GENERAL
AND HISTORICAL
Company
Overview
Ohr
Pharmaceutical, Inc. (“we,” “us,” “our,” “Ohr,” or the “Company”)
is a pharmaceutical company which has been focused on the development of novel therapeutics and delivery technologies for the
treatment of ocular disease.
Recent
Developments
On
January 2, 2019, the Company, Ohr Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Ohr (“Merger
Sub”), and NeuBase Therapeutics, Inc., a Delaware corporation (“NeuBase”), entered into an Agreement and Plan
of Merger and Reorganization (the “Merger Agreement”), pursuant to which, among other things, subject to the satisfaction
or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into NeuBase, with NeuBase becoming
a wholly-owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”). The Merger is
intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended.
Subject
to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a)
each outstanding share of NeuBase common stock, including shares of NeuBase capital stock issued in, or issued upon conversion,
exercise or exchange of securities issued in, the NeuBase Financing (as defined below), will be converted into the right
to receive the number of shares of the Company’s common stock (the “Company Common Stock”) equal to the exchange
ratio described below; (b) each outstanding NeuBase stock option that has not previously been exercised prior to the Effective
Time will be assumed by the Company; and (c) the warrant to purchase shares of common stock of NeuBase will be converted into and
become a warrant to purchase shares of Company Common Stock.
Under
the exchange ratio formula in the Merger Agreement, as of immediately after the Merger, the former NeuBase
securityholders are expected to own approximately 80% (the “NeuBase Allocation Percentage”) of the aggregate
number of shares of the Company Common Stock issued and outstanding following the consummation of the Merger (the
“Post-Closing Shares”), and the stockholders of the Company as of immediately prior to the Merger are expected to
own approximately 20% (the “Ohr Allocation Percentage”) of the aggregate number of Post-Closing Shares. NeuBase
anticipates that it will issue and sell not less than $4,000,000 (the gross proceeds received by NeuBase, the “NeuBase
Proceeds”) of its equity securities (including securities convertible, exercisable or exchangeable into such equity
securities) prior to the Effective Time (the “NeuBase Financing”). The NeuBase Allocation Percentage
will be increased by 0.1% for every $100,000 that the NeuBase Proceeds exceeds $4,000,000, and the Ohr Allocation
Percentage will be decreased by 0.1% for every $100,000 that the NeuBase Proceeds exceeds $4,000,000.
Immediately
following the Effective Time, the name of the Company will be changed from “Ohr Pharmaceutical, Inc.” to
“NeuBase Therapeutics, Inc.” The Merger Agreement contemplates that, immediately after the Effective Time, the
Board of Directors of the Company will consist of five members, all of which will be designated by NeuBase. The executive
officers of the Company immediately after the Effective Time will be designated by NeuBase with NeuBase’s Chief
Executive Officer, Dietrich Stephan, being the Company’s Chief Executive Officer.
The
Merger Agreement contains customary representations, warranties and covenants made by the Company and NeuBase, including covenants
relating to obtaining the requisite approvals of the stockholders of the Company and NeuBase, indemnification of directors and
officers, and the Company and NeuBase signing the Merger Agreement and the closing of the Merger. Consummation
of the Merger is subject to certain closing conditions, including, among other things, approval by the stockholders of the Company
and NeuBase. The Merger Agreement contains certain termination rights for both the Company and NeuBase, and further provides that,
upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay NeuBase a termination
fee of $250,000 or NeuBase may be required to pay the Company a termination fee of $250,000.
In
accordance with the terms of the Merger Agreement, (i) the officers and directors of the Company have each entered into
a support agreement with the Company and NeuBase (the “Ohr Support Agreements”), and (ii) the officers, directors
and certain affiliated stockholders of NeuBase have each entered into a support agreement with NeuBase and the Company (the
“NeuBase Support Agreements,” together with the Ohr Support Agreements, the “Support Agreements”).
The Support Agreements place certain restrictions on the transfer of the shares of the Company and NeuBase held by the
respective signatories thereto and include covenants as to the voting of such shares in favor of approving the transactions
contemplated by the Merger Agreement and against any actions that could adversely affect the consummation of the
Merger.
Concurrently
with the execution of the Merger Agreement, the officers and directors of the Company, and the officers, directors and certain
stockholders of NeuBase, each entered into lock-up agreements (the “Lock-Up Agreements”) pursuant to which they have
agreed, among other things, not to sell or dispose of any shares of Company Common Stock which are or will be beneficially owned
by them at the closing of the Merger until the date that is 90 days after the Effective Time.
In connection with the Merger, on January 2, 2019, Ohr
entered into a Retention Bonus Agreement with Dr. Jason Slakter, Ohr’s Chief Executive Officer (the “Retention
Bonus Agreement”). Under the Retention Bonus Agreement, Dr. Slakter is eligible for a retention bonus payment of
$75,000 upon the earliest to occur of the following: (i) Dr. Slakter’s continued service with the Company in his
current position through and including the closing date of the Merger, or (ii) Dr. Slakter is involuntarily separated from
service without Cause (as such term is defined in the Retention Bonus Agreement) by the Company prior to the closing date of
the Merger. In the event Dr. Slakter voluntarily separates from service with the Company for any reason prior to the closing
of the Merger, Dr. Slakter will not receive any retention bonus payment and the Company will have no further obligation to
Dr. Slakter under the Retention Bonus Agreement.
Corporate
and Historical Information
We
are a Delaware corporation that was organized on August 4, 2009, as successor to BBM Holdings, Inc. (formerly Prime Resource,
Inc., which was organized March 29, 2002 as a Utah corporation) pursuant to a reincorporation merger. On August 4, 2009, we reincorporated
in Delaware as Ohr Pharmaceutical, Inc.
On
May 30, 2014, we completed the ophthalmology assets acquisition (the “SKS Acquisition”) of the privately held SKS
Ocular LLC and its affiliate, SKS Ocular 1 LLC (“SKS”). Simultaneous with the SKS Acquisition, Ohr completed a holding
company reorganization in which Ohr merged with a wholly owned subsidiary and a new parent corporation succeeded Ohr as a public
holding company under the same name. The business operations of Ohr did not change as a result of the reorganization. The new
holding company retained the name “Ohr Pharmaceutical, Inc.” Outstanding shares of the capital stock of the former
Ohr Pharmaceutical, Inc. were automatically converted, on a share for share basis, into identical shares of common stock of the
new holding company.
On
January 5, 2018, the Company reported topline data from the MAKO study which did not meet its primary efficacy endpoint. The MAKO
study evaluated the efficacy and safety of topically administered squalamine in combination with monthly Lucentis® injections
for the treatment of wet-AMD. Based on these results, we discontinued further development of squalamine and have been evaluating
strategic alternatives to maximize stockholder value.
As
part of its review of strategic alternatives, the Company formed a special committee of independent directors. The Board of Directors
and the special committee have engaged Roth Capital Markets, LLC, to advise them and management, and to assist in pursuing a range
of strategic alternatives including some of the following: license, divestiture, or other monetization of current assets; license
or acquisition of additional assets; merger, reverse merger, joint venture, partnership, or other business combination with another
entity, public or private. Neither the Board nor the special committee has set a definitive timetable for completion of this process.
There can be no assurance that this process will result in a strategic alternative of any kind. The Company does not intend to
disclose developments or provide updates on the progress or status of this process unless it deems further disclosure is appropriate
or required.
ASSETS
AND TECHNOLOGIES
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(a)
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SKS
SUSTAINED RELEASE OCULAR DRUG DELIVERY PLATFORM TECHNOLOGY
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The
SKS sustained release technology was designed to develop best-in-class drug formulations for ocular disease. The technology employs
micro fabrication techniques to create nano, micro and macroparticle drug formulations that can provide sustained and predictable
release of a therapeutic drug over a 3-6 month period. The versatility of this delivery technology makes it well suited to potentially
deliver hydrophilic or hydrophobic small molecules, as well as proteins with complex structures.
In
February 2017, the Company suspended activities at its lab facility in San Diego, CA where research regarding the SKS sustained
release technology had been conducted. However, the Company continues to explore strategies and pathways for applications of its
sustained release technology and potential avenues to monetize it.
As
part of the SKS acquisition, we acquired the exclusive rights to an animal model for dry-AMD whereby mice are immunized with a
carboxyethylpyrrole (“CEP”) which is bound to mouse serum albumin (“MSA”) as well as the rights to produce
and use CEP for research, clinical, and commercial applications. CEP is produced following the oxidation of docosahexaenoic acid,
which is abundant in the photoreceptor outer segments that are phagocytosed by the retinal pigment epithelium (“RPE”).
A number of CEP-adducted proteins have been identified in proteomic studies examining the composition of drusen and other subretinal
deposits found in the eyes of patients with dry-AMD. Studies have shown that immunization of CEP-MSA can lead to an ophthalmic
phenotype very similar to dry-AMD, including deposition of complement in the RPE, thickening of the Bruch’s membrane, upregulation
of inflammatory cytokines, and immune cell influx into the eye. Upon immunization with CEP, a marked decrease in contrast sensitivity
which precedes a loss of visual acuity, was observed, similar to what occurs in many patients with dry AMD. The Company has not
yet monetized this technology.
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(c)
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DEPYMED
JOINT VENTURE
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Ohr
also owns various other compounds in earlier stages of development, including the PTP1b inhibitor trodusquemine and related analogs.
On February 26, 2014, we entered into a Joint Venture Agreement and related agreements with Cold Spring Harbor Laboratory (“CSHL”)
pursuant to which a joint venture, DepYmed Inc. (“DepYmed”), was formed to further preclinical and clinical development
of Ohr’s trodusquemine and analogues as PTP1B inhibitors for oncology and rare disease indications. DepYmed licenses research
from CSHL and intellectual property from us. Ohr is a passive joint venturer in DepYmed.
Competitive
Factors
Competition
in General
Competition
in the area of biomedical and pharmaceutical research and development is intense and significantly depends on scientific and technological
factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize
technological developments and the ability to obtain regulatory approval for testing, manufacturing and marketing. Our competitors
include major pharmaceutical and specialized biotechnology companies, many of which have financial, technical and marketing resources
significantly greater than ours. In addition, many biotechnology companies have formed collaborations with large, established
companies to support research, development and commercialization of products that may be competitive. Academic institutions, governmental
agencies and other public and private research organizations are also conducting research activities and seeking patent protection
and may commercialize products on their own or through joint ventures. We can provide no assurance that developments by others
will not render our technology obsolete, noncompetitive or harm our strategy, that we will be able to keep pace with new technological
developments or that our technology will be able to supplant established products and methodologies in the therapeutic areas that
are targeted by us. The foregoing factors could have a material adverse effect on our business, prospects, financial condition
and results of operations. These companies, as well as academic institutions, governmental agencies and private research organizations,
also compete with us in recruiting and retaining highly qualified scientific personnel and consultants.
Competitive
Landscape in Sustained Release Drug Delivery
There
are a number of companies developing various forms of sustained release drug delivery platforms for ophthalmic applications. These
include, but are not limited to:
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GreyBug
with a biodegradable polymer microsphere/nanoparticle matrix system;
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Aerie
Pharmaceuticals with the PRINT® technology system for microparticle and nanoparticle
formulations;
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Kala
Pharmaceuticals with a mucus-penetrating particle (MPP) technology; and
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Ocular
Therapeutix with a proprietary hydrogel technology.
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All
of these programs are in a more advanced stage than us. Each of these may prove to be effective means to deliver drugs in a sustained
manner and we cannot assure that none of them will get to market before us or that our technology will be a better drug delivery
approach.
Corporate
Strategy
The
Board of Directors and the special committee have engaged Roth Capital Markets, LLC, to advise them and management, and to assist
in pursuing a range of strategic alternatives including some of the following: license, divestiture, or other monetization of
current assets; license or acquisition of additional assets; merger, reverse merger, joint venture, partnership, or other business
combination with another entity, public or private. Neither the Board nor the special committee has set a definitive timetable
for completion of this process. There can be no assurance that this process will result in a strategic alternative of any kind.
The Company does not intend to disclose developments or provide updates on the progress or status of this process unless it deems
further disclosure is appropriate or required.
Patents
and Other Proprietary Rights
Patents
and other proprietary rights are important to our business. It is our policy to seek patent protection for our assets, and also
to rely upon trade secrets, know-how and licensing opportunities to develop and maintain our competitive position.
We
generally seek worldwide patent protection for products and have foreign patent rights corresponding to most of our U.S. patents.
We currently own or have exclusively licensed several issued U.S. patents and non-US patents and have additional U.S. and non-
U.S.
pending patent applications.
Under
an agreement with Akina, Inc (“Akina”), we license patents and patent applications, with an estimated expiration date
of September 2031, relating to nano/micro/macro particle fabrication technology for sustained release of molecules. The worldwide,
exclusive, sub-licensable license was granted to SKS (now Ohr) for use in developing ocular products. Under the agreement with
Akina, the parties collaborated on three nano/micro particle products. Additional patent applications have been filed that
expand on this platform technology.
Pursuant
to the terms of the Uruguay Round Agreements Act, the term of a U.S. patent is 20 years and is measured from the effective
date that the patent application was filed rather than the prior calculation of term which was 17 years from the date that
the patent issued. Patent term may be extended beyond the 20-year period by patent term adjustment when the U.S. Patent
Office fails to examine the patent application in a timely manner before issuance of the patent. We take advantage of patent
term adjustment whenever available and expect to seek patent term extensions following marketing approval. Under the Drug
Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) and the Generic Animal Drug
and Patent Term Restoration Act of 1988 (the “GADPTR Act”), a patent that claims a product, use or method of
manufacture covering a drug may be extended for up to five years to compensate the patent holder for a portion of the time
required for FDA review. Our issued U.S. patents and applications related to the SKS technology
have expiration dates ranging from April 2027 to September 2033.
While
we file and prosecute patent applications to protect our inventions, our pending patent applications might not result in the issuance
of patents or our issued patents might not provide competitive advantages. Also, our patent protection might not prevent others
from developing competitive products using related or other technology.
In
addition to seeking intellectual property protection via patents and licenses, we also rely upon trade secrets, know-how and technological
innovation, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees.
The
scope, enforceability and effective term of issued patents can be highly uncertain and often involve complex legal and factual
questions. No consistent policy has emerged regarding the breadth of claims in pharmaceutical patents, so that even issued patents
might later be modified or revoked by the relevant patent authorities or courts. Moreover, the issuance of a patent in one country
does not assure the issuance of a patent with a similar claim scope in another country, and claim interpretation and infringement
laws vary among countries, so we are unable to predict the extent of patent protection in any country. The patents we obtain and
the unpatented proprietary technology we hold might not afford us significant commercial protection. Additional information regarding
risks associated with our patents and other proprietary rights that affect our business is contained under the heading “Intellectual
property litigation is increasingly common and increasingly expensive and may result in restrictions on our business and substantial
costs, even if we prevail” and under the heading “Risk Factors”.
There
are no contested proceedings and/or third-party claims over any of our patents or patent applications.
NUMBER
OF PERSONS EMPLOYED
At
September 30, 2018, we had three full-time employees. In addition, we use consultants on an as needed basis, to provide a cost
efficient alternative to a larger infrastructure to support the Company.
GOVERNMENT
COMPLIANCE
The
Drug Development Process
Regulation
by government authorities in the United States and foreign countries is a significant factor in the research, development, manufacture,
and marketing of product candidates. Any product candidates will require regulatory approval before they can be commercialized.
In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other premarket approval
requirements by the FDA and foreign authorities. Many aspects of the structure and substance of the FDA and foreign pharmaceutical
regulatory practices have been reformed during recent years, and continued reform is under consideration in a number of jurisdictions.
The ultimate outcome and impact of such reforms and potential reforms cannot be predicted.
The
activities required before a product candidate may be marketed in the United States begin with preclinical tests. Preclinical
tests include laboratory evaluations and animal studies to assess the potential safety and efficacy of the product candidate and
its formulations. The results of these studies must be submitted to the FDA as part of an IND, which must be reviewed by the FDA
before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase 1, trials are
conducted with a small number of subjects to determine the early safety profile of the product candidate. In Phase 2, clinical
trials are conducted with subjects afflicted with a specific disease or disorder to provide enough data to evaluate the preliminary
safety, tolerability, and efficacy of the product candidate. In Phase 3, large-scale clinical trials are conducted with patients
afflicted with the specific disease or disorder in order to provide enough data to understand the efficacy and safety profile
of the product candidate, as required by the FDA. The results of the preclinical and clinical testing of a therapeutic product
candidate are then submitted to the FDA in the form of an NDA for evaluation to determine whether the product candidate may be
approved for commercial sale. In responding to an NDA, the FDA may grant marketing approval, request additional information, or
deny the application.
Any
approval required by the FDA for any product candidates may not be obtained on a timely basis, or at all. The designation of a
clinical trial as being of a particular phase is not necessarily indicative that such a trial will be sufficient to satisfy the
parameters of a particular phase, and a clinical trial may contain elements of more than one phase notwithstanding the designation
of the trial as being of a particular phase. The results of preclinical studies or early stage clinical trials may not predict
long-term safety or efficacy of compounds when they are tested or used more broadly in humans.
Approval
of a product candidate by comparable regulatory authorities in foreign countries is generally required prior to commencement of
marketing of the product in those countries. The approval procedure varies among countries and may involve additional testing,
and the time required to obtain such approval may differ from that required for FDA approval.
Other
Regulations
Various
federal, state and local laws, regulations, and recommendations relating to safe working conditions, laboratory practices,
the experimental use of animals, the environment and the purchase, storage, movement, import, export, use, and disposal of
hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in
connection with research activities. They include, among others, the U.S. Atomic Energy Act, the Clean
Air Act, the Clean Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, and Resources Conservation and Recovery Act, national restrictions on technology transfer, import,
export, and customs regulations, and other present and possible future local, state, or federal regulation. The compliance
with these and other laws, regulations and recommendations can be time consuming and involve substantial costs. In addition,
the extent of governmental regulation which might result from future legislation or administrative action cannot be
accurately predicted and may have a material adverse effect on our business, financial condition, results of operations and
prospects.
AVAILABLE
INFORMATION
The
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto,
are filed with the SEC. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and files or furnishes reports, proxy statements and other information with the SEC. Such reports
and other information filed by the Company with the SEC are available free of charge on the Company’s website at
http://ir.ohrpharmaceutical.com/all-sec-filings
,
as soon as reasonably practicable after we have electronically filed with, or furnished to, the SEC. The public may read and copy
any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC at
www.sec.gov
. The contents of these websites are not incorporated into this filing.
Further, the Company’s references to website URLs are intended to be inactive textual references only.
You
should carefully consider the following factors which may affect future results of operations. If any of the adverse events described
below actually occur, our business, financial condition and operating results could be materially adversely affected and you may
lose part or all of the value of your investment. If you choose to invest in our securities, you should be able to bear a complete
loss of your investment.
Risks
Relating to Our Financial Position and Need for Capital
Our
business was substantially dependent on the success of squalamine, which failed to meet its primary efficacy endpoint in the MAKO
Study. Unless we execute on a strategic alternative, we may be required to liquidate, dissolve, or otherwise wind down our operations.
Until January
5, 2018, squalamine for the treatment of wet-AMD was our lead product candidate. On January 5, 2018, we announced topline results
from our MAKO Study which did not meet its primary efficacy endpoint. Based on these results, we have discontinued further development
of squalimine and have been evaluating strategic alternatives to maximize stockholder value. We have no assurance that we will
be able to execute on a strategic alternative and may be required to liquidate, dissolve or otherwise wind down our operations
if we are unable to do so.
We
may not be able to monetize the non-squalamine assets, including the SKS sustained release ocular drug delivery platform technology,
CEP assets, or our interest in the Depymed joint venture.
We
may not be able to monetize any or some of the non-squalamine assets, including the SKS sustained release ocular drug delivery
platform technology, the CEP assets, or our interest in the Depymed joint venture. In that event, we may be constrained to write
off those assets, in whole or in part. At September 30, 2018, we significantly wrote down the value of our SKS sustained release
asset and there can be no assurance that we will not be required to further write down or write off the asset entirely in the
future.
We
are subject to securities class action litigation and derivative shareholder litigation.
If
an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company.
As
a result of our announcement of negative results from the MAKO Study, our stock price declined substantially. On February 14,
2018, a securities class action litigation was brought against the Company, Dr. Jason Slakter, Sam Backenroth, and Irach Tarapowela
in federal district court in the Southern District of New York. An amended securities class action complaint was filed on August
7, 2018, by lead plaintiffs George Lehman and Insured Benefit Plans, Inc. We dispute these claims and intend to defend the matter
vigorously.
On September 17, 2018, we filed a motion to dismiss the complaint. On November
13, 2018, plaintiffs filed a motion to strike exhibits appended to the motion to dismiss. A decision on the motion to strike is
pending, and the motion to dismiss will then be fully briefed based on a schedule to be determined by the court.
This
litigation could result in substantial costs and a diversion of management’s resources and attention, which could harm our
business and the value of our common stock.
On
May 3, 2018, plaintiff Adele J. Barke, derivatively on behalf of the Company, commenced an action in Supreme Court, State of New
York against Michael Ferguson, Orin Hirschman, Thomas M. Riedhammer, June Almenoff and Jason Slakter alleging that the action
was brought in the right and for the benefit of Ohr seeking to remedy their “breach of fiduciary duties, corporate waste
and unjust enrichment that occurred between June 24, 2014 and the present.” It does not quantify any alleged damages. The
Company and the individuals dispute these claims and intend to defend the matter vigorously. Such litigation is currently stayed
pursuant to a stipulation by the parties, which has been so ordered by the court, but that
status could change. Such litigation could result in substantial costs and a diversion of management’s resources and attention,
which could harm our business and the value of our common stock.
In
September 2018, plaintiff John Tomson, derivatively and on behalf of the Company, commenced an action against Michael Ferguson,
Sam Backenroth, Irach Taraporewala, Orin Hirschman, Thomas M. Riedhammer, June Almenoff and Jason Slakter in the US District Court
for the Southern District of New York alleging that the action was brought in the right and for the benefit of Ohr seeking to
remedy their various breaches of fiduciary duties, corporate waste and unjust enrichment that occurred between April 4, 2014 through
January 4, 2018. Thereafter, the complaint largely summarized the allegations of the amended complaint filed in the securities
class action described above. It does not quantify alleged damages. The Company and the individuals dispute these claims and intend
to defend the matter vigorously.
Such litigation is currently stayed pursuant to a stipulation
by the parties, which has been so ordered by the court, but that status could change. This litigation could result in substantial
costs and a diversion of management’s resources and attention, which could harm the Company’s business and the value
of the Company’s common stock. The complaint has not yet been served.
If
we fail to continue to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist our common stock,
the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
On
February 20, 2018, we received a written notice (the “First Notice”) from NASDAQ Stock Market LLC (“Nasdaq”)
that the Company had not been in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2)
for a period of 30 consecutive business days. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum
closing bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum closing
bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.
In
accordance with Nasdaq’s Listing Rule 5810(c)(3)(A), the Company had a period of 180 calendar days, or until August 20,
2018, to regain compliance with the minimum closing bid price requirement. The Company did not regain compliance with the minimum
closing bid price requirement by August 20, 2018. The Company was notified by Nasdaq that it might be afforded a second 180 calendar
period to regain compliance with the minimum closing bid price requirement under certain circumstances. As a result, the Company
applied for an extension of the cure period, as permitted under the notification. In order to cure the deficiency the Company
indicated that, to that extent necessary, it planned to seek approval for a reverse stock split in order to meet the minimum closing
bid price requirement at a special meeting of the Company’s stockholders which the Company will hold prior to the expiration
of the second 180 day period and effectuate the reverse stock split immediately thereafter. On August 21, 2018, we received a
written notice from Nasdaq that the Company had been granted an additional 180 calendar days, or until February 19, 2019, to regain
compliance with the minimum $1.00 bid price per share requirement of the Listing Rules of Nasdaq (“Second Notice”).
According
to the Second Notice, if at any time before February 19, 2019, the bid price of the Company’s common stock closes at or
above $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written notification that the Company
has achieved compliance with the minimum closing bid price requirement. If, however, compliance with the minimum closing bid price
requirement cannot be demonstrated by February 19, 2018, Nasdaq will provide written notification that the Company’s common
stock will be delisted. At that time, the Company may appeal Nasdaq’s determination to a Hearings Panel. The Company has
filed a definitive proxy statement in connection with special meeting of stockholders to be held on January 18, 2019, at which
the Company’s stockholders will vote to approve an amendment to the Company’s certificate of incorporation to effect
a reverse stock split of the Company’s common stock at a split ratio of not less than one-for-three and not more than one-for-twenty,
to be effective, if at all, at such time as the Company’s Board of Directors shall determine in its sole discretion. We
cannot provide any assurances that the stockholders will approve the reverse stock split at the special meeting.
If
the stockholders do not approve the reverse stock split, and if we were unable to maintain compliance with the $1.00 minimum bid
price requirement and our common stock were delisted from Nasdaq, trading of our common stock would most likely take place on
an over-the-counter market established for unlisted securities, such as the OTCQB or the Pink Market maintained by OTC Markets
Group Inc. An investor would likely find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common
stock on an over-the-counter market, and many investors would likely not buy or sell our common stock due to difficulty in accessing
over-the-counter markets, policies preventing them from trading in securities not listed on a national exchange or other reasons.
In addition, as a delisted security, our common stock would be subject to SEC rules as a “penny stock,” which impose
additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher
cost per trade to the investor of penny stocks due to factors such as broker commissions generally representing a higher percentage
of the price of a penny stock than of a higher-priced stock, would further limit the ability of investors to trade in our common
stock. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock,
causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results
of operations, including our ability to attract and retain qualified employees, to raise capital, and execute on a strategic alternative.
There
is no certainty that we will be able to execute on any strategic alternatives to maximize stockholder value. If we are unable
to execute such strategic alternatives, we may be forced to cease operations and liquidate.
Based
on the results of the MAKO study, we began a comprehensive review of strategic alternatives to maximize shareholder value. As
part of its review of strategic alternatives, the Company formed a special committee of independent directors. The Board of Directors
and the special committee have retained Roth Capital Markets, LLC, to advise and assist us in this review. The strategic alternatives
that we are exploring, may include some or all of the following: license, divestiture, or monetization of current assets; license
or acquisition of additional assets; merger, reverse merger, joint venture, partnership, or other business combination with another
entity, public or private. There can be no assurance that this review process will result in a transaction, or that if a transaction
does occur, that it will successfully enhance stockholder value. Our expected cash position, net of all liabilities, limits our
attractiveness to potential merger candidates and the value that we may receive in such merger, joint venture, partnership, or
other business combination scenarios may be less than the current market value of the Company. If we are unable to execute on
a strategic alternative, we may be forced to liquidate.
The
process of exploring strategic alternatives could adversely impact our business, financial condition and results of
operations. We could incur substantial expenses associated with identifying, evaluating, and executing on potential strategic
alternatives, including those related to equity compensation, severance pay and insurance, legal, accounting and financial
advisory fees. In addition, the process may be time consuming and disruptive to our business operations, could divert the
attention of management and the Board from our business, could negatively impact our ability to attract, retain and motivate
key employees, and could expose us to potential litigation in connection with this process or any resulting transaction.
Further, speculation regarding any developments related to the review and execution of strategic alternatives and perceived
uncertainties related to our future could cause our stock price to fluctuate significantly.
We
have incurred significant losses and anticipate that we will incur additional losses. We might never achieve or sustain revenues.
We
have experienced significant net losses since our inception. As of September 30, 2018, we had an accumulated deficit of approximately
$121.3 million. We expect to continue to incur net losses.
The
report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue
as a going concern. Such “going concern” opinion could impair our ability to obtain financing.
Our
auditors, MaloneBailey, LLP, have indicated in their report on the Company’s financial statements for the fiscal year ended
September 30, 2018 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to
our recurring losses from operations. A “going concern” opinion could impair our ability to finance our operations
through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend
upon the availability and terms of future funding. If we are unable to achieve this goal, our business would be jeopardized and
the Company may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
We
depend upon key officers and consultants in a competitive market for skilled personnel. If we are unable to retain key personnel,
it could adversely affect our business. The negative result of the MAKO study and our limited financial resources may make us
less successful at retaining employees.
We
are highly dependent upon the principal members of our management team, especially our Chief Executive Officer, Dr. Jason Slakter,
and Vice President of Business Development and Chief Financial Officer, Sam Backenroth, as well as our directors and key consultants.
A loss of any of these personnel may have a material adverse effect on aspects of our business.
The
announcement that we have commenced a review of strategic alternatives may create uncertainty about our prospects as an independent
business entity, and make it more difficult to retain qualified executive and other key personnel. The review process may also
be costly, time-consuming, divert the attention of management or result in changes in our management team or our board of directors,
all of which could materially and adversely affect our business. We may be required to enter into retention agreements with our
key employees to ensure execution of a strategic transaction, once such transaction is identified. In addition, our stock price
may experience periods of increased volatility as a result of these activities or related rumors and speculation.
Risks
Related to Our Business and Industry
We
currently do not have, and may never have, any products that generate revenues.
We
are a development stage pharmaceutical company and currently do not have, and may never have, any products that generate revenues.
Investment in pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures
and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile,
gain regulatory approval and become commercially viable. To date, we have not generated any product revenues.
We
are highly dependent upon our ability to raise additional capital. Raising additional capital may cause dilution to our stockholders,
restrict our operations or require us to relinquish rights to our technologies.
Until
such time, if ever, as we can generate substantial product revenues, we may finance our cash needs through a combination of equity
offerings, debt financings, and partnerships. We do not have any committed external source of funds. To the extent that we raise
additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will
be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’
rights as holders of our common stock. Debt financing and preferred equity financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions.
If
we raise capital through a partnership, we may have to relinquish rights to our technologies or grant licenses on terms that may
not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required
to cease operations and liquidate.
We
are highly dependent upon our ability to enter into agreements with collaborative partners to develop, commercialize, and market
any products.
We
are dependent on strategic partnerships to develop technologies and products. To date, we have not entered into any strategic
partnerships for any products. We face significant competition in seeking appropriate strategic partners, and these strategic
partnerships can be intricate and time consuming to negotiate and document. We may not be able to negotiate strategic partnerships
on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships because
of the numerous risks and uncertainties associated with establishing strategic partnerships.
While
our strategy is to partner with an appropriate party, no assurance can be given that any third party would be interested in partnering
with us. We currently lack the resources to conduct clinical trials, to manufacture any product candidates on a large scale, and
we have no sales, marketing or distribution capabilities. In the event we are not able to enter into a collaborative agreement
with a partner or partners, on commercially reasonable terms, or at all, we may be unable to conduct clinical trials, or to develop
products which would have a material adverse effect upon our business, prospects, financial condition, and results of operations.
Even
if we succeed in securing a partner, the partner collaborators may fail to develop or effectively commercialize products using
our technologies. Such partnership would pose a number of risks, including the following:
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partners
may not have sufficient resources or decide not to devote the necessary resources due
to internal constraints such as budget limitations, lack of human resources, or a change
in strategic focus;
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collaborators
may believe our intellectual property or the product candidate infringes on the intellectual
property rights of others;
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partners
may dispute their responsibility to conduct development and commercialization activities
pursuant to the applicable collaboration, including the payment of related costs or the
division of any revenues;
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partners
may decide to pursue a competitive product developed outside of the partnership arrangement;
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partners
may not be able to obtain, or believe they cannot obtain, the necessary regulatory approvals;
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partners
may delay the development or commercialization of any product candidates in favor of
developing or commercializing another party’s product candidate; or
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partners
may decide to terminate or not to renew the collaboration for these or other reasons.
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Thus,
should the Company ever be successful in entering into a partnership agreement, the agreements may not lead to development or
commercialization of product candidates in the most efficient manner or at all. Partnership agreements are generally terminable
without cause on short notice. We also face competition in seeking out collaborators. If we are unable to secure new partners
that achieve the partner’s objectives and meet our expectations, we may be unable to advance any product candidates and
may not generate meaningful revenues.
We
have no experience selling, marketing or distributing products and no internal capability to do so.
We
currently have no sales, marketing or distribution capabilities and no experience in building a sales force and distribution capabilities.
If we are ever in a position to commercialize any products, of which there can be no assurance, we must develop internal sales,
marketing and distribution capabilities, which will be expensive and time consuming, or make arrangements with third parties to
perform these services. If we decide to market any products directly, we must commit significant financial and managerial resources
to develop a marketing and sales force with technical expertise and with supporting distribution capabilities. Building an in-house
marketing and sales force with technical expertise and distribution capabilities will require significant expenditures, management
resources and time. Factors that may inhibit our efforts to commercialize any products directly and without strategic partners
include:
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our
inability to recruit and retain adequate numbers of effective sales and marketing personnel;
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the
inability of sales personnel to obtain access to or persuade adequate numbers of physicians
to prescribe any products;
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the
lack of complementary products to be offered by sales personnel, which may put us at
a competitive disadvantage relative to companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating and sustaining an independent sales and marketing
organization.
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We
may not be successful in recruiting the sales and marketing personnel necessary to sell any products and even if we do build a
sales force, they may not be successful in marketing any products, which would have a material adverse effect on our business
and results of operations.
If
we are ever to conduct additional clinical trials, we would continue to rely on third parties to conduct any such trials for us.
If such third parties do not successfully carry out their duties or if we lose our relationships with such third parties, our
drug development efforts could be delayed.
We
are dependent on contract research organizations, third-party vendors and independent investigators for preclinical testing, and
clinical trials related to any potential drug discovery and development efforts. These parties are not our employees, and we cannot
control the amount or timing of resources that they devote to any programs. If they fail to devote sufficient time and resources
to any drug development programs or if their performance is substandard, it would delay the development and commercialization
of these product candidates. The parties with which we would contract for execution of our clinical trials would play a significant
role in the conduct of the trials and the subsequent collection and analysis of data. Their failure to achieve their research
goals or otherwise meet their obligations on a timely basis could adversely affect clinical development of these product candidates.
Communicating
with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities.
Outside parties may:
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have
staffing difficulties;
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fail
to comply with contractual obligations;
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experience
regulatory compliance issues;
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undergo
changes in priorities or become financially distressed; or
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form
relationships with other parties, some of which may be our competitors.
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These
factors may materially adversely affect the willingness or ability of third parties to conduct any clinical trials and may lead
to unexpected cost increases. Nevertheless, we are responsible for ensuring that each of our studies would be conducted in accordance
with the applicable protocol, legal, regulatory and scientific standards, and our reliance on contract research organizations
would not relieve us of our regulatory responsibilities. We and our contract research organizations would be required to comply
with applicable current Good Laboratory Practice (“CGLP”), current Good Manufacturing Practice (“CGMP”),
and current Good Clinical Practice (“CGCP”) regulations and guidelines enforced by the FDA and comparable foreign
regulatory authorities for any products in clinical development. The FDA enforces these CGCP regulations through periodic inspections
of clinical trial sponsors, principal investigators and trial sites. If we or our contract research organizations fail to comply
with applicable CGCP, the clinical data generated in these clinical trials might be deemed unreliable and the FDA or comparable
foreign regulatory authorities may require additional clinical trials before approving the marketing applications. We cannot assure
that, upon inspection, the FDA or any comparable foreign regulatory authority will determine that any clinical trials would comply
with CGCP. In addition, clinical trials must be conducted with product produced under CGMP regulations and would require
a large number of test subjects. Our failure or the failure of our contract research organizations to comply with these regulations
might require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement
action up to and including civil and criminal penalties.
If
we are ever to conduct any additional trials and our contract research organizations do not successfully carry out their duties
or if we were to lose relationships with contract research organizations, any drug development efforts could be delayed or terminated.
If
we were to lose relationships with any one or more of these parties, we could experience a significant delay in both identifying
another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable
terms, if at all. Even if we locate an alternative provider, it is likely that this provider might need additional time to respond
to our needs and might not provide the same type or level of service as the original provider. In addition, any provider that
we retain would be subject to CGLP and CGCP, other regulatory standards, and similar foreign standards, and we do not
have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not
adhered to by these providers, the development and commercialization of any products could be delayed, and have a material adverse
effect on our business.
We
may not be able to continue or fully exploit our relationships with outside advisors, which could impair our business.
We
work with advisors who are experts in their respective fields. They advise us with respect to our business and operations. These
advisors are not our employees and may have other commitments that would limit their future availability to us. If a conflict
of interest arises between their work for us and their work for another entity, we may lose their services, which may impair our
reputation in the industry and our business efforts.
We
have no manufacturing capabilities, and, if needed, would rely completely on third-party manufacturers, which might result in
delays in research, development, clinical trials, regulatory approvals and product introductions.
We
have no manufacturing facilities and do not have extensive experience in the manufacturing of drugs or in designing drug manufacturing
processes. We would have to contract with third-party manufacturers to produce, in collaboration with us, any products for clinical
trials. Our reliance on these third parties for development activities would reduce our control over these activities but would
not relieve us of our responsibility to ensure compliance with all required regulations and study and trial protocols. If these
third parties were not to successfully carry out their contractual duties, meet expected deadlines or conduct studies in accordance
with regulatory requirements or our stated study and trial plans and protocols, or if there were disagreements between us and
these third parties, we would not be able to initiate, or complete, or may be delayed in completing, the clinical trials required
to support future approval of any products. In some such cases, we might need to locate an appropriate replacement third-party
relationship, which may not be readily available or with acceptable terms, which would cause additional delay with respect to
the approval of products and would thereby have a material adverse effect on our business, financial condition, results of operations
and prospects.
Contract
manufacturers are subject to significant regulatory oversight with respect to manufacturing products. The manufacturing facilities
on which we would need to rely may not continue to meet regulatory requirements and may have limited capacity.
Any
manufacturers of product candidates are obliged to operate in accordance with FDA-mandated CGMPs. In addition, the facilities
that would be used by contract manufacturers or other third party manufacturers to manufacture product candidates must be approved
by the FDA or other foreign regulatory authority pursuant to inspections that would be conducted after we request regulatory approval
from the FDA or other foreign regulatory authority. A failure of any contract manufacturers to establish and follow CGMPs and
to document their adherence to such practices may lead to significant delays in development, or in clinical trials or in obtaining
regulatory approval of product candidates or the ultimate launch of products into the market. Furthermore, any contract manufacturers
are likely to be engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes
them to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements
for the production of those materials and products may affect the regulatory clearance of the contract manufacturers’ facilities
generally. Failure by third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed
on us, including fines, injunctions, civil penalties, failure of the government to grant pre-market approval of drugs, delays,
suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions, and criminal prosecutions. Many
aspects of the clinical trial and manufacturing process are outside of our control. The facilities and quality systems of third-party
contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval
of product candidates. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved
with the preparation of product candidates or the associated quality systems for compliance with the regulations applicable to
the activities being conducted. If these facilities do not pass a pre-approval plant inspection, FDA approval of the products
will not be granted.
The
regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those
of third-party manufacturers. If any such inspection or audit identifies a failure to comply with applicable regulations or if
a violation of product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant
regulatory authority may require remedial measures that may be costly and/or time-consuming for us or third-party manufacturers
to implement and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary
or permanent closure of a manufacturing facility. Any such remedial measures imposed upon us or third parties with whom we might
contract could materially harm our business.
Developments
by competitors may render our technologies obsolete or non-competitive which would have a material adverse effect on our business
and results of operations.
We
compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical
companies, academic institutions, government agencies and other public and private research organizations. Any drug candidates
would have to compete with existing therapies and therapies under development by competitors. In addition, the commercial opportunities
may be reduced or eliminated if competitors develop and market products that are less expensive, more effective or safer. Other
companies have drug candidates in various stages of preclinical or clinical development to treat diseases for which we are also
seeking to develop drug products. Some of these potential competing drugs are further advanced in development. Even if we are
successful in developing effective drugs, they may not compete successfully with products produced by our competitors. Most of
our competitors, either alone or together with their collaborative partners, operate larger research and development programs,
have larger staffing and facilities, and have substantially greater financial resources than we do, as well as significantly greater
experience in:
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undertaking
preclinical testing and human clinical trials;
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obtaining
FDA and other regulatory approvals, including foreign regulatory approvals, of drugs;
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formulating
and manufacturing drugs; and
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launching,
marketing and selling drugs.
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These
organizations also compete with us for mergers, acquisitions and joint venture candidates and for other collaborations.
Our
employees, partners, independent contractors, consultants, and vendors may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and requirements.
We
are exposed to the risk that our employees, partners, independent contractors, consultants, and vendors may engage in fraudulent
or other illegal activity with respect to our business. Such misconduct could include intentional, reckless and/or negligent conduct
or unauthorized activity that violates: (1) FDA or any comparable foreign regulatory authority regulations, including those laws
requiring the reporting of true, complete and accurate information to the FDA or any comparable foreign regulatory authority;
(2) manufacturing standards; (3) federal, state and foreign healthcare fraud and abuse laws and regulations; or (4) laws that
require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve
the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which
could result in regulatory sanctions and serious harm to our reputation. Any incidents or any other conduct that leads to an employee
receiving an FDA or other regulatory authority debarment could result in a loss of business from our partners and severe reputational
harm. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter misconduct, and
the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance
with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves
or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal
and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings,
and curtailment of our operations, any of which could adversely affect our ability to operate our business, operating results
and financial condition.
Any
future mergers or acquisitions we make of companies or technologies may result in disruption to our business or distraction of
our management.
We
may merge with, acquire, or make investments in businesses, technologies, services or products if appropriate opportunities arise.
From time to time we engage in discussions and negotiations with companies regarding our acquiring or investing in such companies’
businesses, products, services or technologies, in the ordinary course of our business. We cannot be assured that we will be able
to identify future suitable merger, acquisition or investment candidates, or if we do identify suitable candidates, that we will
be able to make such acquisitions or investments on commercially acceptable terms or at all. If we acquire or merge with another
company, we could have difficulty in assimilating that company’s personnel, operations, technology and software. In addition,
the key personnel of the acquired company may decide not to work for us. If we make other types of acquisitions, we could have
difficulty in integrating the acquired products, services or technologies into our operations. These difficulties could disrupt
our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities
would be dilutive to our existing stockholders.
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and
reputation to suffer.
We
store sensitive data, including intellectual property, our proprietary business information and personally identifiable information
of our employees, in our data centers and on our networks. The secure maintenance of this information is critical to our operations.
Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached
due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored
there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result
in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, and
damage our reputation.
Our
business and operations would suffer in the event of system failures.
Despite
the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable
to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.
Such an event could cause interruption of our operations. To the extent that any disruption or security breach were to result
in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability
and the development of product candidates could be delayed.
Risks
Related to FDA, Comparable Foreign Regulatory Authority and Healthcare Regulations
Pharmaceutical
companies face heavy government regulation. FDA regulatory approval and/or comparable foreign regulatory authority’s approval
of any products is uncertain.
The
research, testing, manufacturing and marketing of drug products are subject to extensive regulation by federal, state and local
government authorities, including the FDA or any comparable foreign regulatory authority. To obtain regulatory approval of a product,
one must demonstrate to the satisfaction of the applicable regulatory agency that, among other things, the product is safe and
effective for its intended use. In addition, one must show that the manufacturing facilities used to produce the products are
in compliance with CGMP regulations.
The
process of obtaining FDA and other required regulatory approvals, including foreign regulatory approvals and clearances, would
require a substantial amount of time and significant capital expenditure. Despite the time and expense expended, regulatory approval
is never guaranteed. The number of preclinical and clinical trials that would be required for FDA approval, or any comparable
foreign regulatory authority’s approval, varies depending on the drug candidate, the disease or condition for which the
drug candidate is in development, and the requirements applicable to that particular drug candidate. The FDA or other foreign
health authority can delay, limit or deny approval of a drug candidate for many reasons, including that:
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a
drug candidate may not be shown to be safe or effective;
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the
FDA or any comparable foreign regulatory authority may not approve the manufacturing
process;
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the
FDA or any comparable foreign regulatory authority may interpret data from preclinical
and clinical trials in different ways; and
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the
FDA may not meet, or may extend, the Prescription Drug User Fee Act date with respect
to a particular NDA.
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If
and when products do obtain marketing approval, the marketing, distribution and manufacture of such products would remain subject
to extensive ongoing regulatory requirements. Failure to comply with applicable regulatory requirements could result in:
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recall
or seizure of products;
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total
or partial suspension of production;
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refusal
of the government to grant future approvals;
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withdrawal
of approvals; and
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We
have not received regulatory approval to market any product candidates in any jurisdiction.
Following
regulatory approval of any drug products, ongoing regulatory obligations and restrictions might result in significant expense
and limit the ability to commercialize any products.
With
regard to drug candidates, if any, approved by the FDA or by another regulatory authority, including a foreign regulatory authority,
we would be held to extensive regulatory requirements over product manufacturing, labeling, packaging, adverse event reporting,
storage, advertising, promotion and record keeping. Regulatory approvals may also be subject to significant limitations on the
indicated uses or marketing of the drug candidates. Potentially costly follow-up or post-marketing clinical studies may be required
as a condition of approval to further substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory
authority. Previously unknown problems with the drug candidate, including adverse events of unanticipated severity or frequency,
may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.
In
addition, the law or regulatory policies governing pharmaceuticals may change. We cannot predict the likelihood, nature or extent
of adverse government regulation that may arise from future legislation or administrative action, either in the United States
or elsewhere. If we were not able to maintain regulatory compliance, we might not be permitted to market any drugs, which could
have a material adverse effect on our business and competitive position.
Healthcare
policy changes, including proposals to reform the U.S. healthcare system, may harm our future business.
Healthcare
costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators
and third-party payors to keep these costs down. Certain proposals, if passed, would impose limitations on the prices we
would be able to charge for products, or the amounts of reimbursement available for these products from governmental agencies
and third party payors. These limitations could in turn reduce the amount of investment into development, and the amount of
revenues that we would be able to generate in the future from sales of products and licenses of our technology.
The
Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, together, the
Healthcare Reform Act, is a sweeping measure intended to expand healthcare coverage within the U.S., primarily through the imposition
of health insurance mandates on employers and individuals, the provision of subsidies to eligible individuals enrolled in plans
offered on the health insurance exchanges, and the expansion of the Medicaid program. This law has substantially changed the way
healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. In addition,
the Healthcare Reform Act imposes an annual fee, which will increase annually, on sales by branded pharmaceutical manufacturers
starting in 2011. The financial impact of these discounts, increased rebates and fees and the other provisions of the legislation
on our business is unclear and there can be no assurance that our business will not be materially adversely affected. In addition,
these and other ongoing initiatives in the United States have increased and will continue to increase pressure on drug pricing.
The announcement or adoption of any government initiatives could have an adverse effect on potential revenues from any product
that we may successfully develop.
Moreover,
additional legislative or regulatory changes remain possible and appear likely. In this regard, the U.S. Tax Cuts and Jobs Act
of 2017, or U.S. Tax Act, signed into law in December 2017, includes a provision repealing, effective January 1, 2019, the tax-based
shared responsibility payment imposed by the Healthcare Reform Act on certain individuals who fail to maintain qualifying health
coverage for all or part of a year that is commonly referred to as the “individual mandate.” The nature and extent
of any additional legislative or regulatory changes to the Healthcare Reform Act are uncertain at this time. We expect that the
Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may
be adopted in the future could have a material adverse effect on our industry generally. In addition to the Healthcare Reform
Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third party payors
to keep healthcare costs down while expanding individual healthcare benefits.
Various
healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will
be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. However, an
expansion in government’s role in the U.S. healthcare industry may lower the revenues for future products
and adversely affect our future business, possibly materially.
Risks
Related to Our Intellectual Property
Our
ability to compete may be undermined if we do not adequately protect our proprietary rights.
Our
commercial success depends on obtaining and maintaining proprietary rights to product candidates and technologies and their uses,
as well as successfully defending these rights against third-party challenges. We will be able to most effectively protect product
candidates, technologies, and their uses from unauthorized use by third parties to the extent that valid and enforceable patents,
or effectively protected trade secrets, cover them. Nonetheless, the issued patents and patent applications covering our technologies
remain subject to uncertainty due to a number of factors, including:
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we
may not have been the first to make one or more of the inventions covered by our pending
patent applications or issued patents;
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we
may not have been the first to file patent applications for one or more of our technologies
we rely upon;
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others
may independently develop similar or alternative technologies or duplicate any of our
technologies;
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our
disclosures in a particular patent application may be determined to be insufficient to
meet the statutory requirements for patentability;
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one
or more of our pending patent applications may not result in issued patents;
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we
may not seek or obtain patent protection in all countries that will eventually provide
a significant business opportunity;
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one
or more patents issued to us or to our collaborators may not provide a basis for commercially
viable products, may not provide us with any competitive advantages or may be challenged
by third parties;
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we
may fail to file for patent protection in all of the countries where patent protection
will ultimately be necessary or fail to comply with other procedural, documentary, fee
payment or other provisions during the patent process in any such country, and we may
be precluded from filing at a later date or may lose some or all patent rights in the
relevant jurisdiction;
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one
or more of our technologies may not be patentable;
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others
may design around one or more of our patent claims to produce competitive products which
fall outside of the scope of our patents;
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others
may identify prior art which could invalidate our patents; or
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changes
to patent laws may limit the exclusivity rights of patent holders.
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Even
if we have or obtain patents covering our technologies, we may still be barred from making, using and selling one or more of our
technologies because of the patent rights of others. Others have or may have filed, and in the future are likely to file, patent
applications covering compounds, assays, therapeutic products and delivery systems, including sustained release delivery, that
are similar or identical to ours. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist
in the area of medical disorders. These could materially affect our ability to develop products. Because patent applications can
take years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents that
our technologies may infringe. These patent applications may have priority over one or more patent applications filed by us.
If
our competitors have prepared and filed patent applications in the United States that claim technology we also claim, we may have
to participate in interference proceedings required by the United States Patent and Trademark Office to determine priority of
invention, which could result in substantial costs, even if we ultimately prevail. Results of interference proceedings are highly
unpredictable and may result in us having to try to obtain licenses in order to develop or market drug products.
Disputes
may arise regarding the ownership or inventorship of our inventions. It is difficult to determine how such disputes would be resolved.
Others may challenge the validity of our patents. If one or more of our patents are found to be invalid, we will lose the ability
to exclude others from making, using or selling the inventions claimed therein.
Research
collaborators and scientific advisors have rights to publish data and information to which we have rights. Additionally, employees
whose positions may be eliminated may seek future employment with our competitors. Each of our employees is required to sign a
confidentiality agreement and invention assignment agreement with us at the time of hire. While such arrangements are intended
to enable us to better control the use and disclosure of our proprietary property and provide for our ownership of proprietary
technology developed on our behalf, they may not provide us with meaningful protection for such property and technology in the
event of unauthorized use or disclosure. In addition, technology that we may in-license may become important to some aspects of
our business. We generally will not control all of the patent prosecution, maintenance or enforcement of in-licensed technology.
We
rely on confidentiality agreements that could be breached and may be difficult to enforce, which could have a material adverse
effect on our business and competitive position.
Our
policy is to enter into agreements relating to the non-disclosure of confidential information with third parties, including our
contractors, consultants, advisors and research collaborators, as well as agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we
employ them. However, these agreements can be difficult and costly to enforce. Moreover, to the extent that our contractors, consultants,
advisors and research collaborators apply or independently develop intellectual property in connection with any of our projects,
disputes may arise as to the proprietary rights to this type of information. If a dispute arises, a court may determine that the
right belongs to a third party, and enforcement of our rights can be costly and unpredictable. In addition, we rely on trade secrets
and proprietary know-how that we will seek to protect in part by confidentiality agreements with our employees, contractors, consultants,
advisors or others. In addition, courts outside the United States may be less willing to protect trade secrets. Despite the protective
measures we employ, we still face the risk that:
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these
agreements may be breached;
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these
agreements may not provide adequate remedies for the applicable type of breach; or
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our
trade secrets or proprietary know-how will otherwise become known.
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Any
breach of our confidentiality agreements or our failure to effectively enforce such agreements would have a material adverse effect
on our business.
If
we infringe the rights of third parties, we could be forced to pay damages and required to defend against litigation which could
result in substantial costs and may have a material adverse effect on our business and results of operations.
We
have not received to date any claims of infringement by any third parties. However, should our public profile be raised,
such infringement claims may be more likely. Defending against such claims, and an occurrence of a judgment adverse to us,
could result in unanticipated costs and may have a material adverse effect on our business. If any of our technologies,
methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs
and we may have to:
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obtain
licenses, which may not be available on commercially reasonable terms, if at all;
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redesign
products or processes to avoid infringement;
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stop
using the subject matter claimed in the patents held by others;
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defend
litigation or administrative proceedings that may be costly whether we win or lose, and
which could result in a substantial diversion of management resources; or
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Any
costs incurred in connection with such events or the inability to develop products may have a material adverse effect on our business
and results of operations.
Intellectual
property litigation is increasingly common and increasingly expensive and may result in restrictions on our business and substantial
costs, even if we prevail.
Patent
and other intellectual property litigation is becoming more common in the pharmaceutical industry. Litigation is sometimes necessary
to defend against or assert claims of infringement, to enforce our patent rights, including those we have licensed from others,
to protect trade secrets or to determine the scope and validity of proprietary rights of third parties. Currently, no third party
is asserting that we are infringing upon their patent rights or other intellectual property, nor are we aware or believe that
we are infringing upon any third party’s patent rights or other intellectual property. We may, however, be infringing upon
a third party’s patent rights or other intellectual property, and litigation asserting such claims might be initiated in
which we would not prevail, or we would not be able to obtain the necessary licenses on reasonable terms, if at all. All such
litigation, whether meritorious or not, as well as litigation initiated by us against third parties, is time-consuming and very
expensive to defend or prosecute and to resolve. In addition, if we infringe the intellectual property rights of others, we could
lose our right to develop, manufacture or sell products or could be required to pay monetary damages or royalties to license proprietary
rights from third parties. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary
licenses could prevent us from manufacturing or selling products, which could harm our business, financial condition and prospects.
A
dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be
time consuming and costly, and an unfavorable outcome could harm our business.
There
is significant litigation in our industry regarding patent and other intellectual property rights. While we are not currently
subject to any pending intellectual property litigation, and are not aware of any such threatened litigation, we may be exposed
to future litigation by third parties based on claims that our technologies or activities infringe the intellectual property rights
of others. If any drug development activities are found to infringe any such patents, we may have to pay significant damages or
seek licenses to such patents. If any products are found to infringe any such patents, we may have to pay significant damages
or seek licenses to such patents. A patentee could prevent us from making, using or selling the patented compounds. We may need
to resort to litigation to enforce a patent issued to us, protect our trade secrets or determine the scope and validity of third-party
proprietary rights. From time to time, we may hire scientific personnel formerly employed by other companies involved in one or
more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade secret
misappropriation or other similar claims as a result of their prior affiliations. If we become involved in litigation, it could
consume a substantial portion of our managerial and financial resources, regardless of whether we win or lose. We also may not
be able to afford the costs of litigation.
The
patent applications of pharmaceutical and biotechnology companies involve highly complex legal and factual questions, which, if
determined adversely to us, could negatively impact our patent position.
The
patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions.
No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. The U.S. Patent and
Trademark Office’s standards are uncertain and could change in the future. Consequently, the issuance and scope of patents
cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent
applications may also be subject to interference or derivation proceedings, and U.S. patents may be subject to inter partes review,
post grant review and ex parte reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject
to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either
loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent
or patent application. Similarly, opposition or invalidity proceedings could result in loss of rights or reduction in the scope
of one or more claims of a patent in foreign jurisdictions. Such interference, inter partes review, post grant review and ex parte
reexamination and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide us with sufficient
protection against competitive products or processes.
Changes
in or different interpretations of patent laws in the United States and foreign countries may permit others to develop and commercialize
our technology without providing any compensation to us or may limit the number of patents or claims we can obtain. In particular,
there have been proposals to shorten the exclusivity periods available under U.S. patent law that, if adopted, could substantially
harm our business. If the exclusivity period for patents is shortened, then our ability to generate revenues without competition
would be reduced and our business could be materially adversely impacted. The laws of some countries do not protect intellectual
property rights to the same extent as U.S. laws, and those countries may lack adequate rules and procedures for defending our
intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods
of treating humans and, in these countries, patent protection may not be available at all to protect product candidates. In addition,
U.S. patent laws may change, which could prevent or limit us from filing patent applications or patent claims to protect our technologies
or limit the exclusivity periods that are available to patent holders. For example, the LeahySmith America Invents Act, or the
Leahy-Smith Act, was recently signed into law and includes a number of significant changes to U.S. patent law. These include changes
to transition from a “first-to-invent” system to a “first-to-file” system and to the way issued patents
are challenged. These changes may favor larger and more established companies that have more resources to devote to patent application
filing and prosecution. The U.S. Patent and Trademark Office has been in the process of implementing regulations and procedures
to administer the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act may affect
our ability to obtain, enforce or defend our patents. Accordingly, it is not clear what, if any, impact the LeahySmith Act will
ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and
our ability to enforce or defend our issued patents.
If
we fail to obtain and maintain patent protection and trade secret protection of any product candidates, proprietary technologies
and their uses, we could lose our competitive advantage and competition we face would increase, reducing our potential revenues
and adversely affecting our ability to attain profitability.
Risks
Related to our Common Stock
The
market price and volume of our common stock fluctuate significantly and could result in substantial losses for individual investors.
The
stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance
of particular companies. These broad market fluctuations may cause the market price and volume of our common stock to decrease.
In addition, the market price and volume of our common stock is highly volatile.
Factors
that may cause the market price and volume of our common stock to decrease include:
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delisting
or other changes in status of Nasdaq listing (See Risk Factor entitled, “If we
fail to continue to meet all applicable Nasdaq Capital Market requirements and Nasdaq
determines to delist our common stock, the delisting could adversely affect the market
liquidity of our common stock and the market price of our common stock could decrease.”);
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changes
in stock market analyst recommendations regarding our common stock or lack of analyst
coverage;
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fluctuations
in our results of operations, timing and announcements of our corporate news;
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developments
concerning discussions that we may be in, or enter into, regarding strategic alliances,
partnerships, reverse mergers, mergers, acquisitions, or similar transactions;
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adverse
actions taken by regulatory agencies with respect to any drug products, clinical trials,
manufacturing processes or sales and marketing activities;
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any
lawsuit involving us or any drug products;
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developments
with respect to our patents and proprietary rights;
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announcements
of technological innovations by our competitors;
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public
concern as to the safety of products developed by us or others;
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regulatory
developments in the United States and in foreign countries;
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the
pharmaceutical industry conditions generally and general market conditions;
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failure
of our results of operations to meet the expectations of stock market analysts and investors;
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sales
of our common stock by our executive officers, directors and five percent stockholders
or sales of substantial amounts of our common stock;
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changes
in accounting principles; and
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loss
of any of our key scientific or management personnel.
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The
market for our common stock is illiquid. Our stockholders may not be able to resell their shares at or above the purchase price
paid by such stockholders, or at all.
Our
common stock is listed on the NASDAQ Capital Market. The market for our securities is illiquid. This illiquidity may be caused
by a variety of factors including:
There
is limited trading in our common stock and our security holders may experience wide fluctuations in the market price of our securities.
Such price and volume fluctuations have particularly affected the trading prices of equity securities of many pharmaceutical and
biotechnology companies. These price and volume fluctuations often appear to have been unrelated to the operating performance
of the affected companies. These fluctuations may have an extremely negative effect on the market price of our securities and
may prevent a stockholder from obtaining a market price equal to the purchase price such stockholder paid when the stockholder
attempts to sell our securities in the open market. In these situations, the stockholder may be required either to sell our securities
at a market price which is lower than the purchase price the stockholder paid, or to hold our securities for a longer period of
time than planned. An inactive market may also impair our ability to raise capital by selling shares of capital stock.
As
a “smaller reporting company,” the Company may avail itself of reduced disclosure requirements, which may make the
Company’s common stock less attractive to investors.
Because
the market value of the Company’s common stock as of the end of its most recently completed second fiscal quarter was less
than $75 million, the Company is a “smaller reporting company” under applicable SEC rules and regulations. As a “smaller
reporting company,” the Company has relied on exemptions from certain disclosure requirements that are applicable to other
public companies. The Company may continue to rely on such exemptions for so long as the Company remains a “smaller reporting
company.” These exemptions include reduced financial disclosure, reduced disclosure obligations regarding executive compensation,
and not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The
Company’s reliance on these exemptions may result in the public finding the Company’s common stock to be less attractive
and adversely impact the market price of the Company’s common stock or the trading market thereof.
We
will not pay cash dividends and investors may have to sell their shares in order to realize their investment.
We
have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend
to use our cash for reinvestment in the development and marketing of products, technologies, and services. As a result, investors
may have to sell their shares of common stock to realize any of their investment.
Our
internal controls over financial reporting may not be effective which could have a significant and adverse effect on our business
and reputation.
We
are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC thereunder
(“Section 404”). Section 404 requires us to report on the design and effectiveness of our internal controls over financial
reporting. In the past, our management has identified certain “material weaknesses” in our internal controls over
financial reporting which we believe have been remediated. However, any failure to maintain effective controls could result in
significant deficiencies or material weaknesses, and cause us to fail to meet our periodic reporting obligations, or result in
material misstatements in our financial statements. We may also be required to incur costs to improve our internal control system
and hire additional personnel. This could negatively impact our results of operations.
Compliance
with changing regulation of corporate governance and public disclosure may result in additional expenses and divert management’s
attention from operating our business, which could have a material adverse effect on our business.
There
have been other changing laws, regulations and standards relating to corporate governance and public disclosure in addition to
the Sarbanes-Oxley Act, as well as new regulations promulgated by the Commission and rules promulgated by the national securities
exchanges. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their
lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory
and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated
by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations
and standards are likely to continue to result in increased general and administrative expenses and a diversion of management
time and attention from revenue-generating activities to compliance activities. Our board members, Chief Executive Officer and
Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties.
As a result, we may have difficulty retaining qualified board members and executive officers, which could have a material adverse
effect on our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies, we may incur additional expenses to comply with standards set by regulatory authorities
or governing bodies which would have a material adverse effect on our business and results of operations.
Delaware
law could discourage a change in control, or an acquisition of the Company by a third party, even if the acquisition would be
favorable to stockholders.
The
Delaware General Corporation Law contains provisions that may have the effect of making more difficult or delaying attempts by
others to obtain control of the Company, even when these attempts may be in the best interests of stockholders. Delaware law imposes
conditions on certain business combination transactions with “interested stockholders.” These provisions and others
that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which stockholders might otherwise receive a premium for their shares of common stock over then current
market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in
their best interests.
Our
Board of Directors has the authority to issue Serial Preferred Stock, which could affect the rights of holders of our common stock
and may delay or prevent a takeover that could be in the best interests of our stockholders.
The
Board of Directors has the authority to issue up to 9,416,664 shares of Serial Preferred Stock, $.0001 par value per share (the
“Serial Preferred Stock”) (after giving effect to the conversion and cancellation of a previous issue of 5,583,336
shares of Series B Preferred), in one or more series and to fix the number of shares constituting any such series, the voting
powers, designation, preferences and relative participation, optional or other special rights and qualifications, limitations
or restrictions thereof, including the dividend rights and dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of the shares constituting any series, without any further
vote or action by the stockholders. 6,000,000 shares of the Serial Preferred Stock, designated the Series B Preferred, have been
authorized, 5,583,336 were issued and, as of the date of this filing, all such shares have been converted and no Series B Preferred
shares remain issued and outstanding. The issuance of additional Serial Preferred Stock could affect the rights of the holders
of Common Stock. For example, such issuance could result in a class of securities outstanding that would have preferential voting,
dividend, and liquidation rights over the Common Stock, and could (upon conversion or otherwise) enjoy all of the rights appurtenant
to the shares of common stock. The authority possessed by the Board of Directors to issue Serial Preferred Stock could potentially
be used to discourage attempts by others to obtain control of the Company through merger, tender offer, proxy contest or otherwise
by making such attempts more difficult or costly to achieve. The Board of Directors may issue the Serial Preferred Stock without
stockholder approval and with voting and conversion rights which could adversely affect the voting power of holders of common
stock. There are no agreements or understandings for the issuance of Serial Preferred Stock and the Board of Directors has no
present intention to issue any Serial Preferred Stock.