted.
The use of our product candidates
in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance or otherwise
defend against any such claims.
We face an inherent risk of product
liability claims and currently have clinical trial liability coverage. We will need to obtain additional product liability insurance
coverage if and when we begin commercialization of any of our product candidates. If claims against us exceed any applicable insurance
coverage we may obtain, then our business could be adversely impacted. Regardless of whether we would be ultimately successful
in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources,
which could significantly harm our business.
Risks
Related to our Intellectual Property
If we are unable to obtain
and maintain protection for intellectual property rights that we own, seek, or have licensed from other parties, the value of
our technology and products will be adversely affected
Our success will depend in large
part on our ability to obtain and maintain protection in the U.S. and other countries for the intellectual property rights covering
or incorporated into our technology and products. The ability to obtain patents covering technology in the field of medical devices
generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain
and maintain patent protection relating to our technology or products. Many of our owned or licensed patent applications are pending.
Even if issued, patents issued or licensed to us may be challenged, narrowed, invalidated, held to be unenforceable or circumvented,
or determined not to cover our product candidates or our competitors’ products, which could limit our ability to stop competitors
from marketing identical or similar products. Because our patent portfolio includes certain patents and applications that are
in-licensed on a non-exclusive basis, other parties may be able to develop, manufacture, market and sell products with similar
features covered by the same patent rights and technologies, which in turn could significantly undercut the value of any of our
product candidates and adversely affect our business. Our licensed MIT European patent No. 1879606 was opposed; however, this
patent was maintained in amended form following an administrative hearing. Both parties have appealed this decision. A decision
is not expected before the end of 2019. If the Opponents prevail in the appeal, European Patent No. 1879606 will be fully or partially
invalidated, resulting in potential loss of rights. Our licensed MIT Japanese patent No. 5204646 was challenged in a Japanese
court. The Japanese Court issued a decision in our favor to maintain the patent in its entirety. The Opponent appealed the decision.
On October 30, 2018, the Japanese IP High Court issued a decision in our favor to maintain the patent in its entirely. The appeal
decision has now become final and binding. European patent No. 2581097 has been opposed. If the Opponents prevail, European
Patent No. 2581097 could be fully or partially invalidated, resulting in potential loss of rights. Further, we cannot be certain
that we were the first to make the inventions claimed in the patents we own or license, or that protection of the inventions set
forth in those patents was the first to be filed in the U.S. Third parties that have filed patents or patent applications covering
similar technologies or processes may challenge our claim of sole right to use the intellectual property covered by the patents
we own or exclusively license. Moreover, changes in applicable intellectual property laws or interpretations thereof in the U.S.
and other countries may diminish the value of our intellectual property rights or narrow the scope of our patent protection. Any
failure to obtain or maintain adequate protection for our intellectual property would materially harm our business, product development
programs and prospects. In addition, our proprietary information, trade secrets and know-how are important components of our intellectual
property rights. We seek to protect our proprietary information, trade secrets, know-how and confidential information, in part,
with confidentiality agreements with our employees, corporate partners, outside scientific collaborators, sponsored researchers,
consultants and other advisors. We also have invention or patent assignment agreements with our employees and certain consultants
and advisors. If our employees or consultants breach those agreements, we may not have adequate remedies for any of those breaches.
In addition, our proprietary information, trade secrets and know-how may otherwise become known to or be independently developed
by others. Enforcing a claim that a party illegally obtained and/or for which a party is using our proprietary information, trade
secrets and/or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside
the U.S. may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to defend,
enforce and/or determine the scope of our intellectual property rights, and failure to obtain or maintain protection thereof could
adversely affect our competitive business position and results of operations.
Many of our owned or licensed
patent applications are pending, and our patent portfolio includes certain patents and applications that are in-licensed on a
non-exclusive basis
As of April 9, 2019, we either own
or license from others a number of U.S. patents, U.S. patent applications, foreign patents and foreign patent applications.
Five patent portfolios assigned
to Arch Biosurgery, Inc. include a total of 33 patents and pending applications in a total of nine jurisdictions, including ten
patents and pending applications in the US. These portfolios cover self-assembling peptides and methods of use thereof and self-assembling
peptidomimetics and methods of use thereof, including five issued US patents (US 9,415,084; US 9,162,005; US 9,789,157; US 9,821,022;
and US 9,339,476) that expire between 2026 and 2034 (absent patent term extension) as well as twelve patents that have been either
allowed, issued or granted in foreign jurisdictions.
We have entered into a license agreement
with Massachusetts Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive
rights under two portfolios of patents and non-exclusive rights under another three portfolios of patents.
The two portfolios exclusively licensed
from MIT include a total of 22 patents and pending applications drawn to self-assembling peptides and methods of use thereof and
self-assembling peptidomimetics and methods of use thereof in a total of nine jurisdictions. The portfolios include five issued
US patents (US 9,511,113; US 9,084,837; US 10,137,166; US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent
patent term extension), as well as fourteen patents that have been either allowed, issued or granted in foreign jurisdictions.
The three portfolios non-exclusively
licensed from MIT include a number of US and foreign applications, including four issued US patents (US 7,449,180; US 7,846,891;
US 7,713,923; and US 8,901,084) that expire between 2021 and 2027 (absent patent term extension), as well as four patents that
have been either allowed, issued or granted in foreign jurisdictions.
If we lose certain intellectual
property rights owned by third parties and licensed to us, our business could be materially harmed.
We have entered into certain in-license
agreements with MIT and with certain other third parties, and may seek to enter into additional in-license agreements relating
to other intellectual property rights in the future. To the extent we and our product candidates rely heavily on any such in-licensed
intellectual property, we are subject to our and the counterparty’s compliance with the terms of such agreements in order
to maintain those rights. Presently, we, our lead product candidates and our business plans are dependent on the patent and other
intellectual property rights that are licensed to us under our license agreement with MIT. Although that agreement has a durational
term through the life of the licensed patents, it also imposes certain diligence, capital raising, and other obligations on us,
our breach of which could permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance
fees under that agreement, and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement.
Any failure by us to satisfy our obligations under our license agreement with MIT or any other dispute or other issue relating
to that agreement could cause us to lose some or all of our rights to use certain intellectual property that is material to our
business and our lead product candidates, which would materially harm our product development efforts and could cause our business
to fail.
If we infringe or are alleged
to infringe the intellectual property rights of third parties, our business and financial condition could suffer.
Our research, development and commercialization
activities, as well as any product candidates or products resulting from those activities, may infringe or be accused of infringing
a patent or other intellectual property under which we do not hold a license or other rights. Third parties may own or control
those patents or other rights in the U.S. or abroad, and could bring claims against us that would cause us to incur substantial
time, expense, and diversion of management attention. If a patent or other intellectual property infringement suit were brought
against us, we could be forced to stop or delay research, development, manufacturing or sales, if any, of the applicable product
or product candidate that is the subject of the suit. In order to avoid or settle potential claims with respect to any of the
patent or other intellectual property rights of third parties, we may choose or be required to seek a license from a third-party
and be required to pay license fees or royalties or both. Any such license may not be available on acceptable terms, or at all.
Even if we or our future collaborators were able to obtain a license, the rights granted to us or them could be non-exclusive,
which could result in our competitors gaining access to the same intellectual property rights and materially negatively affecting
the commercialization potential of our planned products. Ultimately, we could be prevented from commercializing one or more product
candidates, or be forced to cease some aspects of our business operations, if, as a result of actual or threatened infringement
claims, we are unable to enter into licenses on acceptable terms or at all or otherwise settle such claims. Further, if any such
claims were successful against us, we could be forced to pay substantial damages. Any of those results could significantly harm
our business, prospects and operations.
Risks
Related to Ownership of our Common Stock
There is not now, and there
may not ever be, an active market for our Common Stock, which trades in the over-the-counter market in low volumes and at volatile
prices.
There currently is a limited market
for our Common Stock. Although our Common Stock is quoted on the OTCQB, an over-the-counter quotation system, trading of our Common
Stock is extremely limited and sporadic and generally at very low volumes. Further, the price at which our Common Stock may trade
is volatile and we expect that it will continue to fluctuate significantly in response to various factors, many of which are beyond
our control. The stock market in general, and securities of small-cap companies driven by novel technologies in particular, has
experienced extreme price and volume fluctuations in recent years. Continued market fluctuations could result in further volatility
in the price at which our Common Stock may trade, which could cause its value to decline. To the extent we seek to raise capital
in the future through the issuance of equity, those efforts could be limited or hindered by low and/or volatile market prices
for our Common Stock.
We do not now meet the initial listing
standards of the Nasdaq Stock Market or any other national securities exchange. We presently anticipate that our Common Stock
will continue to be quoted on the OTCQB or another over-the-counter quotation system. In those venues, our stockholders may find
it difficult to obtain accurate quotations as to the market value of their shares of our Common Stock, and may find few buyers
to purchase their stock and few market makers to support its price.
A more active market for our Common
Stock may never develop. As a result, investors must bear the economic risk of holding their shares of our Common Stock for an
indefinite period of time.
Our Common Stock is a “penny
stock.”
The SEC has adopted regulations
that generally define “penny stock” as an equity security that has a market price of less than $5.00 per share, subject
to specific exemptions. The market price of our Common Stock is, and is expected to continue to be in the near term, less than
$5.00 per share and is therefore a “penny stock.” Brokers and dealers effecting transactions in “penny stock”
must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. Those rules may restrict the ability of brokers or dealers to
sell our Common Stock and may affect the ability of our stockholders to sell their shares of our Common Stock. In addition, if
our Common Stock continues to be quoted on the OTCQB as we expect, then our stockholders may find it difficult to obtain accurate
quotations for our stock, and may find few buyers to purchase our stock and few market makers to support its price.
If we issue additional
shares in the future, including issuances of shares upon exercise of the Series H Warrants, Series G Warrants, Series
F Warrants, Series E Warrants, and/or the Series D Warrants, our existing stockholders will be diluted.
Our articles of incorporation authorize the issuance of up
to 300,000,000 shares of Common Stock. In connection with the 2019 Financing that closed on May 14, 2019, we issued an
aggregate of 8,615,384 shares of our Common Stock, which equaled approximately 5% of the 164,961,849 shares of our Common
Stock that were issued and outstanding immediately prior to the commencement of the 2019 Financing. Upon the closing of the
2019 Financing, we also issued Series H Warrants to acquire up to an additional 8,615,384 shares of our Common Stock at an
initial exercise price of $0.40 per share. As of May 14, 2019 up to 8,615,384 shares may be acquired upon the exercise of
the Series H Warrants
.
In connection with
the 2018 Financing that closed on July 2, 2018, we issued an aggregate of 9,070,000 shares of our Common Stock, which equaled
approximately 6% of the 154,052,013 shares of our Common Stock that were issued and outstanding immediately prior to the
commencement of the 2018 Financing. Upon the closing of the 2018 Financing, we also issued Series G Warrants to acquire up to
an additional 6,802,500 shares of our Common Stock at an initial exercise price of $0.70 per share. As of May 14, 2019 up to
6,802,500 shares may be acquired upon the exercise of the Series G Warrants.
In connection with the 2017 Financing
that closed on February 24, 2017, we issued an aggregate of 10,166,664 shares of our Common Stock, which equaled approximately
7% of the 136,745,712 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the
2017 Financing. Upon the closing of the 2017 Financing, we also issued Series F Warrants to acquire up to an additional 5,591,664
shares of our Common Stock at an initial exercise price of $0.75 per share. As of May 14, 2019 up to 5,591,664 shares may be acquired
upon the exercise of the Series F Warrants.
In connection with the 2016 Private
Placement Financing that closed on May 26, 2016, we issued an aggregate of 9,418,334 shares of our Common Stock, which equaled
approximately 8% of the 118,592,070 shares of our Common Stock that were issued and outstanding immediately prior to the commencement
of the 2016 Private Placement Financing. Upon the closing of the 2016 Private Placement Financing, we also issued Series E Warrants
to acquire up to an additional 7,063,748 shares of our Common Stock at an initial exercise price of $0.4380 per share. As of May
14, 2019 up to 4,214,582 shares may be acquired upon the exercise of the Series E Warrants. Similarly, in connection with our private
placement financing that concluded on July 2, 2015 (“2015 Private Placement Financing”), we issued an aggregate of
14,390,754 shares of our Common Stock, which equaled approximately 18% of the 78,766,487 shares of our Common Stock that were
issued and outstanding immediately prior to the commencement of the 2015 Private Placement Financing. Upon the closing of the
2015 Private Placement Financing, we also issued Series D Warrants to acquire up to an additional 14,390,754 shares of our Common
Stock at an initial exercise price of $0.25 per share. As of May 14, 2019, up to 8,974,389 shares may be acquired upon the exercise
of the Series D Warrants.
Additionally, as of May 14, 2019,
19,998,356 shares of Common Stock were reserved for future issuance under the 2013 Plan, of which 15,579,998 shares are subject
to outstanding option awards granted under the 2013 Plan at exercise prices ranging from $0.17 to $0.50 per share and with a weighted
average exercise price of $0.40 per share and the numbers issuable under the 2013 Plan will increase by up to 3 million shares
on the first business day of each following fiscal year as set forth in the 2013 Plan. Finally, in addition to the Series G Warrants
granted in connection with the 2018 Financing, the Series F Warrants granted in connection with the 2017 Financing, the Series
E Warrants granted in connection with the 2016 Private Placement Financing, and the Series D Warrants granted in connection with
the 2015 Private Placement Financing, there are currently outstanding warrants to acquire up to 145,985 shares of our Common Stock.
Any future grants of options, warrants or other securities exercisable or convertible into our Common Stock, or the exercise or
conversion of such shares, and any sales of such shares in the market, could have an adverse effect on the market price of our
Common Stock.
In addition to capital raising activities,
other possible business and financial uses for our authorized Common Stock include, without limitation, future stock splits, acquiring
other companies, businesses or products in exchange for shares of Common Stock, issuing shares of our Common Stock to partners
in connection with strategic alliances, attracting and retaining employees by the issuance of additional securities under our
various equity compensation plans, compensating consultants by issuing shares or options to purchase shares of our Common Stock,
or other transactions and corporate purposes that our Board of Directors deems are in the Company’s best interest. By way
of example, on (i) August 9, 2016, we issued 225,000 shares of restricted stock and options to purchase up to an additional 375,000
shares of Common Stock at an exercise price of price of $0.72 per share in connection with our entrance into a consulting agreement
with Acorn Management Partners, LLC (“Acorn”) in consideration of the services to be provided under and in accordance
with the terms of such consulting agreement; and (ii) August 6, 2015, we issued an aggregate of 600,000 shares of restricted stock
in connection with our entrance into separate consulting agreements with two investor relations firms, Excelsior Global Advisors
LLC and Acorn, in each case in consideration of the services to be provided under and in accordance with the terms of each consulting
agreement. Additionally, shares of Common Stock could be used for anti-takeover purposes or to delay or prevent changes in control
or management of the Company. We cannot provide assurances that any issuances of Common Stock will be consummated on favorable
terms or at all, that they will enhance stockholder value, or that they will not adversely affect our business or the trading
price of our Common Stock. The issuance of any such shares will reduce the book value per share and may contribute to a reduction
in the market price of the outstanding shares of our Common Stock. If we issue any such additional shares, such issuance will
reduce the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change
of control of our corporation.
Future sales of our Common
Stock or rights to purchase Common Stock, or the perception that such sales could occur, could cause our stock price to fall.
As noted above under the
risk factor entitled, “
We will need substantial additional funding and may be unable to raise capital when
needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts and
could cause our business to fail
,” as of May 14, 2019 we believe that our current cash on hand will meet
our anticipated cash requirements into the first quarter of fiscal 2020. To raise capital, we may sell Common Stock, convertible
securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time.
Any such sales of our Common Stock by us or resale of our Common Stock by our existing stockholders could cause the market
price of our Common Stock to decline.
Financial Industry Regulatory
Authority (“FINRA”) sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny
stock” rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations
of these rules, FINRA has indicated its belief that there is a high probability that speculative low-priced securities will not
be suitable for at least some customers. These FINRA requirements make it more difficult for broker-dealers to recommend that
at least some of their customers buy our Common Stock, which may limit the ability of our stockholders to buy and sell our Common
Stock and could have an adverse effect on the market for our shares.
There may be additional risks
because we completed a reverse merger transaction in June 2013.
Additional risks may exist because
we completed a “reverse merger” transaction in June 2013. Securities analysts of major brokerage firms may not provide
coverage of the Company because there may be little incentive to brokerage firms to recommend the purchase of our Common Stock.
There may also be increased scrutiny by the SEC and other government agencies and holders of our securities due to the nature
of the transaction, as there has been increased focus on transactions such as the Merger in recent years. Further, since the Company
existed as a “shell company” under applicable rules of the SEC up until the closing of the Merger on June 26, 2013,
there will be certain restrictions and limitations on the Company going forward relating to any potential future issuances of
additional securities to raise funding and compliance with applicable SEC rules and regulations.
The Company may have material
liabilities that were not discovered before the closing of the Merger.
The Company may have material liabilities
that were not discovered before the consummation of the Merger. We could experience losses as a result of any such unasserted
liabilities that are eventually found to be incurred, which could materially harm our business and financial condition. Although
the Merger Agreement contained customary representations and warranties from the Company concerning its assets, liabilities, financial
condition and affairs, there may be limited or no recourse against the Company’s prior owners or principals in the event
those prove to be untrue. As a result, the stockholders of the Company bear risks relating to any such unknown or unasserted liabilities.
Certain of our directors and
officers own a significant percentage of our capital stock and are able to exercise significant influence over the Company.
Certain of our directors and executive
officers own a significant percentage of our outstanding capital stock. As of May 14, 2019, Dr. Terrence W. Norchi, our Chairman
of the Board, President and Chief Executive Officer, James R. Sulat, a director and Punit Dhillon, a director beneficially own
(as determined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) approximately 12% of our shares
of Common Stock. Accordingly, these members of our Board of Directors and management team have substantial voting power to approve
matters requiring stockholder approval, including without limitation the election of directors, and have significant influence
over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in control of our Company,
even if such a change in control would be beneficial to our stockholders.
The elimination of monetary
liability against our directors and officers under Nevada law and the existence of indemnification rights held by our directors,
officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers
and employees.
Our articles of incorporation eliminate
the personal liability of our directors and officers to our Company and our stockholders for damages for breach of fiduciary duty
as a director or officer to the extent permissible under Nevada law. Further, our amended and restated bylaws provide that we
are obligated to indemnify any of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain
conditions, advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its
final disposition. Those indemnification obligations could result in our Company incurring substantial expenditures to cover the
cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and
resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for
breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against
our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.
We are subject to the
reporting requirements of federal securities laws, compliance with which involves significant time, expense and expertise.
We are a public reporting company
in the U.S., and, accordingly, are subject to the information and reporting requirements of the Exchange Act and other federal
securities laws, including the obligations imposed by the Sarbanes-Oxley Act. The costs associated with preparing and filing annual,
quarterly and current reports, proxy statements and other information with the SEC in the ordinary course, as well as preparing
and filing audited financial statements, has caused, and could continue to cause, our operational expenses to remain at higher
levels or continue to increase.
Our present management team has
limited experience in managing public companies. It will be time consuming, difficult and costly for our management team to acquire
additional expertise and experience in operating a public company, and to develop and implement the additional internal controls
and reporting procedures required by Sarbanes-Oxley and other applicable securities laws.
Shares of our Common Stock
that have not been registered under federal securities laws are subject to resale restrictions imposed by Rule 144. In addition,
any shares of our Common Stock that are held by affiliates, including any that are registered, will be subject to the resale restrictions
of Rule 144.
Rule 144 imposes requirements on
us and our stockholders that must be met in order to effect a sale thereunder. As a result, it will be more difficult for us to
raise funding to support our operations through the sale of debt or equity securities unless we agree to register such securities
under the Securities Act, which could cause us to expend significant additional time and cash resources and which we presently
have no intention to pursue. Further, it may be more difficult for us to compensate our employees and consultants with our securities
instead of cash. We were a shell company prior to the closing of the Merger, and such status could also limit our use of our securities
to pay for any acquisitions we may seek to pursue in the future (although none are currently planned), and could cause the value
of our securities to decline. In addition, any shares held by affiliates, including shares received in any registered offering,
will be subject to certain additional requirements in order to effect a sale of such shares under Rule 144.
We do not intend to pay cash
dividends on our capital stock in the foreseeable future.
We have never declared or paid any
dividends on our shares and do not anticipate paying any such dividends in the foreseeable future. Any future payment of cash
dividends would depend on our financial condition, contractual restrictions, solvency tests imposed by applicable corporate laws,
results of operations, anticipated cash requirements and other factors and will be at the discretion of our Board of Directors.
We are at risk of securities
class action litigation that could result in substantial costs and divert management’s attention and resources.
In the past, securities class action
litigation has been brought against companies following periods of volatility of its securities in the marketplace, particularly
following a company’s initial public offering. Due to the volatility of our stock price, we could be the target of securities
litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and
resources.
FORWARD-LOOKING
STATEMENTS
This report contains forward-looking
statements that involve risks, uncertainties and assumptions. In some cases, you can identify forward-looking statements by terminology
such as “if,” “shall,” “may,” “might,” “will likely result,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,”
“intend,” “goal,” “objective,” “predict,” “potential” or “continue,”
or the negative of these terms or other comparable terminology. All statements made in this report on Form 10-Q other than statements
of historical fact are statements that could be deemed forward-looking statements, including without limitation statements about
our business plan, our plan of operations and our need to obtain future financing. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks in the section entitled “
Risk Factors
” and the risks set out below, any of which may cause our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation, risks
related to:
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·
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Our ability
to continue as a going concern;
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·
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Our ability
to obtain financing necessary to operate our business;
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Our limited
operating history;
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·
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The results
of our research and development activities, including uncertainties relating to the preclinical and clinical testing of our
product candidates;
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·
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The early stage
of our primary product candidate presently under development;
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·
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Our ability
to develop, obtain required approvals for and commercialize our product candidates;
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Our ability
to recruit and retain qualified personnel;
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Our ability
to obtain and maintain protection of our intellectual property;
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·
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Our dependence
on third-party manufacturers, suppliers, research organizations, academic institutions, testing laboratories and other potential
collaborators;
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The size and
growth of the potential markets for any of our approved product candidates, and the rate and degree of market acceptance of
any of our approved product candidates;
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Our ability
to successfully complete potential acquisitions and collaborative arrangements;
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Competition
in our industry;
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General economic
and business conditions; and
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Other factors
discussed under the section entitled “
Risk Factors
”.
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New risks emerge in our rapidly-changing
industry from time to time. As a result, it is not possible for our management to predict all risks, nor can we assess the impact
of all factors on our business. If any such risks or uncertainties materialize or such assumptions prove incorrect, our results
could differ materially from those expressed or implied by such forward-looking statements and assumptions. Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity or performance. These forward-looking statements speak only as of the date of this report on Form 10-Q. Except as required
by applicable law, we do not intend to update any of these forward-looking statements.