fiscal year ended May 31, 2017, our disclosure controls and procedures and internal control over financial reporting were not effective, due to material weaknesses in our internal control
over financial reporting related to inadequate segregation of duties over authorization, review and recording of transactions, as well as the financial reporting of such transactions. Any failure to maintain our controls or operation of these
controls, could harm our operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.
We may not be able to attract or retain a majority of independent directors.
Our board of directors may not be comprised of a majority of independent directors in the future. In the absence of a majority of independent
directors, our executive officers could establish policies and enter into transactions without independent review and approval thereof. If we are unable to attract and retain qualified, independent directors, the management of the business could be
compromised.
We currently do not have a majority of independent directors serving on our Board of Directors, which may afford less protection to
our stockholders than if our Board of Directors had a majority of independent directors, and our audit committee currently does not have a financial expert as defined by applicable SEC requirements. If we are unable to attract and retain
qualified, independent directors, the oversight of our business could be compromised.
As of the date of this annual report, a
majority of our directors did not satisfy the standards for independence as specified by the SEC and the listing standards of The Nasdaq Stock Market (the NASDAQ Rules) pursuant to which we evaluate director independence. If our Board of
Directors is not made up of a majority of independent directors, there may be a lower level of oversight on executive management, and our Board of Directors may be influenced by the concerns, issues or objectives of management, including
compensation and governance issues, to a greater extent than would occur with a majority of independent directors. As a result, the composition of our Board of Directors may afford less protection to our stockholders than if our Board of Directors
were composed of a majority of independent directors.
A lack of independent directors may also make it difficult to create board
committees meeting the requirements of our board committee charters and the NASDAQ Rules pursuant to which we evaluate director independence. Historically, we have strived to have an audit committee comprised of at least three independent directors
and other board committees comprised solely of independent directors. Currently, our audit committee has only one member, who is independent under the NASDAQ Rules and applicable SEC requirements, and our other board committees include certain
non-independent directors. Due to the lack of independent directors, it may be difficult to establish effective operating board committees comprised of independent members to oversee committee functions. This structure gives our executive officers
additional control over certain corporate governance issues, including compensation matters and audit issues for internal control and reporting purposes, with more limited oversight of our executive officers decisions and activities.
In addition, as previously reported in our Form 8-K filed August 14, 2019, the chairman of our audit committee resigned from the
Board of Directors effective August 12, 2019. As a result, as of the date of this annual report, our audit committee no longer had a financial expert as defined by applicable SEC requirements. We are currently attempting to identify
additional qualified individuals who are independent, and who have sufficient experience in finance and accounting to satisfy the definition of an audit committee financial expert. Until we have done so, we may be unable to establish or
maintain effective internal control over financial reporting, oversee the relationship with our independent auditing firm, adequately assess the impact on our financial reporting of any newly issued accounting rules or standards, adequately assess
our processes relating to our risk and control environment and evaluate our internal and independent audit processes. As a result, we may discover material weaknesses in our internal control over financial reporting and/or disclosure controls and
procedures, which we may not successfully remediate on a timely basis or at all. Any failure to remediate any future material weaknesses, or to implement required new or improved controls, could cause us to fail to meet our reporting obligations or
result in material misstatements in our financial statements.
As we attempt to identify new board members, we may find that
highly-qualified individuals are not available or willing to serve as directors or on a committee. There can be no assurance that we will be able to identify, recruit and ultimately secure the services of such individuals in a timely manner or at
all. If we are unable to attract and retain qualified individuals who possess the necessary technical, scientific and financial expertise and management and operational experience, our ability to successfully develop, test and commercialize our
product candidate and generate revenues may be negatively affected.
Our success depends substantially upon our ability to obtain and maintain
intellectual property protection relating to our product candidates and research technologies.
Due to evolving legal standards
relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the claim scope of patents, our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or
future patent applications is uncertain and involves complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. Thus, we cannot be
sure that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these patents will be held valid or enforceable by a court of law, will
provide us with any significant protection against competing products, or will afford us a commercial advantage over competitive products. If one or more products resulting from our product candidates is approved for sale by the FDA and we do not
have adequate intellectual property protection for those products, competitors could duplicate them for approval and sale in the United States without repeating the extensive testing required of us or our partners to obtain FDA approval.
Certain agreements and related license agreements require us to make significant milestone, royalty, and other payments, which will require additional
financing and, in the event we do commercialize our leronlimab product, decrease the revenues we may ultimately receive on sales. To the extent that such milestone, royalty and other payments are not timely made, the counterparties to such
agreements in certain cases have repurchase and termination rights thereunder with respect to leronlimab.
Under the Progenics
Purchase Agreement, the PDL License and the Lonza Agreement, we must pay to Progenics, AbbVie Inc. and Lonza significant milestone payments, license fees for system
know-how
technology and
royalties. In order to make the various milestone and license payments that are required, we will need to raise additional funds. In addition, our royalty obligations will reduce the economic benefits to us of any future sales if we do receive
regulatory approval and seek to commercialize leronlimab. To the extent that such milestone payments and royalties are not timely made, under each their respective agreements, Progenics has certain repurchase rights relating to the assets sold to
us, and AbbVie Inc. has certain termination rights relating to our license of leronlimab under the PDL License. For more information, see BusinessPRO 140 Acquisition and Licenses, as well as the Progenics Purchase Agreement, the
PDL License and the Lonza Agreement, each of which are filed, respectively, as Exhibits 2.1, 10.13 and 10.19 to this Form
10-K.
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