Item 1A. RISK FACTORS
You should consider carefully the following risks described below, together with the other information contained in this Annual Report and in our other public filings, in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.
Risks Related to the Proposed Merger
The Exchange Ratio is adjustable based on our net cash at closing and the Nasdaq Adjustment, so the consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed.
The relative proportion of the combined company that the Vallon stockholders will own when and if the Merger closes will be based on the valuations of Vallon and GRI and the Exchange Ratio as negotiated by the parties and as specified in the Merger Agreement. Under the Exchange Ratio formula described in the Merger Agreement, the equity holders of GRI immediately before the Closing (including the Investor in the Equity Financing) are expected to hold approximately between 83.0% to 96.7% of the aggregate number of outstanding shares of Vallon Common Stock immediately after the Closing and the equity holders of Vallon immediately prior to the Closing are expected to hold approximately between 17.0% to 3.3% of the aggregate number of outstanding shares of Vallon Common Stock immediately after the Closing, in each case as calculated on an adjusted fully diluted treasury stock method basis and after giving effect to the Equity Financing but before giving effect to the issuance of the Series A-1, A-2, and T Warrants. Assuming an Exchange Ratio of 1.7759 and without taking into account any beneficial ownership limitations, the outstanding equity of the combined company, as calculated on a fully diluted basis by including all shares underlying all options and warrants of the combined company after giving effect to the Merger, the Equity Financing (including the issuance of the Series A-1, A-2, and T Warrants), the Series T Warrant Exercises (including the Series A-1 Warrants and Series A-2 Warrants issuable upon exercise of the Series T Warrants) and assuming the Investor receives all escrowed shares, is expected to be held as follows: equity holders of GRI immediately prior to the Closing other than the Investor will hold approximately 12.5%; the Investor in the Equity Financing will hold approximately 84.7%; and the Vallon equity holders immediately prior to the Closing will hold approximately 2.7%. The Exchange Ratio formula is based upon a GRI valuation of $49.0 million and a Vallon valuation of $29.0 million, which is subject to adjustment based upon Vallon’s net cash on the Closing Date and any reduction to Vallon’s valuation required in order to meet the initial listing requirements of Nasdaq. The assumed Exchange Ratio of 1.7759 is calculated in accordance with the Exchange Ratio formula in the Merger Agreement after giving effect to the estimated Nasdaq Adjustment (as defined below) that would result if the price per share of Vallon Common Stock selected by Nasdaq for the purpose of determining whether the combined company will satisfy the Nasdaq initial listing standards is $0.30, and implies a GRI valuation of $62.3 million and a Vallon valuation of $12.7 million. Vallon anticipates that it will have approximately negative $3.5 million of net cash, as calculated pursuant to the Merger Agreement, at the Closing provided the Closing occurs during the second quarter of 2023.
The Nasdaq adjustment in the Merger Agreement (the Nasdaq Adjustment) provides that if, at the date of determination by Nasdaq of the market value of unrestricted publicly held shares of the combined company for the purpose of determining whether the combined company will satisfy the Nasdaq initial listing standards, the price per share of Vallon Common Stock as selected by Nasdaq for this purpose is insufficient to enable the combined company to satisfy the unrestricted publicly held shares requirement, then the GRI valuation shall be adjusted upward and the Vallon valuation will be adjusted downward (but not below $5.0 million) until the adjusted valuations enable the combined company to satisfy the Nasdaq’s unrestricted publicly held shares requirement based on the price per share of the Vallon Common Stock selected by Nasdaq for that determination, and the Exchange Ratio will be recalculated based on the adjusted valuations. The price per share of Vallon Common Stock is volatile and uncertain and any Nasdaq Adjustment resulting from a low price per share of Vallon Common Stock could result in the stockholders of Vallon bearing substantial dilution. As of the date of this Annual Report, the parties expect there to be a Nasdaq Adjustment and have assumed an Exchange Ratio that assumes a price per share of Vallon Common Stock of $0.30.
There is no assurance that the proposed Merger between Vallon and GRI will be completed in a timely manner or at all. Failure to complete the Merger may result in Vallon or GRI paying a termination fee to the other party and could harm our common stock price and the future business and operations of each company.
The consummation of the Merger between Vallon and GRI is subject to a number of closing conditions, including approval by Vallon’s and GRI’s respective stockholders ofcertain stockholder proposals and other customary closing conditions. The closing conditions may not be waived without the consent of GRI, Vallon, Vallon Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Vallon (Merger Sub) and, pursuant to the Equity SPA, the Investor. The parties are targeting a closing of the transaction in the second quarter of 2023, however, there can be no assurance that the Merger will be consummated within this desired timeframe, or at all.
If the Merger between Vallon and GRI is not consummated, Vallon may be subject to a number of material risks, its business and stock price could be adversely affected, as follows:
•Vallon has incurred and expects to continue to incur significant expenses related to the Merger, such as legal and accounting fees, which must be paid even if the Merger is not consummated;
•Vallon could be obligated to pay GRI a $2.0 million termination fee and expense reimbursements up to $400,000 in connection with the termination of the Merger Agreement, depending on the reason for the termination;
•The market price of Vallon Common Stock may decline to the extent that the current market price reflects a market assumption that the Merger will be completed;
•Nasdaq could determine to delist Vallon’s Common Stock, which could have an adverse effect on the Merger, the value of Vallon’s Common Stock and any future ability to raise capital;
•Vallon may be forced to cease its operations, dissolve and liquidate its assets.
In addition, if the Merger Agreement is terminated and our board of directors determines to seek another business combination, there can be no assurance that Vallon will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Merger or any partner at all.
We are substantially dependent on a limited number of employees to facilitate the consummation of the Merger.
As of February 15, 2023, we had only two full-time employees. Our ability to successfully complete the Merger depends in large part on our ability to retain certain of our remaining personnel. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of any of these employees could potentially harm our ability to consummate the Merger, to run our day-to-day business operations, and to fulfill our reporting obligations as a public company.
Competition among biotechnology companies for qualified employees is intense, and our ability to retain our key employees is critical to our ability to effectively manage our resources and consummate the Merger. If we develop new product candidates, such development would require expertise from a number of different disciplines, some of which are not widely available. The results of the SEAL study of ADAIR will likely make it more challenging for us to retain qualified personnel and more difficult to recruit personnel in the future, if necessary. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects and ability to consummate the Merger would be harmed.
If the conditions to the closing of the Merger are not met, the Merger may not occur.
Even if the Merger and other stockholder matters are approved by our stockholders, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement, such as the Equity Financing and Vallon’s net cash not exceeding negative $4.0 million. We cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger may not occur or will be delayed, and we may lose some or all of the intended benefits of the Merger.
The pendency of the Merger could have an adverse effect on the trading price of our common stock and our business, financial condition, and prospects.
While there have been no significant adverse effects to date, the pendency of the Merger could disrupt our business in many ways, including:
•the attention of our remaining management and employees may be directed toward the completion of the Merger and related matters and may be diverted from our day-to-day business operations; and
•third parties may seek to terminate or renegotiate their relationships with us as a result of the Merger, whether pursuant to the terms of their existing agreements with us or otherwise.
Should they occur, any of these matters could adversely affect the trading price of our common stock or harm our business, financial condition, and prospects.
The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes, and/or other causes.
In general, either Vallon or GRI can refuse to complete the Merger if there is a material adverse change affecting the other party between the date of the Merger Agreement, and the closing of the Merger. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on Vallon or GRI, including:
•general business or economic conditions generally affecting the industry in which GRI or Vallon operate;
•the taking of any action, or the failure to take any action, by the either party that is required to comply with the terms of Merger Agreement;
•any natural disaster or epidemics, pandemics (including COVID-19 or other outbreaks of diseases or quarantine restrictions), or other force majeure events, or any act or threat of terrorism or war, any armed hostilities or terrorist activities; or
•any change in, or any compliance with or action taken for the purpose of complying with, any law or generally accepted accounting principles (GAAP) (or interpretations of any law or GAAP).
If adverse changes occur and Vallon and GRI still complete the Merger, the stock price of the combined company following the closing of the Merger may suffer. This in turn may reduce the value of the Merger to the stockholders of Vallon, GRI, or both.
Some of our executive officers and directors have interests in the Merger that are different from the respective stockholders of Vallon and GRI and that may influence them to support or approve the Merger without regard to the interests of the respective stockholders of Vallon and GRI.
Some of our officers and directors are parties to arrangements that provide them with interests in the Merger that are different from the respective stockholders of Vallon and GRI, including, among others, service as an officer or director of the combined company following the closing of the Merger, severance benefits, the acceleration of equity award vesting, and continued indemnification.
Based on the terms of their respective agreements, certain of our current executive officers may be entitled to receive vesting acceleration and cash bonuses in connection with the consummation of the Merger and any associated termination of employment from Vallon.
The market price of our common stock following the Merger may decline as a result of the Merger.
The market price of our common stock may decline as a result of the Merger for a number of reasons, including if:
•investors react negatively to the prospects of the combined company’s business and prospects following the closing of the Merger;
•the effect of the Merger on the combined company’s business and prospects following the closing of the Merger is not consistent with the expectations of financial or industry analysts; or
•the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by stockholders or financial or industry analysts.
Our securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the closing of the Merger as compared to their current ownership and voting interest in the respective companies.
After the completion of the Merger, our current securityholders will own a smaller percentage of the combined company than their ownership in their respective companies prior to the Merger. Under the Exchange Ratio formula described in the Merger Agreement, the equity holders of GRI immediately before the Closing (including the Investor in the Equity Financing) are expected to hold approximately between 83.0% to 96.7% of the aggregate number of outstanding shares of Vallon Common Stock immediately after the Closing and the equity holders of Vallon immediately prior to the Closing are expected to hold
approximately between 17.0% to 3.3% of the aggregate number of outstanding shares of Vallon Common Stock immediately after the Closing, in each case as calculated on an adjusted fully diluted treasury stock method basis and after giving effect to the Equity Financing but before giving effect to the issuance of the Series A-1, A-2, and T Warrants. Assuming an Exchange Ratio of 1.7759 and without taking into account any beneficial ownership limitations, the outstanding equity of the combined company, as calculated on a fully diluted basis by including all shares underlying all options and warrants of the combined company after giving effect to the Merger, the Equity Financing (including the issuance of the Series A-1, A-2, and T Warrants), the Series T Warrant Exercises (including the Series A-1 Warrants and Series A-2 Warrants issuable upon exercise of the Series T Warrants) and assuming the Investor receives all escrowed shares, is expected to be held as follows: equity holders of GRI immediately prior to the Closing other than the Investor will hold approximately 12.5%; the Investor in the Equity Financing will hold approximately 84.7%; and the Vallon equity holders immediately prior to the Closing will hold approximately 2.7%. The Exchange Ratio formula is based upon a GRI valuation of $49.0 million and a Vallon valuation of $29.0 million, which is subject to adjustment based upon Vallon’s net cash on the Closing Date and any reduction to Vallon’s valuation required in order to meet the initial listing requirements of Nasdaq. The assumed Exchange Ratio of 1.7759 is calculated in accordance with the Exchange Ratio formula in the Merger Agreement after giving effect to the estimated Nasdaq Adjustment that would result if the price per share of Vallon Common Stock selected by Nasdaq for the purpose of determining whether the combined company will satisfy the Nasdaq initial listing standards is $0.30, and implies a GRI valuation of $62.3 million and a Vallon valuation of $12.7 million. We anticipate that we will have approximately negative $3.5 million of net cash, as calculated pursuant to the Merger Agreement, at the Closing provided the Closing during the second quarter of 2023. As of January 30, 2023, the parties expect there to be a Nasdaq Adjustment and have assumed an Exchange Ratio that assumes a price per share of Vallon Common Stock of $0.30.
During the pendency of the Merger, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede our ability to make acquisitions, subject to specified exceptions relating to fiduciary duties, or complete other mergers, sales of assets, or other business combinations that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, we may be at a disadvantage to our competitors during that period. In addition, while the Merger Agreement is in effect, we are generally prohibited from soliciting, initiating, encouraging, or entering into specified extraordinary transactions, such as a merger, sale of assets, or other business combination, with any third party, subject to specified exceptions, even if any such transaction could be favorable to our stockholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit us from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when our board of directors determines in good faith, after consultation with its independent financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected to result in, a superior competing proposal and that failure to take such action would result in a breach of the fiduciary duties of the board of directors. In addition, if we or GRI terminate the Merger Agreement under specified circumstances, including terminating because of a decision of a board of directors to recommend a superior competing proposal, GRI may be required to pay us a termination fee of $2.0 million and/or up to $0.4 million in expense reimbursements or we may be required to pay GRI a termination fee of $2.0 million, and/or up to $0.4 million in expense reimbursements. This termination fee may discourage third parties from submitting competing proposals to us or our stockholders and may cause our board of directors to be less inclined to recommend a competing proposal.
Because the lack of a public market for GRI’s capital stock makes it difficult to evaluate the fairness of the Merger,we may pay more than the fair market value of GRI’s capital stock.
The outstanding capital stock of GRI is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of GRI’s capital stock. Because the percentage of our equity to be issued to GRI stockholders was determined based on negotiations between the parties, it is possible that we may pay more than the aggregate fair market value for GRI’s capital stock.
The combined company will incur significant transaction costs as a result of the Merger, including investment banking, legal, and accounting fees. In addition, the combined company will incur significant operating expenses which cannot be accurately estimated at this time. Actual transaction costs may substantially exceed the parties’ estimates and may have an adverse effect on the combined company’s financial condition and operating results.
Because the Merger will result in an ownership change under Section 382 of the Code for us, our pre-merger net operating loss (“NOL”) carryforwards and certain other tax attributes will be subject to limitation. In addition, the NOL carryforwards and other tax attributes of GRI and of the combined company may also be subject to limitation as a result of ownership changes.
As of December 31, 2022, we had U.S. federal, state and local NOL carryforwards of $25.6 million, $25.9 million and $18.6 million, respectively. As of Decembr 31, 2022, GRI had U.S. federal NOL carryforwards of $11.7 million and state NOL carryforwards of $12.0 million. Under Sections 382 and 383 of the Code and corresponding provisions of state law, if a corporation undergoes an “ownership change” (within the meaning of Section 382 of the Code (“Section 382”)), the corporation’s NOL carryforwards and certain other tax attributes (such as research tax credits) arising before the ownership change are subject to limitation on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points (by value) over a rolling three-year period. Similar rules may apply under state tax laws. The Merger will result in an ownership change for us and, accordingly, our NOL carryforwards and certain other tax attributes will be subject to limitations (or disallowance) on their use after the Merger. Our NOL carryforwards may also be subject to limitation as a result of prior shifts in equity ownership and/or the Merger. Additional ownership changes in the future could result in additional limitations on our, GRI’s, and the combined company’s NOL carryforwards. Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of our, GRI’s or the combined company’s NOL carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, the combined company’s existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.
Certain stockholders could attempt to influence changes within the combined company which could adversely affect the combined company’s operations, financial condition, and the value of the combined company’s common stock.
The combined company’s stockholders may from time-to-time seek to acquire a controlling stake in the combined company, engage in proxy solicitations, advance stockholder proposals, or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases, or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt the combined company’s operations and divert the attention of the combined company’s board of directors and senior management from the pursuit of the Merger. These actions could adversely affect the combined company’s operations, financial condition, ability to consummate the Merger, and the value of the combined company’s common stock.
Litigation relating to the Merger could require us to incur significant costs and suffer management distraction, and could delay or enjoin the Merger.
Vallon could be subject to demands or litigation related to the Merger, whether or not the Merger is consummated. Such demands or litigation may create uncertainty relating to the Merger, or delay or enjoin the Merger, and responding to such demands could divert management time and resources. In addition, such demands or litigation could lead to a dissolution or bankruptcy of either Vallon or GRI or both parties if the costs associated with such demands or litigation are significant enough.
If Nasdaq does not approve our listing application for the combined company and the parties, including the Investor, waive the Nasdaq closing condition and continue with the Merger, we may be subject to delisting.
We have filed an initial listing application with Nasdaq pursuant to Nasdaq’s “reverse merger” rules. In the event the application is not accepted by Nasdaq and the parties, including the Investor, waive the Nasdaq closing condition and proceed with the merger, the combined company will be subject to delisting proceedings and could be delisted. If our shares lose their status on The Nasdaq Capital Market, we believe that our shares would likely be eligible to be quoted on the inter-dealer electronic quotation and trading system operated by OTC Markets Group Inc., such as the OTC Pink marketplace and now known as the OTCQB market. These markets are generally considered not to be as efficient as, and not as broad as, The Nasdaq Capital Market. If our common stock is delisted, this would, among other things, substantially impair its ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us. Additionally, investors would find it more difficult to buy and sell shares of our common stock.
If our common stock were delisted from Nasdaq, we would be subject to the risks relating to penny stocks.
If our common stock were to be delisted from trading on The Nasdaq Capital Market and the trading price of our common stock were below $5.00 per share on the date its common stock is delisted, trading in our common stock would also be subject to the requirements of certain rules promulgated under the Exchange Act. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock” and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions.
On June 27, 2022, we received notice from the Listing Qualifications Department of Nasdaq indicating that, because the closing bid price for our common stock had fallen below $1.00 per share over the previous 30 consecutive business days, we no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the Bid Price Rule). Nasdaq’s notice had no immediate effect on the listing of our common stock on The Nasdaq Capital Market. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), Nasdaq provided us with an initial compliance period of 180 calendar days, or until December 27, 2022, to regain compliance with the Bid Price Rule.
On December 28, 2022, having not regained compliance with the Bid Price Rule, we received a letter from the Staff notifying us that, unless we timely request a hearing, our common stock would be scheduled for delisting from The Nasdaq Capital Market and would be suspended at the opening of business on January 6, 2023. According to the letter from Nasdaq, we had not regained compliance with the Bid Price Rule and were not eligible for a second 180 day extension period because we did not comply with the minimum $5.0 million stockholders’ equity initial listing requirement for The Nasdaq Capital Market.
Accordingly, we filed an appeal and requested a hearing before the Nasdaq Hearings Panel (the Panel). The hearing request resulted in a stay of any suspension or delisting action pending the hearing and the expiration of any extension period granted by the Panel following the hearing. In that regard, the Panel had the right to grant us an extension to regain compliance with the Bid Price Rule. The hearing before the Panel was held on February 16, 2023. The Panel reached a decision on February 21, 2023, and informed the Company that it was granting the Company’s request for a stay of delisting procedures on The Nasdaq Stock Market until April 28, 2023, subject to the Company meeting certain conditions, including the Company having completed the Merger and having satisfied all initial listing requirements of The Nasdaq Stock Market on or before April 28, 2023. The Panel stated that it based its decision on the efforts made by the Company thus far to complete the Merger and the associated proposed reverse stock split and the relatively short duration of the requested exception period. There can be no assurance that we will be able to regain compliance with all applicable requirements for continued listing or the conditions required by the Panel. If the trading of our common stock is suspended, it will cease to be quoted on The Nasdaq Capital Market and, as a result, the Merger and the Equity Financing will not be consummated unless the related closing conditions under the Merger Agreement and the Equity SPA are waived by GRI, Vallon, Merger Sub and, pursuant to the Equity SPA, the Investor.
We have incurred and will continue to incur significant transaction costs in connection with the Merger.
We have incurred and will continue to incur significant transaction costs in connection with the Merger. We estimate total aggregate direct transaction costs associated with the Merger to be approximately $4.7 million and approximately $0.2 million for our portion of shared transaction expenses, as well as additional costs associated with the commencement of the combined organization’s operation as a public company, which cannot be estimated accurately at this time.
Risks Relating to Our Business and Industry
We have incurred net losses in every year since our inception and anticipates that we will continue to incur net losses in the future.
We are a biopharmaceutical company with a limited operating history. Investment in product development in the healthcare industry, including of biopharmaceutical products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date. As a result, we are not profitable and have incurred losses in each period since our inception. For the year ended December 31, 2022, we reported a net loss of $7.0 million. As of December 31, 2022, we had an accumulated deficit of $28.9 million.
To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including completing clinical trials, manufacturing, marketing and selling products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Our failure to become and remain profitable would decrease our value and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations.
We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We anticipate future losses and negative cash flow, and it is uncertain if or when we will become profitable.
We do not expect to generate any significant revenues until we successfully complete development of our first product, including obtaining all required regulatory approvals, and we are able to successfully commercialize the product through sales and licensing. As of the date of this Annual Report, our product candidates are still in development and have not been approved by the FDA.
We have not yet demonstrated our ability to generate revenue, and we may never be able to produce revenues or operate on a profitable basis. We have incurred losses since our inception (January 11, 2018) and expect to experience operating losses and negative cash flow for the foreseeable future.
Additional capital will be required to fund our operations, ADAIR product development activities or the development of any new product. If we fail to obtain necessary financing, we will not be able to complete the development and commercialization of product candidates.
Our operations have consumed substantial amounts of cash since inception. While we have significantly decreased our research and development expenses as we assesses the best path forward for ADAIR, we expect to continue to spend a considerable amount of resources on pursuing strategic opportunities. Furthermore, to move forward with the development of ADAIR or any other product candidates, we would be required to spend substantial amounts to conduct clinical trials of such programs, to validate the manufacturing process and specifications for any such product candidate, to seek regulatory approvals for such product candidate and to launch and commercialize any products for which we receives regulatory approval, including potentially building ours own commercial organization. As of December 31, 2022, we had approximately $3.8 million of cash and cash equivalents on hand. Our future capital requirements and the period for which our existing resources will support its operations may vary significantly from what we currently expect and may change if our business plan changes from our current expected operating plan. Our monthly spending levels will vary based on development and corporate activities. Because of the uncertainty regarding our future development pathway, we are unable to estimate the actual funds we will require for development of any potential product candidate and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
•the timing and structure of any strategic options that we pursue, including the proposed Merger;
•the terms of any collaboration agreements we may choose to initiate or conclude;
•the outcome, timing and cost of meeting regulatory requirements established by the FDA, and other comparable foreign regulatory authorities;
•delay or failure in obtaining the necessary approvals from regulators or institutional review boards (IRBs) in order to commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;
•failure of third-party contractors, such as contract research organizations (CROs), or investigators to comply with regulatory requirements, including Good Clinical Practices (GCPs);
•governmental or regulatory delays and changes in regulation or policy relating to the development and commercialization of a product candidate by the FDA or other comparable foreign regulatory authorities;
•undertaking and completing additional pre-clinical studies to generate data required to support the clinical development of a product candidate;
•inability to enroll sufficient patients to complete clinical trials;
•difficulty in having patients complete a trial or return for post-treatment follow-up;
•clinical sites deviating from trial protocol or dropping out of a trial;
•problems with biopharmaceutical product candidate storage, stability and distribution;
•our inability to add new or additional clinical trial sites;
•varying interpretations of the data generated from our preclinical or clinical trials;
•inability to manufacture, or obtain from third parties, adequate supply of biopharmaceutical product candidate sufficient to complete our preclinical studies and clinical trials;
•the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements (cGMPs) and a supply chain for the development and manufacture of our product candidate;
•the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
•the effect of competing technological and market developments;
•the cost and timing of establishing, expanding and scaling manufacturing capabilities;
•the cost of establishing sales, marketing and distribution capabilities for any product candidate for which we may receive regulatory approval in regions where we choose to commercialize its products on its own; and
•potential unforeseen business disruptions or market fluctuations that delay our product development or clinical trials and increase our costs or expenses, such as business or operational disruptions, delays, or system failures due to malware, unauthorized access, terrorism, war, natural disasters, strikes, geopolitical conflicts, restrictions on trade, import or export restrictions, or public health crises, such as the current COVID-19 outbreak.
We do not have any committed external source of funds or other support for our development efforts, and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product or royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, each existing investors’ ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to its product candidate, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize itself. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our other research and development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.
Management transition creates uncertainties and could harm our business.
We will experience significant changes in executive leadership, including the changes in executive leadership as a result of the Merger. Changes to company strategy, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our results of operations and financial condition could suffer as a result. In any event, changes in our organization as a result of executive management transition may have a disruptive impact on our ability to implement our strategy and could have a material adverse effect on our business, financial condition, and results of operations.
Our auditors have expressed substantial doubt about our ability to continue as a going concern, and we may not be able to continue as a going concern if we do not obtain additional financing.
We have incurred losses since inception and have not demonstrated an ability to generate revenues from the sales of our proposed products. The report of our independent registered public accounting firm on our financial statements as of and for the
year ended December 31, 2022 includes an explanatory paragraph indicating that there is substantial doubt about its ability to continue as a going concern. We have financed our working capital requirements to date by raising capital through private placements of shares of our common stock, issuing of short-term and convertible notes, and the proceeds from our initial public offering (IPO) completed in February 2021. If we are unable to raise sufficient capital as and when needed, our business, financial condition and results of operations will be materially and adversely affected, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our independent registered public accounting firm, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties and otherwise execute our development strategy. Our ability to continue as a going concern is dependent on raising capital from the sale of our common stock and/or obtaining debt financing. Our cash and cash equivalents balance at December 31, 2022 was approximately $3.8 million. Based on our current expected level of operating expenditures, we expect to be able to fund our operations for more than four months from this filing after paying all current obligations. Our ability to remain a going concern is wholly dependent upon our ability to continue to obtain sufficient capital to fund our operations.
Despite our ability to secure capital in the past, there can be no assurance that additional equity or debt financing will be available to us when needed or that it may be able to secure funding from any other sources. In the event that we are not able to secure funding, we may be forced to curtail operations, delay or stop ongoing clinical trials, cease operations altogether, or file for bankruptcy.
We are a clinical-stage company with no approved products and a lack of operating history, which makes it difficult to evaluate our technology and product development capabilities and predict our future performance.
We have no products approved for commercial sale and have not generated any revenue from product sales. Our ability to generate product revenue or profits was dependent on the successful development and eventual commercialization of ADAIR. Given that the results of our SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for the primary endpoint of Emax Drug Liking and we are assessing the best path forward for the ADAIR program, we may never be able to develop or commercialize a marketable product.
Our current and future programs and product candidates will require additional discovery research, preclinical development, clinical development, regulatory approval to commercialize the product, manufacturing validation, obtaining manufacturing supply, capacity and expertise, building of a commercial and distribution organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. In addition, any drug product candidate must be approved for marketing by the FDA or certain other health regulatory agencies before we may commercialize any product in the respective jurisdictions.
Our limited operating history may make it difficult to evaluate our, or any new, technology and industry and predict its future performance. Our short history as an operating company makes any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If we do not address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.
As a result of our limited operating history, we may not be able to correctly estimate our future revenues, operating expenses, need for investment capital, or stability of operations, which could lead to cash shortfalls.
We have a limited operating history from which to evaluate our business. As a result, our historical financial data is of limited value in estimating future operating expenses. In addition, although we are a clinical-stage company, we have not yet completed all of the non-clinical safety studies for any pivotal clinical trials. We also have not obtained regulatory approvals for any of our products, manufactured a commercial scale product, arranged for a third party to do so on our behalf, or conducted sales and marketing activities necessary for successful product commercialization. Therefore, our budgeted operating expense levels are based in part on our expectations concerning the FDA approval process and expenses related to development of other product candidates. Failing to reach our short-term developmental milestones within anticipated timelines due to delays caused by the COVID-19 outbreak, serious adverse or unacceptable side effects caused by our product candidates, or other events, many of which may be beyond our control, may cause our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year.
Our prospects were highly dependent on a single product candidate, ADAIR, and while we are assessing the best path forward for ADAIR, we may not complete the development or commercialization of ADAIR.
Our long-term prospects were highly dependent on future acceptance and revenues from our lead product candidate, ADAIR. In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for the primary endpoint of Emax Drug Liking and that, given that result, we are currently assessing the best path forward for ADAIR. Any further development of ADAIR would require substantial capital and time to complete, and there is no guarantee that any future clinical trial, if pursued, would be timely or successful, or that ADAIR would be approved or, if approved, that commercialization would be successful. Concurrently, we have been evaluating strategic alternatives to maximize stockholder value, which could involve, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. However, there is no assurance that we will be successful in our pursuit of a strategic alternative, failure of which may have a material adverse impact on our business, financial condition, and results of operations.
We may try to out license the rights to develop and commercialize ADAIR or ADMIR in the United States or other markets but be unsuccessful.
Given the results of the SEAL study and the required additional development activity necessary to gain regulatory approval of ADAIR, we may never be able to out license or sell ADAIR to another pharmaceutical or biotechnology company even if we decide to pursue such efforts. ADMIR is based on similar technology to ADAIR and is not yet a clinical stage drug, therefore, it may be of no more interest to a potential acquiror than ADAIR. We have a small number of employees and consultants who could be dedicated to an asset sale or out license effort.
If we obtain approval to commercialize any other future product, such as ADAIR or ADMIR, outside of the U.S., a variety of risks associated with international operations could materially adversely affect our business.
If any other future product, such as ADAIR or ADMIR, is approved for commercialization outside the U.S., such as pursuant to the license agreement with Medice, who is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors, we will likely enter into agreements with third parties to market such product outside the U.S. We expect that we will be subject to additional risks related to entering into or maintaining international business relationships, including:
•different regulatory requirements for drug approvals in foreign countries;
•differing U.S. and foreign drug import and export rules, particularly regarding controlled substances and scheduled products, such as ADAIR;
•reduced protection for intellectual property rights in foreign countries;
•unexpected changes in tariffs, trade barriers, and regulatory requirements;
•different reimbursement systems;
•economic weakness, including inflation, or political instability in particular foreign economies and markets;
•compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad;
•foreign taxes, including withholding of payroll taxes;
•foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
•workforce uncertainty in countries where labor unrest is more common than in the United States;
•production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
•potential liability resulting from development work conducted by these distributors; and
•business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from any other future product, such as ADAIR or ADMIR.
If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.
Our future growth may depend on our ability to identify and acquire or in-license products and if we do not successfully identify and acquire or in-license related product candidates and products or integrate them into our operations, we may have limited growth opportunities.
An important part of our historical business strategy was to develop a pipeline of product candidates and products by acquiring or in-licensing products, businesses or technologies that we believed were a strategic fit with our business. Future in-licenses or acquisitions, however, may entail numerous operational and financial risks, including:
•exposure to unknown liabilities;
•disruption of our business and diversion of our management’s time and attention to develop acquired products or technologies;
•difficulty or inability to secure financing to fund development activities for such acquired or in-licensed technologies in the current economic environment;
•incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;
•higher than expected acquisition and integration costs;
•increased amortization expenses;
•difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
•impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
•inability to retain key employees of any acquired businesses.
We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure. In particular, we may compete with larger biopharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.
Expanding our product offerings may not be profitable.
We may choose to develop new products to offer. Developing new products involves inherent risks, including our inability to estimate demand for the new offerings, competition from more established market participants, and a lack of market understanding. In addition, expanding into new geographic areas and/or expanding product offerings will be challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market.
We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.
Our business may bring it into conflict with licensees, licensors, or others with whom we have contractual or other business relationships or with our competitors or others whose interests differ from ours. If we are unable to resolve these conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against such parties. Any litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases, could include judgments against us which could have a materially adverse effect on our business.
We may expend our limited resources to pursue a particular proposed product or indication, and fail to capitalize on a different proposed product or indication that may have been more profitable or for which there would have been a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and proposed products that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other proposed products, or for other indications, that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research
and development programs and proposed products for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular proposed product, we may relinquish valuable rights to that proposed product through collaboration, licensing, or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such proposed product.
If we fail to effectively manage our growth, our business and reputation, results of operations, and financial condition may be adversely affected.
We may experience a rapid growth in operations, which may place significant demands on our management team and our operational and financial infrastructure. As we continue to grow, we must effectively identify, integrate, develop and motivate new employees, and maintain the beneficial aspects of our corporate culture. To attract top talent, we believe we will have to offer attractive compensation packages. The risks of over-hiring or overcompensating and the challenges of integrating a rapidly growing employee base may impact profitability.
Additionally, if we do not effectively manage our growth, the quality of our services could suffer, which could adversely affect our business and reputation, results of operations, and financial condition. If operational, technology, and infrastructure improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues. To effectively manage our growth, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. This will require that we refine our information technology systems to maintain effective online services and enhance information and communication systems to ensure that our employees effectively communicate with each other and our growing base of customers. These system enhancements and improvements will require significant incremental and ongoing capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements and maintenance programs effectively, our ability to manage our expected growth and comply with the rules and regulations that are applicable to publicly reporting companies will be impaired and we may incur additional expenses.
We may not be able to manage our business effectively if we are unable to attract and retain key personnel.
Our key employees currently include Mr. David Baker, our President and Chief Executive Officer and Ms. Leanne Kelly, our Chief Financial Officer. We also have consulting arrangements with individuals such as our Chief Medical Officer, Dr. Timothy Whitaker, who is responsible for overseeing clinical development of our product candidates. Our future growth and success depend on our ability to recruit, retain, manage, and motivate our employees and key consultants. The loss of the services of our Chief Executive Officer, or any of our key employees or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results. Although we have employment agreements in place with management, these agreements are terminable at will with minimal notice.
Because of the specialized scientific and managerial nature of our business, we rely heavily on our ability to attract and retain qualified scientific and technical consultants. We may not be able to attract or retain qualified management and commercial, scientific, and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical, and other businesses. In addition, the loss of one or more of our senior executive officers or key consultants could be detrimental to us if we cannot recruit suitable replacements in a timely manner.
We do not currently carry “key person” insurance on the lives of members of senior management. The competition for qualified personnel in the biopharmaceutical field is intense.
If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our directors, consultants and advisors are not obligated to commit their time and attention exclusively to our business and therefore they may encounter conflicts of interest with respect to the allocation of time and business opportunities between our operations and those of other businesses.
Our directors are not obligated to commit their time and attention exclusively to our business and, accordingly, they may encounter conflicts of interest in allocating their own time, or any business opportunities which they may encounter, between our operations and those of other businesses.
Currently, our full-time employees consist of David Baker, our President and Chief Executive Officer, and Leanne Kelly, our Chief Financial Officer. Our key consultants include Dr. Timothy Whitaker, our Chief Medical Officer, as well as consultants for bookkeeping, pre-clinical and formulation development and clinical operations. Currently, consulting arrangements with individuals, such as Dr. Whitaker, only require them to devote an average of approximately 10 to 20 hours per week to our
business. In addition, our consultants and advisors may have other clients or projects that grow in scope or they may acquire new clients and projects that require more of their time that may come at our expense. We also currently rely on consultants for clinical operations, statistical support, and preclinical development. If the execution of our business plan demands more time than is currently committed by any of our officers, directors, consultants or advisors, they will be under no obligation to commit such additional time, and their failure to do so may adversely affect our ability to carry on our business and successfully execute our business plan.
Additionally, all of our officers and directors, in the course of their other business activities, may become aware of investments, business opportunities, or information which may be appropriate for presentation to us as well as to other entities to which they owe a fiduciary duty. They may also in the future become affiliated with entities that are engaged in business or other activities similar to those we intend to conduct. As a result, they may have conflicts of interest in determining to which entity particular opportunities or information should be presented. If, as a result of such conflict, we are deprived of investment, business or information, the execution of our business plan and our ability to effectively compete in the marketplace may be adversely affected.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state health-care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us under the Federal Physician Payments Sunshine Act and similar state laws. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing, making or contributing to the making of a false claim for reimbursement to federal, state or private payors, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. The precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.
We entered into employment contracts with members of our senior management team that contain significant anti-termination provisions which could make future changes in management difficult or expensive.
We have entered into employment agreements with members of our senior management team. These agreements may require the payment of severance in the event one of these employees ceases to be employed. These provisions make the replacement of these employees very costly and could cause difficulty in effecting any required changes in management or a change in control.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for any proposed product we may license or acquire and may have to limit their commercialization.
The use of any proposed product we may license or acquire in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing, or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, or a breach of warranties. Product liability claims might be brought against us by consumers, health care providers, or others using, administering, or selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
•withdrawal of clinical trial participants;
•termination of clinical trial sites or entire trial programs;
•decreased demand for any proposed product or products that we may develop;
•initiation of investigations by regulators;
•impairment of our business reputation;
•costs of related litigation;
•substantial monetary awards to patients or other claimants;
•loss of revenues; and
•reduced resources of our management to pursue our business strategy.
We will obtain limited product liability insurance coverage for any and all of our clinical trials. However, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. When needed, we intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any future product in development, such as ADAIR or ADMIR, but we may be unable to obtain commercially reasonable product liability insurance for any product approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.
Our internal computer systems, or those used by third-party CROs, manufacturers, or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our future CROs, manufacturers, and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. Although to our knowledge we have not experienced any such material system failure or security breach to date, if such an event were to occur, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information (such as individually identifiable health information), we could incur significant liabilities and the further development and commercialization of any future product, including ADAIR or ADMIR, could be delayed.
Increased scrutiny of our environmental, social or governance responsibilities have and will likely continue to result in additional costs and risks and may adversely impact our reputation, employee retention and willingness of customers and suppliers to do business with us.
There is an increasing focus from certain customers, consumers, employees and other stakeholders concerning environmental, social and governance (ESG) matters, including corporate citizenship and sustainability. Additionally, public interest and legislative pressure related to public companies’ ESG practices continues to grow. If our ESG practices fail to meet regulatory requirements or stakeholders’ evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, corporate governance and transparency and employing ESG strategies in our operations, our brand, reputation and employee retention may be negatively impacted, and customers and suppliers may be unwilling to do business with us.
If we fail to adopt ESG standards or practices as quickly as stakeholders desire, fail, or be perceived to fail, in our achievement of such initiatives or goals, or fail in fully and accurately reporting our progress on such initiatives and goals, our reputation, business, financial performance and growth may be adversely impacted. In addition, we could be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in connection with these matters. Our business could be negatively impacted by such matters. Any such matters, or related corporate citizenship and sustainability matters, could have a material adverse effect on our business.
Public health crises such as pandemics or similar outbreaks could materially and adversely affect Vallon’s preclinical and clinical trials, business, financial condition, and results of operations.
As the COVID-19 pandemic continues around the globe, the pandemic may affect our operations and certain other third parties on which we rely, including by causing disruptions in the supply of our product candidates and the conduct of future clinical trials. Moreover, the COVID-19 pandemic may adversely affect the operations of the FDA and other health authorities, resulting in delays of reviews and approvals with respect to our product candidates. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term
and long-term liquidity. In addition, the loss of any of our employees as a result of COVID-19, or another pandemic, may adversely affect our operations. The ultimate impact of the COVID-19 pandemic is highly uncertain, and we do not yet know the full extent of potential delays or impacts that COVID-19 may have on our business, financing, or clinical trial activities.
Some examples of potential disruptions that may result from the COVID-19 pandemic, include, but are not limited to:
•delays or difficulties in enrolling patients in our clinical trials;
•delays or difficulties in initiating or expanding clinical trials, including delays or difficulties with clinical site initiation and recruiting clinical site investigators and clinical site staff;
•increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine;
•interruption of key clinical trial activities, such as clinical trial site data monitoring and efficacy, safety and translational data collection, processing and analyses, due to limitations on travel imposed or recommended by federal, state or local governments, employers and others or interruption of clinical trial subject visits, which may impact the collection and integrity of subject data and clinical study endpoints;
•delays or disruptions in preclinical experiments and IND-enabling studies due to restrictions of on-site staff and unforeseen circumstances at CROs and vendors, including any delays caused by the COVID-19 pandemic;
•interruption or delays in the operations of the FDA and comparable foreign regulatory agencies;
•interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations (CMOs) due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;
•delays in receiving approval from local regulatory authorities to initiate Vallon’s planned clinical trials;
•limitations on employee or other resources that would otherwise be focused on the conduct of our clinical trials and pre-clinical work, including because of sickness of employees or their families, the desire of employees to avoid travel or contact with large groups of people, an increased reliance on working from home, school closures or mass transit disruptions or the refusal of employees to comply with COVID-19 vaccine mandates;
•changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
•delays in necessary interactions with regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government or contractor personnel; and
•refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.
The COVID-19 global pandemic remains a public health threat and its ultimate impact on our business and the global economy is uncertain. The extent to which the pandemic may affect our clinical trials, business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions, actions to contain the pandemic or treat its impact, such as social distancing and quarantines or lock-downs 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, and the ongoing worldwide vaccine rollout and implementation of vaccine mandates. Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, business, financial condition, and results of operations.
Risks Relating to Finances and Capital Requirements
If the Merger is not completed, we may be unsuccessful in completing an alternative strategic transaction on terms that are as favorable as the terms of the proposed transaction with GRI, or at all, and we may be unable to reestablish a viable operating business.
We have not generated revenue from any product sales and do not expect to generate any significant revenues until we successfully complete development of our first product, including obtaining all required regulatory approvals, and we are able to successfully commercialize the product through sales and licensing. In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for the primary endpoint of Emax Drug
Liking. We are continuing to assess the best path forward for the ADAIR and ADMIR programs and commenced a process of evaluating strategic alternatives to maximize stockholder value. Our assets currently consist primarily of cash, cash equivalents, our intellectual property portfolio, and our listing on The Nasdaq Capital Market. While we have entered into the Merger Agreement with GRI, the consummation of the Merger may be delayed or may not occur at all. If the Merger is not completed, the board of directors may elect to pursue an alternative strategic transaction similar to the proposed Merger. Attempting to complete an alternative transaction will be costly and time consuming. If the Merger is not completed and our board of directors determines to pursue an alternative transaction, the terms of any such alternative transaction may not be as favorable to us and our stockholders as the terms of the Merger with GRI. We can make no assurances that such an alternative transaction would occur at all. Further, if the Merger is not completed, given the level of investment and time that would be required to continue development of its existing developmental products or acquire new developmental products, it is unlikely that we would be able to obtain the funding required to recommence its product development activities on terms favorable to our stockholders, or at all.
If the Merger is not completed, our board of directors may decide to pursue a dissolution and liquidation of Vallon. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that the Merger will be completed. If the Merger is not completed, our board of directors may decide to pursue a dissolution and liquidation of Vallon. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution will continue to decrease as we fund our operations while we evaluate our strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of Vallon, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provisions for contingent and unknown obligations, prior to making any distributions in liquidation to its stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control; and (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of Vallon. If a dissolution and liquidation were pursued, our board of directors, in consultation with our advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. In the event of a dissolution or liquidation, there may be no cash to distribute in a wind down and we may owe more than we have at that time. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution, or winding up of Vallon.
If we were to continue to advance our research and development activities and pursue development of any of our pipeline products, we would require substantial additional funding. Raising additional capital would cause dilution to our existing stockholders, and may restrict our operations or require us to relinquish rights to our technologies or to a product candidate.
We currently do not have any committed external source of funds and do not expect to generate any commercial revenue in the foreseeable future. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expects if our operating plans change. If the Merger is not completed and we decide to pursue further research and development activities, we will require substantial additional funding to operate. Additional funds may not be available when we need them on terms that are acceptable to us, or may not be available at all.
To the extent that we raise additional capital through the sale of equity or convertible debt, the ownership interests of our stockholders will be diluted. In addition, the terms of any equity or convertible debt we agree to issue may include liquidation or other preferences that adversely affect the rights of our stockholders. Convertible debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring dividends, and may impose limitations on our ability to acquire, sell, or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.
Furthermore, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the pandemic has resulted in a significant disruption of global financial markets, and the ongoing impact of the COVID-19 pandemic on the global financial markets may reduce our access to capital, when and if needed. If adequate funds are not available to us on a timely basis, we may be required to curtail or cease our operations.
If the Merger is not completed, raising additional funding through debt or equity financing could be difficult or not successful at all, and may cause the market price of our common stock to decline.
If the Merger is not completed, raising additional funding through debt or equity financing could be difficult or unavailable altogether given the turbulent financial markets. 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 stockholders may not agree with the financing plans or the terms of such financings.
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations.
Our operations have consumed substantial amounts of cash since our inception. As of December 31, 2022, we had an accumulated deficit of $28.9 million and our net loss was $7.0 million for the year ended December 31, 2022. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our business will require additional capital for implementation of our long-term business plan and product development and commercialization.
Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. As we require additional funds, we may seek to fund our operations through the sale of additional equity securities, debt financing and/or strategic collaboration agreements. We cannot be sure that additional financing from any of these sources will be available when needed or that, if available, the additional financing will be obtained on favorable terms.
Our future funding requirements will depend on many factors, including, but not limited to:
•the progress, timing, scope, and costs of our clinical trials, including the ability to timely enroll patients in our potential future clinical trials;
•the outcome, timing, and cost of regulatory approvals by the FDA and comparable regulatory authorities, including the potential that the FDA or comparable regulatory authorities may require that we perform more studies than those that we currently expect;
•the number and characteristics of any future product, such as ADAIR or ADMIR, that we may in-license and develop;
•our ability to successfully commercialize any future product, such as ADAIR or ADMIR;
•the amount of sales and other revenues from any future product, such as ADAIR or ADMIR, that we may commercialize, if any, including the selling prices for such potential product and the availability of adequate third-party reimbursement;
•selling and marketing costs associated with our potential products, including the cost and timing of expanding our marketing and sales capabilities;
•the terms and timing of any potential future collaborations, licensing or other arrangements that we may establish;
•cash requirements of any future acquisitions and/or the development of other products;
•the costs of operating as a public company;
•the cost and timing of completion of commercial-scale, outsourced manufacturing activities;
•the time and cost necessary to respond to technological and market developments;
•any disputes which may occur between us and Arcturus, employees, collaborators or other prospective business partners; and
•the costs of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights.
If we raise additional funds by selling shares of our common stock or other equity-linked securities, the ownership interest of our current stockholders will be diluted. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or products or to grant licenses on terms that may not be acceptable to us. If we raise additional funds through debt financing, we may have to grant a security interest on our assets to the future lenders, our debt service costs may be substantial, and the lenders may have a preferential position in connection with any future bankruptcy or liquidation involving the company.
If we are unable to raise additional capital when needed, we may be required to curtail the development of our technology or materially curtail or reduce our operations. We could be forced to sell or dispose of our rights or assets. Any inability to raise adequate funds on commercially reasonable terms could have a material adverse effect on our business, results of operations, and financial condition, including the possibility that a lack of funds could cause our business to fail and our company to dissolve and liquidate with little or no return to investors.
We will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting, and other expenses under Exchange Act, the Sarbanes-Oxley Act, and other applicable securities rules and regulations. In addition, we are subject to the requirements of The Nasdaq Capital Market.
These rules impose various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and appropriate corporate governance practices. Our management and other personnel have devoted and will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, the listing requirements of The Nasdaq Capital Market require that we satisfy certain corporate governance requirements relating to director independence, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel need to devote a substantial amount of time to ensure that we comply with all of these requirements. As a result, it may be difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. As a result, we are required to periodically perform an evaluation of our internal controls over financial reporting to allow management to report on the effectiveness of those controls, as required by Section 404 of the Sarbanes-Oxley Act. Additionally, our independent auditors may be required to perform a similar evaluation and report on the effectiveness of our internal controls over financial reporting. These efforts to comply with Section 404 and related regulations have required, and continue to require, the commitment of significant financial and managerial resources. While we anticipate maintaining the integrity of our internal controls over financial reporting and all other aspects of Section 404, we cannot be certain that a material weakness will not be identified when we test the effectiveness of our control systems in the future. If a material weakness is identified, we could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission (the SEC), or other regulatory authorities, which would require additional financial and management resources, costly litigation or a loss of public confidence in our internal controls, which could have an adverse effect on the market price of our stock. See the risk factor entitled “Financial reporting obligations of being a public company in the United States require well defined disclosure and financial controls and procedures that we did not have as a private company and that are expensive and time-consuming requiring our management to devote substantial time to compliance matters.” in this Annual Report for more information on our internal controls over financial reporting.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our securities less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. As an emerging growth company, we are not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, we have elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, our financial statements may not be comparable to companies that comply with public company effective dates. We cannot predict if investors will find our stock less attractive because we may rely on these provisions. If some investors find our stock less attractive as a result, there may be a less active trading market for our shares and our stock price may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended
transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, will not adopt the new or revised standard until the time private companies are required to adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.
After we become a reporting company under the Exchange Act, we will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.235billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act.
Our ability to utilize our net operating loss (NOL) carryforwards may be limited.
As of December 31, 2022, we had NOL carryforwards available to reduce future taxable income, if any, for federal and state income tax purposes of $25.6 million and $25.9 million, respectively. The federal net operating loss carryforwards do not expire. If not utilized, the state and local losses begin to expire in the year ending December 31, 2038. Our ability to utilize NOL carryforward amounts to reduce taxable income in future years may be limited for various reasons, including if future taxable income is insufficient to recognize the full benefit of such NOL carryforward amounts prior to their expiration. Additionally, our ability to fully utilize these U.S. tax assets can also be adversely affected by “ownership changes” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the Code), in a three-year period. Any ownership change is generally defined as a greater than 50% increase in equity ownership by “5% stockholders,” as that term is defined for purposes of Section 382 of the Code in any three-year period. Further, we may experience an ownership change in the future as a result of further shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Changes in tax laws and regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and operating results.
Changes in tax laws in any jurisdiction in which we operate, or adverse outcomes from any tax audits that we may be subject to in any such jurisdictions, could result in an unfavorable change in our effective tax rate in the future, which could adversely affect our business, financial condition, and operating results.
Risks Relating to Intellectual Property
We have filed multiple patent applications and have three issued patents by the U.S. PTO and two issued patents by the European Patent Office. These or any other patent applications may not result in issued patents, and as a result we may have limited protection of our proprietary technology in the marketplace.
We have had three patents granted and one additional patent application directed to ADAIR for ADHD and narcolepsy filed in the United States, have had two patents granted in Europe, has one patent granted in Japan, and we are seeking patent protection for ADAIR internationally in several foreign countries and territories, including Australia, Canada, and China. The U.S. patents will expire in 2037 and the European and Japanese patents will expire in 2038. It is impossible to predict whether or how our PCT applications will result in any issued patent. Even if the pending applications issue, they may issue with claims significantly narrower than those we currently seek.
The patent position of biotechnology and biopharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the U.S. PTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and biopharmaceutical patents. Consequently, a patent may not issue from our pending patent applications. Therefore, we do not know the degree of future protection that we will have on any proprietary product or technology that we have or may develop.
If we are unable to obtain and maintain patent protection for our technology and products or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be impaired.
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection in the United States and other countries with respect to ADAIR or any other future product, such as ADMIR, that we may license or acquire and the methods we use to manufacture them, as well as successfully defending these patents and trade secrets against third-party challenges. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our proposed products. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.
The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. If our licensors or we fail to obtain or maintain patent protection or trade secret protection for ADAIR or any other future product, such as ADMIR, we may license or acquire, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability. Moreover, should we enter into other collaborations we may be required to consult with or cede control to collaborators regarding the prosecution, maintenance, and enforcement of our patents. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.
The patent position of biotechnology and biopharmaceutical companies generally is highly uncertain, involves complex legal and factual questions, and has in recent years been the subject of much litigation. In addition, no consistent policy regarding the breadth of claims allowed in biopharmaceutical or biotechnology patents has emerged to date in the United States. The patent situation outside the U.S. is even more uncertain. The laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until eighteen (18) months after a first filing, or in some cases at all. Therefore, we cannot know with certainty whether we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or whether we were the first to file for patent protection of such inventions. In the event that a third party has also filed a U.S. patent application relating to our proposed products or a similar invention, we may have to participate in interference proceedings declared by the U.S. PTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act (the Leahy-Smith Act) was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The U.S. PTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the U.S. PTO, or become involved in opposition, derivation, reexamination, inter parties review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, patent office trial, proceeding or litigation could reduce the scope of, render unenforceable, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product.
Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.
The issuance of a patent does not foreclose challenges to its inventorship, scope, validity or enforceability. Therefore, our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing, and regulatory review of new proposed products, patents protecting such proposed products might expire before or shortly after such proposed products are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection.
The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
•our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
•our licensors might not have been the first to file patent applications for these inventions;
•others may independently develop similar or alternative technologies or duplicate ADAIR or any future product, such as ADMIR;
•it is possible that none of the pending patent applications licensed to us will result in issued patents;
•the issued patents covering ADAIR or any future product, such as ADMIR, may not provide a basis for market exclusivity for active products, may not provide us with any competitive advantages, or may be challenged by third parties;
•we may not develop additional proprietary technologies that are patentable; or
•patents of others may have an adverse effect on our business.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our issued patents or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, rendered unenforceable, or interpreted narrowly.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.
Our ability to develop, manufacture, market and sell ADAIR or any other future product, such as ADMIR, that we may license or acquire depends upon our ability to avoid infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the general fields of ADHD and cover the use of numerous compounds and formulations in our targeted markets. Because of the uncertainty inherent in any patent or other litigation involving proprietary rights, we and our licensors may not be successful in defending intellectual property claims by third parties, which could have a material adverse effect on our results of operations. Regardless of the outcome of any litigation, defending the litigation may be expensive, time-consuming and distracting to management. In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that ADAIR may infringe. There could also be existing patents of which we are not aware that ADAIR may inadvertently infringe
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their patents or misappropriated their technology, we could face a number of issues, including:
•infringement and other intellectual property claims, which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business;
•substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent;
•a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it would not be required to do;
•if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and
•redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.
We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the development and commercialization of any future product, such as ADAIR or ADMIR. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize any future product. If we are unable to obtain a license from these third parties, or unable to obtain a license, on commercially reasonable terms, our business could be harmed.
If we fail to comply with our obligations in our intellectual property licenses and funding arrangements with third parties, we could lose rights that are important to our business.
In the future, we may become party to licenses that are important for product development and commercialization. If we fail to comply with our obligations under current or future license and funding agreements, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product or utilize any technology that is covered by these agreements or may face other penalties under the agreements. Such an occurrence could materially and adversely affect the value of a proposed product being developed under any such agreement or could restrict our drug discovery activities. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the biotechnology and biopharmaceutical industry, we employ individuals who were previously employed at other biotechnology or biopharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent protection for ADAIR or any future product, such as ADMIR, we also rely on trade secrets, including unpatented know-how, technology, and other proprietary information, to maintain our competitive position, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We limit disclosure of such trade secrets where possible, but we also seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who do have access to them, such as our employees, our licensors, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors, and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and may unintentionally or willfully disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the U.S. are less willing or unwilling to protect trade secrets. Moreover, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
Risks Relating to Securities Markets and Our Common Stock
An active, liquid and orderly market for our common stock may not be maintained.
Prior to our IPO, there had been no public market for our common stock. Our common stock only recently began trading on The Nasdaq Capital Market, but we can provide no assurance that we will be able to develop and sustain an active trading market for our common stock. Even if an active trading market is developed, it may not be sustained. The lack of an active market may impair stockholders’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses or technologies using our shares as consideration, which, in turn, could materially adversely affect our business.
If we cannot continue to satisfy the listing requirements of The Nasdaq Capital Market and other rules, including the director independence requirements, our securities may be delisted, which could negatively impact the price of our securities and stockholders’ ability to sell them.
Although common stock is listed on The Nasdaq Capital Market, we may be unable to continue to satisfy the listing requirements and rules, including the director independence requirements and certain financial metrics for our stockholders’ equity and market value of listed securities or net income from continuing operations. If we are unable to satisfy The Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting. If The Nasdaq Capital Market delists our securities, we could face significant consequences, including:
•a limited availability for market quotations for our securities;
•reduced liquidity with respect to our securities;
•a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in reduced trading;
•activity in the secondary trading market for our common stock;
•limited amount of news and analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
In addition, we would no longer be subject to The Nasdaq Capital Market rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.
See also the risk factor captioned “If our common stock were delisted from Nasdaq, we would be subject to the risks relating to penny stocks.” in this Annual Report.
Our stock may be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control and may prevent our stockholders from reselling our common stock at a profit.
The market prices for securities of biotechnology and biopharmaceutical companies have historically been highly volatile, and the market has from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In particular, the trading prices for pharmaceutical, biopharmaceutical and biotechnology companies have been highly volatile as a result of the COVID-19 pandemic.
The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
•results from, and any delays in, our clinical trials for our product candidates, including ADAIR and ADMIR, or any other future clinical development programs, including any delays related to the COVID-19 pandemic;
•announcements concerning the progress of our efforts to obtain regulatory approval for and commercialize any future product, including ADAIR or ADMIR, including any requests we receive from the FDA for additional studies or data that result in delays in obtaining regulatory approval or launching such proposed product, if approved;
•market conditions in the biopharmaceutical and biotechnology sectors or the economy as a whole;
•price and volume fluctuations in the overall stock market;
•the failure of any future product, such as ADAIR or ADMIR, if approved, to achieve commercial success;
•announcements of the introduction of new products by us or our competitors;
•developments concerning product development results or intellectual property rights of others;
•litigation or public concern about the safety of our potential products;
•actual fluctuations in our quarterly operating results, and concerns by investors that such fluctuations may occur in the future;
•deviations in our operating results from the estimates of securities analysts or other analyst comments;
•additions or departures of key personnel;
•health care reform legislation, including measures directed at controlling the pricing of biopharmaceutical products, and third-party coverage and reimbursement policies;
•developments concerning current or future strategic collaborations; and
•discussion of us or our stock price by the financial and scientific press and in online investor communities.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our common stock, a liquid trading market, if any, for our common stock may not develop, and if it does, our share price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and analysts may not provide favorable coverage, or any coverage at all. If any of the analysts that do cover us make an adverse recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
Because we do not intend to declare cash dividends on our common stock in the foreseeable future, stockholders must rely on appreciation of the value of our common stock for any return on their investment.
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future.
Our significant stockholders may exert a substantial influence on actions requiring a stockholder vote, potentially in a manner that you do not support.
As of February 15, 2023, our executive officers, directors, beneficial owners of 5% of more of our capital stock and their respective affiliates will, in the aggregate, beneficially own approximately 54.3% of our outstanding common stock, including Medice, through its affiliated entity, Salmon Pharma, and Arcturus Therapeutics, Ltd. (Arcturus), our largest stockholders, assuming no exercise of the underwriters’ option to purchase additional shares.
If Salmon Pharma, Arcturus or any member of our board or management acquires additional shares of common stock in the aftermarket or in privately negotiated transactions, this would increase their control. Factors that would be considered in making such additional purchases would include consideration of the current trading price of our common stock.
Salmon Pharma and Arcturus’s large ownership stake may allow it to exert a substantial influence on actions requiring a stockholder vote, potentially in a manner that stockholders’ do not support, including amendments to our amended and restated certificate of incorporation, election of our board of directors, removal of any of our directors, adoption of measures that could delay or prevent a change in control or impede a merger, takeover, or other business combination involving us, and approval of other major corporate transactions. In addition, Salmon Pharma and Arcturus’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. Accordingly, our stockholders other than Salmon Pharma and Arcturus may be unable to influence management and exercise control over our business.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of Delaware law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws:
•limit who may call stockholder meetings;
•do not provide for cumulative voting rights;
•provide that all vacancies may be filled only by the affirmative vote of a majority of directors then in office, even if less than a quorum;
•provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal claims; and
•provide that the federal district courts of the United States of American will be the exclusive forum for legal claims under the Securities Act.
In addition, once we become a publicly traded corporation, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for a period of three years following the share acquisition. These provisions may have the effect of entrenching our management team and may deprive stockholders’ of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock. See Exhibit 4.5 “Description of Capital Stock” for additional information.
Financial reporting obligations of being a public company in the United States require well defined disclosure and financial controls and procedures that are expensive and time-consuming requiring our management to devote substantial time to compliance matters.
As a publicly traded company, we incur significant legal, accounting and other expenses that we did not incur as a privately held company prior to the completion of our IPO in February 2021. These reporting obligations associated with being a public company in the United States require significant expenditures and place significant demands on our management and other personnel, including costs resulting from our reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, and the listing requirements of The Nasdaq Capital Market. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement,
monitor and maintain compliance with. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations may make some activities more time-consuming and costly, particularly after we are no longer an “emerging growth company.” In addition, we expect these rules and regulations to make it more difficult and more expensive for us to maintain director and officer liability insurance. Our management and other personnel need to devote a substantial amount of time to ensure that we comply with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.
If we fail to comply with the rules under the Sarbanes-Oxley Act related to accounting controls and procedures in the future, or, if we discover additional material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting after a transition period ending with our second annual report on Form 10-K filed under Section 13(a) of the Exchange Act. If we fail to comply with the rules under the Sarbanes-Oxley Act related to disclosure controls and procedures in the future, or, if in the future we discover additional material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.