ITEM
1A: RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information
in this Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually
materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading
price of our common stock could decline and you could lose part or all of your investment. References to the “Company”, the
“Post-Merger Company”, “we” and “us” refer to Vyant Bio, Inc. As StemoniX is the accounting acquirer
in the merger, its historical financial information now becomes the historical financial information of the Company. Therefore, all references
to the Company’s financial information are those of StemoniX, not Cancer Genetics.
RISK
FACTORS
Risk
Related to the Post-Merger Company
We
may not realize the expected benefits of the Merger.
While
we anticipated certain benefits from the Merger, we may not be able to realize those benefits. We may not be able to integrate
the two businesses successfully. We could assume unknown or contingent liabilities. The intellectual property of each company may not
have the scientific value and commercial potential that we envisioned. The synergies we anticipated my not be realized. Any failure of
the merger to meet our expectations could have a material negative effect on our financial condition and results of operations.
Risks
Relating to the Company’s Financial Condition and Capital Requirements
The
Company has a history of net losses; the Company expects to incur net losses in the future, and the Company may never achieve sustained
profitability.
Both the
Company and the pre-Merger CGI operations have historically incurred substantial net losses. The Company had net losses of $8.7 million and $9.0 million for the fiscal
years ended December 31, 2020 and 2019, respectively. The unaudited pro forma condensed combined financial statements of the Company
filed in connection with the Merger with the Company’s Current Report on Form 8-K dated April 5, 2021 reported a pro forma net
loss from continuing operations of $20.3 million for the year ended December 31, 2020. From the Company’s inception in April
2014 through March 31, 2021, the Company had an accumulated deficit of $45.3 million. The Company expects losses to continue. These losses
have had, and will continue to have, an adverse effect on working capital, total assets and stockholders’ equity. Because of the
numerous risks and uncertainties associated with the Company’s revenue growth and costs associated with being a public company,
the Company is unable to predict when it will become profitable, and it may never become profitable. Even if the Company does achieve
profitability, the Company may not be able to sustain or increase profitability on a quarterly or annual basis. The Company’s inability
to achieve, and then maintain, profitability would negatively affect business, financial condition, results of operations and cash flows.
Prior
to the Merger and receipt of the net proceeds of the financings that were a condition of the Merger, recurring losses
from operations raised substantial doubt regarding our ability to continue as a going concern, and we may need to raise additional capital
by issuing securities or debt or through licensing arrangements, which may cause dilution to stockholders or restrict operations or proprietary
rights.
In
the years ended December 31, 2020 and 2019, the Company had net cash used in operating activities of $5.8 million and $7.9 million, respectively.
We expect our expenses to increase in connection with our ongoing activities.
Although
management believes that our cash and cash equivalents at March 31, 2021 ($33 million) and cash flows from operations will be adequate
to fund operations for at least the next 12 months, such estimate may prove to be wrong, and we could use our available capital resources
sooner than we currently expect.
For
instance, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than
we currently anticipate, and we may need to seek additional funds sooner than planned. Future capital requirements depend upon many factors,
including, but not limited to:
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the
rate at which we expand our business development and marketing operations;
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the
rate at which we are able to enter into strategic relationships;
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the
extent to which we expand our products and service offerings;
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the
response of competitors to our products and services;
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the
costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights including
enforcing and defending intellectual property related claims; and
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the
costs of operating as a public company.
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We
may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and
alliances, licensing arrangements or monetization transactions. To the extent that we raise additional capital through the sale of equity,
convertible debt securities or other equity-based derivative securities, our existing shareholders’ ownership interest will be
diluted and the terms may include liquidation or other preferences that adversely affect shareholder rights. Any indebtedness we incur
would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur
additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that
could adversely impact our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity or debt,
by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing shareholders may not
agree with our financing plans or the terms of such financings. If we raise additional funds through strategic partnerships and alliances,
licensing arrangements or monetization transactions with third parties, we may have to relinquish valuable rights to our technologies,
or our products, or grant licenses on terms unfavorable to us. Adequate additional financing may not be available to us on acceptable
terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our
product development or future commercialization efforts or grant rights to develop and market products that we would otherwise prefer
to develop and market ourselves.
Our
future revenues are unpredictable and operating results are expected to fluctuate from period to period
Our
limited operating history and the emerging nature of the markets in which we compete make it difficult for us to accurately forecast
our revenues in any given period.
Our
ability to obtain license and/or subscription agreements with pharmaceutical companies and other industry partners is unproven, and in
the best of circumstances it may take several months or more in order to enter into such agreements. Moreover, even after entering into
such agreements, there may be a delay of months or years before they generate revenue, if at all.
Our
vivoPharm Discovery Business currently derives substantially all revenues from testing services, laboratory services and CRO at
the premarket stage. Discovery Services are services that include proprietary preclinical test systems supporting clinical diagnostic
and prognostic offerings at early stages, supporting the pharmaceutical industry, biotechnology companies and academic research centers.
It is unclear whether the Company will be able to maintain and grow the number of pharmaceutical and biotech companies and clinical research
organizations that will avail themselves of the Company’s services.
In
addition, with regard to the sale of products (such as microOrgans, cells and plates) and services (such as the Company’s
historic Discovery as a Service), even when we have received customer orders, those orders often are not secured by customer deposits
or other prepayment, and delivery of the requested products and services (and thus invoicing and payment for the same) may be delayed
or even canceled by the customer, sometimes for reasons entirely out of our control, such as customers’ changes in research and
development priorities, acquisitions by a third parties, the need for additional time to prepare for the products and/or services ordered
or budgetary concerns.
Natural
disasters as well as disease outbreaks and pandemics (including the COVID-19 pandemic) may also impact the ability of customers to take
delivery on, or of us to make delivery of, products and/or services ordered, or on one or more parties to otherwise perform under partnership
agreements.
For
these and other reasons, including those set forth below, revenues could fall short of management expectations. We have a limited financial
history on which to base the planned operating expenses. If revenues in a period fall short of our expectations, we may be unable to
quickly adjust our spending in order to compensate for that revenue shortfall. As a result, our ability to fund our ongoing operations
could be adversely affected, and we would not be able to produce sufficient revenue to become profitable.
Our
operating results are likely to fluctuate substantially from period to period as a result of several factors, many of which are beyond
our control. These factors include:
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the
timing of fulfillment and/or cancellation of orders, as described above;
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the
ability to enter into successful strategic relationships;
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the
amount and timing of operating costs and capital expenditures relating to expansion of our operations;
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expansion
of our operations;
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the
rate at which organizations purchase our products and services;
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the
announcement or introduction of new or enhanced technologies, products, or services by competitors;
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the
ability to attract and retain qualified personnel;
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the
ability to derive licensing contracts for Company-identified drug candidates;
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the
adoption of personalized medicine; and
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the
pricing policies of competitors.
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Our
limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future prospects.
The Company was formed in April 2014.
It remains in the development stage and is subject to all the risks inherent in a new business enterprise. The Company has a limited
operating history for you to consider in evaluating it and its prospects. Accordingly, you should consider our prospects in light of
the costs, uncertainties, delays and difficulties and risks frequently encountered by development-stage companies, especially companies
operating in a rapidly evolving market like ours. These risks include the need to:
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expand
our business development and marketing activities;
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quickly
integrate newly hired personnel;
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manage
our rapidly developing and changing operations; and
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expand
our product offerings and to respond to changing technologies and user preferences.
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Any
predictions you make about our future success or viability may not be as accurate as they would be if we had a longer operating history.
We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business
objectives.
We
expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year
due to a variety of factors, many of which are beyond our control, including as a result of the effects of the merger. Accordingly, you
should not rely upon the results of any quarterly or annual periods as indications of future operating performance.
Our
business is subject to risks arising from epidemic diseases, such as the recent global outbreak of COVID-19.
The
outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting
worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that the Company or its employees,
contractors, suppliers, courier delivery services and other partners may be prevented from conducting business activities for an indefinite
period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental
authorities. While it is not possible at this time to fully estimate the impact that COVID-19 has had and may have on our business, the
COVID-19 pandemic and any preventative or protective actions that governments or we may take in respect of this pandemic has resulted
and may continue to result in periods of business disruption, reduced customer activity and reduced operations. Any resulting financial
impact cannot be reasonably estimated at this time, but the COVID-19 pandemic has materially affected and will likely continue to materially
affect our business, financial condition and results of operations. The extent to which the COVID-19 pandemic impacts our results will
depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning
the severity of the COVID-19 pandemic and the actions taken to contain it or treat its impact, among others.
The
continued spread of COVID-19 and its variants, and the measures taken by the governments of countries affected could disrupt the supply
chain of material needed for our business and could delay future projects from commencing due to COVID-19 related impacts on the demand
for our services and therefore have a material adverse effect on business, financial condition and results of operations.
Many
of the Company’s customers worldwide were impacted by COVID-19 and temporarily closed their facilities which impacted revenues
in the first half of 2020 for the Company’s StemoniX business. Revenues continued in the first half of 2020 for the historical
CGI business as signed contracts were already in place. Revenues at historical CGI began to slow in the second half of 2020 as fewer
contracts were signed due to COVID-19 and the studies related to contracts signed pre COVID-19 were completed. While the impact of the
pandemic on our business has lessened, the global outbreak of COVID-19 continues with new variants and is impacting the way we operate
our business as well as in certain circumstances limiting the availability of lab supplies. The extent to which the COVID-19 pandemic
may impact the Company’s future business will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, such as the availability and effectiveness of vaccines, the duration of the outbreak, travel restrictions and social
distancing in the United States and other countries, business closures or business disruptions, and the effectiveness of actions taken
in the United States and other countries to contain and treat the disease.
The
Company is actively monitoring the impact of the COVID-19 pandemic on its business, results of operations and financial condition. The
full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition
in the future is unknown at this time and will depend on future developments that are highly unpredictable.
Risks
Related to Our Industry and Our Business
Our
industry is highly competitive.
The
life sciences industry is highly competitive. In the early stages of operation and growth, competition will affect our ability to obtain
the services of preferred employees and consultants. We will be competing with a large universe of competitors in the local, national
and global marketplace. Many of these competitors have substantially greater resources, larger and more experienced staff and established
histories of successful operations, including in research, product development, technology, manufacturing, government regulation, securing
funding and sales and marketing. These competitors may also have collaborative arrangements in our target markets with leading companies
and research institutions. Established companies may invest heavily to accelerate discovery and development, which could make the technology
that we develop obsolete. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources
being concentrated among a smaller number of our competitors. As a result of these factors, our competitors may succeed in obtaining
patent protection and/or marketing approval or discovering, developing, and commercializing products in our field before we do.
Smaller
and other early-stage companies may also prove to be significant competitors. Such companies compete with us in recruiting and retaining
qualified scientific and management personnel, as well as in acquiring technologies complementary to, or necessary for, our programs.
In addition, the industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change,
we may be unable to compete effectively. Technological advances or products developed by our competitors may render our product candidates
obsolete, less competitive or not economical.
Our
commercial opportunities could be reduced or eliminated if our competitors develop and commercialize technologies, products or services
that are more effective, are more convenient, have a broader label, are marketed more effectively, are reimbursed or are less expensive
than any that we may develop.
In
addition, there are unique challenges and requirements associated with the development and operation of companies in our industry, including
death or disability of key personnel; supply chain issues; commodity pricing and availability; and other factors causing delays, destruction,
or malfunction of production facilities; the inability of management personnel to comply with regulatory requirements; and physical destruction
or damage to our products. Significant difficulties such as these may materially increase the cost of development and operation for us.
Risks
Related to Our Industry and Our Business
Our
success depends upon achieving a critical mass of customers and strategic relationships.
Our
success is dependent upon achieving significant market acceptance and strategic relationships. To date, we have achieved only limited
market acceptance and formed only limited strategic relationships. We do not know whether we will be able to create all the customer
and strategic relationships necessary to make our business model function.
To
generate demand for vivoPharm’s Discovery Services, we need to educate pharmaceutical and biotech companies and clinical research
organizations on the utility of our tests and services to improve the outcomes of clinical trials for new oncology drugs and more rapidly
advance targeted therapies through the clinical development process through published papers, presentations at scientific conferences
and one-on-one education sessions by members of our sales force. We may need to hire additional commercial, scientific, technical and
other personnel to support this process.
While
current interest in the Company’s historic StemoniX products and services is high, it is possible that our technology and
assay plates will not be of interest to our future customers. The degree of market acceptance and adoption will depend on a number of
factors, including cost, potential efficacy and potential advantages over alternatives, ease of use and quality, the strength of marketing
and distribution support and timing of market introduction of competitive products and services, publicity concerning our products and
services or competing products and services or the standards of our competitors who are trying to improve on their own stem cell development
technologies. Another risk of adoption is changes in the allocated spending by these companies as our products come online, which is
unpredictable and could hurt our business. Other changes in the healthcare landscape, including current treatments and reimbursements,
will impact interest in adopting our technology.
Even
if a product or service displays a favorable efficacy in development, market acceptance of the product or service will not be known until
after it is launched. Our efforts to educate the medical community on the benefits of our products and services may require significant
resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional
technologies marketed by our competitors, particularly due to the novelty of our approach. If these products do not achieve an adequate
level of acceptance, we may not generate significant product revenue and may not become profitable.
Many
of the development-stage companies that are launched each year are not commercially successful and fail to provide positive financial
returns to their investors.
Although
our industry has consistently grown, there is not a guarantee of revenue or net profits. Commercial success in our industry is particularly
dependent upon product development and relationships with customers, third-party distributors and suppliers. If our products and services
are not well received by these parties, our business may be substantially harmed, and we may not become profitable. We also may be unable
to manage intended growth, which could harm our business, including expanding our research and development function, sales and marketing,
and employee base.
If
we are unable to manage growth, our prospects may be limited and our future results of operations may be adversely affected.
We
intend to continue to attempt to expand our business with sales and marketing programs and other activities as needed to meet future
demand. Any significant expansion may strain managerial, financial and other resources. If we are unable to manage such growth, business,
operating results and financial condition could be adversely affected. We will need to improve continually the operations, financial
and other internal systems to manage growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result
in reduced growth prospects and diminished operational results.
We
may be unable to scale the technology of growing and differentiating stem and organ cells.
The
Company was founded on the principle that current manual production
techniques, which take significant amounts of time and resources, with varying quality standards, can be improved upon. We believe that
a high throughput imprinting technique will be able to increase the production of cells at a faster rate for lower cost and higher quality.
To accomplish this goal, we have brought together experts in the essential fields, including micro-imprinting and stem cell biology.
Because of the higher surface area/volume ratio of the microscopic technique, risks that the cells cannot survive the growth and differentiation
processes due to dehydration, malnutrition (including lack of energy sources), or mechanical forces may increase. If some cells are non-viable,
that will significantly decrease adoption and business revenue. Additionally, we have tested our techniques in limited operations but
not on a full-scale basis. As with any rapidly growing business, we may encounter unforeseen difficulties in scaling our operations.
We
may be unable to lower the cost of technology.
One
goal in scaling the technology is to lower the cell assay plate cost. If our plate costs are not significantly lower than competitors’
plate costs, our plates would be of less interest to researchers/pharma.
The
initial development and subsequent production marginal costs are major focus areas. The initial development costs are unpredictable,
as it is impossible to know how many trials or adjustments will be needed to develop the organ-specific imprinting technology and the
required circuitry complexity. The subsequent material and labor marginal costs may need to be adjusted based on our scaled processes,
with the possibility of significantly increasing costs.
We
may be unable to produce the required level of quality of certain aspects of our products.
Our
potential research and pharmaceutical customers have made clear that consistent high-quality cells in the creation of cell plates are
very important. This level of quality will be challenging, as current techniques have a high number of non-viable cells, and further
miniaturization can further increase these issues. If we cannot achieve the level of quality required, we may not achieve an adequate
level of acceptance, and thus we may not generate significant revenue or become profitable.
The
potential loss or delay of the Company’s large contracts or of multiple contracts could adversely affect results.
Most
of the Company’s Discovery Services customers can terminate the contracts upon 30 to 90 days’ notice. These customers may
delay, terminate or reduce the scope of the contracts for a variety of reasons beyond the Company’s control, including but not
limited to:
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decisions
to forego or terminate a particular clinical trial;
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lack
of available financing, budgetary limits or changing priorities;
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failure
of products being tested to satisfy safety requirements or efficacy criteria;
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unexpected
or undesired clinical results for products; or
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shift
of business to a competitor or internal resources.
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As
a result, contract terminations, delays and alterations are a possible outcome in the Company’s Discovery Services business. In
the event of termination, the contracts often provide for fees for winding down the project, but these fees may not be sufficient for
the Company to maintain margins, and termination may result in lower resource utilization rates. In addition, the Company may not realize
the full benefits of the backlog of contractually committed services if customers cancel, delay or reduce their commitments under the
Company’s contracts with them, which may occur if, among other things, a customer decides to shift its business to a competitor
or revoke the Company’s status as a preferred provider. Thus, the loss or delay of a large contract or the loss or delay of multiple
contracts could adversely affect Company revenues and profitability. The Company believes the risk of loss or delay of multiple contracts
potentially has greater effect where the Company is party to broader partnering arrangements with global biopharmaceutical companies.
The
Company’s quarterly operating results may be subject to significant fluctuations and may be difficult to forecast.
The
timing, size and duration of the Company’s contracts with pharmaceutical and biotech companies and clinical research organizations
depend on the size, pace and duration of such customer’s clinical trial, over which the Company has no control and sometimes limited
visibility. In addition, expense levels are based, in part, on expectation of future revenue levels. A shortfall in expected revenue
could, therefore, result in a disproportionate decrease in the Company’s net income. As a result, quarterly operating results may
be subject to significant fluctuations and may be difficult to forecast.
The
Company’s financial results may be adversely affected if it underprices contracts, overruns cost estimates or fails to receive
approval for or experience delays in documenting change orders.
Most
of the Discovery Services contracts are either fee for service contracts or fixed-fee contracts. The Company’s past financial results
have been, and future financial results may be, adversely impacted if the Company initially underprices contracts or otherwise overrun
cost estimates and is unable to successfully negotiate a change order. Change orders can occur when the scope of work the Company performs
needs to be modified from that originally contemplated by the contract with the customer and are typically treated as new projects. Modifications
can occur, for example, when there is a change in a key clinical trial assumption or parameter or a significant change in timing. Where
the Company is not successful in converting out-of-scope work into change orders under current contracts, the Company bears the cost
of the additional work. Such underpricing, significant cost overruns or delay in documentation of change orders could have a material
adverse effect on business, results of operations, financial condition or cash flows.
If
the Company fails to perform the services in accordance with contractual requirements, regulatory standards and ethical considerations,
the Company could be subject to significant costs or liability and the Company’s reputation could be harmed.
In
connection with the Discovery Services business, the Company contracts with biopharmaceutical companies to provide specialized services
to assist them in planning and conducting unique, specialized studies to guide drug discovery and development programs with a concentration
in oncology and immuno-oncology. The Company’s services include managing pre-clinical trials, data and laboratory analysis, electronic
data capture and other related services. Such services are complex and subject to contractual requirements, regulatory standards and
ethical considerations. If the Company fails to perform the services in accordance with these requirements, regulatory agencies may take
action against the Company for failure to comply with applicable regulations governing clinical trials. Customers may also bring claims
against the Company for breach of contractual obligations. Any such action could have a material adverse effect on results of operations,
financial condition and reputation.
The
performance of clinical development services is complex and time-consuming. For example, the Company may make mistakes in conducting
a clinical trial that could negatively impact or obviate the usefulness of the clinical trial or cause the results of the clinical trial
to be reported improperly. If the clinical trial results are compromised, the Company could be subject to significant costs or liability,
which could have an adverse impact on the ability to perform services. As examples:
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non-compliance
generally could result in the termination of ongoing clinical trials or sales and marketing projects or the disqualification of data
for submission to regulatory authorities;
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compromise
of data from a particular clinical trial, such as failure to verify that informed consent was obtained from patients, could require
the Company to repeat the clinical trial under the terms of the contract at no further cost to the customer, but at a substantial
cost to the Company; and
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breach
of a contractual term could result in liability for damages or termination of the contract.
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While
the Company endeavors to contractually limit exposure to such risks, improper performance of the Company’s services could have
an adverse effect on the Company’s financial condition, damage reputation and result in the cancellation of current contracts by
or failure to obtain future contracts from the affected customer or other customers
Any
investigation of our customers could damage our business.
From
time to time, one or more of the Company’s customers are audited or investigated by regulatory authorities or enforcement agencies
with respect to regulatory compliance of their clinical trials, programs or the marketing and sale of their drugs. There is a risk that
either the Company’s customers or regulatory authorities could claim that the Company performed services improperly or that the
Company is responsible for clinical trial or program compliance. If the Company’s customers or regulatory authorities make such
claims against the Company and prove them, the Company could be subject to damages, fines or penalties. In addition, negative publicity
regarding regulatory compliance of customers’ clinical trials, programs or drugs could have an adverse effect on the Company’s
business and reputation.
We
may acquire other businesses or make investments in other companies or technologies that could harm operating results, dilute its stockholders’
ownership, increase debt or cause us to incur significant expense.
As
part of our business strategy, we may pursue other mergers or acquisitions of businesses and assets. If the Company makes any acquisitions,
the Company may not be able to integrate these acquisitions successfully into existing business, and could assume unknown or contingent
liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities,
any of which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. Integration
of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing
existing business. The Company may experience losses related to investments in other companies, which could have a material negative
effect on the results of operations. The Company may not identify or complete these transactions in a timely manner, on a cost-effective
basis, or at all, and may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or joint venture.
To
finance any mergers or acquisitions, the Company may choose to issue shares of common stock as consideration, which would dilute the
ownership of its stockholders. If the price of the Company’s common stock is low or volatile, the Company may not be able to acquire
other companies using stock as consideration. Alternatively, it may be necessary for the Company to raise additional funds for acquisitions
through public or private financings. Additional funds may not be available on terms that are favorable to the Company, or at all.
If
the Company’s laboratory facilities become damaged or inoperable, or the Company is required to vacate any facility, the ability
to provide services may be jeopardized.
The
Company currently derives substantially all revenues from preclinical services. The Company’s facilities and equipment could be
harmed or rendered inoperable by natural or man-made disasters, including fire, flooding and power outages, which may render it difficult
or impossible for the Company to perform tests or provide laboratory services for some period of time. The inability to perform services
or the backlog of projects that could develop if any of the Company’s facilities is inoperable for even a short period of time
may result in the loss of customers or harm to the Company’s reputation or relationships with key researchers, collaborators, and
customers, and the Company may be unable to regain those customers or repair the Company’s reputation in the future. Furthermore,
the Company’s facilities and the equipment used to perform research and development work could be costly and time-consuming to
repair or replace.
If
the Company cannot compete successfully with competitors, the Company may be unable to increase or sustain revenues or achieve and sustain
profitability.
The
Company faces competition from companies that offer or are developing animal models for tumors and that have capabilities in toxicology
and pharmacology testing. The competitors in the Company’s Discovery Services business include Covance, Champions Oncology, Crown
BioScience (recently acquired by JSR Life Sciences), Eurofins Scientific, Charles River, Jackson Labs and Explora Biolabs.
The
Company’s competitors may succeed in selling their products to pharmaceutical and biotech customers more effectively than the Company
sells products. In addition, academic institutions, hospitals, governmental agencies, and other public and private research organizations
also may conduct similar research, seek patent protection, and may develop and commercially introduce competing products or technologies
on their own or through joint ventures. If one or more of the Company’s competitors succeeds in developing similar technologies
and products that are more effective or successful than any of those that the Company currently sells or will develop, results of operations
will be significantly adversely affected.
Our
revenues come from a limited number of customers and a reduction in demand or loss of one or more of our customers may adversely affect
our business.
As
we develop and grow our revenues, our sales may come from a limited number of customers, including licensees. Such a customer concentration
would increase the risk of fluctuations in our operating results and our sensitivity to any material, adverse developments with our customers.
Concentrations of credit risk with respect to trade receivables, which are typically unsecured, are limited due to the wide variety of
customers using our products and services as well as their dispersion across many geographic areas. . During the three months ended March
31, 2021 and 2020, three customers accounted for approximately 69% and 55% of the consolidated revenues, respectively.
The
loss of or any substantial reduction in sales to any customer could have a material adverse effect on our business, financial condition,
and results of operations and cash flows.
If
the Company uses biological and hazardous materials in a manner that causes injury, the Company could be liable for damages.
The
Company’s activities currently require the controlled use of potentially harmful biological materials and hazardous materials and
chemicals. The Company cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage,
handling or disposal of these materials. In the event of contamination or injury, the Company could be held liable for any resulting
damages, and any liability could exceed the Company’s resources or any applicable insurance coverage the Company may have. Additionally,
the Company is subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and
disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant
and could have a material adverse effect on the financial condition, results of operations and cash flows. In the event of an accident
or if the Company otherwise fails to comply with applicable regulations, the Company could lose permits or approvals or be held liable
for damages or penalized with fines.
The
Company’s Discovery Services customers face intense competition from lower cost generic products, which may lower the amount that
they spend on the Company’s services.
The
Company’s Discovery Services customers face increasing competition from lower cost generic products, which in turn may affect their
ability to pursue research and development activities with the Company. In the United States, EU and Japan, political pressure to reduce
spending on prescription drugs has led to legislation and other measures which encourages the use of generic products. In addition, proposals
emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of
generic drugs. Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing customers’
sales of that product and their overall profitability. Availability of generic substitutes for the Company’s customers’ drugs
may adversely affect their results of operations and cash flow, which in turn may mean that they would not have surplus capital to invest
in research and development and drug commercialization, including in the Company’s services. If competition from generic products
impacts customers’ finances such that they decide to curtail the Company’s services, revenues may decline and this could
have a material adverse effect on the Company’s business.
Cyber-attacks
or other failures in telecommunications or information technology systems could result in information theft, data corruption and significant
disruption of our business operations.
The
Company depends on information technology and telecommunications systems for significant aspects of operations. These information technology
and telecommunications systems support a variety of functions, including test processing, sample tracking, quality control, customer
service and support, billing, and general and administrative activities. Information technology and telecommunications systems are vulnerable
to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. In
May, 2019, an unknown individual gained unauthorized access to the then StemoniX CEO’s email account and fraudulently sent an email instructing
an employee to wire company funds to a bank account. As a result of this breach, we suffered financial loss of $109,000. In response,
StemoniX implemented additional information technology security precautions, including enhanced e-mail security software, employee training,
verbal acknowledgement of requests for payment and dual authorization payment controls at a new bank, as well as hired our current Chief
Financial Officer, however, we can provide no assurances that a cyber-attack or security breach will not occur again. If we are subjected
to one or more cyber-attacks or security breaches, we would suffer additional financial loss. Furthermore, as use of digital technologies
has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks,
have increased in frequency and sophistication and make us even more at risk. These threats pose a risk to the security of our systems
and networks, the confidentiality and the availability and integrity of our data. Any disruption or loss of information technology or
telecommunications systems on which critical aspects of the Company’s operations depend could have an adverse effect on business.
The
Company’s results of operations may be adversely affected if the Company fails to realize the full value of goodwill and intangible
assets.
The
Company assesses the realizable condition of indefinite-lived intangible assets and goodwill annually and conducts an interim evaluation
whenever events or changes in circumstances, such as operating losses or a significant decline in earnings associated with the acquired
business or asset, indicate that these assets may be impaired. The Company’s ability to realize the value of the goodwill and indefinite-lived
intangible assets will depend on the future cash flows of the vivoPharm business, which in turn depend in part on how well the
Company has integrated these businesses into the Company’s own business. If the Company is not able to realize the value of the
goodwill and indefinite-lived intangible assets, the Company may be required to incur material charges relating to the impairment of
those assets. Such impairment charges could materially and adversely affect the Company’s operating results and financial condition.
Risks
Related to the Discovery, Development and Regulatory Approval of Our Technologies and Products and Services
Our
business model and technology are evolving and unproven.
The
Company’s historic StemoniX business model is relatively
new, unproven, and likely to continue to evolve. Accordingly, our business model may not be successful, and it may need to be changed.
Our ability to generate significant revenues will depend, in large part, on its ability to successfully market its products. We intend
to continue to develop our business model as the market for our products and services continues to evolve.
In
addition, the technology our business model depends on is rapidly changing. Our current model is based on current knowledge and technologies
in stem cell sciences, which change frequently. These changes may soon cause our current model to be less relevant, decreasing potential
business revenue.
Future
governmental regulation or lack of regulatory approvals of the industry could affect our business.
Legislative
and regulatory proposals may be under consideration by federal, state, local, and foreign governmental organizations, and it is possible
that laws or regulations may exist or may be adopted with respect to our industry. The adoption of any such laws or regulations may decrease
the growth in the use of our products, our ability to attract and retain personnel, increase our cost of doing business, or otherwise
have a material adverse effect on our business. Regulatory changes or failure to comply with existing regulations could adversely affect
our business and financial condition and results of operations. We may need to obtain regulatory approvals in the use of stem cells and
our other technologies and may not receive these approvals. We also may not receive approvals for our potential therapeutic applications.
We would be unable to act without approval, as that would be a regulatory violation and expose the business to significant liability.
If
we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur
costs that could have a material adverse effect on the success of our business.
We
are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the
handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable
materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract
with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these
materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting
damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines
and penalties. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent.
We cannot predict the impact of such changes and cannot be certain of our future compliance. In addition, we may incur substantial costs
in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations
may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial
fines, penalties or other sanctions.
Although
we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential
liabilities. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws
and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in substantial fines, penalties or other sanctions or liabilities, which could
materially adversely affect our business, financial condition, results of operations and prospects.
In
our preclinical CRO business unit doing early-stage discovery work we conduct testing on animals, which could subject us to disruptions
by animal rights activists, and we are subject to laws and standards dealing with animal testing, each of which could affect our business
negatively.
The
Company’s Pennsylvania and Australia research laboratory facilities comply with Good Laboratory Practices (“GLP”) to
the extent required by the FDA, Environmental Protection Agency, USDA, Organization for Economic Co-operation and Development (OECD),
as well as other international regulatory agencies. Furthermore, the Company’s early-stage discovery work, which is not subject
to GLP standards, is typically carried out under a quality management system or internally developed quality systems. The Company’s
facilities are regularly inspected by U.S. and other regulatory compliance monitoring authorities, its clients’ quality assurance
departments, and its own internal quality assessment program. The Company is also accredited by AAALAC International, a private, nonprofit
organization that promotes the humane treatment of animals in science through voluntary accreditation and assessment programs. The Company
volunteers to participate in the AAALAC’s program to demonstrate its commitment to responsible animal care and use, in addition
to its compliance with local, state and federal laws that regulate animal research.
Animal
rights group, such as People for the Ethical Treatment of Animals (PETA) have in the past targeted scientific research, which, if targeted
at the Company or its customers, could affect our business.
Risks
Related to Our Dependence on Third Parties
We
will require third-party relationships that may not provide needed services. If such collaborators or partners fail to perform as expected
the potential for us to generate future revenue from our technologies and products and services would be significantly reduced and our
business would be harmed.
Many
aspects of our business require third-party relationships, including but not limited to equipment, materials, technology, knowledge,
sales, business development and distribution. In particular, we rely significantly on TriNet Group, Inc., a cloud-based professional
employer organization that administers our payroll and health benefits and provides other human resources services.
Specific and
unique material needs are human cells and co-factors to support the growth and development of those cells. These partners may not
allocate the resources, including time and capital, necessary to supply whatever is needed for our business. This and other issues
may require termination or conflict with partners that our business model depends upon. We have been sourcing a number of our lab
supplies from alternative suppliers due to product availability from our normal suppliers. For our StemoniX business, 384 well
plates used to grow microOrgans are in scarce supply to due to product availability and a lack of alternative suppliers.
Our
current and any future partnerships are subject to numerous risks, including:
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partners
have significant discretion in determining the efforts and resources that they will apply to the partnerships;
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partners
may not perform their obligations as expected or fail to fulfill their responsibilities in a timely manner, or at all;
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we
may not have access to, or may be restricted from disclosing, certain information regarding products or services being developed
or commercialized under a partnership and, consequently, may have limited ability to inform our shareholders about the status of
such developments;
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partners
could independently develop, or develop with third parties, products that compete directly or indirectly with ours if the collaborators
believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more
economically attractive than ours;
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products
or services developed with partners may be viewed by our partners as competitive with their own products or services, which may cause
partners to stop work on our behalf; or
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partners
may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite
litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation.
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addition, certain partnership agreements provide our partners with rights to terminate such agreements, which rights may or may not be
subject to conditions, and which rights, if exercised, could adversely affect our product development efforts and could make it difficult
for us to attract new partners. In that event: we would likely be required to limit the size and scope of efforts for the development
and commercialization; we would likely be required to seek additional financing to fund further development or identify alternative strategic
collaborations; our potential to generate future revenue from royalties and milestone payments would be significantly reduced, delayed
or eliminated; and it could have an adverse effect on our business and future growth prospects.
If
conflicts arise with our partners, collaborators or licensors, they may act in their own self-interest, which may be adverse to the interests
of our company.
We
may in the future experience disagreements with our partners, collaborators or licensors. Conflicts may arise in our collaboration and
license arrangements with third parties due to one or more of the following:
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disputes
with respect to milestone or payments that are believed due under the applicable agreements;
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disagreements
with respect to the ownership of intellectual property rights or scope of licenses;
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disagreements
with respect to the scope of any obligations;
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unwillingness
on the part of a partner or collaborator to keep us informed regarding the progress of its activities; and
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disputes
with respect to our efforts with respect to the agreement with a partner or collaborator.
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Conflicts
with our partners, collaborators or licensors could materially adversely affect our business, financial condition or results of operations
and future growth prospects.
A
partner may choose to violate confidentiality agreements or use knowledge of our business operations to compete, decreasing our potential
collaborators and increasing competition, which could lead to a loss of business revenues.
Our
reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them
or that our trade secrets will be misappropriated or disclosed.
Because
we collaborate with various organizations and academic institutions, we must, at times, share trade secrets with them. We seek to protect
our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative
research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior
to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use
or disclose our confidential information, such as trade secrets.
Despite
the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information
increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others,
or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and
trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive
position and may have a material adverse effect on our business. A competitor’s discovery of our trade secrets would impair our
competitive position and have an adverse impact on our business.
Intellectual
Property Risks Relating to the Company’s Business
The
Company’s rights to use technologies licensed from third parties are not within the Company’s control, and the Company may
not be able to sell products if the Company loses existing rights or cannot obtain new rights on reasonable terms.
The
Company’s ability to market certain of services, domestically and/or internationally, is in part derived from licenses to intellectual
property which is owned by third parties. As such, the Company may not be able to continue selling services if the Company loses existing
licensed rights or sell new services if the Company cannot obtain such licensed rights on reasonable terms. As may be expected, the Company’s
business may suffer if (i) these licenses terminate; (ii) if the licensors fail to abide by the terms of the license, properly maintain
the licensed intellectual property or fail to prevent infringement of such intellectual property by third parties; (iii) if the licensed
patents or other intellectual property rights are found to be invalid or (iv) if the Company is unable to enter into necessary licenses
on reasonable terms or at all. In return for the use of a third-party’s technology, the Company may agree to pay the licensor royalties
based on sales of products as well as other fees. Such royalties and fees are a component of cost of product revenues and will impact
the margins on the Company’s tests.
If
we are unable to obtain and maintain patent and other intellectual property protection for our products and processes, or if the scope
of the patent and other intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize
products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
Our
ability to compete effectively will depend, in part, on our ability to maintain the proprietary nature of our technology and processes.
We rely on know-how, patents, trade secrets, license agreements and contractual provisions to establish our intellectual property rights
and protect our products. These legal means, however, afford only limited protection and may not adequately protect our rights.
Through
our StemoniX subsidiary, we currently have twenty patent applications pending in the United States. The main risks related to these patent
applications is that the underlying patents will not be issued, or if they are issued, that the technology will still be used or challenged
by competitors. If the patents are issued and need to be defended from lawsuits, such defense would require significant time and financial
costs, and there is the risk of losing the challenge. In addition, we may not be issued similar patent rights throughout the world. These
risks apply to any of our trademarks as well. Furthermore, competitors may allege that our business infringes on their intellectual property.
If challenged, there will be legal costs and the risk of loss, even if such allegations are false.
Moreover,
the patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or
desirable patent applications at a reasonable cost or in a timely manner. Furthermore, we, or any future partners, collaborators, or
licensees, may fail to identify patentable aspects of inventions made in the course of development and commercialization activities before
it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to seek additional patent protection.
If we fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated.
If there are material defects in the form, preparation, prosecution or enforcement of our patents or patent applications, such patents
may be invalid and/or unenforceable, and such applications may never result in valid, enforceable patents.
Even
if they are unchallenged, our patents and patent applications, if issued, may not provide us with any meaningful protection or prevent
competitors from designing around our patent claims by developing similar or alternative technologies in a non-infringing manner. For
example, a third party may develop a competitive technology that is similar to ours, but that falls outside the scope of our patent protection.
If the patent protection provided by the patents and patent applications we hold or pursue is not sufficiently broad to impede such competition,
our ability to successfully commercialize our technology could be negatively affected.
In
addition to patent protection, we expect to rely heavily on trade secrets, know-how and other unpatented technology, which are difficult
to protect. Although we seek such protection in part by entering into confidentiality agreements with our vendors, employees, consultants
and others who may have access to proprietary information, we cannot be certain that these agreements will not be breached, adequate
remedies for any breach would be available, or our trade secrets, know-how and other unpatented proprietary technology will not otherwise
become known to or be independently developed by our competitors. If we are unsuccessful in protecting our intellectual property rights,
sales of our products may suffer and our ability to generate revenue could be severely impacted.
If
our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our marks of interest
and our business may be adversely affected.
Our
trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks.
We rely on both registration and common law protection for our trademarks. We may not be able to protect our rights to these trademarks
and trade names or may be forced to stop using these names, which we need for name recognition by potential partners or customers in
our markets of interest. During trademark registration proceedings, we may receive rejections. Although we would be given an opportunity
to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in
many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered
trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.
If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and
our business may be adversely affected.
The
Company may become involved in lawsuits or other proceedings to protect or enforce patents or other intellectual property rights, which
could be time-consuming and costly to defend, and could result in loss of significant rights and the assessment of treble damages.
From
time to time the Company may face intellectual property infringement (or misappropriation) claims from third parties. Some of these claims
may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect the Company negatively.
For example, were a third-party to succeed on an infringement claim against the Company, the Company may be required to pay substantial
damages (including up to treble damages if such infringement were found to be willful). In addition, the Company could face an injunction,
barring the Company from conducting the allegedly infringing activity. The outcome of the litigation could require the Company to enter
into a license agreement which may not be pursuant to acceptable or commercially reasonable or practical terms or which may not be available
at all. It is also possible that an adverse finding of infringement against the Company may require the Company to dedicate substantial
resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, the
Company would also need to include non-infringing technologies which would require the Company to re-validate tests. Any such re-validation,
in addition to being costly and time consuming, may be unsuccessful.
Furthermore,
the Company may initiate claims to assert or defend intellectual property against third parties. Any intellectual property litigation,
irrespective of whether the Company is the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming,
and could divert management’s attention from the Company’s business and negatively affect operating results or financial
condition. The Company may not be able to prevent, alone or with third-party collaborators or suppliers, misappropriation of the Company’s
proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States. In addition,
interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to patents and patent
applications or those of the Company’s current or future collaborators, suppliers or customers.
Finally,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some
of the Company’s confidential and proprietary information could be compromised by disclosure during this type of litigation. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the Company’s financial
condition.
If
we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could
prevent or delay us from developing or commercializing our product candidates.
Our
commercial success depends, in part, on our ability to develop, manufacture, market and sell our products without infringing the intellectual
property and other proprietary rights of third parties. Third parties may have U.S. and non-U.S. issued patents and pending patent applications
relating to uses or methods for which we are developing our technologies and products. If any third-party patents or patent applications
are found to cover our technologies and products, we and our collaborators or sublicensees may not be free to manufacture or market our
technologies and products as planned without obtaining a license, which may not be available on commercially reasonable terms, or at
all. We may also be required to indemnify our collaborators or sublicensees in such an event.
There
is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party
to, or threatened with, litigation or other adversarial proceedings. We cannot guarantee that any of our patent searches or analyses
including, but not limited to, the identification of relevant patents, the scope of patent claims or the expiration of relevant patents
are complete or thorough. Because patent applications can take many years to issue, there may be currently pending patent applications
which may later result in issued patents that our technologies or products may be accused of infringing. In addition, third parties may
obtain patents in the future and claim that use of our technologies infringes upon these patents. Accordingly, third parties may assert
infringement claims against us based intellectual property rights that exist now or arise in the future. The outcome of intellectual
property litigation is subject to uncertainties that cannot be adequately quantified in advance. Even if we are successful in any such
proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in
pursuing these proceedings, which could significantly harm our business and operating results. In addition, we may not have sufficient
resources to bring these actions to a successful conclusion.
If
we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease using,
developing, manufacturing or commercializing the infringing technology or product. Alternatively, we may be required to obtain a license
from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product.
However, we may not be able to obtain any required license on commercially reasonable terms or at all.
We
may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming
ownership of what we regard as our own intellectual property.
Many
of our current and former employees, including our senior management, were previously employed at universities or at other biotechnology
or pharmaceutical companies, including some which may be competitors or potential competitors. Some of these employees may be subject
to proprietary rights, non-disclosure and non- competition agreements, or similar agreements, in connection with such previous employment.
Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may
be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary
information, of any such third party. Litigation may be necessary to defend against such claims. If we fail in defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual
property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize
our technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful
in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In
addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual
property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with
each party who in fact develops intellectual property that we regard as our own, which may result in claims by or against us related
to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary
damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims,
litigation could result in substantial costs and be a distraction to our senior management and scientific personnel.
Issued
patents covering our technology or products could be found invalid or unenforceable if challenged in court or in administrative proceedings.
We may not be able to protect our trade secrets in court.
If
we initiate legal proceedings against a third-party to enforce a patent, should such a patent issue, the defendant could counterclaim
that the patent covering is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity
or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements,
including lack of novelty, obviousness, written description or non- enablement. Grounds for an unenforceability assertion could be an
allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made
a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States
or abroad, even outside the context of litigation. An adverse determination could result in the revocation or cancellation of, or amendment
to, our patents. Such a loss of patent protection could have a material adverse impact on our business.
In
addition, our trade secrets may otherwise become known or be independently discovered by competitors. Competitors and other third parties
could attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe, misappropriate
or otherwise violate our intellectual property rights, design around our protected technology or develop their own competitive technologies
that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently developed
by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology
or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors,
our competitive position could be adversely affected, as could our business. Additionally, if the steps taken to maintain our trade secrets
are deemed inadequate, we may have insufficient recourse against third parties for misappropriating our trade secrets.
We
may be subject to claims challenging the inventorship or ownership of the patents and other intellectual property.
We
may be subject to claims that former employees, collaborators or other third parties have an ownership interest in the patents and intellectual
property that we own or that we may own or license in the future. While it is our policy to require our employees and contractors who
may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may
be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own or
such assignments may not be self-executing or may be breached. We could be subject to ownership disputes arising, for example, from conflicting
obligations of employees or consultants. Litigation may be necessary to defend against any claims challenging inventorship or ownership.
If we or fail in defending any such claims, we may have to pay monetary damages and may lose valuable intellectual property rights, such
as exclusive ownership of, or right to use, intellectual property, which could adversely impact our business, results of operations and
financial condition.
Obtaining
and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non- compliance with these requirements.
Periodic
maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid
to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in
which non- compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of
patent rights in the relevant jurisdiction. The terms of one or more licenses that we enter into the future may not provide us with the
ability to maintain or prosecute patents in the portfolio, and must therefore rely on third parties to do so.
If
we fail to comply with our obligations under any future intellectual property licenses with third parties, we could lose license rights
that are important to our business.
We
may enter into license agreements in the future. We expect that such license agreements will impose, various diligence, milestone payment,
royalty, insurance and other obligations on us. If we fail to comply with our obligations under these licenses, our licensors may have
the right to terminate these license agreements. Termination of these license agreements or reduction or elimination of our licensed
rights may also result in our having to negotiate new or reinstated licenses with less favorable terms.
If
we do not obtain patent term extension and exclusivity, our business may be materially harmed.
Patents
have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally
20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection
it affords, is limited. Even if patents covering our proprietary technology are obtained, once the patent life has expired, we may be
open to competition from competitive products. As a result, our patent portfolio may not provide us with sufficient rights to exclude
others from commercializing products similar or identical to ours.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting, maintaining, defending and enforcing patents in all countries throughout the world would be prohibitively expensive, and
our intellectual property rights in some countries outside the United States could be less extensive than those in the United States.
The requirements for patentability may differ in certain countries, particularly in developing countries; thus, even in countries where
we do pursue patent protection, there can be no assurance that any patents will issue. There can be no assurance that we will obtain
or maintain patent rights in or outside the United States under any future license agreements. In addition, the laws of some foreign
countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently,
we may not be able to prevent third parties from practicing our inventions in countries outside the United States, even in jurisdictions
where we pursue patent protection, or from selling or importing technologies or products made using our inventions in and into the United
States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection
to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection,
but enforcement is not as strong as that in the United States. These competitors may compete with us, and our patents or other intellectual
property rights may not be effective or sufficient to prevent them from competing.
We
are exposed to risks related to our licensed-in intellectual property.
We
are heavily dependent on licensed in technology in order to operate our business. In particular, through our StemoniX subsidiary, we
license multiple patents and protocols from the University of California, San Diego, where several of our stem cell scientific experts
serve as faculty, as well as from (1) Academia Japan for technology that we need in order to create and sell induced pluripotent stem
cells, (2) ID Pharma for the Sendai virus vector technology, and (3) the Salk Institute for Biological Studies for brain cell growth
media. None of these licenses are exclusive. In addition, we may need to obtain additional licenses that are also non-exclusive. The
lack of exclusivity could decrease the barriers of entry for potential competitors. Additionally, if one or more of the Company’s
license agreements terminates, the Company may not be able to enter into new license agreements for comparable technology or on comparable
terms.
Risks
Relating to the Company’s International Operations
International
expansion of the Company’s business exposes the Company to business, regulatory, political, operational, financial and economic
risks associated with doing business outside of the United States.
The
Company’s business strategy incorporates international expansion, including recent acquisitions which have provided facilities
in Australia, and the possibility of establishing and maintaining other locations outside of the United States and expanding relationships
with biopharmaceutical, academic and governmental research organizations. Doing business internationally involves a number of risks,
including:
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multiple,
conflicting and changing laws and regulations such as tax and transfer pricing laws, export and import restrictions, employment laws,
regulatory requirements and other governmental approvals, permits and licenses;
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being
subject to additional privacy and cybersecurity laws, including the Australian Privacy Act of 1988;
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failure
by the Company or distributors to obtain regulatory approvals for the sale or use of tests in various countries, including failure
to achieve “CE Marking”, a conformity mark which is required to market in vitro diagnostic medical devices in the European
Economic Area and which is broadly accepted in other international markets;
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difficulties
in managing foreign operations;
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financial
risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency
exchange rate fluctuations;
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reduced
protection for intellectual property rights;
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natural
disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment
of trade and other business restrictions; and
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failure
to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by
maintaining accurate information and control over sales and distributors’ activities.
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Any
of these risks, if encountered, could significantly harm future international expansion and operations and, consequently, have a material
adverse effect on the Company’s financial condition, results of operations and cash flows.
The
Company’s operating results may be adversely affected by fluctuations in foreign currency exchange rates and restrictions on the
deployment of cash across global operations.
Although
the Company reports operating results in U.S. dollars, a portion of the Company’s revenues and expenses are or will be denominated
in currencies other than the U.S. dollar, particularly in Australia and Europe. Fluctuations in foreign currency exchange rates can have
a number of adverse effects on the Company. Because the Company’s consolidated financial statements are presented in U.S. dollars,
the Company must translate revenues, expenses and income, as well as assets and liabilities, into U.S. dollars at exchange rates in effect
during or at the end of each reporting period. Therefore, changes in the value of the U.S. dollar against other currencies will affect
revenues, income from operations, other income (expense), net and the value of consolidated balance sheet items originally denominated
in other currencies. There is no guarantee that the Company’s financial results will not be adversely affected by currency exchange
rate fluctuations. In addition, in some countries the Company could be subject to strict restrictions on the movement of cash and the
exchange of foreign currencies, which could limit the Company’s ability to use these funds across its global operations.
The
Company could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other worldwide
anti-bribery laws.
The
FCPA and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments
for the purpose of obtaining or retaining business or other commercial advantage. The Company’s policies mandate compliance with
these anti-bribery laws, which often carry substantial penalties, including criminal and civil fines, potential loss of export licenses,
possible suspension of the ability to do business with the federal government, denial of government reimbursement for products and exclusion
from participation in government health care programs. The Company may operate in jurisdictions that have experienced governmental and
private sector corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with certain
local customs and practices. The Company cannot assure that the internal control policies and procedures always will protect the Company
from reckless or other inappropriate acts committed by affiliates, employees or agents. Violations of these laws, or allegations of such
violations, could have a material adverse effect on the Company’s business, financial position and results of operations.
Risks
Related to Employee Matters and Managing Growth
We
only have a limited number of employees to manage and operate our business.
As
of April 30, 2021, we had 77 employees and 5 consultants, researchers and contractors. Our focus on the development of our products requires
us to optimize cash utilization and to manage and operate our business in a highly efficient manner. We cannot assure you that we will
be able to hire or retain adequate staffing levels to develop our technology or run our operations or to accomplish all of the objectives
that we otherwise would seek to accomplish.
There
is a scarcity of experienced professionals in the Company’s industry. If the Company is not able to retain and recruit personnel
with the requisite technical skills, the Company may be unable to successfully execute the business strategy.
The
specialized nature of the Company’s industry results in an inherent scarcity of experienced personnel in the field. The Company’s
future success depends upon the ability to attract and retain highly skilled personnel (including medical, scientific, technical, commercial,
business, regulatory and administrative personnel) necessary to support anticipated growth, develop business and perform certain contractual
obligations. Given the scarcity of professionals with the scientific knowledge that the Company requires and the competition for qualified
personnel among life science businesses, the Company may not succeed in attracting or retaining the personnel required to continue and
grow operations. The loss of a key employee, the failure of a key employee to perform in his or her current position or the Company’s
inability to attract and retain skilled employees could result in the inability to continue to grow the Company’s business or to
implement business strategy.
The
loss or transition of any member of the Company’s senior management team or the inability to attract and retain highly skilled
scientists, clinicians, and salespeople could adversely affect Company business.
The
Company’s success depends on the skills, experience, and performance of key members of the senior management team. The individual
and collective efforts of these employees will be important as the Company continues to develop tests and services, and as the Company
expands commercial activities. The loss or incapacity of existing members of the senior management team could adversely affect operations
if the Company experiences difficulties in hiring qualified successors.
The
complexity inherent in integrating a new key member of the senior management team with existing senior management may limit the effectiveness
of any such successor or otherwise adversely affect the Company’s business. Leadership transitions can be inherently difficult
to manage and may cause uncertainty or a disruption to business or may increase the likelihood of turnover of other key officers and
employees. Specifically, a leadership transition in the commercial team may cause uncertainty about or a disruption to the Company’s
commercial organization, which may impact the ability to achieve sales and revenue targets.
Our
officers and directors have significant influence over critical decisions.
Our
officers and directors have a significant stake in the Company and are likely to have influence over any critical decisions relating
to the Company. Our officers and directors beneficially own, directly or indirectly, approximately 8.5% of the Company’s
outstanding common stock as of April 30, 2021. As a result, such individuals are likely to continue to have a significant influence in
determining the outcome of any matter submitted to the shareholders for approval (including the election of directors and any merger,
consolidation or sale of all or substantially all of the Company’s assets) and to have significant influence in the management
and affairs of the Company. The interests of the officers and directors may differ from the interests of other shareholders due to various
factors, which may include the differing price at which they acquired their ownership in the Company as compared to other shareholders,
the significant investment of personal time and effort by the officers and directors into the Company, and differing views on the effect
of sunk costs with regard to potential future liquidity events.
Our
employees, independent contractors, consultants, collaborators and contract research organizations may engage in misconduct or other
improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for
us and harm our reputation.
We
are exposed to the risk that our employees, independent contractors, consultants, collaborators and contract research organizations may
engage in fraudulent conduct or other illegal activity. Misconduct by those parties could include intentional, reckless and/or negligent
conduct or disclosure of unauthorized activities to us that violates: (1) FDA regulations or similar regulations of comparable non-U.S.
regulatory authorities, including those laws requiring the reporting of true, complete and accurate information to such authorities,
(2) manufacturing standards, (3) federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established
and enforced by comparable non-U.S. regulatory authorities, and (4) laws that require the reporting of financial information or data
accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations
intended to prevent fraud, misconduct, kickbacks, self- dealing, bribery and other abusive practices. These laws and regulations restrict
or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business
arrangements. Employee or collaborator misconduct could also involve the improper use of, including trading on, information obtained
in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted and
maintained a code of conduct and in connection with the merger, we intend to maintain our code of conduct and business 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, standards or regulations. If any such actions are instituted against us,
and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business
and results of operations, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, imprisonment,
contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could
have a material adverse effect on our ability to operate our business and our results of operations.
Other
Risks
The
Company identified a material weakness in its internal control over financial reporting. If the Company is not able to remediate the
material weakness and otherwise maintain an effective system of internal control over financial reporting, the reliability of its financial
reporting, investor confidence in the Company and the value of its common stock could be adversely affected.
As
a public company, the Company is required to maintain internal control over financial reporting and to report any material weaknesses
in such internal controls. Section 404 of the Sarbanes-Oxley Act (“Section 404”), requires that the Company evaluate and
determine the effectiveness of internal controls over financial reporting and provide a management report on internal control over financial
reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected
and corrected on a timely basis.
During
the audit for the 2020 fiscal year, the Company identified a material weakness in internal control over financial reporting related to
the Company’s accounting for the potential impairment of intangible assets. This accounting requires the Company to record an impairment
charge if the carrying amount of the asset group is not recoverable and is in excess of the fair value of the asset group. The Company’s
calculation of undiscounted future cash flows resulted in a conclusion that no impairment was necessary, however, the Company could not
supply supporting evidence that its calculation was accurate.
Management
is committed to remediating the material weakness. The Company began the process of implementing changes to its internal control over
intangible assets to remediate the control deficiencies that gave rise to the material weakness, including further improvements in processes
and analyses that support the recording of possible impairment of intangible assets. In addition a full-time chief financial officer
joined the Company upon the Merger closing on March 30, 2021.The Company expects this deficiency to be corrected by the end of 2021.
If
the Company’s steps are insufficient to successfully remediate the material weaknesses and otherwise establish and maintain an
effective system of internal control over financial reporting, the reliability of its financial reporting, investor confidence in the
Company and the value of its common stock could be materially and adversely affected. Effective internal control over financial reporting
is necessary for the Company to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures,
are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered
in their implementation could cause the Company to fail to meet its reporting obligations. For as long as the Company is a “smaller
reporting company” under the U.S. securities laws, the Company’s independent registered public accounting firm will not be
required to attest to the effectiveness of its internal control over financial reporting pursuant to Section 404. An independent assessment
of the effectiveness of internal control over financial reporting could detect problems that management’s assessment might not.
Undetected material weaknesses in its internal control over financial reporting could lead to financial statement restatements and require
the Company to incur the expense of remediation.
The
Company does not expect that disclosure controls or internal control over financial reporting will prevent all error and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of its control
systems to prevent error or fraud could materially adversely impact the Company.
We
are exposed to the risks of natural and man-made catastrophes, pandemics and malicious and terrorist acts that could materially adversely
affect our business, financial condition and results of operations.
Natural
and man-made catastrophes, pandemics, and malicious and terrorist acts present risks that could materially adversely affect our results
of operations. While we have taken steps to identify and mitigate these risks, such risks cannot be predicted, nor fully protected against
even if anticipated. In addition, such events could result in overall macroeconomic volatility or specifically a decrease or halt in
economic activity in large geographic areas, adversely affecting the marketing or operation of our business within such geographic areas
or the general economic climate, which in turn could have an adverse effect on our business, operations and financial condition.
In
particular, the COVID-19 outbreak, which has been declared a global pandemic by the World Health Organization, has significantly and
negatively impacted financial markets and economic conditions in the United States and globally. As a result, our operations have been,
and may be further, negatively impacted. Consequently, our business, financial condition and results of operations has been, and could
be further, significantly and adversely affected.
The
Company is the target, and may in the future be the target, of securities class action and derivative lawsuits, which could result in
substantial costs and may delay or prevent the completion of the merger.
Securities
class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements in an effort
to enjoin the relevant merger or seek monetary relief. The Company is currently the defendant in eight lawsuits, and the Company may
in the future be defendants in one or more lawsuits, relating to the Merger Agreement and the merger and, even if the pending or any
future lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources.
The Company cannot predict the outcome of these lawsuits, or others, nor can it predict the amount of time and expense that will be required
to resolve such litigation. An unfavorable resolution of any such litigation surrounding the merger could delay or prevent its consummation.
In addition, the costs of defending the litigation, even if resolved in the Company’s favor, could be substantial and such litigation
could distract the Company from pursuing the consummation of the merger and other potentially beneficial business opportunities.
Risks
Relating to the Company’s Common Stock
The
price of the Company’s common stock has been and could remain volatile, and the market price of common stock may decrease.
The
market price of the Company’s common stock has historically experienced and may continue to experience significant volatility.
From January 2019 through April 30, 2021, the market price of the Company’s common stock has fluctuated from a high of $17.50
per share in the first quarter of 2021, to a low of $1.92 per share in the first quarter of 2020. In the month
of February 2021, the market price of the Company’s stock fluctuated from a low of $3.52 per share to a high of $17.50 per
share. Market prices for securities of development-stage life sciences companies have historically been particularly volatile. The factors
that may cause the market price of the Company’s common stock to fluctuate include, but are not limited
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progress,
or lack of progress, in developing and commercializing the Company’s proprietary tests;
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the
Company’s ability to recruit and retain qualified regulatory and research and development personnel;
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changes
in the relationship with key collaborators, suppliers, customers and third parties;
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changes
in the market valuation or earnings of competitors or companies viewed as similar to the Company;
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changes
in key personnel;
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depth
of the trading market in the Company’s common stock;
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changes
in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt;
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the
granting or exercise of employee stock options or other equity awards;
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realization
of any of the risks described under this section titled “Risk Factors”; and
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general
market and economic conditions.
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addition, the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the
securities of newly public companies for a number of reasons, including reasons that may be unrelated to business or operating performance.
These broad market fluctuations may result in a material decline in the market price of the Company’s common stock and you may
not be able to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities
class action lawsuits have been instituted against public companies. Such litigation, if instituted against the Company, could result
in substantial cost and the diversion of management attention.
Reports
published by securities or industry analysts, including projections in those reports that exceed actual results, could adversely affect
the Company’s common stock price and trading volume.
Securities
research analysts establish and publish their own periodic projections for the Company’s business. These projections may vary widely
from one another and may not accurately predict the results the Company actually achieves. The Company’s stock price may decline
if the actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes
reports on the Company downgrades the Company’s stock or publishes inaccurate or unfavorable research about the Company’s
business, stock price could decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on the
Company regularly, the Company’s stock price or trading volume could decline. While the Company expects securities research analyst
coverage, if no securities or industry analysts begin to cover the Company, the trading price for the Company’s stock and the trading
volume could be adversely affected.
The
Company is incurring significant costs and devotes substantial management time as a result of operating as a public company.
As
a public company, the Company is incurring significant legal, accounting and other expenses. For example, in addition to being required
to comply with certain requirements of the Sarbanes-Oxley Act of 2002, the Company is required to comply with certain requirements of
the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC,
including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance
practices. The Company expects that compliance with these requirements will continue to increase legal and financial compliance costs
and will make some activities more time consuming and costly. In addition, the Company expects that management and other personnel will
continue to need to divert attention from operational and other business matters to devote substantial time to these public company requirements.
The
Sarbanes-Oxley Act requires, among other things, that the Company maintains effective internal control over financial reporting and disclosure
controls and procedures. In particular, the Company must perform system and process evaluation and testing of internal control over financial
reporting to allow management to report on the effectiveness of internal control over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. In addition, if the Company loses status as a “non-accelerated filer,” the Company will be required
to have the Company’s independent registered public accounting firm attest to the effectiveness of internal control over financial
reporting. The Company’s compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires the Company to incur substantial
accounting expense and expend significant management efforts. The Company currently does not have an internal audit group, and the Company
will need to continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting
knowledge. If the Company or the independent registered public accounting firm identify deficiencies in the Company’s internal
control over financial reporting that are deemed to be material weaknesses, the market price of the Company’s stock could decline
and the Company could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, which would require
additional financial and management resources.
The
Company’s ability to successfully implement the Company’s business plan and maintain compliance with Section 404, as applicable,
requires the Company to be able to prepare timely and accurate financial statements. The Company expects that the Company will need to
continue to improve existing, and implement new operational and financial systems, procedures and controls to manage the Company’s
business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or
controls, may cause operations to suffer and the Company may be unable to conclude that internal control over financial reporting is
effective. If the Company fails to maintain an effective system of internal control over financial reporting, the Company may not be
able to accurately report financial results, and current and potential stockholders may lose confidence in the Company’s financial
reporting. This, in turn, could have an adverse impact on trading prices for the Company’s common stock, and could adversely affect
the Company’s ability to access the capital markets.
Anti-takeover
provisions of the Company’s certificate of incorporation, bylaws and Delaware law could make an acquisition of the Company, which
may be beneficial to the Company’s stockholders, more difficult and may prevent attempts by the Company’s stockholders to
replace or remove the current members of the board and management.
Certain
provisions of the Company’s amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger,
acquisition or other change of control that stockholders may consider favorable, including transactions in which you might otherwise
receive a premium for your shares. Furthermore, these provisions could prevent or frustrate attempts by the Company’s stockholders
to replace or remove members of the board of directors. These provisions also could limit the price that investors might be willing to
pay in the future for the Company’s common stock, thereby depressing the market price of the Company’s common stock. Stockholders
who wish to participate in these transactions may not have the opportunity to do so. These provisions, among other things:
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authorize
the board of directors to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion
of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential
hostile acquirer to prevent an acquisition that the board of directors does not approve;
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establish
advance notice requirements for stockholder nominations to the board of directors or for stockholder proposals that can be acted
on at stockholder meetings; and
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limit
who may call a stockholder meeting.
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addition, the Company is governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which may, unless
certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on the Company’s
common stock, from merging or combining with the Company for a prescribed period of time.
Because
the Company does not expect to pay cash dividends for the foreseeable future, you must rely on appreciation of the Company’s common
stock price for any return on your investment. Even if the Company changes that policy, the Company may be restricted from paying dividends
on the Company’s common stock.
The
Company does not intend to pay cash dividends on shares of common stock for the foreseeable future. Any determination to pay dividends
in the future will be at the discretion of the board of directors and will depend upon results of operations, financial performance,
contractual restrictions, restrictions imposed by applicable law and other factors the board of directors deems relevant. Accordingly,
you will have to rely on capital appreciation, if any, to earn a return on your investment in the Company’s common stock. Investors
seeking cash dividends in the foreseeable future should not purchase the Company’s common stock.
Risks
Related to Drug Discovery
We
have limited experience in drug discovery and drug development, and we have never advanced a drug to human development or had a drug
approved alone or with collaborators.
The
convergence in drug discovery of human organoid disease models along with new in silico technologies including artificial intelligence,
machine learning, and new chemistry creation is unproven. There is limited evidence that such an approach will reduce time and risk around
preclinical development. Regarding our business model to date, we are pursuing two distinct but parallel tracks to identify novel and
repurposed drug therapies: we develop and license access to human cell-derived disease models, and in conjunction with applying data
science and in vivo testing, use this technology to identify candidates to bring through the discovery phase which we will then partner
with pharmaceutical companies to pursue clinical development and commercialization. Going forward, we intend to continue to focus on
a service business of developing novel disease models according to either our partners’ or internal specifications, then either
sell microOrgan disease specific or wild-type (non-disease specific) plates to them, use them for our own internal development or offer
them as a Discovery as a Service (“DaaS”) on behalf (depending on if exclusivity was acquired or licensed by the original
partner). To date, we have made very limited independent drug discovery efforts and no assurances can be given that we will be successful.
Our
approach to the discovery and development of drug candidates based on our microOrgan plates and our AnalytiX tools is novel and unproven,
and we do not know whether we will be able to develop any products of commercial value.
We
are leveraging our microOrgan plates and our AnalytiX tools to attempt to create a pipeline of drug candidates for patients whose diseases
have not been adequately addressed to date by other approaches, and to identify drug candidates with a higher likelihood of success in
clinical trials. While we believe that our technology may potentially enable drug research and clinical development that is more efficient
than conventional drug research and development, our approach is both novel and unproven. Because our approach is both novel and unproven,
the cost and time needed to discover our drug candidates is difficult to predict, and our efforts may not result in the discovery and
development of commercially viable medicines or therapies. We may also be incorrect about the effects of any drug candidates we pursue
by disease state, which may limit the utility of our approach or the perception of the utility of our approach. Furthermore, our estimates
of our defined patient populations available for study and treatment may be lower than expected, which could adversely affect our or
our partners’ ability to conduct clinical trials and may also adversely affect the size of any market for medicines we may license
for commercialization. Our approach may not result in time savings, higher success rates or reduced costs as we expect it to, and if
not, we may not attract collaborators or develop new drugs as quickly or cost effectively as expected and therefore we may not be able
to commercialize our approach as expected at this time.
We
may never realize return on our investment of resources and cash in our drug discovery collaborations.
We
intend to use our high-throughput drug screening on our microOrgan plate technology and use our data scienced-based AnalytiX tools to
quickly test and evaluate a drug for toxicity and efficacy. We believe such technologies, which we have developed at significant expense,
will provide us or our collaborators with valuable drug discovery insights. Our collaborators could include start-up, pre-commercial
biotechnology, in silico and large-scale pharmaceutical companies. When we engage in drug discovery with these collaborators,
we will strive to receive a mixture of upfront payments, including licensing fees, milestone-based fees, and ongoing royalty payments
in addition to any charges for in vivo, in vitro and in silico testing, and our DaaS services. However, we have not yet
been successful in generating any significant payments or contracts using this business model.
We
may never enter into any material drug discovery collaborations nor realize return on our investment of resources and cash in our drug
discovery collaborations. Drug discovery is complex, capital intensive and is prone to high failure rates and uncertain outcomes. Our
drug discovery collaborators may incur additional costs or experience delays in completing, or ultimately be unable to complete, the
development and commercialization of any drug candidates. In addition, our ability to realize return from our drug discovery collaborations
is subject to the following risks, among others:
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drug
discovery collaborators have significant discretion in determining the amount and timing of efforts and resources that they will
apply to our collaborations and may not perform their obligations as expected;
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drug
discovery collaborators may not pursue development or commercialization of any drug candidates for which we are entitled to option
fees, milestone payments, or royalties or may elect not to continue or renew development or commercialization programs based on results
of clinical trials or other studies, changes in the collaborator’s strategic focus or available funding, or external factors,
such as an acquisition, that divert resources or create competing priorities;
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drug
discovery collaborators may delay clinical trials for which we are entitled to milestone payments;
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we
may not have access to, or may be restricted from disclosing, certain information regarding our collaborators’ drug candidates
being developed or commercialized and, consequently, may have limited ability to inform our stockholders about the status of, and
likelihood of achieving, milestone payments or royalties under such collaborations;
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drug
discovery collaborators could independently develop, or develop with third parties, products that compete directly or indirectly
with any drug candidates and products for which we are entitled to milestone payments or royalties if the collaborator believes that
the competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically
attractive;
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drug
candidates discovered in drug discovery collaborations with us may be viewed by our collaborators as competitive with their own drug
candidates or products, which may cause our collaborators to cease to devote resources to the commercialization of any such drug
candidates;
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drug
discovery collaborators may begin to perceive us to be a competitor more generally, particularly if we advance our internal drug
discovery programs, and therefore may be unwilling to continue then existing collaborations with us or to enter into new collaborations
with us;
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a
drug discovery collaborator may fail to comply with applicable regulatory requirements regarding the development, manufacture, distribution,
or marketing of a drug candidate or product, which may impact our ability to receive milestone payments;
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disagreements
with drug discovery collaborators, including disagreements over intellectual property or proprietary rights, contract interpretation,
or the preferred course of development, might cause delays or terminations of the research, development, or commercialization of
drug candidates for which we are eligible to receive milestone payments, or might result in litigation or arbitration;
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drug
discovery collaborators may not properly obtain, maintain, enforce, defend or protect our intellectual property or proprietary rights
or may use our proprietary information in such a way as to potentially lead to disputes or legal proceedings that could jeopardize
or invalidate our or their intellectual property or proprietary information or expose us and them to potential litigation;
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drug
discovery collaborators may infringe, misappropriate, or otherwise violate the intellectual property or proprietary rights of third
parties, which may expose us to litigation and potential liability;
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drug
discovery collaborators could suffer from operational delays as a result of global health impacts, such as the COVID-19 pandemic;
and
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drug
discovery collaborations may be terminated prior to our receipt of any significant value from the collaboration.
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Any
drug discovery collaborations we enter into may not lead to development or commercialization of drug candidates that results in our receipt
of fees, milestone payments, or royalties in a timely manner, or at all. If any drug discovery collaborations that we enter into do not
result in the successful development and commercialization of drug products that result in fees, milestone payments, or royalties to
us, we may not receive return on the resources we have invested in the drug discovery collaboration. Moreover, even if a drug discovery
collaboration initially leads to the achievement of milestones that result in payments to us, it may not continue to do so.
We
also will likely rely on collaborators for the development and potential commercialization of drug candidates we discover internally
when we believe it will help maximize the commercial value of the drug candidate. Such collaborators may not achieve the research, development,
regulatory and sales milestones for those development candidates that result in material payments to us.
Our
technology may fail to help us discover and develop additional potential drug candidates.
Any
drug discovery that we are conducting using our microOrgan plates and our AnalytiX tools may not be successful in identifying compounds
that have commercial value or therapeutic utility. Our technology may initially show promise in identifying potential drug candidates,
yet fail to yield viable drug candidates for clinical development or commercialization for a number of reasons, including:
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research
programs to identify new drug candidates will require substantial technical, financial and human resources, and we may be unsuccessful
in our efforts to identify new drug candidates. If we are unable to identify suitable additional compounds for preclinical and clinical
development, our ability to develop drug candidates and obtain product revenues in future periods could be compromised, which could
result in significant harm to our financial position and adversely impact our stock price;
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compounds
found through our process may not demonstrate efficacy, safety or tolerability;
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our
microOrgan platforms are limited in cell number and type and thus may fail to recapitulate human drug response adequately;
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potential
drug candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are
unlikely to receive marketing approval and achieve market acceptance;
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competitors
may develop alternative therapies that render our potential drug candidates non-competitive or less attractive; or
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a
potential drug candidate may not be capable of being produced at an acceptable cost.
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We
may not be successful in our efforts to identify or discover drug candidates and may fail to capitalize on programs, collaborations,
or drug candidates that may present a greater commercial opportunity or for which there is a greater likelihood of success.
Research
programs to identify new drug candidates require substantial technical, financial human resources, and external expertise. As a newly
formed organization of existing technologies, we have not yet developed any drug candidates, and we may fail to identify potential drug
candidates for clinical development. Similarly, a key element of our business plan is to expand the use of our technology in drug discovery
collaborations with third parties. A failure to demonstrate the utility of our platform by successfully using it ourselves to discover
internal drug candidates could harm our business prospects.
Because
we have limited resources, we focus our research programs on diseases where we have some know-how and where we believe there is a meaningful
commercial opportunity, among other factors. The focus of our initial internal drug discovery programs is in the area of neurological
disorders including Rett Syndrome, Schizophrenia, CDLK5 Deficiency Disorder, as well as for genetic forms of Type 2 Diabetes and Cardiac
Hypertrophy, and we have only recently begun expanding into other therapeutic areas, including oncology with a focus on glioblastoma.
We may forego or delay pursuit of opportunities with certain programs, collaborations, or drug candidates or for indications that later
prove to have greater commercial potential. However, the development of any drug candidate we pursue may ultimately prove to be unsuccessful
or less successful than another potential drug candidate that we might have chosen to pursue on a more aggressive basis with our capital
resources. If we do not accurately evaluate the commercial potential for a particular drug candidate, we may relinquish valuable rights
to that drug candidate through strategic collaboration, partnership, licensing, or other arrangements in cases in which it would have
been more advantageous for us to retain development and commercialization rights to such drug candidate. Alternatively, we may allocate
internal resources to a drug candidate in a therapeutic area in which it would have been more advantageous to enter into a collaboration.
If
we are not able to establish or maintain collaborations to develop and commercialize any of the disease models we develop or drug candidates
we discover, we may have to alter our development and commercialization plans for those disease models and drug candidates and our business
could be adversely affected.
We
have not yet established license collaborations for our disease models and related AnalytiX tools. We expect to rely on future collaborators
for either the development of our disease models or leverage such licensed models for drug discovery. We face significant competition
in seeking appropriate collaborators for these activities, and a number of more established companies may also be pursuing such collaborations.
We
have also not yet identified any drug candidates or advanced any of our drug discovery programs past the discovery stage and into preclinical
studies or human clinical trials. We expect to rely on future collaborators for the development and potential commercialization of drug
candidates we discover internally when we believe it will help maximize the commercial value of the drug candidate. We face significant
competition in seeking appropriate collaborators for these activities, and a number of more established companies may also be pursuing
such collaborations. These established companies may have a competitive advantage over us due to their size, financial resources, and
greater clinical development and commercialization expertise. Whether we reach a definitive agreement for such collaborations will depend,
among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed
collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results
of preclinical studies and clinical trials, the likelihood of approval by the U.S. Food and Drug Administration, or FDA, or similar regulatory
authorities outside the United States, the potential market for the subject drug candidate, the costs and complexities of manufacturing
and delivering such drug candidate to patients, the potential of competing products, the existence of uncertainty with respect to our
ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and
industry and market conditions generally. The collaborator may also consider alternative drug candidates or technologies for similar
indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for
our drug candidate. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant
number of recent business combinations among large biopharmaceutical companies that have resulted in a reduced number of potential future
collaborators.
If
we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms or at all, we may have to curtail
the development of a drug candidate, reduce or delay its development program or one or more of our other development programs, or increase
our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund and undertake development
or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available
to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake
the necessary development and commercialization activities, we may not be able to further develop any drug candidates or bring them to
market.
As
a Company, we do not have any experience in clinical development and have not advanced any drug candidates into clinical development.
We
only began conducting our own internal drug discovery efforts in mid-2018. As a company, we do not have any experience in clinical development
and have not advanced any drug candidates into clinical development, if we decide to pursue this pathway. Our lack of experience in conducting
clinical development activities may adversely impact the likelihood that we will be successful in advancing our programs, if we are not
able to find experienced partners. Further, any predictions you make about the future success or viability of our internal drug discovery
programs may not be as accurate as they could be if we had a history of conducting clinical trials and developing our own drug candidates.
In
addition, as our internal drug discovery business grows, we may encounter unforeseen expenses, difficulties, complications, delays, and
other known and unknown factors. Our internal drug discovery business may need to transition to a business capable of supporting clinical
development activities. We may not be successful in such a transition.
If
any current or future collaborators are unable to successfully complete clinical development, obtain regulatory approval for, or commercialize
any drug candidates, or experience delays in doing so, our business may be materially harmed.
The
success of any current or future collaborators’ development and commercialization programs will depend on several factors associated
with our collaborators’ operations, including the following:
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acceptable
data based on in vitro or in silico screenings;
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acceptable
data at the completion of necessary preclinical studies to enable the initiation of clinical trials;
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successful
enrollment of patients in, and the completion of, the clinical trials;
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acceptance
by the FDA or other regulatory agencies of regulatory filings for any drug candidates we and our current or future collaborators
may develop;
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expanding
and maintaining a workforce of experienced scientists and others to continue to develop any drug candidates;
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obtaining
and maintaining intellectual property protection and regulatory exclusivity for any drug candidates we and our current or future
collaborators may develop;
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making
arrangements with third-party manufacturers for, or establishing, clinical and commercial manufacturing capabilities;
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establishing
sales, marketing, and distribution capabilities for drug products and successfully launching commercial sales, if and when approved;
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acceptance
of any drug candidates we and our current or future collaborators may develop, if and when approved, by patients, the medical community,
and third-party payors;
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effectively
competing with other therapies;
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obtaining
and maintaining coverage, adequate pricing, and adequate reimbursement from third-party payors, including government payors;
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patients’
willingness to pay out-of-pocket in the absence of coverage and/or adequate reimbursement from third-party payors;
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maintaining
a continued acceptable safety profile following receipt of any regulatory approvals.
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Many
of these factors are beyond our control, including clinical outcomes, the regulatory review process, potential threats to our intellectual
property rights, and the manufacturing, marketing, and sales efforts of any current or future collaborator. Clinical drug development
involves a lengthy and expensive process, with an uncertain outcome. If we or our current or future collaborators are unable to develop,
receive marketing approval for, and successfully commercialize any drug candidates, or if we or they experience delays as a result of
any of these factors or otherwise, we may need to spend significant additional time and resources, which would adversely affect our business,
prospects, financial condition, and results of operations.
Our
drug discovery collaborators will have significant discretion in determining when to make announcements, if any, about the status of
our collaborations, including about clinical developments and timelines for advancing collaborative programs, and the price of our common
stock may decline as a result of announcements of unexpected results or developments.
Our
drug discovery collaborators will have significant discretion in determining when to make announcements about the status of our collaborations,
including about preclinical and clinical developments and timelines for advancing the collaborative programs. While as a general matter
we intend to periodically report on the status of our collaborations, our drug discovery collaborators may wish to report such information
more or less frequently than we intend to or may not wish to report such information at all unless legally required to do so. The price
of our common stock may decline as a result of the public announcement of unexpected results or developments in our collaborations, or
as a result of our collaborators withholding such information.
Clinical
trials are expensive, time-consuming and difficult to design and implement, and have traditionally had high attrition.
Before
obtaining marketing approval from the FDA or other comparable foreign regulatory authorities for the sale of our drug candidates, we
or our collaborators must complete preclinical development and extensive clinical trials to demonstrate the safety and efficacy of our
drug candidates. We currently plan to rely on our collaboration partners to design, fund and operate clinical trials. Clinical testing
is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical
trial process. Our collaborators may experience delays in their clinical trials and it is unknown whether clinical trials will
begin on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed
for a variety of reasons, including delays related to:
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our
collaboration partner’s funding and operational execution;
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regulatory
requirements for prolonged in vivo dosing regimens due to proposed treatment protocols;
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the
FDA or comparable foreign regulatory authorities requiring additional preclinical assessment of the candidate or disagreeing as to
the design or implementation of clinical studies;
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obtaining
regulatory authorizations to commence a trial or consensus with regulatory authorities on trial designs;
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reaching
agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which
can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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diversion
of healthcare resources to combat epidemics, such as the COVID-19 pandemic;
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obtaining
institutional review board, or IRB, approval at each site, or independent ethics committee, or IEC, approval at any sites outside
the United States;
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dependence
on the needs and timing of third-party collaborators;
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changes
to clinical trial protocols;
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recruiting
suitable patients to participate in a trial in a timely manner and in sufficient numbers;
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clinical
sites deviating from trial protocol or dropping out of a trial;
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addressing
patient safety concerns that arise during the course of a trial;
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having
patients complete a trial or return for post-treatment follow-up;
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imposition
of a clinical hold by regulatory authorities, including as a result of unforeseen safety issues or side effects or failure of trial
sites to adhere to regulatory requirements;
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the
occurrence of serious adverse events in trials of the same class of agents conducted by other companies or institutions;
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subjects
choosing an alternative treatment for the indications for which we are developing our drug candidates, or participating in competing
trials;
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adding
a sufficient number of clinical trial sites;
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manufacturing
sufficient quantities of a drug candidate for use in clinical trials;
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challenges
in transporting the drug candidate to investigation sites;
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lack
of adequate funding to continue the clinical trial;
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selection
of clinical end points that require prolonged periods of clinical observation or analysis of the resulting data;
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failure
to meet deadlines for annual reports or untimely review of reports by regulators;
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a
facility manufacturing our drug candidates or any of their components being ordered by the FDA or comparable foreign regulatory authorities
to temporarily or permanently shut down due to violations of current good manufacturing practice, or cGMP, regulations or other applicable
requirements, or infections or cross-contaminations of drug candidates in the manufacturing process;
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any
changes to the manufacturing process that may be necessary or desired;
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third-party
clinical investigators losing the licenses or permits necessary to perform the clinical trials, not performing clinical trials on
anticipated schedule or consistent with the clinical trial protocol, good clinical practice, or GCP, or other regulatory requirements;
or
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third-party
contractors not performing data collection or analysis in a timely or accurate manner; or third-party contractors providing poor
quality data that requires extensive cleansing; or third-party contractors becoming debarred or suspended or otherwise penalized
by the FDA or other government or regulatory authorities for violations of regulatory requirements or of the US Foreign Corrupt Practices
Act while conducting non-US trials, in which case we or our collaborators.may need to find a substitute contractor, and we or our
collaborators may not be able to use some or all of the data produced by such contractors in support of our marketing applications.
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In
addition, disruptions caused by the COVID-19 pandemic or other public health crises may increase the likelihood that our collaborators
encounter such difficulties or delays in initiating, enrolling, conducting or completing clinical trials or research and development.
Our collaborators could encounter delays if a clinical trial is suspended or terminated by them, by the IRBs (or IECs) of the institutions
in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory
authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the
clinical trial in accordance with regulatory requirements or clinical protocols, inspection of the clinical trial operations or trial
site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side
effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of
adequate funding to continue the clinical trial. Furthermore, our collaborators may rely on CROs and clinical trial sites to ensure the
proper and timely conduct of clinical trials and, while there may be agreements governing these activities, our collaborators would have
limited influence over their actual performance.
Further,
conducting clinical trials in foreign countries, as our collaborators may do for our current and future drug candidates, presents additional
risks that may delay completion of clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere
to clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens
associated with foreign regulatory schemes, failure to account for foreign currency exchange rates in budgeting and financial considerations,
customs and trade practices in the shipment of drug substances, as well as political and economic risks relevant to such foreign countries.
If
our collaborators experience delays in the completion of, or termination of, any clinical trial of our drug candidates, the commercial
prospects of our drug candidates will be harmed, and our ability to generate product and/or license revenues from any of these drug candidates
will be delayed. In addition, any delays in completing clinical trials will increase our collaborators’ costs, slow down our drug
candidate development and approval process and jeopardize the ability to commence product sales and generate revenues. Any of these occurrences
may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay
in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our drug candidates.
Our
collaborators will depend on enrollment of patients in their clinical trials in order to continue development of our drug candidates.
If they are unable to enroll patients in those clinical trials, our and their research and development efforts could be adversely affected.
The
timely completion of clinical trials in accordance with their protocols depends, among other things, on our collaborators’ ability
to enroll a sufficient number of patients who remain in the study until its conclusion. Our collaborators may experience difficulties
in patient enrollment in their clinical trials for a variety of reasons. Patient enrollment is affected by many factors including the
size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design
of the clinical trial, the size of the patient population required for analysis of the trial’s primary endpoints, the proximity
of patients to study sites, our collaborators’ ability to recruit clinical trial investigators with the appropriate competencies
and experience, our collaborators’ ability to obtain and maintain patient consents, the risk that patients enrolled in clinical
trials will drop out of the trials before completion, and competing clinical trials and clinicians’ and patients’ perceptions
as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be
approved for the indications we are investigating. Our collaborators’ ability to enroll patients in clinical trials may be impacted
by governmental restrictions and diversion of healthcare resources resulting from the COVID-19 pandemic. Many pharmaceutical companies
may conduct clinical trials in patients with the disease indications that our potential drug products may target. As a result, our collaborators
may need to compete with them for clinical sites, physicians and the limited number of patients who fulfill the stringent requirements
for participation in clinical trials. Also, due to the confidential nature of clinical trials, it is unknown how many of the eligible
patients may be enrolled in competing studies and who are consequently not available for our collaborators’ clinical trials. Our
collaborators’ clinical trials may be delayed or terminated due to the inability to enroll enough patients. The delay or inability
to meet planned patient enrollment may result in increased costs and delay or termination of the trials, which could have a harmful effect
on our and our collaborators’ ability to develop products.
The
regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming, expensive and inherently challenging,
and if we or our collaborators are ultimately unable to obtain regulatory approval for our drug candidates, our business could be significantly
limited.
The
time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following
the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities.
The results of preclinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage
clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having
progressed through preclinical studies and initial clinical trials. It is common for companies in the biopharmaceutical industry to suffer
significant setbacks in advanced clinical trials due to nonclinical findings made while clinical studies were underway and safety or
efficacy observations made in clinical studies, including previously unreported adverse events. Our collaborators’ future clinical
trial results may not be successful, and notwithstanding any potential promising results in earlier studies, we cannot be certain that
we and our collaborators’ will not face similar setbacks. The historical failure rate for drug candidates in our industry is high.
In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the
course of a drug candidate’s clinical development, is subject to individual or review panel interpretation, and may vary among
jurisdictions. We have not obtained regulatory approval for any drug candidate and it is possible that none of our existing drug candidates
or any drug candidates we may seek to develop in the future will ever obtain regulatory approval.
Our
drug candidates could fail to receive regulatory approval for many reasons, including the following:
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the
FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our collaborators’ clinical
trials;
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we
or our collaborators’ may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities
that a drug candidate is safe and effective for its proposed indication;
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the
results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory
authorities for approval;
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the
FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical
studies or clinical trials;
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the
data collected from clinical trials of our drug candidates may not be sufficient to support the submission of an New Drug Application
(NDA), or Biologics License Application (BLA), or other submission or to obtain regulatory approval in the United States or elsewhere;
the FDA or comparable foreign regulatory authorities may disagree that changes to branded reference drugs meet the criteria for the
505(b)(2) regulatory pathway or foreign regulatory pathways such as the hybrid medicinal product pathway;
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the
FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers
with which we or our collaborators contract for clinical and commercial supplies; and
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the
approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering
clinical data insufficient for approval.
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The
lengthy approval process as well as the unpredictability of future clinical trial results may result in our or our collaborators
failing to obtain regulatory approval to market our drug candidates, which would significantly harm our business, results of operations
and prospects.
In
addition, even if we were to obtain approval, regulatory authorities may approve any of our potential drug candidates for fewer or more
limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on
the performance of costly post-marketing clinical trials, may approve a drug candidate with a label that does not include the labeling
claims necessary or desirable for the successful commercialization of that drug candidate may classify our drug candidates in a way that
hinders market acceptance, or may restrict its distribution. Any of the foregoing scenarios could materially harm the commercial prospects
for our potential drug candidates.
We
have not previously submitted an NDA or BLA to the FDA or similar drug approval filings to comparable foreign authorities, for any drug
candidate, and we cannot be certain that any of our drug candidates will be successful in clinical trials or receive regulatory approval.
Further, our drug candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive
regulatory approvals for our drug candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory
approvals to market one or more of our drug candidates, our revenues will be dependent, in part, upon the size of the markets in the
territories for which we gain regulatory approval and have commercial rights. If the markets for patients that we or our collaborators
are targeting for our drug candidates are not as significant as we estimate, we may not generate significant revenues from sales of such
products, if approved.
We
may plan to seek regulatory approval to commercialize our drug candidates in the United States, the European Union, and in additional
foreign countries. While the scope of regulatory approval is similar in other countries, to obtain separate regulatory approval in many
other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy and
governing, among other things, clinical trials and commercial sales, pricing and distribution of our drug candidates, and we cannot predict
success in these jurisdictions.
We
face competition in drug discovery from other biotechnology and pharmaceutical companies and our operating results may be negatively
affected if we fail to compete effectively.
The
biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have
competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures and financial,
technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop novel compounds
that could make our drug candidates obsolete or uneconomical. Any new product that competes with an approved product may need to demonstrate
compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially successful. Other competitive factors,
including generic competition, could force us to lower prices or could result in reduced sales. In addition, new products developed by
others could emerge as competitors to our drug candidates. If we are not able to compete effectively against our current and future competitors,
our business will not grow and our financial condition and operations will suffer.
We
expect that we will rely on third parties to assist us and our collaborators in conducting clinical trials for our drug candidates. If
these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory
approval for or commercialize our drug candidates and our business would be substantially harmed.
We
expect that our collaborators will enter into agreements with third-party CROs to assist our collaborators in conducting and managing
their clinical programs, including contracting with clinical sites to perform clinical studies. Our collaborators may rely on these parties
for execution of clinical studies for our drug candidates, and they would control only certain aspects of conducting the clinical studies.
Nevertheless, our collaborators will be responsible for ensuring that each of their studies is conducted in accordance with the applicable
protocol, legal, regulatory and scientific standards, and their reliance on CROs and clinical sites will not relieve them of their regulatory
responsibilities. Such CROs will be required to comply with current Good Clinical Practices regulations, or cGCPs, which are regulations
and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign
regulatory authorities for any products in clinical development. The FDA enforces these cGCP regulations through periodic inspections
of trial sponsors, principal investigators and trial sites. If our collaborators or their CROs fail to comply with applicable cGCPs,
the clinical data generated in clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may
require our collaborators to perform additional clinical trials before approving their marketing applications. We cannot assure you that,
upon inspection, the FDA will determine that any of the clinical trials comply with cGCPs. In addition, clinical trials must be conducted
with products produced under current Good Manufacturing Practices, or cGMP regulations and will require a large number of test subjects.
The failure of our collaborators, CROs or clinical sites to comply with these regulations may require them to repeat clinical trials,
which would delay the regulatory approval process and could also subject them to enforcement action up to and including civil and criminal
penalties.
Although
we expect our collaborators to design the clinical trials for our drug candidates in consultation with CROs, we expect that the CROs
will manage and assist our collaborators with the clinical trials conducted at contracted clinical sites. As a result, many important
aspects of our drug development programs would be outside of our collaborators’ direct control. In addition, the CROs and clinical
sites may not perform all of their obligations under arrangements with us or our collaborators or in compliance with regulatory requirements.
If the CROs or clinical sites do not perform clinical trials in a satisfactory manner, or if they breach their obligations to our collaborators
or fail to comply with regulatory requirements, the development and commercialization of our drug candidates for the subject indications
may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these
CROs and clinical sites will devote to our program or our drug candidates. If our collaborators are unable to rely on clinical data collected
by CROs through the clinical research sites, our collaborators could be required to repeat, extend the duration of, or increase the size
of clinical trials, which could significantly delay commercialization and require significantly greater expenditures.
If
any of our collaborators’ relationships with these third-party CROs or clinical sites terminate, our collaborators may not be able
to enter into arrangements with alternative CROs or clinical sites. If CROs do not successfully carry out their contractual duties or
obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to clinical protocols, regulatory requirements or for other reasons, any such clinical trials
may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our drug
candidates. As a result, our financial results and the commercial prospects for our drug candidates would be harmed, our costs could
increase and our ability to generate revenue could be delayed.
We
expect that we will rely on third parties to assist us and our collaborators in formulation and manufacture of our drug candidates and
approved drugs. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not
be able to obtain regulatory approval for our drug candidates or commercialize approved drugs and our business would be substantially
harmed.
We
do not currently, nor do we expect in the future to, have expertise in the formulation and manufacturing of drug candidates for use in
clinical trials or commercial drug products. As such, we expect to engage a contract manufacturing organization (CMO) for the formulation,
production, packaging, and distribution of high-quality drug products in sufficient quantities for clinical trials and market entry.
These products must meet FDA and other regulatory authority standards for quality, strength, and potency. Regulatory authorities require
submission of manufacturing specification in the investigational new drug application (IND), which must adhere to quality standards and
be manufactured according to guidance on cGMP.
The
CMO is reliant on the availability of the active pharmaceutical ingredient (API) in sufficient quantities to meet the requirements for
the production of the specified dosage form for the clinical trial as well as subsequent manufacturing requirements for the marketed
drug. The CMO may manufacture the API in-house or contract with a third-party chemical manufacturer to supply the API in sufficient quantity.
If the CMO or the third-party API supplier are not able to produce the API or drug product because of scarcity of raw materials, manufacturing
equipment malfunction, manufacturing facility inoperability or damage, disruption of shipping or transport logistics, or other unplanned
for complications the approval of the IND will be delayed until a replacement CMO can be secured. Likewise, disruptions to the production
of the dosage form for marketed drug manufacture will delay the final approval of the NDA or BLA or will affect our ability to enter
the market. If the CMO fails to meet quality standards in the manufacture of the drug product for any reason, significant delays in the
availability of the product will adversely affect the availability of the marketed product.