UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCD.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from toCommission file number
SEELOS THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 87-0449967 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
300 San Diego, CA 92130
(Address of Principal Executive Offices) (Zip Code)
(646)293-2100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Stock, par value | SEEL | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☐ Accelerated filer ☐Non-accelerated filer☒ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 27, 2017, 15,215,517April 28, 2022, shares of the common stock, par value $.001,$0.001, of the registrant were outstanding.
| PAGE | ||
| . | FINANCIAL STATEMENTS (UNAUDITED) | 1 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 19 |
| . | 28 | |
| ITEM | 28 | |
| PART II. | ||
| . | 29 | |
| ITEM | 29 | |
| ITEM | 61 | |
| ITEM | 61 | |
| ITEM | ||
| 61 | ||
| ITEM | OTHER INFORMATION | 61 |
| EXHIBITS | 61 | |
| SIGNATURES | 66 | |
| i |
PART I.
ITEM 1. FINANCIAL STATEMENTS
Seelos Therapeutics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and par valueper share data)
| September 30, 2017 | December 31, 2016 | ||||||
| (Unaudited) | |||||||
| Assets | |||||||
| Current assets | |||||||
| Cash | $ | 8,463 | $ | 2,087 | |||
| Prepaid expenses and other current assets | 216 | 177 | |||||
| Current assets of discontinued operations | 9 | 1,370 | |||||
| Total current assets | 8,688 | 3,634 | |||||
| Property and equipment, net | 100 | 164 | |||||
| Other long term assets | 35 | 60 | |||||
| Noncurrent assets of discontinued operations | — | 842 | |||||
| Total assets | $ | 8,823 | $ | 4,700 | |||
| Liabilities and stockholders’ equity (deficit) | |||||||
| Current liabilities | |||||||
| Note payable, net | $ | — | $ | 6,650 | |||
| Accounts payable | 262 | 686 | |||||
| Accrued expenses | 783 | 1,236 | |||||
| Accrued compensation | 668 | 614 | |||||
| Current liabilities of discontinued operations | 101 | 2,108 | |||||
| Total current liabilities | 1,814 | 11,294 | |||||
| Warrant liabilities | 636 | 846 | |||||
| Deferred rent | 54 | 76 | |||||
| Total liabilities | 2,504 | 12,216 | |||||
| Commitments and contingencies | |||||||
| Stockholders’ equity (deficit) | |||||||
| Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2017 and December 31, 2016 | $ | — | $ | — | |||
| Common stock, $.001 par value, 30,000,000 shares authorized, 15,029,052 and 7,733,205 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 15 | 8 | |||||
| Additional paid-in-capital | 319,845 | 308,784 | |||||
| Accumulated deficit | (313,541 | ) | (316,308 | ) | |||
| Total stockholders’ equity (deficit) | 6,319 | (7,516 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 8,823 | $ | 4,700 | |||
(Unaudited)
| March 31, | December 31, | |||||
| 2022 | 2021 | |||||
| Assets | ||||||
| Current assets | ||||||
| Cash | $ | 61,772 | $ | 78,734 | ||
| Prepaid expenses and other current assets | 8,895 | 4,727 | ||||
| Total current assets | 70,667 | 83,461 | ||||
| Operating lease right-of-use asset | 26 | 39 | ||||
| Total assets | $ | 70,693 | $ | 83,500 | ||
| Liabilities and stockholders’ equity | ||||||
| Current liabilities | ||||||
| Accounts payable | $ | 2,127 | $ | 1,693 | ||
| Accrued expenses | 3,549 | 3,728 | ||||
| Licenses payable | - | 200 | ||||
| Short-term portion of convertible notes payable, at fair value | 4,238 | 1,030 | ||||
| Derivative liability | - | 1,174 | ||||
| Warrant liabilities, at fair value | 190 | 424 | ||||
| Operating lease liability | 26 | 38 | ||||
| Total current liabilities | 10,130 | 8,287 | ||||
| Convertible notes payable, at fair value | 14,926 | 17,890 | ||||
| Total liabilities | 25,056 | 26,177 | ||||
| Commitments and contingencies (note 12) | - | - | ||||
| Stockholders’ equity | ||||||
| Preferred stock, $ par value, shares authorized, shares issued or outstanding as of March 31, 2022 and December 31, 2021 | - | - | ||||
| Common stock, $ par value, shares authorized, and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 105 | 105 | ||||
| Additional paid-in-capital | 200,743 | 198,428 | ||||
| Accumulated deficit | (155,211) | (141,210) | ||||
| Total stockholders’ equity | 45,637 | 57,323 | ||||
| Total liabilities and stockholders’ equity | $ | 70,693 | $ | 83,500 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Seelos Therapeutics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2022 and 2021
(In thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Operating expense | |||||||||||||||
| Research and development | $ | 1,960 | $ | 170 | $ | 3,226 | $ | 5,274 | |||||||
| General and administrative | 1,756 | 1,550 | 4,799 | 5,878 | |||||||||||
| Total operating expense | 3,716 | 1,720 | 8,025 | 11,152 | |||||||||||
| Loss before other income (expense) | (3,716 | ) | (1,720 | ) | (8,025 | ) | (11,152 | ) | |||||||
| Other income (expense) | |||||||||||||||
| Interest income (expense), net | 3 | (234 | ) | (89 | ) | (771 | ) | ||||||||
| Loss on extinguishment of debt | — | — | (422 | ) | — | ||||||||||
| Change in fair value of warrant liability | (296 | ) | 626 | (588 | ) | 5,063 | |||||||||
| Other financing expenses | — | (256 | ) | — | (461 | ) | |||||||||
| Other expense, net | — | (12 | ) | (26 | ) | (23 | ) | ||||||||
| Total other income (expense) | (293 | ) | 124 | (1,125 | ) | 3,808 | |||||||||
| Loss from continuing operations | (4,009 | ) | (1,596 | ) | (9,150 | ) | (7,344 | ) | |||||||
| Income from discontinued operations | 177 | 305 | 11,917 | 210 | |||||||||||
| Net income (loss) | $ | (3,832 | ) | $ | (1,291 | ) | $ | 2,767 | $ | (7,134 | ) | ||||
| Basic and diluted earnings (loss) per share | |||||||||||||||
| Continuing operations | $ | (0.30 | ) | $ | (0.24 | ) | $ | (0.85 | ) | $ | (1.20 | ) | |||
| Discontinued operations | $ | 0.01 | $ | 0.05 | $ | 1.11 | $ | 0.03 | |||||||
| Total earnings (loss) per share | $ | (0.29 | ) | $ | (0.19 | ) | $ | 0.26 | $ | (1.17 | ) | ||||
| Weighted average common shares outstanding for basic and diluted earnings (loss) per share | 13,208 | 6,632 | 10,781 | 6,108 | |||||||||||
(Unaudited)
Three Months Ended March 31, | ||||||
| 2022 | 2021 | |||||
| Operating expense | ||||||
| Research and development | $ | 10,009 | $ | 14,112 | ||
| General and administrative | 4,001 | 2,500 | ||||
| Total operating expense | 14,010 | 16,612 | ||||
| Loss from operations | (14,010) | (16,612) | ||||
| Other income (expense) | ||||||
| Interest income | 26 | 19 | ||||
| Interest expense | (7) | (990) | ||||
| Change in fair value of convertible notes | (244) | - | ||||
| Change in fair value of warrant liabilities | 234 | (1,533) | ||||
| Total other income (expense) | 9 | (2,504) | ||||
| Net loss and comprehensive loss | $ | (14,001) | $ | (19,116) | ||
| Net loss per share basic and diluted | $ | $ | ||||
| Weighted-average common shares outstanding basic and diluted | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Seelos Therapeutics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2022 and 2021
(In thousands)
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 2,767 | $ | (7,134 | ) | |||
| Net income from discontinued operations | 11,917 | 210 | ||||||
| Net loss from continuing operations | (9,150 | ) | (7,344 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities from continuing operations: | ||||||||
| Depreciation and amortization | 98 | 217 | ||||||
| Non-cash interest expense | 56 | 282 | ||||||
| Stock-based compensation expense | 903 | 1,427 | ||||||
| Warrant liabilities revaluation | 588 | (5,063 | ) | |||||
| Loss on debt extinguishment | 422 | — | ||||||
| Other financing expenses | — | 461 | ||||||
| Changes in operating assets and liabilities from continuing operations: | ||||||||
| Prepaid expenses and other current assets | (39 | ) | 257 | |||||
| Other assets | 25 | 18 | ||||||
| Accounts payable | (425 | ) | 105 | |||||
| Accrued expenses | (583 | ) | (1,103 | ) | ||||
| Accrued compensation | 54 | (318 | ) | |||||
| Deferred compensation | — | (135 | ) | |||||
| Other liabilities | (22 | ) | 15 | |||||
| Net cash used in operating activities from continuing operations | (8,073 | ) | (11,181 | ) | ||||
| Cash flows from investing activities from continuing operations: | ||||||||
| Release of restricted cash | — | 280 | ||||||
| Purchase of fixed assets, net | — | (18 | ) | |||||
| Net cash provided by investing activities from continuing operations | — | 262 | ||||||
| Cash flows from financing activities from continuing operations: | ||||||||
| Issuance of common stock and warrants | 10,733 | 14,785 | ||||||
| Issuance costs related to common stock and warrants | (1,235 | ) | (641 | ) | ||||
| Repayment of capital lease obligations | — | (5 | ) | |||||
| Repayment of notes payable | (7,129 | ) | (2,311 | ) | ||||
| Net cash provided by financing activities from continuing operations | 2,369 | 11,828 | ||||||
| Cash flows from discontinued operations: | ||||||||
| Net cash provided by operating activities of discontinued operations | 80 | 818 | ||||||
| Net cash provided by investing activities of discontinued operations | 12,000 | — | ||||||
| Net cash provided by discontinued operations | 12,080 | 818 | ||||||
| Net increase in cash | 6,376 | 1,727 | ||||||
| Cash, beginning of period | 2,087 | 3,887 | ||||||
| Cash, end of period | $ | 8,463 | $ | 5,614 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 92 | $ | 508 | ||||
| Non-cash investing and financing activities: | ||||||||
| Issuance of restricted stock | $ | — | $ | 249 | ||||
| Accrued transaction costs for financing activities | $ | (131 | ) | $ | (259 | ) | ||
| Issuance of placement agent warrants | $ | 287 | $ | 103 | ||||
| Reclassification of warrant liabilities to equity | $ | 798 | $ | — | ||||
(Unaudited)
| Additional | Total | |||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
| (Shares) | (Amount) | Capital | Deficit | Equity | ||||||||||
| Balance as of December 31, 2021 | 105,500,445 | $ | 105 | $ | 198,428 | $ | (141,210) | $ | 57,323 | |||||
| Stock-based compensation expense | - | - | 2,232 | - | 2,232 | |||||||||
| Issuance of common stock, options exercised | 6,250 | - | 8 | - | 8 | |||||||||
| Issuance of common stock, ESPP | 84,078 | - | 75 | - | 75 | |||||||||
| Net loss | - | - | - | (14,001) | (14,001) | |||||||||
| Balance as of March 31, 2022 | 105,590,773 | $ | 105 | $ | 200,743 | $ | (155,211) | $ | 45,637 | |||||
| Additional | Total | |||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
| (Shares) | (Amount) | Capital | Deficit | Equity | ||||||||||
| Balance as of December 31, 2020 | 54,535,891 | $ | 54 | $ | 77,680 | $ | (75,162) | $ | 2,572 | |||||
| Stock-based compensation expense | - | - | 705 | - | 705 | |||||||||
| Issuance of common stock, options exercised | 29,999 | - | 65 | - | 65 | |||||||||
| Issuance of common stock, ESPP | 40,518 | - | 30 | - | 30 | |||||||||
| Warrants exercised for cash | 6,146,125 | 6 | 7,017 | - | 7,023 | |||||||||
| Issuance of common stock, net of issuance costs | 17,530,488 | 18 | 33,463 | - | 33,481 | |||||||||
| Net loss | - | - | - | (19,116) | (19,116) | |||||||||
| Balance as of March 31, 2021 | 78,283,021 | $ | 78 | $ | 118,960 | $ | (94,278) | $ | 24,760 | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Seelos Therapeutics, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended March 31, 2022 and 2021
(In thousands)
(Unaudited) (In thousands)
| Common Stock (Shares) | Common Stock (Amount) | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |||||||||||||||
| Balance as of December 31, 2016 | 7,733 | $ | 8 | $ | 308,784 | $ | (316,308 | ) | $ | (7,516 | ) | ||||||||
| Stock-based compensation expense | — | — | 903 | — | 903 | ||||||||||||||
| Issuance of common stock due to the vesting of restricted stock, net of shares withheld to cover taxes | 129 | — | — | — | — | ||||||||||||||
| Issuance of common stock and warrants, net of offering costs | 7,167 | 7 | 9,360 | — | 9,367 | ||||||||||||||
| Reclassification of warrant liabilities to equity | — | — | 798 | — | 798 | ||||||||||||||
| Net income | — | — | — | 2,767 | 2,767 | ||||||||||||||
| Balance as of September 30, 2017 | 15,029 | $ | 15 | $ | 319,845 | $ | (313,541 | ) | $ | 6,319 | |||||||||
Three Months Ended | ||||||
| March 31, | ||||||
| 2022 | 2021 | |||||
| Cash flows from operating activities | ||||||
| Net loss | $ | (14,001) | $ | (19,116) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||
| Stock-based compensation expense | 2,232 | 705 | ||||
| Change in fair value of warrant liability | (234) | 1,533 | ||||
| Change in fair value of convertible notes payable | 244 | - | ||||
| Amortization of debt discount | - | 986 | ||||
| Changes in operating assets and liabilities | ||||||
| Prepaid expenses and other current assets | (4,168) | (777) | ||||
| Accounts payable | 434 | (259) | ||||
| Accrued expenses | (178) | (199) | ||||
| Derivative liability | (1,174) | - | ||||
| Licenses payable | (200) | 5,875 | ||||
| Net cash used in operating activities | (17,045) | (11,252) | ||||
| Cash flows provided by financing activities | ||||||
| Payment of convertible note | - | (5,167) | ||||
| Proceeds from issuance of common stock, net of issuance costs | - | 33,481 | ||||
| Proceeds from exercise of warrants | - | 5,868 | ||||
| Proceeds from exercise of options | 8 | 65 | ||||
| Proceeds from sales of common stock under ESPP | 75 | 30 | ||||
| Net cash provided by financing activities | 83 | 34,277 | ||||
| Net increase (decrease) in cash | (16,962) | 23,025 | ||||
| Cash, beginning of period | 78,734 | 15,662 | ||||
| Cash, end of period | $ | 61,772 | $ | 38,687 | ||
| Supplemental disclosure of cash flow information: | ||||||
| Cash paid for interest | $ | 4 | $ | 4 | ||
| Cash paid for income taxes | $ | - | $ | - | ||
| Non-cash investing and financing activities: | ||||||
| Reclass of warrant liabilities related to Series A warrants exercised for cash | $ | - | $ | 1,155 | ||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | - | $ | 74 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Seelos Therapeutics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Seelos Therapeutics, Inc. (together with its subsidiaries, the “Company”) is a clinical-stage biopharmaceutical company focused on achieving efficient development of products that address significant unmet needs in Central Nervous System (“CNS”) disorders and other rare disorders. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto as of andCompany’s lead programs are SLS-002 for the year ended December 31, 2016 includedpotential treatment of acute suicidal ideation and behavior in patients with major depressive disorder (“ASIB in MDD”) and SLS-005 for the Apricus Biosciences, Inc.potential treatment of Amyotrophic Lateral Sclerosis (“ALS”) and subsidiaries (the “Company”Spinocerebellar Ataxia (“SCA”) Annual Report on Form 10-K (“Annual Report”) filed with. SLS-005 for the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2017. The accompanying financial statements have been prepared bypotential treatment of Sanfilippo Syndrome currently requires additional natural history data, which is being considered. Additionally, the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10is developing several preclinical programs, most of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAPwhich have been condensed or omitted. In the opinionwell-defined mechanisms of management, the accompanying condensed consolidated financial statementsaction, including: SLS-004, SLS-006, SLS-007 for the periods presented reflect all adjustments, consistingpotential treatment of only normal, recurring adjustments, necessary to fairly state the Company’s financial position, results of operationsParkinson’s Disease (“PD”) and cash flows. Certain prior year items have been reclassified to conform to the current year presentation. The December 31, 2016 condensed consolidated balance sheet was derived from audited financial statements, but does not include all GAAP disclosures. The unaudited condensed consolidated financial statementsSLS-008, which is being developed for the interim periods are not necessarily indicativepotential treatment of results for the full year. The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimatesan undisclosed indication, but may also be targeted at chronic inflammation in asthma and judgments that affect the amounts reported in the financial statementsorphan indications such as pediatric esophagitis.
2. Liquidity and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.
The accompanying condensed consolidated financial statements have been prepared on a basis which assumes the Company is a going concern and that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company had an accumulated deficit of approximately $313.5 million and working capital of $6.9 million as of September 30, 2017 and reported net income of approximately $2.8 million and negative cash flows from operations for the nine months ended September 30, 2017. While the Company believes it has enough cash to fund its current operating plans through the fourth quarter of 2018, the Company’s history and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has principally been financed through the sale of its common stock and other equity securities, debt financings, up-front payments received from commercial partners for the Company’s products under development, and through the sale of assets. As of September 30, 2017, the Company had cash and cash equivalents of approximately $8.5 million.
The Company has generated limited revenues, has incurred operating losses since inception, and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of March 31, 2022, the Company had $61.8 million in cash and an accumulated deficit of $155.2 million. The Company has historically funded its operations through the issuance of convertible notes (see Note 9), the sale of common stock (see Note 6) and exercises of warrants (see Note 10).
On May 24, 2021, the Company completed an underwritten public offering, pursuant to which the Company sold shares of its common stock, at a price to the public of $ per share, which included the exercise in full by the underwriter of its option to purchase up to 2,903,226 additional shares of common stock. The net proceeds to the Company from the offering were approximately $64.5 million, after deducting underwriting discounts and commissions and other offering costs. The Company used $7.3 million of the net proceeds from the offering for the partial repayment of certain outstanding convertible promissory notes.
On January 28, 2021, the Company completed an underwritten public offering, pursuant to which the Company sold shares of its common stock, at a price to the public of $ per share, which included the exercise in full by the underwriter of its option to purchase up to 2,286,585 additional shares of common stock. The net proceeds to the Company from the offering were approximately $33.5 million, after deducting underwriting discounts, commissions and other offering costs. The Company used $3.8 million of the net proceeds from the offering for the partial repayment of certain outstanding convertible promissory notes.
The Company currently has an effective shelf registration statement on Form S-3 filed with the Securities and Exchange Commission (the “SEC”). The Company may use the shelf registration statement on Form S-3 to offer from time to time any combination of debt securities, common and preferred stock and warrants. As of March 31, 2022, the Company had approximately $95.1 million available under its Form S-3 shelf registration statement. The Company also has the ability to raise funds through other means, such as through the filing of a registration statement on Form S-1 or in private placements. The rules and regulations of the SEC or any other regulatory agencies may restrict the Company’s ability to conduct certain types of financing activities or may affect the timing of and amounts it can raise by undertaking such activities.
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year beyond the filing of this Quarterly Report on Form 10-Q. Based on such evaluation and the Company’s current plans (including the ongoing clinical programs for SLS-002, SLS-005, and other product candidates), which are subject to change, management believes that the Company’s existing cash and cash equivalents as of March 31, 2022 are not sufficient to satisfy its operating cash needs for the year after the filing of this Quarterly Report on Form 10-Q.
The Company’s future liquidity and capital funding requirements will depend on numerous factors, including:
| • | its ability to raise additional funds to finance its operations; |
| • | its ability to maintain compliance with the listing requirements of the Nasdaq Capital Market; |
| • | the outcome, costs and timing of clinical trial results for the Company’s current or future product candidates; |
| • | potential litigation expenses; |
| • | the emergence and effect of competing or complementary products or product candidates; |
| • | its ability to maintain, expand and defend the scope of its intellectual property portfolio, including the amount and timing of any payments the Company may be required to make, or that it may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights; |
| • | its ability to retain its current employees and the need and ability to hire additional management and scientific and medical personnel; |
| • | the terms and timing of any collaborative, licensing or other arrangements that it has or may establish; |
| • | the trading price of its common stock; and |
| • | its ability to increase the number of authorized shares outstanding to facilitate future financing events. |
The Company may be required to make, or that it may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
3. Significant Accounting Policies
Basis of Presentation
The Company’s outstanding common stock warrants issuedaccompanying unaudited interim condensed consolidated financial statements should be read in connectionconjunction with its February 2015the audited financial statements and January 2016 financings are classifiednotes thereto as liabilitiesof and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K (the “Annual Report”) filed with the SEC on March 4, 2022. The accompanying financial statements have been prepared by the Company in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows. The December 31, 2021 condensed consolidated balance sheets as they contain provisions thatsheet was derived from audited financial statements, but it does not include all U.S. GAAP disclosures. The unaudited condensed consolidated financial statements for the interim periods are considered outsidenot necessarily indicative of results for the Company’s control, such as requiringfull year. The preparation of these unaudited condensed consolidated financial statements requires the Company to maintain active registrationmake estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the shares underlying such warrants.financial statements and the reported amounts of expenses during the reporting period. The warrants were recorded at fair value using the Black-Scholes option pricing model. The fair value of these warrants is re-measured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense)most significant estimates in the accompanying condensed consolidatedCompany’s financial statements relate to the valuation of operations.
Fair Value Measurements
The Company determinesfollows the accounting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), for its fair value measurements of applicablefinancial assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s common stock warrant liabilities are measured and disclosed at fair value on a recurring basis, and are classified within the Level 3 designation.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value hierarchy. In such cases, the level in therequires significant judgment or estimation.
The fair value hierarchy within whichalso requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value measurementare classified in itstheir entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company’s assessment ofmeasurement.
Fair Value Option
As permitted under FASB ASC Topic 825, Financial Instruments (“ASC 825”), the significance of a particular input toCompany elected the fair value measurementoption to account for its November 2021 and December 2021 convertible notes (collectively, the “2021 Convertible Notes”). In accordance with ASC 825, the Company records these convertible notes at fair value with changes in its entirety requires judgment,fair value recorded in the Consolidated Statement of Operations and considers factors specificComprehensive Loss. As a result of applying the fair value option, direct costs and fees related to the assetconvertible notes were expensed as incurred and were not deferred.
The Company expenses stock-based compensation to employees, non-employees and board members over the requisite service period based on the estimated grant-date fair value of the awards and forfeitures rates. The Company accounts for forfeitures as they occur. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. All stock-based compensation costs are recorded in general and administrative or liability.research and development costs in the statements of operations based upon the underlying individual’s role at the Company.
Performance share awards are initially valued based on the Company’s closing stock price on the date of grant. The number of performance share awards that vest will be determined based on the achievement of specified performance milestones by the end of the performance period. Compensation expense for performance awards is recognized over the service period and will vary based on remeasurement during the performance period. If achievement of the performance milestone is not probable of achievement during the performance period, compensation expense is reversed.
Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible debt, warrants, performance-based restricted stock unit awards and stock options that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.
| 7 |
Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share
| Three Months | ||||||
| Ended March 31, | ||||||
| 2022 | 2021 | |||||
| Outstanding stock options | 10,299 | 7,204 | ||||
| Restricted stock units | - | 2,400 | ||||
| Outstanding warrants | 2,635 | 3,920 | ||||
| Convertible debt | 3,704 | 5,326 | ||||
| 16,638 | 18,850 | |||||
Amounts in the table presentsreflect the common stock equivalents of the noted instruments.
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). This standard simplifies the accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature, as well as convertible instruments with a beneficial conversion feature. As a result, entities will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce non-cash interest expense for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. Additionally, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and precludes the use of the treasury stock method for certain debt instruments. The provisions of ASU 2020-06 are applicable for the Company beginning after January 1, 2024, with early adoption permitted, and an entity should adopt the provisions at the beginning of its annual fiscal year. The Company does not expect the adoption of ASU 2020-06 to have an impact on its consolidated financial statements and related disclosures.
4. Fair Value Measurement
The following tables present information about the Company’s fair value hierarchy for its warrantfinancial assets and liabilities measured at fair value on a recurring basis (in thousands) asand indicate the level of September 30, 2017the fair value hierarchy utilized to determine such fair values. There were 0 transfers between fair value measurement levels during the three months ended March 31, 2022.
The Company’s financial assets and liabilities measured at fair value at March 31, 2022 and December 31, 2016:
| Quoted Market Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
| Warrant liabilities | ||||||||||||||||
| Balance as of September 30, 2017 | $ | — | $ | — | $ | 636 | $ | 636 | ||||||||
| Balance as of December 31, 2016 | $ | — | $ | — | $ | 846 | $ | 846 | ||||||||
| Fair Value Measurements | ||||||||||||
| as of March 31, 2022 | ||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets: | ||||||||||||
| Cash | $ | 61,772 | $ | - | $ | - | $ | 61,772 | ||||
| Liabilities: | ||||||||||||
| Convertible notes payable, at fair value | $ | - | $ | - | $ | 19,164 | $ | 19,164 | ||||
| Warrant liabilities, at fair value | - | - | 190 | 190 | ||||||||
| $ | - | $ | - | $ | 19,354 | $ | 19,354 | |||||
| Fair Value Measurements | ||||||||||||
| as of December 31, 2021 | ||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||
| Assets: | ||||||||||||
| Cash | $ | 78,734 | $ | - | $ | - | $ | 78,734 | ||||
| Liabilities: | ||||||||||||
| Convertible notes payable, at fair value | $ | - | $ | - | $ | 18,920 | $ | 18,920 | ||||
| Derivative liability, at fair value | 1,174 | - | - | 1,174 | ||||||||
| Warrant liabilities, at fair value | - | - | 424 | 424 | ||||||||
| $ | 1,174 | $ | - | $ | 19,344 | $ | 20,518 | |||||
The common stockfair value of the Company’s money market funds is based on quoted active market prices for the funds and is determined using the market approach.
The Company measures the 2021 Convertible Notes and warrant liabilities are recorded at fair value based on significant inputs not observable in the market, which causes them to be classified as a Level 3 measurement within the fair value hierarchy. These valuations use assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of the convertible notes payable and warrant liabilities related to updated assumptions and estimates are recognized within the Consolidated Statements of Operations and Comprehensive Loss.
The fair value of the convertible notes payable and warrant liabilities may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of outcomes used to estimate the fair value of the liabilities. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.
Derivative Liability
The derivative liability represents the fair value of the “Shortfall Amount” provision provided for in the license agreement with iX Biopharma Europe Limited.
At issuance, the fair value of the embedded derivative was estimated by using a Monte Carlo simulation model. As of December 31, 2021, the Black-Scholes option pricingCompany determined it was probable it would settle the Shortfall Amount in cash and estimated the fair value based on a probability weighted market approach. The Company paid the Shortfall Amount of $1.2 million in cash in January 2022.
2021 Convertible Notes
The 2021 Convertible Notes are valued using a Monte Carlo simulation model. The following assumptions were used in determining the fair value of the 2021 Convertible Notes as of March 31, 2022 and December 31, 2021:
Summary of Fair Value Measurements Convertible Notes Valuation Assumptions
| Three Months Ended | Year Ended | |||||
| March 31, 2022 | December 31, 2021 | |||||
| Risk-free interest rate | % | % - % | ||||
| Volatility | % | % - % | ||||
| Dividend yield | % | % | ||||
| Contractual term (years) | 2.7 | 3.0 | ||||
| Stock price | $ | $ | - |
Warrant Liabilities
The common stock warrant liabilities were recorded at fair value using the Black-Scholes option pricing model.
The following assumptions were used in determining the fair value of the warrant liabilities valued using the Black-Scholes option pricing model asfor the three months ended March 31, 2022 and 2021.
Summary of September 30, 2017 and December 31, 2016:
| September 30, 2017 | December 31, 2016 | |||||||
| Risk-free interest rate | 1.93%-1.94% | 1.64%-1.99% | ||||||
| Volatility | 87.72%-88.33% | 77.25%-81.03% | ||||||
| Dividend yield | — | % | — | % | ||||
| Expected term | 5.29-5.42 | 4.75-6.17 | ||||||
| Weighted average fair value | $ | 0.73 | $ | 0.49 | ||||
| Three Months Ended March 31, | ||||||
| 2022 | 2021 | |||||
| Risk-free interest rate | 1.96% | 0.32% | ||||
| Volatility | 103.30% | 120.91% | ||||
Dividend yield | % | % | ||||
| Expected term (years) | 1.82 | 2.82 | ||||
| Weighted-average fair value | $ | 0.63 | $ | 4.76 | ||
The following table is a reconciliation for allthe common stock warrant liabilities and convertible notes measured at fair value using Level 3 unobservable inputs (in thousands):
| Warrant liabilities | ||||
| Balance as of December 31, 2016 | $ | 846 | ||
| Change in fair value measurement of warrant liability | 588 | |||
| Warrant liability reclassified to stockholders' equity | (798 | ) | ||
| Balance as of September 30, 2017 | $ | 636 | ||
Schedule of Fair Value Level 3 Reconciliation
| Warrant | Derivative | Convertible notes, | |||||||
| liabilities | liability | at fair value | |||||||
| Balance as of December 31, 2020 | $ | 1,062 | $ | - | $ | - | |||
| Warrant liability reclassified to stockholders' equity | (1,155) | - | - | ||||||
| Issuance of convertible notes, at fair value | - | - | 19,150 | ||||||
| Issuance of derivative liability | - | 805 | - | ||||||
| Change in fair value measurement of derivative liability | - | 369 | - | ||||||
| Change in fair value measurement of convertible notes | - | - | (230) | ||||||
| Change in fair value measurement of warrant liability | 517 | - | - | ||||||
| Balance as of December 31, 2021 | $ | 424 | $ | 1,174 | $ | 18,920 | |||
| Settlement of derivative liability | - | (1,174) | - | ||||||
| Change in fair value measurement of convertible notes | - | - | 244 | ||||||
| Change in fair value measurement of warrant liability | (234) | - | - | ||||||
| Balance as of March 31, 2022 | $ | 190 | $ | - | $ | 19,164 |
For the inputsthree months ended March 31, 2022 and the year ended December 31, 2021, the changes in fair value of the convertible notes, derivative liability and warrant liability primarily resulted from the volatility of the Company’s common stock.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are comprised of the following (in thousands):
Schedule of Prepaid Expenses and Other Current Assets
| March 31, | December 31, | |||||
| 2022 | 2021 | |||||
| Prepaid insurance | $ | 787 | $ | 59 | ||
| Prepaid clinical costs | 7,694 | 4,481 | ||||
| Other | 414 | 187 | ||||
| Prepaid expenses and other current assets | $ | 8,895 | $ | 4,727 |
6. Common Stock Offerings
Public Offerings
On May 24, 2021, the Company completed an underwritten public offering, pursuant to which the Company sold shares of its common stock, at a price to the public of $ per share, which included the exercise in full by the underwriter of its option to purchase up to 2,903,226 additional shares of common stock. The net proceeds to the Company from the offering were approximately $64.5 million, after deducting underwriting discounts, commissions and other offering expenses. The Company used $7.3 million of the net proceeds from the offering for the partial repayment of certain outstanding convertible promissory notes.
On January 28, 2021, the Company completed an underwritten public offering, pursuant to which the Company sold shares of its common stock, at a price to the public of $per share, which included the exercise in full by the underwriter of its option to purchase up to 2,286,585 additional shares of common stock. The net proceeds to the Company from the offering were approximately $33.5 million, after deducting underwriting discounts, commissions and other offering expenses. The Company used $3.8 million of the net proceeds from the offering for the partial repayment of certain outstanding convertible promissory notes.
Stock Purchase Agreement with iX Biopharma Europe Limited
On November 24, 2021, the Company entered in an exclusive license agreement and stock purchase agreement (the “iXBEL Stock Purchase Agreement”) with iX Biopharma Europe Limited (“iXBEL”). As consideration for the license under the license agreement, the Company paid iXBEL an upfront fee of $9.0 million, comprised of $3.5 million in cash and restricted shares of the Company’s common stock. Pursuant to the iXBEL Stock Purchase Agreement, the Company agreed to reimburse iXBEL for the difference in value (the “Shortfall Amount”) in the event the aggregate value of the shares of the Company’s common stock at the time of registration and issuance was less than $ million. The initial fair value of this Shortfall Amount was $0.8 million and in January 2022, the Company settled the Shortfall Amount by the payment of $1.2 million in cash to iXBEL. The change in fair value of the Shortfall Amount is included in Change in fair value of derivative liability on the Condensed Consolidated Statement of Operations and Comprehensive Loss (see Note 4).
7. License Agreements
Specific information pertaining to each of the Company’s significant license agreements is discussed in its audited financial statements included in the Annual Report for the years ended December 31, 2021 and 2020, including their nature and purpose, the significant rights and obligations of the parties, and specific accounting policy elections. The following represents updates for the three months ended March 31, 2022, if applicable, to the Company’s significant license agreements:
Acquisition of Assets from Phoenixus AG f/k/a Vyera Pharmaceuticals, AG and Turing Pharmaceuticals AG (“Vyera”)
See Note 13 for a subsequent event related to the Vyera Purchase Agreement.
Acquisition of License from Stuart Weg, MD
On August 29, 2019, the Company entered into an amended and restated exclusive license agreement with Stuart Weg, M.D. (the “Weg License Agreement”), pursuant to which the Company was granted an exclusive worldwide license to certain intellectual property and regulatory materials related to SLS-002. Under the terms of the Weg License Agreement, the Company paid an upfront license fee of $75,000 upon execution of the agreement. The Company agreed to pay additional consideration to Dr. Weg as follows: (i) $0.1 million on January 2, 2020, (ii) $0.125 million on January 2, 2021, and (iii) in the event the FDA has not approved an NDA for a product containing ketamine in any dosage on or before December 31, 2021, $0.2 million on January 2, 2022. The Company paid the required $0.1 million on January 2, 2020, $0.125 million on January 2, 2021 and $0.2 million on January 2, 2022.
The remaining potential regulatory and commercial milestones are not yet considered probable, and 0 other milestone payments have been accrued at March 31, 2022.
8. Accrued Expenses
Accrued expenses are comprised of the following (in thousands):
Schedule of Accrued Liabilities
| March 31, | December 31, | |||||
| 2022 | 2021 | |||||
| Professional fees | $ | 190 | $ | 181 | ||
| Personnel related | 332 | 1,303 | ||||
| Outside research and development services | 2,387 | 2,219 | ||||
| Insurance | 580 | - | ||||
| Other | 60 | 25 | ||||
| Accrued expenses, net | $ | 3,549 | $ | 3,728 |
9. Debt
Convertible Notes
November 2021 and December 2021 Convertible Notes and Private Placement
On November 23, 2021, the Company entered into a Securities Purchase Agreement (the “2021 Lind Securities Purchase Agreement”) with Lind Global Asset Management V, LLC (“Lind V”) pursuant to which, among other things, on November 23, 2021 (the “Closing Date”), the Company issued and sold to Lind V, in a private placement transaction (the “Private Placement”), in exchange for the payment by Lind V of $20.0 million, (i) a convertible promissory note (the “2021 Note”) in an aggregate principal amount of $22.0 million (the “Principal Amount”), which will bear no interest until the first anniversary of the issuance of the 2021 Note and will thereafter bear interest at a rate of 5% per annum, and mature on November 23, 2024 (the “Maturity Date”), and (ii) 534,759 shares of Company common stock.
At the first anniversary of the Closing Date, the Company shall have the option, at its sole discretion, to issue to Lind V a convertible promissory note (the “Second Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. At the earlier of (i) the two-year anniversary of the Closing Date, or (ii) the successful readout for SLS-005 in ALS, and subject to the mutual agreement of the Company and Lind V, the Company shall issue to Lind V a convertible promissory note (the “Third Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. In the event of the filing of a new drug application with the U.S. Food & Drug Administration for either SLS-002 or SLS-005, and subject to the mutual agreement of the Company and Lind V, the Company shall issue to Lind V a convertible promissory note (the “Fourth Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. The Second Note, the Third Note and the Fourth Note, if issued, would be in substantially the same form as the 2021 Note.
At any time following August 23, 2022, from time to time and before the Maturity Date, Lind V shall have the option to convert any portion of the then-outstanding Principal Amount of the 2021 Note into shares of Common Stock at a price per share of $6.00, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions (the “Conversion Price”). At any time prior August 23, 2022, the Company shall have the right to prepay, in whole or in part (exercisable by the Company at any time or from time to time during such period), up to an aggregate of $14.7 million of the outstanding Principal Amount of the 2021 Note with no penalty. If the Company does not prepay any amounts of the 2021 Note prior to August 23, 2022 then, commencing August 23, 2022, the Company shall have the right to prepay, in whole or in part (exercisable by the Company at any time or from time to time prior to the Maturity Date), up to the full remaining Principal Amount of the 2021 Note with no penalty; however, if the Company exercises such prepayment right, Lind V will have the option to convert up to thirty-three and one-third percent (33 1/3%) of the amount that the Company elects to prepay at the Conversion Price. If the Company prepays any amounts of the 2021 Note prior to August 23, 2022 then, commencing November 23, 2022, the Company shall not have the right to prepay any amounts of the 2021 Note between August 23, 2022 to November 23, 2022 and, commencing November 23, 2022, the Company shall have the right to prepay, in whole or in part (exercisable by the Company at any time or from time to time prior to the Maturity Date) up to the full remaining Principal Amount of the 2021 Note with no penalty; however, if the Company exercises such prepayment right, Lind V will have the option to convert up to thirty-three and one-third percent (33 1/3%) of the amount that the Company elects to prepay at the Conversion Price.
Subject to certain exceptions, the Company will be required to direct proceeds from any subsequent debt financings (including subordinated debt, convertible debt or mandatorily redeemable preferred stock but other than purchase money debt or capital lease obligations or other indebtedness incurred in the ordinary course of business) to repay the 2021 Notes, unless waived by Lind V in advance.
Beginning on November 23, 2022, the 2021 Note will amortize in twenty-four monthly installments equal to the quotient of (i) the then-outstanding Principal Amount of the 2021 Note, divided by (ii) the number of months remaining until the Maturity Date. All amortization payments shall be payable, at the Company’s sole option, in cash, shares of Common Stock or a combination of both. In addition, commencing on the last business day of the first month following November 23, 2022, the Company will pay, on a monthly basis, all interest that has accrued and remains unpaid on the then-outstanding Principal Amount of the 2021 Note. Any portion of an amortization payment or interest payment that is paid in shares of Common Stock shall be priced at 90% of the average of the five lowest daily volume weighted average prices of the Common Stock during the 20 trading days prior to the date of issuance of the shares. If, after the first amortization payment, the Company elects to make any amortization payments in cash, the Company shall pay a 5% premium on each cash payment. In conjunction with the 2021 Lind Securities Purchase Agreement and the 2021 Note, on the Closing Date, the Company and Lind V entered into a security agreement, which provides Lind V with a first priority lien on the Company’s assets and properties.
On December 2, 2021, the Company entered into two separate securities purchase agreements with certain accredited investors on substantially the same terms as the 2021 Lind Securities Purchase Agreement, pursuant to which the Company sold, in private placement transactions, in exchange for the payment by the accredited investors of an aggregate of $201,534, (i) convertible promissory notes in an aggregate principal amount of $221,688, which will bear no interest and mature on December 2, 2024, and (ii) an aggregate of 5,388 shares of its common stock. These notes have substantially the same terms as the 2021 Note.
During the year ended December 31, 2021, the Company received aggregate gross proceeds of $20.2 million from the convertible note offerings. The Company elected to account for these notes under the fair value option. At time of issuance, the Company recorded a liability of $19.2 million, which was determined to be the fair value at time of issuance. As of December 31, 2021, the Company recognized a $0.2 million gain on change in fair value of convertible notes, recognizing a total convertible note liability of $18.9 million. During the three months ended March 31, 2022, the Company recognized a $0.2 million loss on change in fair value of convertible notes, recognizing a total convertible note liability of $19.2 million.
As of March 31, 2022, the principal contractual balance of the convertible notes totaled $22.2 million.
December 2020 Convertible Note and Private Placement
On December 11, 2020, the Company entered into a Securities Purchase Agreement (the “2020 Lind Securities Purchase Agreement”) with Lind Global Asset Management II, LLC (the “Investor”) pursuant to which, among other things, on December 11, 2020, the Company issued and sold to the Investor, in a private placement transaction, in exchange for the payment by the Investor of $10,000,000, (1) a convertible promissory note (the “2020 Note”) in an aggregate principal amount of $12,000,000 (the “Principal Amount”), which did not bear interest and was to mature on December 11, 2022 (the “Maturity Date”), and (2) 975,000 shares of the Company’s common stock. At any time following June 11, 2021, and from time to time before the Maturity Date, the Investor had the option to convert any portion of the then-outstanding Principal Amount of the Note into shares of common stock warrant liabilitiesat a price per share of $1.60, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions. Prior to June 11, 2021, the Company had the right to prepay up to sixty-six and two-thirds percent (66 2/3%) of the then-outstanding Principal Amount of the 2020 Note with no penalty. Subject to certain exceptions, the Company was required to direct proceeds from any subsequent debt financings (including subordinated debt, convertible debt or mandatorily redeemable preferred stock but other than purchase money debt or capital lease obligations or other indebtedness incurred in the ordinary course of business) to repay the 2020 Note, unless waived by the Investor in advance. The 2020 Note began amortizing in June 2021 and was to amortize in eighteen monthly installments equal to the quotient of (i) the then-outstanding Principal Amount of the 2020 Note, divided by (ii) the number of months remaining until the Maturity Date. All amortization payments were to be payable solely in cash, plus a 2% premium. During the first half of 2021, the Company made certain repayments on the outstanding principal balance of the convertible notes. On June 14, 2021, the Company and the Investor entered into an Acknowledgment and Termination Agreement, pursuant to which the Company agreed to issue to the Investor an aggregate of 406,250 additional shares of its common stock (the “Lind Shares”) and to pay the Investor the remaining principal amount of $790,804 (the “Final Payment”) in full satisfaction of the Company’s remaining obligations to the Investor under the 2020 Note. The Company issued the Lind Shares and made the Final Payment to the Investor, and the 2020 Lind Securities Purchase Agreement and the 2020 Note terminated, effective June 15, 2021.
On December 17, 2020, the Company entered into three separate securities purchase agreements with certain accredited investors on substantially the same terms as the Lind Securities Purchase Agreement (the “December 17 SPAs”), pursuant to which the Company sold, in private placement transactions, in exchange for the payment by the accredited investors of an aggregate of $1,138,023, (1) convertible promissory notes (the “December 17 Notes”) in an aggregate principal amount of $1,365,628, which did not bear interest and were to mature on December 17, 2022, and (2) an aggregate of 110,956 shares of its common stock. On December 18, 2020, the Company entered into an additional securities purchase agreement with an accredited investor on substantially the same terms as the Lind Securities Purchase Agreement (the “December 18 SPA” and, together with the December 17 SPAs, the "Subsequent Securities Purchase Agreements"), pursuant to which the Company sold, in a private placement transaction, in exchange for the payment by the accredited investor of $269,373, (1) a convertible promissory note in an aggregate principal amount of $323,247, which did not bear interest and was to mature on December 18, 2022 (the “December 18 Note” and, together with the December 17 Notes, the “Subsequent Notes”), and (2) 26,263 shares of the Company’s common stock. The Subsequent Securities Purchase Agreements had substantially the same terms as the Lind Securities Purchase Agreement, and the Subsequent Notes had substantially the same terms as the Note. During the first half of 2021, the Company made certain repayments on the outstanding principal balance of the convertible notes. On July 7, 2021, the Company and the holder of the December 18 Note (the “December 18 Note Holder”) entered into an Acknowledgement and Termination Agreement, pursuant to which: (i) the December 18 Note Holder agreed to return to the Company $42,777 in cash (the “Repayment”) previously paid by the Company to the December 18 Note Holder as a payment against the Company’s obligations under the December 18 Note, and (ii) the Company agreed to issue to the December 18 Note Holder an aggregate of 43,664 additional shares of its common stock (the “December 18 Note Shares”) in full satisfaction of the Company’s remaining obligations to the December 18 Note Holder under the December 18 Note. The December 18 Note Holder paid the Company the Repayment and the Company issued the December Note Shares, and the December 18 SPA and the December 18 Note terminated, effective July 7, 2021.
The Company received aggregate net proceeds of $10.9 million from the convertible note offering, net of $0.5 million of issuance costs. The total gross proceeds were allocated to the convertible notes and common stock issued under the agreements based on their relative fair values. Due to the principal payments made during the year, the Company remeasured the beneficial conversion feature discount at each payment date and recorded a loss on extinguishment of debt of approximately $1.0 million during the year ended December 31, 2021 as well as a reduction in additional paid-in capital of $1.5 million as of December 31, 2021.
During the year ended December 31, 2021, the Company paid approximately $13.6 million in principal payments on the outstanding convertible notes and issued an aggregate of shares of its common stock upon conversion of the convertible notes, and NaN of the 2020 convertible notes remain outstanding as of December 31, 2021.
10. Stockholders’ Equity
Preferred Stock
The Company is authorized to issue shares of preferred stock, par value $. shares of preferred stock were outstanding as of March 31, 2022 or December 31, 2021.
Common Stock
The Company has authorized shares of common stock as of March 31, 2022 and December 31, 2021. Each share of common stock is entitled to one voting right. Common stock owners are entitled to dividends when funds are legally available and declared by the Board of Directors.
Warrants
September 2020 Warrants
On September 4, 2020, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company issued and sold an aggregate of 8,865,000 shares of common stock in a registered direct offering and issued warrants to purchase up to 6,648,750 shares of common stock in a concurrent private placement (the “September 2020 Warrants”). The September 2020 Warrants are initially exercisable for shares of common stock at an exercise price per share equal to $. The September 2020 Warrants became exercisable beginning on March 9, 2021 and will expire on March 9, 2026.
During the three months ended March 31, 2022 and 2021, September 2020 Warrants were exercised for and million shares of common stock, respectively, for approximately $0 and $3.9 million, respectively. As of March 31, 2022, September 2020 Warrants exercisable for 1.0 million shares of common stock remain outstanding at an exercise price of $per share.
August 2019 Warrants
On August 23, 2019, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company issued and sold an aggregate of shares of common stock in a registered direct offering and issued warrants to purchase up to 2,237,500 shares of common stock in a concurrent private placement (the “August 2019 Warrants”). The August 2019 Warrants were initially exercisable for 2,237,500 shares of common stock at an exercise price per share equal to $1.78. The August 2019 Warrants became exercisable beginning on February 27, 2020 and will expire on August 28, 2023.
During the three months ended March 31, 2022 and 2021, August 2019 Warrants for and million shares of common stock were exercised for approximately $0 and $1.8 million, respectively. As of March 31, 2022, August 2019 Warrants exercisable for 900,000 shares of common stock remain outstanding at an exercise price of $per share.
Series A Warrants
On January 24, 2019, STI and the Company closed a private placement with certain accredited investors pursuant to which, among other things, the Company issued warrants representing the right to acquire 1,463,519 shares of common stock (the “Series A Warrants”). The Series A Warrants were initially exercisable for 1,463,519 shares of common stock at an exercise price per share equal to $4.15, which was adjusted several times pursuant to the terms thereof to 3,629,023 shares of common stock at an exercise price per share equal to $0.2957 per share. The most recent adjustment to the exercise price (from $0.60 to $0.2957 per share) occurred during the three months ended September 30, 2017,2020 as a result of the most subjective input isannouncement of the Company’s estimateregistered direct offering of expected volatility.
During the three months ended March 31, 2022 and 2021, Series A Warrants for and shares of common stock, respectively, were exercised for approximately $0 and $0.1 million, respectively. As of March 31, 2022, Series A Warrants exercisable for million shares of common stock remain outstanding at an exercise price of $per share.
A summary of warrant activity during the same period. Diluted net income (loss) per sharethree months ended March 31, 2022 is computed by dividing netas follows (share amounts in thousands):
Summary of Warrant Activity
| Weighted- | |||||||
| Weighted- | Average | ||||||
| Average | Remaining | ||||||
| Exercise | Contractual Life | ||||||
| Warrants | Price | (in years) | |||||
| Outstanding as of December 31, 2021 | 2,635 | $ | 4.29 | 2.4 | |||
| Issued | - | $ | - | ||||
| Exercised | - | $ | - | ||||
| Cancelled | - | $ | - | ||||
| Outstanding as of March 31, 2022 | 2,635 | $ | 4.29 | 2.2 | |||
| Exercisable as of March 31, 2022 | 2,635 | $ | 4.29 | 2.2 |
The Series A Warrants were recognized as a liability at their fair value upon issuance. The warrant liability is remeasured to the then fair value prior to their exercise or at period end for warrants that are unexercised and the gain or loss by the weighted average number of common shares and common equivalent shares outstandingrecognized in earnings during the same period. Common equivalent shares may be related to
Stock options
During the three months ended March 31, 2022, the Company granted incentive stock options and non-qualified stock options to employees with a weighted average exercise price per share whenof $ and a -year term, subject to the effect is anti-dilutive.
| As of September 30, | ||||||
| 2017 | 2016 | |||||
| Outstanding stock options | 391 | 490 | ||||
| Outstanding warrants | 7,270 | 2,318 | ||||
| Restricted stock | 721 | 116 | ||||
During the vesting period.three months ended March 31, 2022, the Company also granted non-qualified stock options to non-employee directors with a weighted average exercise price per share of $and a -year term, subject to the terms and conditions of the 2012 Plan above. The Company estimatesstock options granted to non-employee directors vest monthly over the months following the grant.
The fair value of eachstock option awardgrants are estimated on the date of grant using the Black-Scholes option pricingoption-pricing model.
During the three months ended March 31, 2022, stock options were exercised and options were forfeited.
Schedule of 2017.
| September 30, 2016 | ||||
| Risk-free interest rate | 1.36%-1.78% | |||
| Volatility | 72.35%-80.02% | |||
| Dividend yield | — | % | ||
| Expected term | 5.25-6.08 years | |||
| Forfeiture rate | 11.33 | % | ||
| Weighted average grant date fair value | $ | 7.23 | ||
| Three Months Ended | ||||||
| March 31, 2022 | March 31, 2021 | |||||
| Risk-free interest rate | % - % | % - % | ||||
| Volatility | % | %-% | ||||
| Dividend yield | % | % | ||||
| Expected term (years) | - | - | ||||
| Weighted-average fair value | $ | $ | ||||
A summary of the Company’s stock option activity under its stock option plans during the ninethree months ended September 30, 2017March 31, 2022 is as follows (share amounts in thousands):
| Number of Shares | Weighted Average Exercise Price | ||||||
| Outstanding as of December 31, 2016 | 415 | $ | 17.23 | ||||
| Cancelled | (24 | ) | $ | 15.32 | |||
| Outstanding as of September 30, 2017 | 391 | $ | 17.34 | ||||
Summary of Stock Option Activity
| Weighted- | ||||||||||
| Weighted- | Average | Total | ||||||||
| Average | Remaining | Aggregate | ||||||||
| Stock | Exercise | Contractual | Intrinsic | |||||||
| Options | Price | Life (in years) | Value | |||||||
| Outstanding as of December 31, 2021 | 7,306 | $ | 2.60 | |||||||
| Granted | 3,000 | 1.47 | ||||||||
| Exercised | (6) | 1.06 | ||||||||
| Cancelled | - | 0 | ||||||||
| Outstanding as of March 31, 2022 | 10,300 | $ | 2.27 | 8.7 | $ | 2,894 | ||||
| Vested and expected to vest as of March 31, 2022 | 10,300 | $ | 2.27 | 8.7 | $ | 2,894 | ||||
| Exercisable as of March 31, 2022 | 3,085 | $ | 3.00 | 8.1 | $ | 2,894 |
The intrinsic value of options exercised during the three months ended March 31, 2022 and 2021 was $ million and $, respectively. As of March 31, 2022, unrecognized stock-option compensation expense of $ million is expected to be realized over a weighted-average period of years.
Performance Stock Award
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||
| Unvested as of December 31, 2016 | 115 | $ | 5.11 | ||||
| Granted | 873 | $ | 1.13 | ||||
| Vested | (211 | ) | $ | 1.70 | |||
| Forfeited | (56 | ) | $ | 1.45 | |||
| Unvested as of September 30, 2017 | 721 | $ | 1.57 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Research and development | $ | 57 | $ | 54 | $ | 193 | $ | 479 | ||||||||
| General and administrative | 275 | 279 | 710 | 948 | ||||||||||||
| Total | $ | 332 | $ | 333 | $ | 903 | $ | 1,427 | ||||||||
Schedule of Stock-Based Compensation Expense
| Three Months Ended | ||||||
| March 31, | ||||||
| 2022 | 2021 | |||||
| Research and development | $ | 229 | $ | 136 | ||
| General and administrative | 2,003 | 569 | ||||
| $ | 2,232 | $ | 705 | |||
12. Commitments and Contingencies
Leases
In March 2019, the Company entered into a nine-month office space rental agreement for its headquarters in New York, New York expiring November 2019. In November 2019, the Company renewed this rental agreement for an additional twelve-months for a base rent of approximately $9,000 per month. In November 2020, the Company renewed this rental agreement for an additional twelve-months for a base rent of approximately $3,800 per month. In March 2021, the Company was notified that the counterparty’s right to occupy the space at 300 Park Avenue, New York, NY was terminated, and the Company was required to vacate by March 26, 2021. The Company operates under one segment which develops pharmaceutical products.
In March 2021, the Company entered into an eighteen-month office space rental agreement for its headquarters at 300 Park Avenue, New York, NY, expiring July 2022. The rental agreement contains a material impact on its consolidated financial statements.
Upon the commencement of the 300 Park Avenue, New York, NY office space in March 2021, in exchange for the new operating lease liability, the Company recognized a right-of-use asset of $74,000. As March 31, 2022, the weighted-average remaining lease term of the operating lease is 0.5 years, and Cash Payments,
At March 31, 2022, future minimum lease payments have aspectsfor operating leases with non-cancelable terms of more than one classyear were as follows (in thousands):
Schedule of cash flowsfuture minimum operating lease payments
| Operating | |||
| Leases | |||
| Remaining Period Ended December 31, 2022 | $ | 27 | |
| Total | 27 | ||
| Less present value discount | (1) | ||
| Operating lease liabilities | $ | 26 |
For each of the three months ended March 31, 2022 and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. 2021, rent expense totaled $0.1million.
Contractual Commitments
The Company is currently evaluating whetherhas entered into long-term agreements with certain manufacturers and suppliers that require it to make contractual payment to these organizations. The Company expects to enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the adoptionfuture, which may require up-front payments and long-term commitments of cash.
Litigation
As of March 31, 2022, there was no material litigation against or involving the Company.
13. Subsequent Events
On April 8, 2022, Seelos Corporation (“STI”), a wholly-owned subsidiary of the new standard will have Company, and Phoenixus AG f/k/a material effect on its condensed consolidated financial statements and related disclosure.
| Upfront payment received | $ | 11,500 | |
| Transition services payment earned in Q2 and Q3 2017 | 500 | ||
| Payment received for inventory | 709 | ||
| Total proceeds from sale | $ | 12,709 | |
| Carrying value of assets sold in sale | (1,578 | ) | |
| Liabilities transferred upon sale | 1,186 | ||
| Total gain on sale of Purchased Assets | $ | 12,317 | |
| September 30, 2017 | December 31, 2016 | ||||||
| Accounts receivable | $ | 9 | $ | 530 | |||
| Inventories | — | 764 | |||||
| Prepaid expenses and other current assets | — | 76 | |||||
| Current assets of discontinued operations | 9 | 1,370 | |||||
| Property and equipment, net | — | 842 | |||||
| Total assets of discontinued operations | $ | 9 | $ | 2,212 | |||
| Accounts payable | 25 | 274 | |||||
| Accrued expenses | 76 | 1,834 | |||||
| Total liabilities of discontinued operations | $ | 101 | $ | 2,108 | |||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Product sales | $ | — | $ | 172 | $ | 143 | $ | 541 | |||||||
| Royalty revenue | — | 195 | 368 | 866 | |||||||||||
| License fee revenue | — | 3,950 | — | 4,000 | |||||||||||
| Cost of goods sold | — | (110 | ) | (74 | ) | (436 | ) | ||||||||
| Cost of Sandoz rights | — | (3,380 | ) | — | (3,380 | ) | |||||||||
| Operating expenses | (73 | ) | (504 | ) | (821 | ) | (1,363 | ) | |||||||
| Other expense | — | (17 | ) | (16 | ) | (17 | ) | ||||||||
| Gain on sale | 250 | — | 12,317 | — | |||||||||||
| Income (loss) from discontinued operations | $ | 177 | $ | 306 | $ | 11,917 | $ | 211 | |||||||
Pursuant to the Ferring AssetVyera Purchase Agreement, as amended by the Company sold all of its rightsAmendment, STI agreed to these assets and recognized product sales during(i) make a cash payment to Vyera in the first quarter of 2017 related to the sales from January 1, 2017 through the completion of the sale, on March 8, 2017. The Company recorded product sales of $0.1 million and related cost of goods sold of $0.1 million for this time period.
| September 30, 2017 | December 31, 2016 | ||||||
| Professional fees | $ | 601 | $ | 783 | |||
| Deferred compensation | — | 134 | |||||
| Outside research and development services | 64 | 142 | |||||
| Other | 118 | 177 | |||||
| $ | 783 | $ | 1,236 | ||||
| December 31, 2016 | ||||
| Notes payable, principal | $ | 6,392 | ||
| Add: accretion of final payment fee | 378 | |||
| Less: unamortized debt discount | (120 | ) | ||
| 6,650 | ||||
| Less: current portion of notes payable, net | (6,650 | ) | ||
| $ | — | |||
| Common Shares Issuable upon Exercise | Weighted Average Exercise Price | |||||
| Outstanding at December 31, 2016 | 2,317,846 | $ | 15.19 | |||
| Issued | 5,199,138 | $ | 1.60 | |||
| Cancelled | (246,914 | ) | 52.50 | |||
| Outstanding as of September 30, 2017 | 7,270,070 | $ | 3.85 | |||
| Exercisable as of September 30, 2017 | 7,270,070 | $ | 3.85 | |||
| Shares Issuable Upon Exercise | Exercise Price | Expiration Date | |||||
| 300,000 | $ | 34.00 | May 2018 | ||||
| 1,068,307 | $ | 1.67 | March 2020 | ||||
| 106,831 | $ | 2.16 | March 2020 | ||||
| 251,500 | $ | 1.75 | April 2022 | ||||
| 4,638,425 | $ | 1.55 | May 2022 | ||||
| 428,620 | $ | 8.80 | January 2023 | ||||
| 441,763 | $ | 8.80 | March 2023 | ||||
| 19,380 | $ | 12.90 | October 2024 | ||||
| 15,244 | $ | 16.40 | July 2025 | ||||
| 7,270,070 | |||||||
The Company is a partypaid the $4.0 million cash payment and issued the Initial Shares to the following litigation and may be a party to certain other litigation that is either judged to be not material or that arisesVyera in the ordinary course of business from time to time. The Company intends to vigorously defend its interests in these matters and does not expect that the resolution of these matters will have a material adverse effect on its business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.April 2022.
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| ITEM 2. |
Disclosures Regarding Forward-Looking Statements
The following should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report as well as in conjunction with the Risk Factors section and in our Annual Report on Form 10-K10- K for the year ended December 31, 20162021 as filed with the United States Securities and Exchange Commission (“SEC”) on March 13, 2017.4, 2022 (the “Form 10-K”). This report and ourthe Form 10-K include forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
We have common law trademark rights in the United States, which is pending registrationunregistered marks “Seelos Therapeutics, Inc.,” “Seelos,” and subject to our agreement with Warner Chilcott Company, Inc., now a subsidiary of Allergan plc (“Allergan”). Vitaros is a registered trademark of Ferringthe Seelos logo in certain countries outside of the United States. In addition, we own trademarks for NexACT
Overview
We are a clinical-stage biopharmaceutical company focused on achieving efficient development of products that address significant unmet needs in Central Nervous System ("CNS") disorders and other rare disorders.
Recent Developments
Impact of COVID-19
In March 2020, we began taking precautionary measures to protect the health and safety of our employees and contractors and further assessing the actual and potential impact of the coronavirus (“COVID-19”) pandemic on our business, financial condition and operations. COVID-19 infections have been reported throughout the United States, along with other jurisdictions in which our suppliers, partners and collaborators operate. In addition, COVID-19 has caused disruption and volatility in the global capital markets, and has led to an economic slowdown. Certain national, provincial, state and local governmental authorities have issued proclamations and/or directives aimed at minimizing the spread of COVID-19 and additional, more restrictive proclamations and/or directives may be issued in the future. Before the COVID-19 outbreak, most of our employees worked remotely. Up until the fourth quarter of 2021, we had not experienced any significant delays with our past or ongoing clinical trials for SLS-002, or our start up activities for clinical trials for SLS-005. Beginning in the fourth quarter of 2021 and through the issuance of this report, we have experienced a slowdown in patient enrollment primarily due to staffing issues at our study sites related to the spike in COVID-19 cases due to the Omicron variant. However, the pandemic has not materially affected our liquidity as we maintain our resources in the form of cash.
In addition, although we do not currently expect the preventative measures taken to date to have a material adverse impact on our business for the second quarter of 2022, the continued impact of the COVID-19 pandemic on our business, financial condition and results of operations is unknown and will depend on future developments and risks, which are highly uncertain and cannot be predicted. These developments and risks include, among others, the duration and severity of the COVID-19 pandemic, the emergence or spread of new COVID-19 variants, the impact on the capital markets, the impact on our partners and the regulatory agencies that oversee our sector and any additional preventative and protective actions that governmental authorities, or we, may implement, any of which may result in an extended period of business disruption, including potential delays in commencing future clinical trials, or in completing enrollment for any clinical trials we may commence or in the U.S. Food and Drug Administration (“FDA”) or other regulatory agencies conducting in-person inspections or accommodations for alternatives to in-person inspections. Any resulting financial impact cannot be reasonably estimated at this time, but the COVID-19 pandemic may force us to make adjustments to our business, our plans and our timeline for developing assets, including our programs. In addition, the pandemic is currently not anticipated to have a material adverse impact on our business, financial condition and results of operations, including our ability to raise additional capital, although, if the pandemic continues at its current rate into the third quarter of 2022, it could have a material adverse impact on our business. See Part I, Item 1A, Risk Factors, for an additional discussion of risks related to COVID-19.
Business Update
Our business model is to advance multiple late-stage therapeutic candidates with proven mechanisms of action that address large markets with unmet medical needs and for which there is a strong economic and scientific rationale for development.
Our product development pipeline is as follows:
| Product | Indication | Development Phase | Development Status | |||
| SLS-002 Intranasal Racemic Ketamine | | Acute Suicidal Ideation and Behavior (ASIB) in Major Depressive Disorder (MDD) | Phase II | | Completed open-label patient enrollment and announced the initial topline data from Part 1 of the proof-of-concept study on May 17, 2021 and initiated enrollment of Part 2 of a registration directed study | |
SLS-005 IV Trehalose | Amyotrophic Lateral Sclerosis (ALS) | Phase II/III | On February 28, 2022, we announced dosing of the first participants in the registrational study; enrollment ongoing | |||
| Spinocerebellar Ataxia (SCA) | Phase IIb/III | Startup activities ongoing; enrollment of our first participants expected in the second quarter of 2022 | ||||
| Sanfilippo Syndrome | Phase II | Obtaining natural history data | ||||
| SLS-004 | Parkinson's Disease (PD) | Pre-IND | Preclinical studies ongoing | |||
| Gene Therapy | ||||||
| SLS-006 | Parkinson's Disease (PD) | Phase II/III | Not in active development; considering next steps | |||
| Partial Dopamine Agonist | ||||||
| SLS-007 | Parkinson's Disease (PD) | Pre-IND | Preclinical study ongoing | |||
| Peptide Inhibitor | ||||||
Lead Programs
Our lead programs are currently SLS-002 for the potential treatment of Acute Suicidal Ideation and Behavior (“ASIB”) in patients with Major Depressive Disorder (“MDD”) and SLS-005 for the potential treatment of Amyotrophic Lateral Sclerosis (“ALS”) and Spinocerebellar Ataxia (“SCA”). SLS-005 for the potential treatment of Sanfilippo Syndrome currently requires additional natural history data, which is being considered.
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SLS-002 is intranasal racemic ketamine with two investigational new drug applications (“INDs”). The lead program is focused on the treatment of ASIB in MDD. SLS-002 was originally derived from a Javelin Pharmaceuticals, Inc./Hospira, Inc. program with 16 clinical studies involving approximately 500 subjects. SLS-002 addresses an unmet need for an efficacious drug to treat suicidality in the United States. Traditionally, anti-depressants have been used in this setting but many of the existing treatments are known to contribute to an increased risk of suicidal thoughts in some circumstances, and if and when they are effective, it often takes weeks for the full therapeutic effect to be manifested. We believe there is a large opportunity in the United States and European markets for products in this space. Based on information gathered from the databases of the Agency for Healthcare Research and Quality, there were approximately 1,000,000 visits to emergency rooms for suicide attempts in 2013 in the United States alone. Experimental studies suggest ketamine has the potential to be a rapid, effective treatment for refractory depression and suicidality.
The clinical development program for SLS-002 includes two parallel healthy volunteer studies (Phase I). We announced interim data from our Phase I study of SLS-002 during the quarterly period ended March 31, 2020. As a result, in March 2020, we completed a Type C meeting with the FDA and received guidance to conduct a Phase II proof of concept (“PoC”) study of SLS-002 for ASIB in patients with MDD, to support the further clinical development of this product candidate, together with nonclinical data under development.
As a result of the Type C meeting and the Fast Track designation for SLS-002 for the treatment of ASIB in patients with MDD, we believe we are well positioned to pursue the FDA's expedited programs for drug development and review.
On June 23, 2020, we announced the final safety data from our Phase I pharmacokinetics/pharmacodynamics study of intranasal racemic ketamine (SLS-002) as well as the planned design of a Phase II double blind, placebo-controlled PoC study for ASIB in subjects with MDD. We initiated this PoC study in two parts: Part 1 was an open-label study of 17 subjects, and is being followed by Part 2, which is a double blind, placebo-controlled study of approximately 120 subjects. On January 15, 2021, we announced dosing of the first subjects in Part 1 of the PoC study. On March 5, 2021, we announced the completion of open-label enrollment of subjects in Part 1 of the PoC study. On May 17, 2021, we announced positive topline data from Part 1 of the POC study, the open-label cohort, of our study of SLS-002 (intranasal racemic ketamine), demonstrating a significant treatment effect and a well-tolerated safety profile for ASIB in patients with MDD. This study enrolled 17 subjects diagnosed with MDD requiring psychiatric hospitalization due to significant risk of suicide with a baseline score of ≥ 28 points on the Montgomery-Åsberg Depression Rating Scale ("MADRS"), a score of 5 or 6 on MADRS Item-10, a score of ≥ 15 points on the Sheehan-Suicidality Tracking Scale (S-STS) total score and a history of previous suicide attempt(s), as confirmed on the Columbia Suicide Severity Rating Scale (C-SSRS) with a history of at least one actual attempt, or if the attempt was interrupted or aborted, is judged to have been serious in intent. SLS-002 demonstrated a 76.5% response rate (response meaning 50% reduction from baseline) in the primary endpoint on MADRS twenty-four hours after first dose, with a mean reduction in total score from 39.4 to 14.5 points.
On July 6, 2021, we announced dosing of the first subject in Part 2 of the planned registration directed study. Based on feedback from a Type C meeting with the FDA in June 2021, we are planning to increase the subjects in Part 2 to increase the sample size and power to support a potential marketing application.
SLS-005 is IV trehalose, a protein stabilizer that crosses the blood-brain-barrier and activates autophagy and the lysosomal pathway. Based on preclinical and in vitro studies, there is a sound scientific rationale for developing trehalose for the treatment of ALS, SCA and other indications such as Sanfilippo Syndrome. Trehalose is a low molecular weight disaccharide (0.342 kDa) that protects against pathological processes in cells. It has been shown to penetrate muscle and cross the blood-brain-barrier. In animal models of several diseases associated with abnormal cellular protein aggregation, it has been shown to reduce pathological aggregation of misfolded proteins as well as to activate autophagy pathways through the activation of Transcription Factor EB ("TFEB"), a key factor in lysosomal and autophagy gene expression. Activation of TFEB is an emerging therapeutic target for a number of diseases with pathologic accumulation of storage material.
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Trehalose 90.5 mg/mL IV solution has demonstrated promising clinical potential in prior Phase II clinical development for oculopharyngeal muscular dystrophy ("OPMD") and spinocerebellar ataxia type 3 ("SCA3"), also known as Machado Joseph disease, with no significant safety signals to date and encouraging efficacy results. Pathological accumulation of protein aggregates within cells, whether in the CNS or in muscle, eventually leads to loss of function and ultimately cell death. Prior preclinical studies indicate that this platform has the potential to prevent mutant protein aggregation in other devastating PolyA/PolyQ diseases.
We own three United States patents for parenteral administration of trehalose for patients with OPMD and SCA3, all of which are expected to expire in 2034. In addition, Orphan Drug Designation ("ODD") for OPMD and SCA3 has been secured in the United States and in the European Union ("EU"). In February 2019, we assumed a collaborative agreement, turned subsequently into a research grant, with Team Sanfilippo Foundation (“TSF”), a nonprofit medical research foundation founded by parents of children with Sanfilippo Syndrome. On April 30, 2020, we were granted ODD for SLS-005 in Sanfilippo Syndrome from the FDA. SLS-005 was previously granted ODD from the FDA and European Medicines Agency for SCA3 and OPMD as well as Fast Track designation for OPMD. On August 25, 2020, we were issued U.S. patent number 10,751,353 titled "COMPOSITIONS AND METHODS FOR TREATING AN AGGREGATION DISEASE OR DISORDER" which relates to trehalose (SLS-005). The issued patent covers the method of use for trehalose (SLS-005) formulation for treating a disease or disorder selected from any one of the following: spinal and bulbar muscular atrophy, dentatombral-pallidoluysian atrophy, Pick's disease, corticobasal degeneration, progressive supranuclear palsy, frontotemporal dementia or parkinsonism linked to chromosome 17. On May 15, 2020, we were granted Rare Pediatric Disease Designation ("RPDD") for SLS-005 in Sanfilippo Syndrome from the FDA. RPDD is an incentive program created under the Federal Food, Drug, and Cosmetic Act to encourage the development of innovative product candidatesnew therapies for the prevention and treatment of certain rare pediatric diseases. On May 27, 2021, we announced that we were granted ODD for SLS-005 in ALS from the European Medicines Agency. In December 2020, we announced the selection of SLS-005 for the Healey ALS platform trial led by Harvard Medical School, Massachusetts. The Healey ALS platform trial is designed to study multiple potential treatments for ALS simultaneously. The platform trial model aims to greatly accelerate the study access, reduce costs and shorten development timelines. On February 28, 2022, we announced the dosing of the first participants in the areasHealey ALS platform trial. In November 2021, we announced the FDA acceptance of urologyan IND and rheumatology.grant of Fast Track designation for SLS-005 for the treatment of SCA. Start-up activities are underway and we expect to enroll our first participants in the second quarter of 2022.
Additionally, we are developing several preclinical programs, most of which have well-defined mechanisms of action, including SLS-004, licensed from Duke University, and SLS-007, licensed from The Regents of the University of California, for the potential treatment of Parkinson’s Disease (“PD”), SLS-008, targeted at chronic inflammation in asthma, atopic dermatitis and orphan indications such as pediatric esophagitis, SLS-010 in narcolepsy and related disorders and SLS-012, an injectable therapy for post-operative pain management.
Strategy and Ongoing Programs
SLS-002: The clinical development program for SLS-002 includes two parallel healthy volunteer studies (Phase I). Following these Phase I studies, we completed a Type C meeting with the FDA in March 2020 and received guidance to conduct a Phase II PoC study of SLS-002 for ASIB in subjects with MDD. We released topline data for Part 1 of our open-label study on May 17, 2021. We initiated enrollment in Part 2 of the registration directed study on July 6, 2021.
SLS-005 is undergoing startup activities for clinical studies in ALS and SCA. In December 2020, we announced the selection of SLS-005 for the Healey ALS platform trial led by Harvard Medical School, Massachusetts. The Healey ALS platform trial is designed to study multiple potential treatments for ALS simultaneously. The platform trial model aims to greatly accelerate the study access, reduce costs, and shorten development timelines. On February 28, 2022, we announced dosing of the first participants in the Healey ALS platform trial. In November 2021, we announced the FDA acceptance of an IND and grant of Fast Track designation for SLS-005 for the treatment of SCA. We have begun the start-up activities for a Phase IIb/III study for SCA and expect to enroll our first participants in the second quarter of 2022. We are continuing to consider trials in Sanfilippo Syndrome and are seeking more natural history data based on the guidance from regulatory agencies.
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SLS-004 is an all-in-one lentiviral vector, targeted for gene editing through DNA methylation within intron 1 of the synuclein alpha ("SNCA") gene responsible for expressing alpha-synuclein protein. SLS-004, when delivered to dopaminergic neurons derived from human induced pluripotent stem cells of a PD patient, modified the expression on alpha-synuclein ("α-synuclein") and exhibited reversal of the disease-related cellular-phenotype characteristics of the neurons. The role of mutated SNCA in PD pathogenesis and the need to maintain the normal physiological levels of α-synuclein protein emphasize the yet unmet need to develop new therapeutic strategies, such as SLS-004, targeting the regulatory mechanism of α-synuclein expression. On May 28, 2020, we announced the initiation of a preclinical study of SLS-004 in PD through an all-in-one lentiviral vector targeting the SNCA gene. We are constructing a bimodular viral system harboring an endogenous α-synuclein transgene and inducible regulated repressive CRISPR/Cas9-unit to achieve constitutive activation and inducible suppression of PD-related pathologies. On July 7, 2021, we announced positive in vivo data demonstrating down-regulation of SNCA mRNA and protein expression under this study.
SLS-006 is a true partial dopamine agonist, originally developed by Wyeth Pharmaceuticals, Inc., with previous clinical studies on 340 subjects in various Phase I and Phase II studies. It is a potent D2/D3 agonist/antagonist that has shown promising efficacy with statistical significance in Phase II studies in early-stage PD patients and an attractive safety profile. Moreover, it has also shown synergistic effect with reduced doses of L-DOPA. Currently, this program is not in active development and we are considering the next steps.
SLS-007 is a rationally designed peptide-based approach, targeting the nonamyloid component core ("NACore") of α-synuclein to inhibit the protein from aggregation. Recent in vitro and cell culture research has shown that SLS-007 has the ability to stop the propagation and seeding of α-synuclein aggregates. We will evaluate the potential for in vivo delivery of SLS-007 in a PD transgenic mice model. The goal will be to establish in vivo pharmacokinetics/pharmacodynamics and target engagement parameters of SLS-007, a family of anti-α-synuclein peptidic inhibitors. On June 25, 2020, we announced the initiation of a preclinical study of SLS-007 in PD delivered through an adeno associated viral ("AAV") vector targeting the non-amyloid component core of α-synuclein. We have initiated an in vivo preclinical study of SLS-007 in rodents to assess the ability of two specific novel peptides, S62 and S71, delivered via AAV1/2 viral vector, to protect dopaminergic function in the preformed α-synuclein fibril rodent model of PD. Production of AAV1/2 vectors encoding each of the two novel peptides incorporating hemagglutinin tags has already been completed. This preclinical study is designed to establish the in vivo pharmacokinetic and pharmacodynamic profiles and target engagement parameters of SLS-007.
We intend to become a leading biopharmaceutical company focused on neurological and psychiatric disorders, including orphan indications. Our business strategy includes:
| · | advancing SLS-002 in ASIB in MDD and post-traumatic stress disorder; |
| · | advancing SLS-004 in PD; |
| · | advancing SLS-005 in ALS, SCA and Sanfilippo Syndrome; |
| · | advancing SLS-007 in PD as a monotherapy; and |
| · | acquiring synergistic assets in the CNS therapy space through licensing and partnerships. |
We also have two legacy product candidates currently in development. Vitaros iscandidates: a product candidate in the United States for the treatment of erectile dysfunction, (“ED”), which we in-licensed from Warner Chilcott Company, Inc., now a subsidiary of Allergan. RayVa
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Recent Developments
On April 8, 2022, Seelos Corporation (“STI”), our wholly-owned subsidiary, and Phoenixus AG f/k/a Vyera Pharmaceuticals AG (“Vyera”) entered into an amendment (the “Amendment”) to the Asset Purchase Agreement by and between STI and Vyera, dated March 6, 2018 (as amended by a first amendment thereto entered into on May 18, 2018, a second amendment thereto entered into on December 31, 2018, a third amendment thereto entered into on October 15, 2019 and a fourth amendment thereto entered into on February 15, 2021, the “Vyera Purchase Agreement”). Pursuant to the Vyera Purchase Agreement, STI acquired the assets and liabilities of Vyera related to a product candidate currently referred to as SLS-002 (intranasal ketamine) (the “Vyera Assets”) and agreed, among other things, to make certain development and commercialization milestone payments and royalty payments related to the Vyera Assets (the “Milestone and Royalty Payment Obligations”) and further agreed that in the event that we sold, directly or indirectly, all or substantially all of the Vyera Assets to a third party, then we would pay Vyera an amount equal to 4% of the net proceeds actually received by us as an upfront payment in such sale (the “Change of Control Payment Obligation”).
Pursuant to the Vyera Purchase Agreement, as amended by the Amendment, STI agreed to (i) make a cash payment to Vyera in the aggregate amount of $4.0 million on or before April 8, 2017,2022; (ii) issue to Vyera on or before April 11, 2022 500,000 shares of our common stock (the “Initial Shares”); (iii) issue to Vyera on or before July 11, 2022 an additional 500,000 shares of our common stock (as adjusted for stock splits, stock dividends, combinations, recapitalizations and the like) (the “July 2022 Shares”); and (iv) issue to Vyera on or before January 11, 2023 an additional number of shares of our common stock equal to $1.0 million divided by the volume weighted average closing price of our common stock for the ten consecutive trading days ending on the fifth trading day prior to the applicable date of issuance of the shares of our common stock (the “January 2023 Shares”, and together with the Cash Payment, the Initial Shares and the July 2022 Shares, “Final Payments”). In consideration for the Final Payments, all of STI’s contingent payment obligations under the Vyera Purchase Agreement, including the Milestone and Royalty Payment Obligations and the Change of Control Payment Obligation, as well as all commercialization covenants of STI under the Vyera Purchase Agreement, will terminate in full upon the date that all of the Final Payments have been made.
We paid the $4.0 million cash payment and issued the 500,000 Initial Shares to Vyera in April 2022.
Liquidity, Capital Resources and Financial Condition
Liquidity
We have generated limited revenues, incurred operating losses since inception, and we expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of March 31, 2022, we had $61.8 million in cash and an accumulated deficit of $155.2 million. We have historically funded our operations through the issuance of convertible notes (the “Notes”) (see Note 9 to our condensed consolidated financial statements), the sale of common stock (see Note 6 to our condensed consolidated financial statements) and the exercise of warrants (see Note 10 to our condensed consolidated financial statements).
On November 23, 2021, we entered into an asset purchase agreement with Ferringa Securities Purchase Agreement (the “Ferring Asset“Securities Purchase Agreement”) with Lind Global Asset Management V, LLC (“Lind V”) pursuant to which, among other things, on November 23, 2021 (the “Closing Date”), we issued and sold to Lind V, in a private placement transaction (the “Private Placement”), in exchange for the payment by Lind V of $20.0 million, (1) a convertible promissory note (the “2021 Note”) in an aggregate principal amount of $22.0 million (the “Principal Amount”), which will bear no interest until the first anniversary of the issuance of the First Note and will thereafter bear interest at a rate of 5% per annum, and mature on November 23, 2024 (the “Maturity Date”), and (2) 534,759 shares (the “2021 Closing Shares”) of our common stock.
At the first anniversary of the Closing Date, we shall have the option, at our sole discretion, to issue to Lind V a convertible promissory note (the “Second Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. At the earlier of (i) the two-year anniversary of the Closing Date, or (ii) the successful readout for SLS-005 in ALS, and subject to the mutual agreement of us and Lind V, we shall issue to Lind V a convertible promissory note (the “Third Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. In the event of the filing of a new drug application with the FDA for either SLS-002 or SLS-005, and subject to the mutual agreement of us and Lind V, we shall issue to Lind a convertible promissory note (the “Fourth Note”) in the principal amount of $11.0 million in exchange for the payment by Lind V of $10.0 million. The Second Note, the Third Note and the Fourth Note, if issued, would be in substantially the same form as the 2021 Note. See Note 9 to our condensed consolidated financial statements for further discussion.
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On December 2, 2021, we entered into two separate securities purchase agreements with certain accredited investors on substantially the same terms as the Securities Purchase Agreement, pursuant to which we sold, to Ferring our assets and rights related to Vitaros outside of the United States for up to approximately $12.7 million. In addition to the upfront payment of $11.5 million, Ferring paid us approximately $0.7 millionin private placement transactions, in exchange for the deliverypayment by the accredited investors of certain product-related inventory in April 2017 and an aggregate of $0.5 million related$201,534, (i) convertible promissory notes (the “December 2021 Notes”) in an aggregate principal amount of $221,688, which will bear no interest and mature on December 2, 2024, and (ii) an aggregate of 5,388 shares of our common stock. The December 2021 Notes have substantially the same terms as the 2021 Note.
On May 24, 2021, we completed an underwritten public offering pursuant to transition services, paid in July 2017 and September 2017.
On January 28, 2021, we completed an erection. Vitaros is currently
We expect to finalizeuse the RayVa Phase 2b delivery devicenet proceeds from the above transactions primarily for general corporate purposes, which may include financing our normal business operations, developing new or existing product candidates and study protocolfunding capital expenditures, acquisitions and seekinvestments.
We currently have an ex-U.S. collaboration partner prior to initiating any future clinical studies.
We evaluated whether there are any conditions and recorded net income of approximately $2.8 million and negative cash flows from operations forevents, considered in the nine months ended September 30, 2017. As of September 30, 2017, we had cash and cash equivalents of approximately $8.5 million. While we believe we have enough cash to fund our operations through the fourth quarter of 2018, our history and other factorsaggregate, that raise substantial doubt about our ability to continue as a going concern. We have principally been financed throughconcern within one year beyond the salefiling of this Quarterly Report on Form 10-Q. Based on such evaluation and our common stockcurrent plans (including the ongoing clinical programs for SLS-002, SLS-005, and other equity securities, debt financingsproduct candidates), which are subject to change, management believes that our existing cash and up-front payments received from commercial partnerscash equivalents as of March 31, 2022 are not sufficient to satisfy our operating cash needs for our products under development.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.
Our future liquidity and capital funding requirements will depend on numerous factors, including:
| • | our ability to raise additional funds to finance our operations; |
| • | our ability to maintain compliance with the listing requirements of The Nasdaq Capital Market; |
| • | the outcome, costs and timing of any clinical trial results for our current or future product candidates; |
| • | potential litigation expenses; |
| • | the emergence and effect of competing or complementary products or product candidates; |
| • | our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights; |
| • | our ability to retain our current employees and the need and ability to hire additional management and scientific and medical personnel; |
| • | the terms and timing of any collaborative, licensing or other arrangements that we have or may establish; |
| • | the trading price of our common stock; and |
| • | our ability to increase the number of authorized shares outstanding to facilitate future financing events. |
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We may need to raise substantial additional funds, and if we do so, we may do so through one or more of the following: issuance of additional debt, equity, or equity,both and/or the completion of a licensing or other commercial transaction for one or more of our pipeline assets.product candidates. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. This could adversely affect future development and business activities, operations and business plans, such as potential commercialization activities for Vitaros in the United States and future clinical studies for RayVa.and/or other future ventures. There can be no assurance that we will be able to obtain the needed financing on acceptable terms or at all. Additionally, equity or convertible debt financings may have a dilutive effect on the holdings of our existing stockholders.
Critical Accounting Estimates and Policies
The preparation of financial statements in accordance with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and analysis of our financial condition and results of operations is based uponassumptions that affect the amounts reported in our unaudited condensed consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. On an ongoing basis, we evaluate our estimates including those related to bad debts, inventories, other long-term assets, warrants, stock-based compensation, income taxes, and legal proceedings. We base ouraccompanying notes. Management bases its estimates on historical experience, market and onother conditions, and various other assumptions we believeit believes to be reasonable underreasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the circumstances,future, the resultsestimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our unaudited condensed consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which formmay also have a material effect in our unaudited condensed consolidated financial statements. We review our estimates, judgments, and assumptions used in our accounting practices periodically and reflect the basis for making judgments abouteffects of revisions in the carrying values of assets and liabilities not readily apparent from other sources. Actualperiod in which they are deemed to be necessary. We believe that these estimates are reasonable; however, our actual results may differ from these estimates.
Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162021 and there have been no material changes to such policies or estimates during the ninethree months ended September 30, 2017.
Recent Accounting Pronouncements
Please refer to the notes to the unaudited condensed consolidated financial statements (unaudited) for a discussion of recent accounting pronouncements.
Comparison of Operations
Operating Expense
Operating expense was as follows (in thousands, except percentages):
| Three Months Ended September 30, | 2017 vs 2016 | Nine Months Ended September 30, | 2017 vs 2016 | ||||||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||
| Operating expense | |||||||||||||||||||||||||||||
| Research and development | $ | 1,960 | $ | 170 | $ | 1,790 | 1,053 | % | $ | 3,226 | $ | 5,274 | $ | (2,048 | ) | (39 | )% | ||||||||||||
| General and administrative | 1,756 | 1,550 | 206 | 13 | % | 4,799 | 5,878 | (1,079 | ) | (18 | )% | ||||||||||||||||||
| Total operating expense | 3,716 | 1,720 | 1,996 | 116 | % | 8,025 | 11,152 | (3,127 | ) | (28 | )% | ||||||||||||||||||
| Loss from operations | $ | (3,716 | ) | $ | (1,720 | ) | $ | (1,996 | ) | 116 | % | $ | (8,025 | ) | $ | (11,152 | ) | $ | 3,127 | (28 | )% | ||||||||
| Three Months Ended March 31, | |||||||||||
| Three Months Ended March 31, | 2022 vs 2021 | ||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||
| Operating expense | |||||||||||
| Research and development | $ | 10,009 | $ | 14,112 | $ | (4,103) | -29% | ||||
| General and administrative | 4,001 | 2,500 | 1,501 | 60% | |||||||
| Total operating expense | $ | 14,010 | $ | 16,612 | $ | (2,602) | -16% | ||||
Research and Development Expenses from Continuing Operations
Research and development expenses were as follows (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||
| Three Months Ended March 31, | 2022 vs 2021 | ||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||
| Research and development expenses | |||||||||||
| License payments | $ | - | $ | 9,000 | $ | (9,000) | -100% | ||||
| Clinical trial expenses | 5,951 | 2,781 | 3,170 | 114% | |||||||
| Manufacturing expenses | 2,323 | 1,022 | 1,301 | 127% | |||||||
| Employee compensation | 957 | 690 | 267 | 39% | |||||||
| Contract consulting expenses | 559 | 432 | 127 | 29% | |||||||
| Other research and development expenses | 219 | 187 | 32 | 17% | |||||||
| Total research and development expenses | $ | 10,009 | $ | 14,112 | $ | (4,103) | -29% | ||||
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Research and development (“R&D”) costs are expensed as they are incurred and include the cost of compensation and related expenses, as well as expenses for third parties who conduct research and developmentR&D on our behalf. The $1.8$4.1 million increasedecrease in research and developmentR&D expense during the three months ended September 30, 2017,March 31, 2022, as compared to the same period in the prior year, was primarily due to the $1.5 million milestone payment paid to Allergan during September 2017 following the FDA’s acknowledgment of receipt of our Vitaros NDA resubmission. The $2.0 million decrease in research and development expense during the nine months ended September 30, 2017, as compared to the same period in the prior year,2021, resulted primarily from decreasesa decrease of $9.0 million in outside services relatedlicense payments pursuant to the developmentVyera Purchase Agreement in the first quarter of fispemifene and RayVa as well as decreased personnel-related expenses, partially2021, offset by the $1.5increases in clinical trial costs of approximately $3.2 million, payment to Allergan for the NDA resubmission. We expect to continue to incur additionalmanufacturing expenses during the remainder of 2017 related primarily to activities as we prepare for commercializationapproximately $1.3 million and employee compensation expenses of Vitaros in the United States, as well as personnel-related expenses.
General and Administrative Expenses from Continuing Operations
General and administrative expenses(“G&A”) costs include expenses for personnel, finance, legal, business development and investor relations. General and administrativeG&A expenses were comparableincreased by $1.5 million during the three months ended September 30, 2017March 31, 2022, as compared to the same period in 2021. This increase was primarily due to an increase of $1.4 million for stock compensation expense, primarily related to the prior year. General and administrative expenses decreased $1.1 millioncancellation of performance-based restricted stock units in the first quarter of 2022, as well as an increase of $403,000 in personnel costs due to increased staffing during the ninethree months ended September 30, 2017, as comparedMarch 31, 2022. These increases were partially offset by decreases in costs including but not limited to, the same period of the prior year due to lower professional services expenses, such as legal, accounting, andexternal investor relations expenses.
Other Income and Expense from Continuing Operations
Other income and expense were as follows (in thousands, except percentages)thousands):
| Three Months Ended September 30, | 2017 vs 2016 | Nine Months Ended September 30, | 2017 vs 2016 | ||||||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||
| Other (expense) income | |||||||||||||||||||||||||||||
| Interest income (expense), net | $ | 3 | $ | (234 | ) | $ | 237 | (101 | )% | $ | (89 | ) | $ | (771 | ) | $ | 682 | (88 | )% | ||||||||||
| Loss on extinguishment of debt | — | — | $ | — | N/M | (422 | ) | — | (422 | ) | N/M | ||||||||||||||||||
| Change in fair value of warrant liability | (296 | ) | 626 | (922 | ) | (147 | )% | (588 | ) | 5,063 | (5,651 | ) | (112 | )% | |||||||||||||||
| Other financing expenses | — | (256 | ) | 256 | (100 | )% | — | (461 | ) | 461 | (100 | )% | |||||||||||||||||
| Other expense, net | — | (12 | ) | 12 | (100 | )% | (26 | ) | (23 | ) | (3 | ) | 13 | % | |||||||||||||||
| Total other income (expense) | $ | (293 | ) | $ | 124 | $ | (417 | ) | (336 | )% | $ | (1,125 | ) | $ | 3,808 | $ | (4,933 | ) | (130 | )% | |||||||||
| Three Months Ended March 31, | |||||||||
| 2022 | 2021 | $ Change | |||||||
| Other income (expense) | |||||||||
| Interest income | $ | 26 | $ | 19 | $ | 7 | |||
| Interest expense | (7) | (990) | 983 | ||||||
| Change in fair value of convertible notes | (244) | - | (244) | ||||||
| Change in fair value of warrant liabilities | 234 | (1,533) | 1,767 | ||||||
| Total other income (expense) | $ | 9 | $ | (2,504) | $ | 2,513 | |||
Interest Income
Interest income was $26,000 and $19,000 for the three months ended March 8, 2017, pursuant31, 2022 and 2021, respectively. The increase in interest income primarily related to the Ferring Asset Purchase Agreement, we repaidhigher average cash balances during the three months ended March 31, 2022 compared to the Lenders all amountsthree months ended March 31, 2021.
Interest Expense
Interest expense was $7,000 and $990,000 for the three months ended March 31, 2022 and 2021, respectively. This decrease in interest expense was due to our repayment of the December 2020 convertible notes during 2021.
Change in Fair Value of Convertible Notes
Change in fair value of convertible notes was $0.2 million and owed$0 for the three months ended March 31, 2022 and 2021, respectively. This change was due to our 2021 convertible notes issued in fullNovember 2021 and December 2021, which have been accounted for under the Credit Facility. The final payment included the outstanding balance of the term loansfair value option and are revalued at each reporting period, with changes in full as well as (i) a prepayment fee contractually owed of approximately 2%, or $0.1 million, (ii) a final payment equal to 6% of the original principal amount of each term loan, or $0.6 million, and (iii) per diem interest of approximately $0.05 million, for a total payment of $6.6 million, which resultedfair value reflected in a loss on extinguishment of debt of $0.4 million.
Change in Fair Value of Warrant Liability
The fair value of these warrants is remeasuredwarrant liability was $190,000 at each financial reporting period with any changes in fair value recognized as aMarch 31, 2022. For the three months ended March 31, 2022, the change in fair value of warrant liability inliabilities was $234,000, which income was due to revaluation of the accompanying condensed consolidated statements of operations (see notes 1 and 6 to our condensed consolidated financial statements for further details). The positiveSeries A Warrants during such period. For the three months ended March 31, 2021, the change in fair value of warrant liability isliabilities was $1.5 million, which expense was due to the decrease in the Company’s stock price for all periods presented.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Product sales | $ | — | $ | 172 | $ | 143 | $ | 541 | |||||||
| Royalty revenue | — | 195 | 368 | 866 | |||||||||||
| License fee revenue | — | 3,950 | — | 4,000 | |||||||||||
| Cost of goods sold | — | (110 | ) | (74 | ) | (436 | ) | ||||||||
| Cost of Sandoz rights | — | (3,380 | ) | — | (3,380 | ) | |||||||||
| Operating expenses | (73 | ) | (504 | ) | (821 | ) | (1,363 | ) | |||||||
| Other expense | — | (17 | ) | (16 | ) | (17 | ) | ||||||||
| Gain on sale | 250 | — | 12,317 | — | |||||||||||
| Income (loss) from discontinued operations | $ | 177 | $ | 306 | $ | 11,917 | $ | 211 | |||||||
Cash Flow Summary
The following table summarizes selected items in our unaudited condensed consolidated statements of cash flows (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net cash used in operating activities from continuing operations | $ | (8,073 | ) | $ | (11,181 | ) | ||
| Net cash provided by investing activities from continuing operations | — | 262 | ||||||
| Net cash provided by financing activities from continuing operations | 2,369 | 11,828 | ||||||
| Net cash provided by discontinued operations | 12,080 | 818 | ||||||
| Net increase in cash | $ | 6,376 | $ | 1,727 | ||||
| Three Months Ended | ||||||
| March 31, | ||||||
| 2022 | 2021 | |||||
| Net cash (used in) provided by operations | ||||||
| Net cash used in operating activities | $ | (17,045) | $ | (11,252) | ||
| Net cash provided by financing activities | 83 | 34,277 | ||||
| Net increase (decrease) in cash | $ | (16,962) | $ | 23,025 | ||
Operating Activities from Continuing Operations
Cash used in operating activities from continuing operations of $8.1$17.0 million during the ninethree months ended September 30, 2017March 31, 2022 was primarily due to a net loss from continuing operations of $9.2$14.0 million netand changes in operating assets and liabilities of adjustments$5.3 million, which was partially offset by non-cash adjustment related to net loss for non-cash items such as the warrant liability revaluation of $0.6 million, stock-based compensation expense of $0.9$2.2 million.
Cash used in operating activities of $11.3 million during the three months ended March 31, 2021 was primarily due to a net loss of $19.1 million, which was partially offset by changes in operating assets and the loss on extinguishmentliabilities of debt of $0.4$4.6 million.
Financing Activities from Continuing Operations
Cash provided by financing activities of $83,000 during the three months ended March 31, 2022 was primarily due to proceeds from continuing operationsthe sale of $2.4common stock under our employee stock purchase plan.
Cash provided by financing activities of $34.3 million during the ninethree months ended September 30, 2017March 31, 2021 was due to net proceeds of $9.5 million from the issuance and sale of common stock, net of costs, of approximately $33.5 million and the proceeds from the exercise of warrants in our April 2017 Financing,of approximately $5.9 million during the three months ended March 31, 2021. The cash provided was partially offset by the repaymentpayment of our Credit Facility$5.2 million of $7.1 millionconvertible debt principal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as a closing conditiondefined by Rule 12b-2 of the Ferring Asset Purchase Agreement.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, communicated to our management to allow timely decisions regarding required disclosure, summarized and reported within the time periods specified in the SEC’s rules and forms.
Under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”), who serves as the principal executive officer and the principal financial officer,Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2017.March 31, 2022. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2017.
Changes in Internal Control over Financial Reporting
There were no material changes into our internal control over financial reporting during the most recent fiscal quarterthree months ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. March 31, 2022.
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PART II.
ITEM 1.
LEGAL PROCEEDINGSWe are anot currently party to, and none of our property is currently the following litigation andsubject of, any material legal proceedings. We may be a party to certain other litigation that is either judged to be not material or that arises in the ordinary course of business from time to time. We intend to vigorously defend our interests in these matters. We expect that the resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.
ITEM 1A. RISK FACTORS
We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Certain factors may have a material adverse effect on our business, prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in this Quarterly Report on Form 10-Q and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Risk Factor Summary
Below is a summary of the principal factors that make an investment in our securities speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with all of the other information appearing in or incorporated by reference into this Quarterly Report on Form 10-Q and our other public filings with the SEC before making investment decisions regarding the common stock. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
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Risk Factors
The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2021, as filed with the SEC on March 13, 2017:
Risks Related to the Company
*We are a clinical-stage company, we have a very limited operating history, are not currently profitable, do not expect to become profitable in the near future and may never become profitable.
We are a clinical-stage biopharmaceutical company. Since our incorporation, we have focused primarily on the development and acquisition of clinical-stage therapeutic candidates. All of our therapeutic candidates are in the clinical development stage and none of our pipeline therapeutic candidates have been approved for marketing or are being marketed or commercialized.
As a result, we have no meaningful historical operations upon which to evaluate our business and prospects and have not yet demonstrated an ability to obtain marketing approval for any of our product candidates or successfully overcome the risks and uncertainties frequently encountered by companies in the biopharmaceutical industry. We also have generated minimal revenues from collaboration and licensing agreements and no revenues from product sales to date and continue to incur significant research and development and other expenses. As a result, we have not been profitable and have incurred significant operating losses in every reporting period since our inception. We have incurred an accumulated deficit of $155.2 million from our inception through March 31, 2022.
For the foreseeable future, we expect to continue to incur losses, which will increase significantly from historical levels as we expand our drug development activities, seek partnering and/or regulatory approvals for our product candidates and begin to commercialize them if they are approved by the FDA, the EMA or comparable foreign authorities. Even if we succeed in developing and commercializing one or more product candidates, we may never become profitable.
We are dependent on the success of one or more of our current product candidates and we cannot be certain that any of them will receive regulatory approval or be commercialized.
We have spent significant time, money and effort on the licensing and development of our core assets, SLS-002, SLS-005 and SLS-006 and our other earlier-stage assets, SLS-004, SLS-007, SLS-008, SLS-010 and SLS-012. To date, no pivotal clinical trials designed to provide clinically and statistically significant proof of efficacy, or to provide sufficient evidence of safety to justify approval, have been completed with any of our pipeline product candidates. All of our product candidates will require additional development, including clinical trials as well as further preclinical studies to evaluate their toxicology, carcinogenicity and pharmacokinetics and optimize their formulation, and regulatory clearances before they can be commercialized. Positive results obtained during early development do not necessarily mean later development will succeed or that regulatory clearances will be obtained. Our drug development efforts may not lead to commercial drugs, either because our product candidates may fail to be safe and effective or because we have inadequate financial or other resources to advance our product candidates through the clinical development and approval processes. If any of our product candidates fail to demonstrate safety or efficacy at any time or during any phase of development, we would experience potentially significant delays in, or be required to abandon, development of the product candidate.
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We do not anticipate that any of our current product candidates will be eligible to receive regulatory approval from the FDA, the EMA or comparable foreign authorities and begin commercialization for a number of years, if ever. Even if we ultimately receive regulatory approval for any of these product candidates, we or our potential future partners, if any, may be unable to commercialize them successfully for a variety of reasons. These include, for example, the availability of alternative treatments, lack of cost-effectiveness, the cost of manufacturing the product on a commercial scale and competition with other drugs. The success of our product candidates may also be limited by the prevalence and severity of any adverse side effects. If we fail to commercialize one or more of our current product candidates, we may be unable to generate sufficient revenues to attain or maintain profitability, and our financial condition and stock price may decline.
If development of our product candidates does not produce favorable results, or encounters challenges, we and our collaborators, if any, may be unable to commercialize these products.
To receive regulatory approval for the commercialization of our core assets, SLS-002, SLS-005 and SLS-006 and our earlier-stage assets, SLS-004, SLS-007, SLS-008, SLS-010 and SLS-012, or any other product candidates that we may develop, adequate and well-controlled clinical trials must be conducted to demonstrate safety and efficacy in humans to the satisfaction of the FDA, the EMA and comparable foreign authorities. In order to support marketing approval, these agencies typically require successful results in one or more Phase III clinical trials, which our current product candidates have not yet reached and may never reach. The development process is expensive, can take many years and has an uncertain outcome. Failure can occur at any stage of the process. We may experience numerous unforeseen events during, or as a result of, the development process that could delay or prevent commercialization of our current or future product candidates, including the following:
Success in early development does not mean that later development will be successful because, for example, product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy despite having progressed through initial clinical trials.
We have licensed or acquired all of the intellectual property related to our product candidates from third parties. All clinical trials, preclinical studies and other analyses performed to date with respect to our product candidates have been conducted by their original owners. Therefore, as a company, we have limited experience in conducting clinical trials for our product candidates. Since our experience with our product candidates is limited, we will need to train our existing personnel and hire additional personnel in order to successfully administer and manage our clinical trials and other studies as planned, which may result in delays in completing such planned clinical trials and preclinical studies. Moreover, to date our product candidates have been tested in less than the number of patients that will likely need to be studied to obtain regulatory approval. The data collected from clinical trials with larger patient populations may not demonstrate sufficient safety and efficacy to support regulatory approval of these product candidates.
We currently do not have strategic collaborations in place for clinical development of any of our current product candidates, except for our collaborative agreement with Team Sanfilippo Foundation ("TSF"), which we assumed in connection with the asset purchase agreement with Bioblast Pharma Ltd. for IV Trehalose, which is now known as SLS-005. Therefore, in the future, we or any potential future collaborative partner will be responsible for establishing the targeted endpoints and goals for development of our product candidates. These targeted endpoints and goals may be inadequate to demonstrate the safety and efficacy levels required for regulatory approvals. Even if we believe data collected during the development of our product candidates are promising, such data may not be sufficient to support marketing approval by the FDA, the EMA or comparable foreign authorities. Further, data generated during development can be interpreted in different ways, and the FDA, the EMA or comparable foreign authorities may interpret such data in different ways than us or our collaborators. Our failure to adequately demonstrate the safety and efficacy of our product candidates would prevent our receipt of regulatory approval, and ultimately the potential commercialization of these product candidates.
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Since we do not currently possess the resources necessary to independently develop and commercialize our product candidates or any other product candidates that we may develop, we may seek to enter into collaborative agreements to assist in the development and potential future commercialization of some or all of these assets as a component of our strategic plan. However, our discussions with potential collaborators may not lead to the establishment of collaborations on acceptable terms, if at all, or it may take longer than expected to establish new collaborations, leading to development and potential commercialization delays, which would adversely affect our business, financial condition and results of operations.
We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability.
We expect to expend substantial funds in research and development, including preclinical studies and clinical trials of our product candidates, and to manufacture and market any product candidates in the event they are approved for commercial sale. We also may need additional funding to develop or acquire complementary companies, technologies and assets, as well as for working capital requirements and other operating and general corporate purposes. Moreover, our planned increases in staffing will dramatically increase our costs in the near and long-term.
However, our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. Due to our limited financial and managerial resources, we must focus on a limited number of research programs and product candidates and on specific indications. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.
Because the successful development of our product candidates is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially commercialize them. In addition, we may not be able to generate sufficient revenue, even if we are able to commercialize any of our product candidates, to become profitable.
*Given our lack of current cash flow, we may need to raise additional capital; however, it may be unavailable to us or, even if capital is obtained, may cause dilution or place significant restrictions on our ability to operate our business. If we fail to raise the necessary additional capital, we may be unable to complete the development and commercialization of our product candidates, or continue our development programs.
As of March 31, 2022, we had a cash balance of approximately $61.8 million. Since we will be unable to generate sufficient, if any, cash flow to fund our operations for the foreseeable future, we may need to seek additional equity or debt financing to provide the capital required to maintain or expand our operations.
As a result of our sale of assets to Ferring, we do not expect to generate revenue for the foreseeable future and we may not be successful in obtaining FDA approval for our recently resubmitted NDA for U.S. Vitaros. *
We currently have filed aan effective shelf registration statement on Form S-3 filed with the Securities and Exchange Commission (“SEC”), which if declared effective bySEC. We may use the SEC, will allow usshelf registration statement on Form S-3 to offer from time to time any combination of debt securities, common and preferred stock and warrants. We registered $100.0warrants, and, as of the date hereof, a total of $95.1 million in aggregateof securities which will beremains available for sale under our Form S-3 shelf registration statement if and when its declared effective by the SEC. However, under current SEC regulations, at any time during which the aggregate market value of our common stock held by non-affiliates (“public float”) is less than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements is limitedissuance pursuant to an aggregate of one-third of our public float. SEC regulations permit us to use the highest closing sales price of our common stock (or the average of the last bid and last ask prices of our common stock) on any day within 60 days of sales under the shelf registration statement. Since our public float was less than $75.0 million as
There can be no assurance that we will be able to raise sufficient additional capital on acceptable terms or at all. In addition, the impact of the date we filedCOVID-19 pandemic on the Form S-3 registration statement, our usage of our Form S-3 will be limited if and when declared effective by the SEC. We still maintain the ability to raise funds through other means, such as through additional public or private placements. The rules and regulations of the SEC or any other regulatory agenciesglobal financial markets may restrictreduce our ability to conduct certain types of financing activities, or mayaccess capital, which could negatively affect the timing ofour liquidity and amounts we can raise by undertaking such activities.
Our future capital requirements will depend on many factors, including, but not be available to us, to conduct additional trials in supportlimited to:
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If we raise additional capital by issuing equity securities, the percentage ownership of our existing stockholders may be materially harmedreduced, and accordingly these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock. Given our need for cash and that equity issuances are the most common type of fundraising for similarly situated companies, the risk of dilution is particularly significant for our stockholders. In addition, debt financing may involve agreements that include covenants limiting or restricting our ability to create long-term stockholder value will be limited.
Undesirable side effects observed in clinical trials or in supportive preclinical studies with our product candidates may also be soldcould interrupt, delay or halt their development and marketed outsidecould result in the United States, we and/denial of regulatory approval by the FDA, the EMA or our licensees may be subject tocomparable foreign regulatory requirements governingauthorities for any or all targeted indications or adversely affect the conductmarketability of clinical trials, product licensing, pricing and reimbursements. These requirements vary widely from country to country. The failure to meet each foreign country’s requirements could delay the introduction of our proposedany such product candidates that receive regulatory approval. In turn, this could eliminate or limit our ability to commercialize our product candidates.
Our product candidates may exhibit adverse effects in preclinical toxicology studies and adverse interactions with other drugs. There are also risks associated with additional requirements the FDA, the EMA or comparable foreign authorities may impose for marketing approval with regard to a particular disease.
Our product candidates may require a risk management program that could include patient and healthcare provider education, usage guidelines, appropriate promotional activities, a post-marketing observational study, and ongoing safety and reporting mechanisms, among other requirements. Prescribing could be limited to physician specialists or physicians trained in the respective foreign country and limit our revenues from salesuse of our proposed product candidates in foreign markets.
Undesirable side effects involving our product candidates may have other significant adverse implications on our abilitybusiness, financial condition and results of operations. For example:
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In addition, if approved.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product and could substantially increase the costs and expenses of commercializing the product, which in part onturn could delay or prevent us from generating significant revenues from the availabilitysale of coveragethe product.
Our efforts to discover product candidates beyond our current product candidates may not succeed, and reimbursement from third-party payors such as United Statesany product candidates we recommend for clinical development may not actually begin clinical trials.
We intend to use our technology, including our licensed technology, knowledge and foreign government insurance programs, including Medicareexpertise to develop novel drugs to address some of the world's most widespread and Medicaid, private health insurers, health maintenance organizationscostly central nervous system, respiratory and other health care related organizations. Bothdisorders, including orphan indications. We intend to expand our existing pipeline of core assets by advancing drug compounds from current ongoing discovery programs into clinical development. However, the federalprocess of researching and state governments indiscovering drug compounds is expensive, time-consuming and unpredictable. Data from our current preclinical programs may not support the United Statesclinical development of our lead compounds or other compounds from these programs, and foreign governments continuewe may not identify any additional drug compounds suitable for recommendation for clinical development. Moreover, any drug compounds we recommend for clinical development may not demonstrate, through preclinical studies, indications of safety and potential efficacy that would support advancement into clinical trials. Such findings would potentially impede our ability to proposemaintain or expand our clinical development pipeline. Our ability to identify new drug compounds and pass new legislation affecting coverageadvance them into clinical development also depends upon our ability to fund our research and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and healthcare reforms are likely that could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our productsdevelopment operations, and we cannot predict the scope of any future changes or the impactbe certain that those changes would have on our operations.
Delays in the commencement or completion of clinical trials are commoncould result in increased costs to us and have many causes, and if we experience significant delaysdelay our ability to establish strategic collaborations.
Delays in the clinical development and regulatory approvalcommencement or completion of our product candidates, our business may be substantially harmed.
In addition, once a clinical trial or return for post-treatment follow-up;
If we experience termination of, or delays in the completion, or termination, of any clinical trial of our product candidates, the commercial prospects forof our product candidates will be harmed, and our ability to commence product sales and generate product revenues from any of our product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development and approval process and jeopardizeprocess. Delays in completing our abilityclinical trials could also allow our competitors to commence product sales and generate revenues fromobtain marketing approval before we do or shorten the patent protection period during which we may have the exclusive right to commercialize our
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The COVID-19 pandemic, and any other pandemic, epidemic or outbreak of an infectious disease may materially and adversely affect our business and operations.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect our operations and those of third parties on which we rely, including by causing disruptions in the supply of our product candidates and the conduct of future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the FDA and other health authorities, which could result in delays of reviews and approvals, including with respect to our product candidates. Additionally, while the potential economic impact brought by, and the duration of the COVID-19 pandemic are unabledifficult to obtain regulatoryassess 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 have a material adverse effect on our operations. We are actively monitoring the effect of the global situation on our financial condition, liquidity, operations, suppliers, industry and workforce. While the spread of COVID-19 may eventually be contained or mitigated, we cannot predict the timing of the vaccine roll-out globally or the continued efficacy of such vaccines, and we do not yet know how businesses or our partners will operate in a post COVID-19 environment. The ultimate impact of the COVID-19 pandemic on our business, operations or the global economy as a whole remains highly uncertain, and a continued and prolonged public health crisis such as the COVID-19 pandemic could have a material negative impact on our business, financial condition, and operating results.
Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.
The results of preclinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy results despite having progressed through preclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, our future clinical trial results may not be successful for these or other reasons.
This product candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical to early- to late-stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late-stage clinical trials, approval and commercialization, such changes carry the risk that they will not achieve these intended objectives. In addition, nonclinical studies may be requested or required even after clinical trials have been commenced or completed.
Any of these changes could make the results of our planned clinical trials or other future clinical trials we may initiate less predictable and could cause our product candidates to perform differently, including causing toxicities, which could delay completion of our clinical trials, delay approval of our product candidates, and/or jeopardize our ability to commence product sales and generate revenues.
If we willexperience delays in the enrollment of patients in our clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or other regulatory authorities. In addition, the COVID-19 pandemic may result in a reduction of patient enrollment, a loss of patient enrollment and other delays affecting our clinical trials. Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians' and patients' perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.
If we fail to enroll and maintain the number of patients for which the clinical trial was designed, the statistical power of that clinical trial may be reduced, which would make it harder to demonstrate that the product candidate being tested in such clinical trial is safe and effective. Additionally, enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.
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We intend to rely on third parties to conduct our preclinical studies and clinical trials and perform other tasks. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business, willfinancial condition and results of operations could be adversely impacted.
We intend to rely upon third-party CROs, medical institutions, clinical investigators and contract laboratories to monitor and manage data for our ongoing preclinical and clinical programs. Nevertheless, we maintain responsibility for ensuring that each of our clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on these third parties does not relieve us of our regulatory responsibilities. We and our CROs and other vendors are required to comply with current requirements on good manufacturing practices ("cGMP"), good clinical practices ("GCP") and good laboratory practice ("GLP"), which are a collection of laws and regulations enforced by the FDA, the EMA and comparable foreign authorities for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections of preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other contractors. If we failor any of our CROs or vendors fails to comply with applicable regulations, the data generated in our preclinical studies and clinical trials may be deemed unreliable and the FDA, the EMA or comparable foreign authorities may require us to perform additional preclinical studies and clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with products produced consistent with cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the development and regulatory approval processes.
We may not be able to enter into arrangements with CROs on commercially reasonable terms, or at all. In addition, our CROs will not be our employees, and except for remedies available to us under our agreements with such CROs, we will not be able to control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our protocols, regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. CROs may also generate higher costs than anticipated. As a result, our business, financial condition and results of operations and the commercial prospects for our product candidates could be materially and adversely affected, our costs could increase, and our ability to generate revenue could be delayed.
Switching or adding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. There can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse effect on our business, financial condition or results of operations.
Our product candidates are subject to extensive regulation under the FDA, the EMA or comparable foreign authorities, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution of our product candidates are subject to extensive regulation by the FDA and other U.S. regulatory agencies, the EMA or comparable authorities in foreign markets. In the U.S., neither we nor our collaborators are permitted to market our product candidates until we will be unable to sellor our product candidates, which will impair our ability to generate additional revenues. Tocollaborators receive approval we must, among other things, demonstrate with substantial evidenceof a new drug application ("NDA") from clinical trials, to the satisfaction of the FDA that the product candidateor receive similar approvals abroad. The process of obtaining these approvals is both safeexpensive, often takes many years, and effective for each indication for which approval is sought. Failure can occur in any stage of development. Satisfaction of the approval requirements is unpredictable but typically takes several years following the commencement of clinical trials, and the time and money needed to satisfy them may vary substantially based onupon the type, complexity and novelty of the pharmaceutical product. We cannot predict ifproduct candidates involved. Approval policies or when our existingregulations may change and planned clinical trials will generatemay be influenced by the data necessaryresults of other similar or competitive products, making it more difficult for us to support an NDAachieve such approval in a timely manner or at all. Any guidance that may result from recent FDA advisory panel discussions may make it more expensive to develop and if, or when, we might receive regulatory approvals for ourcommercialize such product candidates. For example, an NDA wasIn addition, as a company, we have not previously submitted for Vitaros, but the FDA issued a non-approvable letter in 2008 identifying certain deficiencies with the application. Although we did not conduct additional clinical testing, we addressed the issues the FDA raised in the non-approvable letter in our NDA resubmission in August 2017. Based on feedback during our pre-NDA meetingsfiled NDAs with the FDA we believe that the resubmission of the Vitaros NDA did not require additional clinical testing, but there is no assurance that the FDA will accept the NDA for Vitaros or agree that no additional clinical trials were required.
Despite the time and expense invested, regulatory approval is never guaranteed. The FDA, the EMA or comparable foreign authorities can delay, limit or deny approval of a product candidate for many reasons, including:
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We are pursuing the FDA 505(b)(2) NDA pathway for our lead product candidate, SLS-002, which presents certain additional development and commercialization risks as compared to a conventional 505(b)(1) NDA for an innovator product candidate. We may pursue this pathway for other product candidates as well.
For our lead product candidate (SLS-002) we mayare pursuing development in order to seek potential FDA approval through the Sectionunder an abbreviated regulatory pathway called a 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2)NDA, which permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference. We may also pursue this pathway for other of our product candidates. Section 505(b)(2), if applicable to us under the FDCA,for a particular product candidate, would allow an NDA we submit to the FDA to rely, in part, on data in the public domain or the FDA’sFDA's prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the development program for oura product candidatescandidate by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If
Even if the FDA does not allowallows us to pursuerely on the Section 505(b)(2) regulatory pathway, as anticipated, wethere is no assurance that such marketing approval will be obtained in a timely manner, or at all. The FDA may needrequire us to conductperform additional nonclinical studies and clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this wereconduct other development work, to occur,support any change from the time and financial resources required to obtain FDA approval for these product candidates, and complications and risks associatedreference listed drug (including with these product candidates, would likely substantially increase. We could need to obtain more additional funding, which could result in significant dilutionrespect to the ownership interestsroute of administration and drug delivery method and device), which presents uncertainty about the data that may ultimately be necessary and could be time-consuming and substantially delay our then existing stockholders to the extentapplication for or potential receipt of marketing approval.
Even if we issue equity securities or convertible debt. We cannot assure you that we would beare able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursueutilize the Section 505(b)(2) regulatory pathway, could resulta drug approved via this pathway may be subject to the same post-approval limitations, conditions and requirements as any other drug, including, for example a Risk Evaluation and Mitigation Strategy ("REMS"), which we anticipate will be required for our lead product candidate.
Also, as has been the experience of others in new competitive products reachingour industry, our competitors may file citizens' petitions with the market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowedFDA to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.
In addition, we may face Hatch-Waxman litigation in relation to our NDAs submitted under the 505(b)(2) regulatory pathway, which may further delay or prevent the approval of our product candidate. The pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirementsIf the previously approved drugs referenced in an applicant's 505(b)(2) NDA are protected by patent(s) listed in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations publication, or the Orange Book, the 505(b)(2) applicant is required to make a claim after filing its NDA that each such patent is invalid, unenforceable or will not be infringed. The patent holder may give rise tothereafter bring suit for patent litigation andinfringement, which will trigger a mandatory delays30-month delay (or the shorter of dismissal of the lawsuit or expiration of the patent(s)) in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with505(b)(2) NDA application.
If the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Sectiondetermines that our 505(b)(2) regulatory pathway there is no guarantee thisnot viable for SLS-002 or any other applicable product candidate for any reason, we would ultimately leadneed to acceleratedreconsider our plans and might not be able to commercialize any such product developmentcandidate in a cost-efficient manner, or earlier approval.
Even if our product candidates receive regulatory approval in the U.S., we may never receive approval or commercialize our products outside of the U.S.
In order to market any products outside of the U.S., we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay seeking or obtaining such approval would impair our ability to develop foreign markets for our product candidates.
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Even if any of our product candidates receive regulatory approval, our product candidates may still face future development and regulatory difficulties.
If any of our product candidates receive regulatory approval, the FDA, the EMA or comparable foreign authorities may still impose significant restrictions on the indicated uses or marketing of the product candidates or impose ongoing requirements for potentially costly post-marketing testing, including Phase 4 clinical trials,post-approval studies and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require additional risk management activities and labeling which may limit distribution or patient/prescriber uptake. An example would be the requirement of a risk evaluation and mitigation strategy in order to approve our product candidates, which could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.trials. In addition, ifregulatory agencies subject a product, our manufacturer and the FDA ormanufacturer's facilities to continual review and periodic inspections. If a comparable foreign regulatory authority approves our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and record-keeping for our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, and registration. We are also required to maintain continued compliance with cGMP requirements and GCPs requirements for any clinical trials that we conduct post-approval. Later discovery ofagency discovers previously unknown problems with oura product, candidates or other manufacturers’ products in the same class, including adverse events of unanticipated severity or frequency, or problems with our third-party manufacturers or manufacturing processes, or failure to comply withthe facility where the product is manufactured, a regulatory requirements,agency may result in, among other things:
The FDA, the EMA and comparable foreign authorities actively enforce the laws and regulations prohibiting the promotion of license approvals;
The FDA, the EMA and comparable foreign authorities strictly regulate the promotional claims that may be made about prescription products, such as our product seizurecandidates, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA, the EMA or detention,comparable foreign authorities as reflected in the product's approved labeling. If we receive marketing approval for our product candidates for our proposed indications, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment that our products could be used in such manner. However, if we are found to have promoted our products for any off-label uses, the federal government could levy civil, criminal or refusal to permitadministrative penalties, and seek fines against us. Such enforcement has become more common in the importindustry. The FDA, the EMA or exportcomparable foreign authorities could also request that we enter into a consent decree or a corporate integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of our product candidates;candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business, financial condition and results of operations.
If our competitors have product candidates that are approved faster, marketed more effectively, are better tolerated, have a more favorable safety profile or are demonstrated to be more effective than ours, our commercial opportunity may be reduced or eliminated.
The biopharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face potential competition from many different sources, including commercial biopharmaceutical enterprises, academic institutions, government agencies and private and public research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.
Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical studies, clinical trials, regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our competitors may succeed in developing technologies and therapies that are more effective, better tolerated or less costly than any which we are developing, or that would render our product candidates obsolete and noncompetitive. Even if we obtain regulatory approval for any of our product candidates, our competitors may succeed in obtaining regulatory approvals for their products earlier than we do. We will also face competition from these third parties in recruiting and retaining qualified scientific and management personnel, in establishing clinical trial sites and patient registration for clinical trials, and in acquiring and in-licensing technologies and products complementary to our programs or advantageous to our business.
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The key competitive factors affecting the success of each of our product candidates, if approved, are likely to be its efficacy, safety, tolerability, frequency and route of administration, convenience and price, the level of branded and generic competition and the availability of coverage and reimbursement from government and other third-party payors.
The pharmaceutical market for the treatment of major depressive disorder includes selective serotonin reuptake inhibitors ("SSRIs"), serotonin and norepinephrine reuptake inhibitors ("SNRIs") and atypical antipsychotics. A number of these marketed antidepressants will be generic, and would be key competitors to SLS-002. These products include Forest Laboratory's Lexapro/Cipralex (escitalopram) and Viibryd (vilazodone), Pfizer, Inc.'s Zoloft (sertraline), Effexor (venlafaxine) and Pristiq (desvenlafaxine), GlaxoSmithKline plc's Paxil/Seroxat (paroxetine), Eli Lilly and Company's Prozac (fluoxetine) and Cymbalta (duloxetine), AstraZeneca plc's Seroquel (quetiapine) and Bristol-Myers Squibb Company's Abilify (aripiprazole), among others.
Patients with treatment-resistant depression often require treatment with several antidepressants, such as an SSRI or SNRI, combined with an "adjunct" therapy such as an antipsychotic compound, such as AstraZeneca plc's Seroquel (quetiapine) and Bristol-Myers Squibb Company's Abilify (aripiprazole), or mood stabilizers, such as Janssen Pharmaceutica's Topamax (topiramate). In addition, Janssen's Spravato (intranasal esketamine), which has been approved for treatment-resistant depression and for depressive systems in adults with major depressive disorder with suicidal thoughts or actions, targets the NMDA receptor and is expected to have a faster onset of therapeutic effect as compared to currently available therapies.
Current treatments for Parkinson's Disease ("PD") are intended to improve the symptoms of patients. The cornerstone of PD therapy is levodopa, as it is the most effective therapy for reducing symptoms of PD. There are other drug therapies in development that will target the disease, such as gene and stem cell therapy and A2A receptor agonists.
We, or any future collaborators, may not be able to obtain orphan drug designation or orphan drug exclusivity for our product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. In the United States and Europe, obtaining orphan drug approval may allow us to obtain financial incentives, such as an extended period of exclusivity during which only we are allowed to market the orphan drug. While we have received orphan drug designation for SLS-005 in Sanfilippo Syndrome and in spinocerebellar ataxia type 3 and in oculopharyngeal muscular dystrophy and we plan to seek orphan drug designation from the FDA for SLS-008 for the treatment of a pediatric indication, we, or any future collaborators, may not be granted orphan drug designations for our product candidates in the U.S. or in other jurisdictions.
Even if we, or any future collaborators, obtain orphan drug designation for a product candidate, we, or they, may not be able to obtain orphan drug exclusivity for that product candidate. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first marketing approval for the indication for which it has such designation, in which case the FDA or the impositionEMA will be precluded from approving another marketing application for the same drug for that indication for the applicable exclusivity period. The applicable exclusivity period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we, or any future collaborators, obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because FDA has taken the position that, under certain circumstances, another drug with the same active chemical and pharmacological characteristics, or moiety, can be approved for the same condition. Specifically, the FDA's regulations provide that it can approve another drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
The active ingredient of our lead product candidate, SLS-002, ketamine hydrochloride, is recognized as having the potential for abuse, misuse and diversion and, as a result, is and will be subject to extensive federal and state laws and regulations governing controlled substances and the entities involved in their research, manufacturing, sale and distribution, and possession. In addition, we anticipate that if we obtain marketing approval for SLS-002 it will be the subject of an FDA Risk Evaluation and Mitigation Strategy (REMS).
Ketamine is listed by the Drug Enforcement Administration ("DEA") as a Schedule III controlled substance under the Controlled Substances Act. The DEA classifies substances as Schedule I, II, III, IV or V controlled substances, with Schedule I controlled substances considered to present the highest risk of substance abuse and Schedule V controlled substances the lowest risk. Scheduled controlled substances are subject to DEA regulations relating to supply, procurement, manufacturing, storage,
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distribution and physician prescription procedures. In addition to federal scheduling, some drugs may be subject to state-level controlled substance laws and regulations and in some cases more broadly applicable or more extensive requirements than those determined by the DEA and FDA. Federal and state-level controlled substance laws impose a broad range of registration and licensure requirements along with requirements for systems and controls intended to provide security and reduce the risk of diversion and misuse, and to identify suspicious activities.
Compliance with these laws can be expensive and time consuming. Failure to follow these requirements can lead to significant civil and/or criminal penalties.
If SLS-002 receives marketing approval from the FDA or other regulatory authority, we may be required to implement REMS to address the potential for abuse and misuse of our product candidate. As a result, our product candidate may only be available through a restricted or limited distribution system to which only certain prescribing healthcare professionals may have access for their patients or healthcare professionals may be limited in their prescribing.
Furthermore, product candidates containing controlled substances may generate public controversy. As a result, these products may be at risk of having their sale and distribution and marketing approvals further restricted or in extreme cases withdrawn in the event that regulators were to assess that the benefits of a product no longer outweigh emerging risks. Political pressures or adverse publicity could lead to delays in, and increased expenses for, and limit or restrict, the commercialization of our product or product candidates.
We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our product candidates.
The FDA’sprocess of manufacturing our product candidates is complex, highly regulated, and subject to several risks. For example, the process of manufacturing our product candidates is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes for any of our product candidates could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. In addition, the manufacturing facilities in which our product candidates are made could be adversely affected by equipment failures, labor shortages, natural disasters, public health crises, pandemics and epidemics, such as the COVID-19 pandemic, power failures and numerous other factors.
In addition, any adverse developments affecting manufacturing operations for our product candidates may result in shipment delays, inventory shortages, lot failures, withdrawals or recalls or other interruptions in the supply of our product candidates. We also may need to take inventory write-offs and incur other charges and expenses for product candidates that fail to meet specifications, undertake costly remediation efforts or seek costlier manufacturing alternatives.
We rely completely on third parties to manufacture our preclinical and clinical drug supplies, and our business, financial condition and results of operations could be harmed if those third parties fail to provide us with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.
We do not currently have, nor do we plan to acquire, the infrastructure or capability internally to manufacture our preclinical and clinical drug supplies for use in our clinical trials, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our product candidates, and there may be a need to identify alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials, and, if approved, ultimately for commercial sale. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete such clinical trial, any significant delay or discontinuity in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory authorities’approval of our product candidates, which could harm our business, financial condition and results of operations.
Product candidates that are considered combination products for FDA purposes, such as the SLS-002 drug-device combination product consisting of ketamine hydrocholoride and a USP aqueous spray solution in a bi-dose nasal delivery device, may face additional challenges, risks and delays in the product development and regulatory approval process.
SLS-002 is delivered by an intranasal delivery device and considered a drug-device combination product (the device having been developed by a third party is subject to a license agreement). When evaluating products that utilize a specific drug delivery system or device, the FDA will evaluate the characteristics of that delivery system and its functionality, as well as the potential
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for undesirable interactions between the drug and the delivery system, including the potential to negatively impact the safety or effectiveness of the drug. The FDA review process can be more complicated for combination products, and may result in delays, particularly if novel delivery systems are involved. Additionally, quality or design concerns with the delivery system could delay or prevent regulatory approval and commercialization of our product candidates.
We and our contract manufacturers are subject to significant regulation with respect to manufacturing our product candidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements.
All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our contract manufacturers for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of an NDA or marketing authorization application ("MAA") on a timely basis and must adhere to GLP and cGMP regulations enforced by the FDA, the EMA or comparable foreign authorities through their facilities inspection program. Some of our contract manufacturers may not have produced a commercially approved pharmaceutical product and therefore may not have obtained the requisite regulatory authority approvals to do so. The facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or any of our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. Although we plan to oversee the contract manufacturers, we cannot control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-approval plant inspection, regulatory approval of the products may not be granted or may be substantially delayed until any violations are corrected to the satisfaction of the regulatory authority, if ever.
The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly or time consuming for us or a third party to implement, and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business, financial condition and results of operations.
If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA, the EMA or comparable foreign authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a product candidate, withdrawal of an approval or suspension of production. As a result, our business, financial condition and results of operations may be materially and adversely affected.
Additionally, if supply from one manufacturer is interrupted, an alternative manufacturer would need to be qualified through an NDA supplement or MAA variation, or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also require additional studies or trials if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.
These factors could cause us to incur higher costs and could cause the delay or termination of clinical trials, regulatory submissions, required approvals, or commercialization of our product candidates. Furthermore, if our suppliers fail to meet contractual requirements and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue.
Any collaboration arrangement that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our current and potential future product candidates.
We may seek collaboration arrangements with biopharmaceutical companies for the development or commercialization of our current and potential future product candidates. To the extent that we decide to enter into collaboration agreements, we will face significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, execute and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we choose to enter into such arrangements, and the terms of the arrangements may not be favorable to us. If and when we collaborate with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.
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Disagreements between parties to a collaboration arrangement can lead to delays in developing or commercializing the applicable product candidate and can be difficult to resolve in a mutually beneficial manner. In some cases, collaborations with biopharmaceutical companies and other third parties are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect our business, financial condition and results of operations.
If we are unable to develop our own commercial organization or enter into agreements with third parties to sell and market our product candidates, we may be unable to generate significant revenues.
We do not have a sales and marketing organization, and we have no experience as a company in the sales, marketing and distribution of pharmaceutical products. If any of our product candidates are approved for commercialization, we may be required to develop our sales, marketing and distribution capabilities, or make arrangements with a third party to perform sales and marketing services. Developing a sales force for any resulting product or any product resulting from any of our other product candidates is expensive and time consuming and could delay any product launch. We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force we do establish may not be capable of generating sufficient demand for our product candidates. To the extent that we enter into arrangements with collaborators or other third parties to perform sales and marketing services, our product revenues are likely to be lower than if we marketed and sold our product candidates independently. If we are unable to establish adequate sales and marketing capabilities, independently or with others, we may not be able to generate significant revenues and may not become profitable.
The commercial success of our product candidates depends upon their market acceptance among physicians, patients, healthcare payors and the medical community.
Even if our product candidates obtain regulatory approval, our products, if any, may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any of our approved product candidates will depend on a number of factors, including:
In addition, the potential market opportunity for our product candidates is difficult to precisely estimate. Our estimates of the potential market opportunity for our product candidates include several key assumptions based on our industry knowledge, industry publications, third-party research reports and other surveys. Independent sources have not verified all of our assumptions. If any of these assumptions proves to be inaccurate, then the actual market for our product candidates could be smaller than our estimates of the potential market opportunity. If the actual market for our product candidates is smaller than we expect, our product revenue may be limited, it may be harder than expected to raise funds and it may be more difficult for us to achieve or maintain profitability. If we fail to achieve market acceptance of our product candidates in the U.S. and abroad, our revenue will be limited and it will be more difficult to achieve profitability.
If we fail to obtain and sustain an adequate level of reimbursement for our potential products by third-party payors, potential future sales would be materially adversely affected.
There will be no viable commercial market for our product candidates, if approved, without reimbursement from third-party payors. Reimbursement policies may changebe affected by future healthcare reform measures. We cannot be certain that reimbursement will be available for our current product candidates or any other product candidate we may develop. Additionally, even if there is a viable commercial market, if the level of reimbursement is below our expectations, our anticipated revenue and additionalgross margins will be adversely affected.
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Third-party payors, such as government regulationsor private healthcare insurers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. Reimbursement rates may be enactedbased on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. There is a current trend in the U.S. healthcare industry toward cost containment.
Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. We believe our drugs will be priced significantly higher than existing generic drugs and consistent with current branded drugs. If we are unable to show a significant benefit relative to existing generic drugs, Medicare, Medicaid and private payors may not be willing to provide reimbursement for our drugs, which would significantly reduce the likelihood of our products gaining market acceptance.
We expect that private insurers will consider the efficacy, cost-effectiveness, safety and tolerability of our potential products in determining whether to approve reimbursement for such products and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business, financial condition and results of operations would be materially adversely affected if we do not receive approval for reimbursement of our potential products from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Our business, financial condition and results of operations could be materially adversely affected if Part D prescription drug plans were to limit access to, or deny or limit reimbursement of, our product candidates or other potential products.
Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In many countries, the product cannot be commercially launched until reimbursement is approved. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. The negotiation process in some countries can exceed 12 months. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products to other available therapies.
If the prices for our potential products are reduced or if governmental and other third-party payors do not provide adequate coverage and reimbursement of our drugs, our future revenue, cash flows and prospects for profitability will suffer.
Current and future legislation may increase the difficulty and cost of commercializing our product candidates and may affect the prices we may obtain if our product candidates are approved for commercialization.
In the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding the healthcare system that could prevent limit or delay regulatory approval of our product candidates.candidates, restrict or regulate post-marketing activities and affect our ability to profitably sell any of our product candidates for which we obtain regulatory approval.
In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA") changed the way Medicare covers and pays for pharmaceutical products. Cost reduction initiatives and other provisions of this legislation could limit the coverage and reimbursement rate that we receive for any of our approved products. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively the "PPACA"), was enacted. The PPACA was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The PPACA increased manufacturers' rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of "average manufacturer price", which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare & Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid rebates to the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the PPACA
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imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the "donut hole." Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
There have been public announcements by members of the U.S. Congress regarding plans to repeal and replace or amend and expand the PPACA and Medicare. For example, on December 22, 2017 the Tax Cuts and Jobs Act of 2017 was signed into law, which, among other things, eliminated the individual mandate requiring most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing approval testing and other requirements.
In addition to the PPACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our current and future solutions or the amounts of reimbursement available for our current and future solutions from governmental agencies or third-party payers. While in general it is difficult to predict specifically what effects the PPACA or any future healthcare reform legislation or policies will have on our business, current and future healthcare reform legislation and policies could have a material adverse effect on our business and financial condition.
In Europe, the United Kingdom withdrew from the European Union on January 31, 2020 and began a transition period that ended on December 31, 2020. Although the ultimate effects of Brexit have yet to be seen, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for companies and increased restrictions on imports and exports throughout Europe, which could adversely affect our ability to conduct and expand our operations in Europe and which may have an adverse effect on our business, financial condition and results of operations. Additionally, Brexit may increase the possibility that other countries may decide to leave the EU in the future.
Changes in government funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, properly administer drug innovation, or prevent our product candidates from being developed or commercialized, which could negatively impact our business, financial condition and results of operations.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including budget and funding levels, ability to hire and retain key personnel, and statutory, regulatory and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
In December 2016, the 21st21st Century Cures Act, or Cures Act was signed into law. The Cures Act, amongThis new legislation is designed to advance medical innovation and empower the FDA with the authority to directly hire positions related to drug and device development and review. However, government proposals to reduce or eliminate budgetary deficits may include reduced allocations to the FDA and other things,related government agencies. These budgetary pressures may result in a reduced ability by the FDA to perform their respective roles, including the related impact to academic institutions and research laboratories whose funding is intendedfully or partially dependent on both the level and timing of funding from government sources.
Disruptions at the FDA and other agencies may also slow the time necessary for our product candidates to modernize the regulation of drugs and spur innovation, but its ultimate implementation is unclear. If we are slowbe reviewed or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability,approved by necessary government agencies, which wouldcould adversely affect our business, prospects, financial condition and results of operations.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 23, 2017, President Trump ordered a hiring freeze for all executive departments and agencies, including the FDA, which prohibits the FDA from filling employee vacancies or creating new positions. Under the terms of the order, the freeze will remain in effect until implementation of a plan to be recommended by the Director for the Office of Management and Budget, or OMB, in consultation with the Director of the Office of Personnel Management, to reduce the size of the federal workforce through attrition. An under-staffed FDA could result in delays in FDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance, or implement or enforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, that requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued executive orders relating to the review of federal regulations, however it is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
In the U.S., we are subject to various federal and state healthcare regulatory"fraud and abuse" laws, which could expose usincluding anti-kickback laws, false claims laws and other laws intended, among other things, to penalties.
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The federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities forprohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal government,healthcare programs, claims for paymentreimbursed drugs or services that are false or fraudulent, claims for items or making a false statement to avoid, decreaseservices that were not provided as claimed, or conceal an obligation to pay money toclaims for medically unnecessary items or services. Under the federal government;
Many states have adopted laws similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledgesome of the statute or specific intent to violate it to have committed a violation;
Neither the relevant compliancegovernment nor the courts have provided definitive guidance promulgated byon the federal government; stateapplication of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that require drug manufacturers to report information related to payments and other transferssome of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer, and any of our product candidates that are ultimately approved for commercialization could be subject to restrictions or withdrawal from the market.
Any government investigation of alleged violations of law could require us to expend significant time and resources in Medicare, Medicaidresponse, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to generate revenues from any of our product candidates that are ultimately approved for commercialization. If regulatory sanctions are applied or if regulatory approval is withdrawn, our business, financial condition and results of operations will be adversely affected. Additionally, if we are unable to generate revenues from product sales, our potential for achieving profitability will be diminished and our need to raise capital to fund our operations will increase.
*If we fail to retain current members of our senior management and scientific personnel, or to attract and keep additional key personnel, we may be unable to successfully develop or commercialize our product candidates.
Our success depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. As of April 29, 2022, we have 16 employees. Our organization will rely primarily on outsourcing research, development and clinical trial activities, and manufacturing operations, as well as other functions critical to our business. We believe this approach enhances our ability to focus on our core product opportunities, allocate resources efficiently to different projects and allocate internal resources more effectively. We have filled several key open positions and are currently recruiting for a few remaining positions. However, competition for qualified personnel is intense. We may not be successful in attracting qualified personnel to fulfill our current or future needs and there is no guarantee that any of these individuals will join us on a full-time employment basis, or at all. In the event we are unable to fill critical open employment positions, we may need to delay our operational activities and goals, including the development of our product candidates, and may have difficulty in meeting our obligations as a public company. In addition, we may experience employee turnover as a result of the ongoing “great resignation” occurring throughout the U.S. economy, which has impacted job market dynamics. New hires require training and take time before they achieve full productivity. New employees may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. In the event we are unable to fill critical open employment positions, we may need to delay our operational activities and goals, including the development of our product candidates, and may have difficulty in meeting our obligations as a public company. We do not maintain "key person" insurance on any of our employees.
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In addition, competitors and others are likely in the future to attempt to recruit our employees. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel, particularly senior management and other federal healthcare programs, contractual damages, reputational harm, diminished profitstechnical personnel, could materially and future earnings,adversely affect our business, financial condition and curtailmentresults of operations. In addition, the replacement of key personnel likely would involve significant time and costs, and may significantly delay or prevent the achievement of our business objectives.
From time to time, our management seeks the advice and guidance of certain scientific advisors and consultants regarding clinical and regulatory development programs and other customary matters. These scientific advisors and consultants are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our scientific advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with us.
We will need to increase the size of our organization and may not successfully manage our growth.
We are a clinical-stage biopharmaceutical company with a small number of planned employees, and our management system currently in place is not likely to be adequate to support our future growth plans. Our ability to grow and to manage our growth effectively will require us to hire, train, retain, manage and motivate additional employees and to implement and improve our operational, financial and management systems. These demands also may require the hiring of additional senior management personnel or the development of additional expertise by our senior management personnel. Hiring a significant number of additional employees, particularly those at the management level, would increase our expenses significantly. Moreover, if we fail to expand and enhance our operational, financial and management systems in conjunction with our potential future growth, it could have a material adverse effect on our business, financial condition and results of operations.
Our management's lack of public company experience could put us at greater risk of incurring fines or regulatory actions for failure to comply with federal securities laws and could put us at a competitive disadvantage, and could require our management to devote additional time and resources to ensure compliance with applicable corporate governance requirements.
Our executive officers do not have prior experience as executive officers in managing and operating a public company, which could have an adverse effect on their ability to quickly respond to problems or adequately address issues and matters applicable to public companies. Any failure to comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, financial condition and results of operations. Further, since our executive officers do not have prior experience as executive officers managing and operating a public company, we may need to dedicate additional time and resources to comply with legally mandated corporate governance policies relative to our competitors whose management teams have more public company experience.
We are exposed to product liability, non-clinical and clinical liability risks which could place a substantial financial burden upon us, should lawsuits be filed against us.
Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical formulations and products. In addition, the use in our clinical trials of pharmaceutical products and the subsequent sale of these products by us or our potential collaborators may cause us to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
We currently carry product liability insurance for our clinical development activities. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.
Our research and development activities involve the use of hazardous materials, which subject us to regulation, related costs and delays and potential liabilities.
Our research and development activities involve the controlled use of hazardous materials and chemicals, and we will need to develop additional safety procedures for the handling and disposing of hazardous materials. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate any of whichthese laws or regulations.
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We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could adversely affectharm our ability to operate our business effectively.
Despite the implementation of security measures, our internal computer systems and our resultsthose of operations. Defending against any such actions can be costly, time-consumingthird parties with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and may require significant financialtelecommunication and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Our employees independent contractors, principal investigators, CROs,and consultants commercial partnersmay engage in misconduct or other improper activities, including noncompliance with regulatory standards and vendors are subject to a number of regulations and standards.
We are exposed to the risk that employees, independent contractors, principal investigators, CROs,of employee or consultant and vendors may engage in fraudulentfraud or other illegal activity for which we may be held responsible.misconduct. Misconduct by these partiesour employees or consultants could include intentional reckless and/or negligent conduct or disclosure of unauthorized activitiesfailures to us that violates: (1) the laws of thecomply with FDA and other similar foreign regulatory bodies; including those laws that require the reporting of true, complete andregulations, provide accurate information to the FDA, and other similar foreign regulatory bodies, (2)comply with manufacturing standards, (3)comply with federal and state healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws, or (4) laws that require the true, complete and accurate reporting ofregulations, report financial information or data. These laws may impact, among other things, our currentdata accurately or disclose unauthorized activities with principal investigators and research subjects, as well as proposed and futureto us. In particular, sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry are subject to extensive laws designedand regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certainsales commissions, customer incentive programs and other business arrangements generally. Activities subject to these lawsarrangements. Employee and consultant misconduct also could involve the improper use of information obtained in the course of patient recruitment for clinical trials. Iftrials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter such misconduct, and the precautions we obtain FDA approval for any of our product candidatestake to detect and begin commercializing those productsprevent this activity may not be effective in the United States, our potential exposure under such laws will increase significantly, and our costs associated withcontrolling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws are also likely to increase.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 impactmaterial adverse effect on our business, includingfinancial condition and results of operations, and result in the imposition of civil, criminalsignificant fines or other sanctions against us.
Business disruptions such as natural disasters could seriously harm our future revenues and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profitsfinancial condition and future earnings,increase our costs and curtailmentexpenses.
We and our suppliers may experience a disruption in our and their business as a result of natural disasters. A significant natural or man-made disaster, such as an earthquake, power outages, hurricane, flood or fire, drought and other extreme weather events and changing weather patterns, which are increasing in frequency due to the impacts of climate change, could severely damage or destroy our headquarters or facilities or the facilities of our operations, anymanufacturers or suppliers, which could have a material and adverse effect on our business, financial condition and results of operations. In addition, terrorist acts or acts of war targeted at the U.S., and specifically the greater New York, New York region, could cause damage or disruption to us, our employees, facilities, partners and suppliers, which could have a material adverse effect on our business, financial condition and results of operations.
We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.
From time to time, we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our business, financial condition and results of operations. For example, these transactions may entail numerous operational and financial risks, including:
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Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete may be subject to the foregoing or other risks, and could have a material adverse effect on our business, financial condition and results of operations.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to comply with such requirements could subject us to significant fines and penalties, which may have a material adverse effect on our business, financial condition or results of operations.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate has established its own data security and privacy frameworks with which we must comply. For example, the collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the European Union, including personal health data, is subject to the EU General Data Protection Regulation (the “GDPR”), which took effect across all member states of the European Economic Area (the “EEA”) in May 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. In addition, the GDPR also imposes strict rules on the transfer of personal data to countries outside the European Union, including the United States and, as a result, increases the scrutiny that clinical trial sites located in the EEA should apply to transfers of personal data from such sites to countries that are considered to lack an adequate level of data protection, such as the United States. The GDPR also permits data protection authorities to require destruction of improperly gathered or used personal information and/or impose substantial fines for violations of the GDPR, which can be up to 4% of global revenues or €20 million, whichever is greater, and it also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. In addition, the GDPR provides that EU member states may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data.
Similar actions are either in place or under way in the United States. There are a broad variety of data protection laws that are applicable to our activities, and a wide range of enforcement agencies at both the state and federal levels that can review companies for privacy and data security concerns based on general consumer protection laws. The Federal Trade Commission and state Attorneys General all are aggressive in reviewing privacy and data security protections for consumers. New laws also are being considered at both the state and federal levels. For example, the California Consumer Privacy Act, which went into effect on January 1, 2020, is creating similar risks and obligations as those created by the GDPR, though the California Consumer Privacy Act does exempt certain clinical trial data. Many other states are considering similar legislation. A broad range of legislative measures also have been introduced at the federal level. Accordingly, failure to comply with federal and state laws (both those currently in effect and future legislation) regarding privacy and security of personal information could expose us to fines and penalties under such laws. There also is the threat of consumer class actions related to these laws and the overall protection of personal data.
Given the breadth and depth of changes in data protection obligations, preparing for and complying with these requirements is rigorous and time intensive and requires significant resources and a review of our technologies, systems and practices, as well as those of any third-party collaborators, service providers, contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to change our business practices and put in place additional compliance mechanisms, may interrupt or delay our development, regulatory and commercialization activities and increase our cost of doing business, and could lead to government enforcement actions, private litigation and significant fines and penalties against us and could have a material adverse effect on our business, financial condition or results of operations. Similarly, failure to comply with federal and state laws regarding privacy and security of personal information could expose us to fines and penalties under such laws. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our reputation and our business.
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We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. If we fail to comply with these laws, we could be subject to civil or criminal liabilities, other remedial measures and legal expenses, be precluded from developing, manufacturing and selling certain products outside the United States or be required to develop and implement costly compliance programs, which could adversely affect our business, results of operations and financial condition.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act 2010 (the “Bribery Act”) and other anti-corruption laws that apply in countries where we do business and may do business in the future. The FCPA, the Bribery Act and these other laws generally prohibit us, our officers, and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. Compliance with the FCPA, in particular, is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.
We may in the future operate in jurisdictions that pose a high risk of potential FCPA or Bribery Act violations, and we may participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the FCPA, the Bribery Act or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. If we expand our operations outside of the United States, we will need to dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United States, the United Kingdom and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations (collectively referred to as “Trade Control Laws”). In addition, various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the FCPA, the Bribery Act or other legal requirements, including Trade Control Laws. If we are not in compliance with the FCPA, the Bribery Act and other anti-corruption laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. The Securities and Exchange Commission also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions. Any investigation of any potential violations of the FCPA, the Bribery Act, other anti-corruption laws or Trade Control Laws by U.S., United Kingdom or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenue, if any.
In some countries, particularly member states of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we, or our future collaborators, may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of any product candidate approved for marketing is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
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*Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors, employees, regulators and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance, or ESG, factors. Some investors and investor advocacy groups may use these factors to guide investment strategies and, in some cases, investors may choose not to invest in our company if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance, and a variety of organizations currently measure the performance of companies on such ESG topics, and the results of these assessments are widely publicized. Investors, particularly institutional investors, use these ratings to benchmark companies against their peers and if we are perceived as lagging with respect to ESG initiatives, certain investors may engage with us to improve ESG disclosures or performance and may also make voting decisions, or take other actions, to hold us and our board of directors accountable. In addition, the criteria by which our corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate.
We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, stockholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks. Any failure or perceived failure by us in this regard could have a material adverse effect on our reputation and on our business, share price, financial condition, or results of operations, including the sustainability of our business over time.
In addition, the SEC has announced proposed rules that, among other matters, will establish a framework for reporting of climate-related risks. To the extent the proposed rules impose additional reporting obligations, we could face increased costs. Separately, the SEC has also announced that it is scrutinizing existing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege our existing climate disclosures are misleading or deficient.
Risks Related to Our Intellectual Property
We may not be successful in obtaining or maintaining necessary rights to our product candidates through acquisitions and in-licenses.
Because several of our programs require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to maintain and exploit these proprietary rights. In addition, we may need to acquire or in-license additional intellectual property in the future. We may be unable to acquire or in-license any compositions, methods of use, processes or other intellectual property rights from third parties that we identify as necessary for our product candidates. We face competition with regard to acquiring and in-licensing third-party intellectual property rights, including from a number of more established companies. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license intellectual property rights to us. We also may be unable to acquire or in-license third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment.
We may enter into collaboration agreements with U.S. and foreign academic institutions to accelerate development of our current or future preclinical product candidates. Typically, these agreements include an option for the company to negotiate a license to the institution's intellectual property rights resulting from the collaboration. Even with such an option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable to license rights from a collaborating institution, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our desired program.
If we are unable to successfully obtain required third-party intellectual property rights or maintain our existing intellectual property rights, we may need to abandon development of the related program and our business, financial condition and results of operations could be materially and adversely affected.
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If we fail to comply with our obligations in the agreements under which we in-license intellectual property and other rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important to our business.
Our license agreement with Ligand Pharmaceuticals Incorporated, Neurogen Corporation and CyDex Pharmaceuticals, Inc. (the "Ligand License Agreement"), our license agreement with the Regents of the University of California (the "UC Regents License Agreement"), our license agreement with Duke University (the "Duke License Agreement) and our license agreement with iX Biopharma Ltd. (the “iX License Agreement”, together with the Ligand License Agreement, the UC Regents License Agreement and the Duke License Agreement, the “License Agreements”) are important to our business and we expect to enter into additional license agreements in the future. The License Agreements impose, and we expect that future license agreements will impose, various milestone payments, royalties and other obligations on us. If we fail to comply with our obligations under these agreements, or if we file for bankruptcy, we may be required to make certain payments to the licensor, we may lose the exclusivity of our license, or the licensor may have the right to terminate the license, in which event we would not be able to develop or market products covered by the license. Additionally, the milestone and other payments associated with these licenses could materially and adversely affect our business, financial condition and results of operations.
Pursuant to the terms of the Ligand License Agreement, the licensors each have the right to terminate the Ligand License Agreement with respect to the programs licensed by such licensor under certain circumstances, including, but not limited to: (i) if we do not pay an amount that is not disputed in good faith, (ii) if we willfully breach the Ligand License Agreement in a manner for which legal remedies would not be expected to make such licensor whole, or (iii) if we file or have filed against us a petition in bankruptcy or make an assignment for the benefit of creditors. In the event the Ligand License Agreement is terminated by a licensor, all licenses granted to us by such licensor will terminate immediately. Further, pursuant to the terms of the UC Regents License Agreement, the licensor has the right to terminate the UC Regents License Agreement or reduce our license to a nonexclusive license if we fail to achieve certain milestones within a specified timeframe. Similarly, pursuant to the terms of the Duke License Agreement and the iX License Agreement, each licensor has the right to terminate the Duke License Agreement or the iX License Agreement, as applicable, if we fail to achieve certain milestones within a specified timeframe.
In some cases, patent prosecution of our licensed technology may be controlled solely by the licensor. If our licensor fails to obtain and maintain patent or other protection for the proprietary intellectual property we in-license, then we could lose our rights to the intellectual property or our exclusivity with respect to those rights, and our competitors could market competing products using the intellectual property. In certain cases, we may control the prosecution of patents resulting from licensed technology. In the event we breach any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise regarding intellectual property subject to a licensing agreement, including, but not limited to:
If disputes over intellectual property and other rights that we have in-licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates. If we fail to comply with any such obligations to our licensor, such licensor may terminate its licenses to us, in which case we would not be able to market products covered by these licenses. The loss of our licenses would have a material adverse effect on our business.
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*We are required to make certain cash payments and may be required to pay milestones and royalties pursuant to certain commercial agreements, which could adversely affect the overall profitability for us of any products that we may seek to commercialize.
Under the terms of the Ligand License Agreement, we may be obligated to pay the licensor under the Ligand License Agreement up to an aggregate of approximately $126.7 million in development, regulatory and sales milestones. Similarly, under the terms of the iX License Agreement, we may be obligated to pay the licensor under the iX License Agreement up to an aggregate of approximately $239 million in development, regulatory and sales milestones. We will also be required to pay royalties on future worldwide net product sales. We will also be required to pay up to an aggregate of approximately $17 million in development and regulatory milestones and royalties on any net sales of SLS-005 pursuant to our asset purchase agreement with Bioblast Pharma Ltd. These cash, milestone and royalty payments could adversely affect the overall profitability for us of any products that we may seek to commercialize.
We may not be able to protect our proprietary or licensed technology in the marketplace.
We depend on our ability to protect our proprietary or licensed technology. We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Our success depends in large part on our ability and any licensor's or licensee's ability to obtain and maintain patent protection in the U.S. and other countries with respect to our proprietary or licensed technology and products. We currently in-license some of our intellectual property rights to develop our product candidates and may in-license additional intellectual property rights in the future. We cannot be certain that patent enforcement activities by our current or future licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. We also cannot be certain that our current or future licensors will allocate sufficient resources or prioritize their or our enforcement of such patents. Even if we are not a party to these legal actions, an adverse outcome could prevent us from continuing to license intellectual property that we may need to operate our business, which would have a material adverse effect on our business, financial condition and our results of operations.
Although we believe we will be able to obtain, through prosecution of patent applications covering our owned technology and technology licensed from others, adequate patent protection for our proprietary drug technology, including those related to our in-licensed intellectual property, if we are compelled to spend significant time and money protecting or enforcing our licensed patents and future patents we may own, designing around patents held by others or licensing or acquiring, potentially for large fees, patents or other proprietary rights held by others, our business, financial condition and results of operations may be materially and adversely affected. If we are unable to effectively protect the intellectual property that we own or in-license, other companies may be able to offer the same or similar products for sale, which could materially adversely affect our business, financial condition and results of operations. The patents of others from whom we may license technology, and any future patents we may own, may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing the same or similar products or limit the length of term of patent protection that we may have for our products.
Obtaining and maintaining patent protection depends on third partiescompliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection for licensed patents, pending patent applications and potential future patent applications and patents could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or patent applications will be due to conduct our preclinical studiesbe paid to the U.S. Patent and clinical trials. These third parties may not perform as contractually required Trademark Office ("USPTO") and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the applicable patent and/or expectedpatent application. The USPTO and issues may arise that could delayvarious non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the completionpatent application process. In many cases, an inadvertent lapse can be cured by payment of clinical trials and impact regulatory approval of our product candidates.
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The patent positions of pharmaceutical products are often complex and uncertain. The breadth of claims allowed in pharmaceutical patents in the U.S. and many jurisdictions outside of the U.S. is not consistent. For example, in many jurisdictions, the support standards for pharmaceutical patents are becoming increasingly strict. Some countries prohibit method of treatment claims in patents. Changes in either the patent laws or interpretations of patent laws in the U.S. and other countries may diminish the value of our licensed or owned intellectual property or create uncertainty. In addition, publication of information related to our current product candidates and potential products may prevent us from obtaining or enforcing patents relating to these product candidates and potential products, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.
Patents that we currently license and patents that we may own or license in the future do not necessarily ensure the protection of our licensed or owned intellectual property for a number of reasons, including, without limitation, the following:
If we encounter delays in our development or clinical trials, is conductedthe period of time during which we could market our potential products under patent protection would be reduced.
Our competitors may be able to circumvent our licensed patents or future patents we may own by developing similar or alternative technologies or products in accordance with its general investigational plan and protocol. Thea non-infringing manner. Our competitors may seek to market generic versions of any approved products by submitting abbreviated new drug applications to the FDA and the European Medicines Agency require usin which our competitors claim that our licensed patents or any future patents we may own are invalid, unenforceable or not infringed. Alternatively, our competitors may seek approval to comply with good laboratory practices for conducting and recording the results of our preclinical studies and GCP, for conducting, monitoring, recording and reporting the results of clinical trialsmarket their own products similar to assure that the data gathered and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with GCP, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data,competitive with our products. In these circumstances, we may need to enter into new arrangementsdefend or assert our licensed patents or any future patents we may own, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with alternativejurisdiction may find our licensed patents or any future patents we may own invalid or unenforceable. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection. Even if we own or in-license valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.
The issuance of a patent is not conclusive as to its inventorship, scope, ownership, priority, validity or enforceability. In this regard, third parties may challenge our licensed patents or any future patents we may own in the courts or patent offices in the U.S. 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 clinical trialsability 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 potential products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized.
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We may infringe the intellectual property rights of others, which may prevent or delay our drug development efforts and prevent us from commercializing or increase the costs of commercializing our products.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our current or potential future product candidates infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe.
Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be morecurrently pending applications of which we are unaware that may later result in issued patents that our product candidates or potential products infringe. For example, pending applications may exist that claim or can be amended to claim subject matter that our product candidates or potential products infringe. Competitors may file continuing patent applications claiming priority to already issued patents in the form of continuation, divisional, or continuation-in-part applications, in order to maintain the pendency of a patent family and attempt to cover our product candidates.
Third parties may assert that we are employing their proprietary technology without authorization and may sue us for patent or other intellectual property infringement. These lawsuits are costly than expected or budgeted, extended, delayed or terminated or mayand could adversely affect our business, financial condition and results of operations and divert the attention of managerial and scientific personnel. If we are sued for patent infringement, we would need to be repeated,demonstrate that our product candidates, potential products or methods either do not infringe the claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the U.S., proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion. If a court holds that any third-party patents are valid, enforceable and cover our products or their use, the holders of any of these patents may be able to block our ability to commercialize our products unless we acquire or obtain regulatory approvala license under the applicable patents or until the patents expire.
We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, we could be found liable for monetary damages, including treble damages and attorneys' fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or commercializeforce us to cease some of our business operations, which could materially and adversely affect our business, financial condition and results of operations. Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar material and adverse effect on our business, financial condition and results of operations. In addition, any uncertainties resulting from the product candidate being testedinitiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Any claims or lawsuits relating to infringement of intellectual property rights brought by or against us will be costly and time consuming and may adversely affect our business, financial condition and results of operations.
We may be required to initiate litigation to enforce or defend our licensed and owned intellectual property. Lawsuits to protect our intellectual property rights can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biopharmaceutical industry generally. Such litigation or proceedings could substantially increase our operating expenses and reduce the resources available for development activities or any future sales, marketing or distribution activities.
In any infringement litigation, any award of monetary damages we receive may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such trials.infringement claims, which typically last for years before they are resolved. Further, any claims we assert against a perceived infringer could provoke these parties to assert counterclaims against us alleging that we have infringed their patents. 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 have a material adverse effect on our ability to compete in the marketplace.
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In addition, our licensed patents and patent applications, and patents and patent applications that we may also have relationshipsapply for, own or license in the future, could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings and other forms of post-grant review. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our licensed patents and patent applications and patents and patent applications that we may apply for, own or license in the future subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management and scientific personnel's time and attention.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other commercial entities, includingbiopharmaceutical companies, our competitors, for whom theysuccess is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is costly, time-consuming and inherently uncertain. For example, the U.S. previously enacted and is currently implementing wide-ranging patent reform legislation. Specifically, on September 16, 2011, the Leahy-Smith America Invents Act (the "Leahy-Smith Act") was signed into law and included a number of significant changes to U.S. patent law, and many of the provisions became effective in March 2013. However, it may alsotake the courts years to interpret the provisions of the Leahy-Smith Act, and the implementation of the statute could increase the uncertainties and costs surrounding the prosecution of our licensed and future patent applications and the enforcement or defense of our licensed and future patents, all of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we might obtain in the future.
We may not be conducting clinical studiesable to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates throughout the world would be prohibitively expensive. Competitors may use our licensed and owned technologies in jurisdictions where we have not licensed or obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain or license patent protection, but where patent enforcement is not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other drug development activities thatintellectual property rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could harmmake it difficult for us to stop the infringement of our licensed patents and future patents we may own, or marketing of competing products in violation of our proprietary rights generally. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the U.S. As a result, we may encounter significant problems in protecting and defending our licensed and owned intellectual property both in the U.S. and abroad. For example, China currently affords less protection to a company's intellectual property than some other jurisdictions. As such, the lack of strong patent and other intellectual property protection in China may significantly increase our vulnerability regarding unauthorized disclosure or use of our intellectual property and undermine our competitive position. Proceedings to enforce our future patent rights, if any, in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
In order to protect our proprietary and licensed technology and processes, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, manufacturers, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of our confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
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If our CROs dotrademarks and trade names are not successfully carry out their contractual duties or obligations, fail to meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical studies may be extended, delayed or terminated andadequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
We intend to use registered or unregistered trademarks or trade names to brand and market ourselves and our products. Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest, and it may be difficult and costly to register, maintain and/or protect our rights to these trademarks and trade names in jurisdictions in and outside of the United States. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively, and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our financial condition or results of operations.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We expect to employ individuals who were previously employed at other biopharmaceutical companies. Although we have no knowledge of any such claims against us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees' former employers or other third parties. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. To date, none of our employees have been subject to such claims.
We may be subject to claims challenging the inventorship of our licensed patents, any future patents we may own and other intellectual property.
Although we are not currently experiencing any claims challenging the inventorship of our licensed patents or our licensed or owned intellectual property, we may in the future be subject to claims that former employees, collaborators or other third parties have an interest in our licensed patents or other licensed or owned intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arising from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business, financial condition and results of operations. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation extending the terms of our licensed patents and any future patents we may own, our business, financial condition and results of operations may be materially and adversely affected.
Depending upon the timing, duration and specifics of FDA regulatory approval for or successfully commercialize our product candidates.
The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension. We may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which we will have the right to exclusively market and/or experience other adverse consequences, including delays, whichour product will be shortened and our competitors may obtain earlier approval of competing products, and our ability to generate revenues could be materially harm our business.adversely affected.
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Risks Related to Owning Our Common Stock
*The market price of our common stock has been and will likely continue to be volatile.
The trading price of our common stock has been and is likely to continue to be volatile. For example, from January 3, 2022 to March 31, 2022, our closing stock price ranged from $0.84 to $1.71 per share. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:
In addition, the stock market in general, and small biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Further, a decline in the financial markets and related factors beyond our control may cause our stock price to decline rapidly and unexpectedly.
*If we are not ablefail to comply with the applicable continued listing requirements or standards of the NASDAQNasdaq Capital Market, NASDAQ could delist our Common Stock.*
We must continue to satisfy the Nasdaq Capital Market (“NASDAQ”). In order to maintain that listing, we must satisfy minimum financial and otherMarket's continued listing requirements, and standards, including, those regarding director independence
A delisting of our common stock from the Nasdaq Capital Market could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors and employees.
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On April 22, 2022, we received written notice from Nasdaq indicating that, for the last thirty consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were granted aprovided an initial period of 180 calendar day compliance period,days, or until November 7, 2016,October 19, 2022, to regain compliance. The written notice states that the Nasdaq Staff will provide written notification that we have achieved compliance with Rule 5550(a)(2) if at any time before October 19, 2022, the minimum bid price requirement. During the compliance period, our shares of common stock continued to be listed and traded on NASDAQ. To regain compliance, the closing bid price of our shares of common stock needed to meet or exceedcloses at $1.00 per share or more for at least 10a minimum of ten consecutive business days during the 180 calendar daydays. There is no guarantee that we will regain compliance period, which was accomplished through a 1-for-10 reverse stock splitby October 19, 2022.
In addition, we have previously received similar notices from Nasdaq that our bid price of our common stock effectedhad closed below the minimum $1.00 per share requirement for continued listing on October 21, 2016. On November 8, 2016, we received a letter from NASDAQ confirming that we are in compliance with NASDAQthe Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2).
We will incur significant costs as a result of operating as a public company and our management will be conducted onlyrequired to devote substantial time to new compliance initiatives.
The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") as well as rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies. There are significant corporate governance and executive compensation related provisions in the over-the-counterDodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate our business. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such insurance coverage.
As a publicly traded company, we will incur legal, accounting and other expenses associated with the SEC reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as corporate governance requirements, including those under the Sarbanes-Oxley Act, the Dodd-Frank Act and other rules implemented by the SEC and Nasdaq. The expenses incurred by public companies generally to meet SEC reporting, finance and accounting and corporate governance requirements have been increasing in recent years as a result of changes in rules and regulations and the adoption of new rules and regulations applicable to public companies.
*Sales of a substantial number of shares of our common stock in the public market by our existing stockholders, future issuances of our common stock or rights to purchase our common stock, could cause our stock price to fall.
Sales of a substantial number of shares of our common stock by our existing stockholders in the public market, or on an electronic bulletin board established for unlisted securities such as the Pink Sheets orperception that these sales might occur, could depress the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause themarket price of our Common Stock to decline further. Also, it may be difficult for uscommon stock and could impair our ability to raise capital through the sale of additional capital ifequity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock. As of March 31, 2022, we are not listed on a major exchange. In addition, following delisting, unless ourhave outstanding warrants to purchase an aggregate of approximately 2.6 million shares of Commonour common stock, which, if exercised, would further increase the number of shares of our common stock outstanding and the number of shares eligible for resale in the public market. As of March 31, 2022, 18,900,558 shares of our common stock were reserved for issuance under our equity incentive plans, of which 10,299,170 shares of our common stock were subject to options outstanding at such date at a weighted-average exercise price of $2.27 per share, 5,518,648 shares of our common stock were reserved for future issuance pursuant to our Amended and Restated 2012 Stock Long Term Incentive Plan, 646,465 shares of our common stock were immediately thereafter trading onreserved for future issuance pursuant to our 2019 Inducement Plan and 2,436,275 shares of our common stock were reserved for issuance pursuant to our 2020 Employee Stock Purchase Plan. To the OTC Bulletin Board orextent outstanding options are exercised, our existing stockholders may incur dilution. Furthermore, at any time following nine-months from the OTCQB or OTCQX market placesdate of issuance of the OTC Markets, we would no longer be able to sell shares to Aspire Capital under the Purchase Agreement.
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our common stock pursuant to the operating performanceConvertible Promissory Notes will result in dilution to our then-existing stockholders and increase the number of particular companies. In addition, future announcements,shares eligible for resale in the public market. Sales of substantial numbers of such asshares in the results of testing and clinical trials, the status of our relationships with third-party collaborators, technological innovations or new therapeutic products, governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products developed by us or others and general market conditions concerning us, our competitors or other biopharmaceutical companies, may have a significant effect oncould depress the market price of our common stock. In addition, pursuant to the past, whenasset purchase agreement, as amended, with Phoenixus AG f/k/a Vyera Pharmaceuticals AG and Turing Pharmaceuticals AG (“Vyera”), we will (i) issue to Vyera on or before July 11, 2022 500,000 shares of common stock; and (ii) issue to Vyera on or before January 11, 2023 an additional number of shares of common stock equal to $1.0 million divided by the volume weighted average closing price of our common stock for the ten consecutive trading days ending on the fifth trading day prior to the applicable date of issuance of the shares of common stock. Such issuances of shares of our common stock to Vyera will result in dilution to our then-existing stockholders.
The Financing Warrants contain price-based adjustment provisions which, if triggered, may cause substantial additional dilution to our stockholders.
On October 16, 2018, we entered into a Securities Purchase Agreement with the investors listed on the Schedule of Buyers attached thereto, as amended, pursuant to which, among other things, we issued warrants to purchase shares of our common stock (the "Financing Warrants").
The outstanding Financing Warrants contain price-based adjustment provisions, pursuant to which the exercise price of the Financing Warrants may be adjusted downward in the event of certain dilutive issuances by us.
If the Financing Warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to our then-existing stockholders and increase the number of shares eligible for resale in the public market. As of March 31, 2022, the Financing Warrants were exercisable for approximately 0.3 million shares of our common stock at an exercise price of $0.2957 per share of common stock. Sales of substantial numbers of such shares in the public market could depress the market price of our common stock.
Anti-takeover provisions in our governing documents and under Nevada law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.
Provisions in our articles of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors and the ability of the board of directors to issue preferred stock has been volatile, holderswithout stockholder approval. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.
Certain provisions of Nevada corporate law deter hostile takeovers. Specifically, Nevada Revised Statutes ("NRS") 78.411 through 78.444 prohibit a publicly held Nevada corporation from engaging in a "combination" with an "interested stockholder" for a period of two years following the date the person first became an interested stockholder, unless (with certain exceptions) the "combination" or the transaction by which the person became an interested stockholder is approved in a prescribed manner. Generally, a "combination" includes a merger, asset or stock sale, or certain other transactions resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, beneficially owns or within two years prior to becoming an "interested stockholder" did own, 10% or more of a corporation's voting power. While these statutes permit a corporation to opt out of these protective provisions in its articles of incorporation, our articles of incorporation do not include any such opt-out provision.
Nevada's "acquisition of controlling interest" statutes, NRS 78.378 through 78.3793, contain provisions governing the acquisition of a controlling interest in certain Nevada corporations. These "control share" laws provide generally that any person that acquires a "controlling interest" in certain Nevada corporations may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. These statutes provide that a person acquires a "controlling interest" whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares that it acquired in the transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become "control shares" to which the voting restrictions described above apply. While these statutes permit a corporation to opt out of these protective provisions in its articles of incorporation or bylaws, our articles of incorporation and bylaws do not include any such opt-out provision.
Further, NRS 78.139 also provides that directors may resist a change or potential change in control of the corporation if the board of directors determines that the change or potential change is opposed to or not in the best interest of the corporation upon consideration of any relevant facts, circumstances, contingencies or constituencies pursuant to NRS 78.138(4).
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Our net operating loss carryforwards and certain other tax attributes may be subject to limitations. The net operating loss carryforwards and certain other tax attributes of us may also be subject to limitations as a result of certain prior ownership changes.
In general, a corporation that undergoes an "ownership change" as defined in Section 382 of the United States Internal Revenue Code of 1986, as amended, is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders, generally stockholders beneficially owning five percent or more of a corporation's common stock, applying certain look-through and aggregation rules, increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the testing period, generally three years. We may have been more likelyexperienced ownership changes in the past and may experience ownership changes in the future. It is possible that our net operating loss carryforwards and certain other tax attributes may also be subject to initiate securities class action litigation againstlimitation as a result of ownership changes in the company that issued the stock. If anypast. Consequently, even if we achieve profitability, we may not be able to utilize a material portion of our stockholders broughtnet operating loss carryforwards and certain other tax attributes, which could have a lawsuit against us,material adverse effect on cash flow and results of operations.
We are a “smaller reporting company” and the reduced disclosure requirements applicable to smaller reporting companies may make our common stock less attractive to investors.
We are a smaller reporting company, as defined in Rule 12b-2 under the Exchange Act, and we could incur substantial costs defendingwill remain a smaller reporting company until the lawsuit. Such a lawsuit could also divertfiscal year following the timedetermination that our voting and attentionnon-voting common stock held by non-affiliates is more than $250 million measured on the last business day of our management.
We dohave elected to take advantage of certain of these exemptions in the past and may continue to choose to take advantage of some, but not expect toall, of them in the future. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, which may result in additional stock price volatility.
We may never pay dividends on our common stock inso any returns would be limited to the appreciation of our stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate we will declare or pay any cash dividends for the foreseeable future.
General Risk Factors
An active trading market for our stockholderscommon stock may not be sustained, and you may not be able to resell your common stock at a desired market price.
If no active trading market for our common stock is sustained, you may be unable to sell your shares when you wish to sell them or at a price that you consider attractive or satisfactory. The lack of an active market may also adversely affect our ability to raise capital by selling securities in the future receive dividends ifor impair our ability to acquire or in-license other product candidates, businesses or technologies using our shares as consideration.
Our internal control over financial reporting may not meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, could have a material adverse effect on our business and share price.
Our management is required to report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
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In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies or material weaknesses that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the implementation of any requested improvements and, when declaredrequired, receiving a favorable attestation in connection with the attestation provided by our boardindependent registered public accounting firm. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business, financial condition and results of directors, weoperations and could limit our ability to report our financial results accurately and in a timely manner.
If securities or industry analysts do not intend to declare dividends onpublish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the foreseeable future. Therefore, you should not purchaseresearch and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock if you need immediate or future incomecould decrease, which might cause our stock price and trading volume to decline.
*The impact of the Russian invasion of Ukraine on the global economy, energy supplies and raw materials is uncertain, but may prove to negatively impact our business and operations.
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. We continue to monitor any adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by way of dividends from your investment.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNot applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURESNot applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
| EXHIBITS NO. | DESCRIPTION | |
| 2.1* | ||
| Amendment | ||
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| 2.3 | Amendment No. 2 Agreement and Plan of Merger and Reorganization, dated December 14, 2018, by and among the Company, Arch Merger Sub, Inc. and Seelos Therapeutics, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2018). | |
| 2.4 | Amendment No. 3 Agreement and Plan of Merger and Reorganization, dated January 16, 2019, by and among the Company, Arch Merger Sub, Inc. and Seelos Therapeutics, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2019). | |
| 2.5* | Asset Purchase Agreement, dated February 15, 2019, by and between the Company and Bioblast Pharma Ltd. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 19, 2019). | |
| 3.1 | Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on March 14, 1997). | |
| Certificate of Amendment to Articles of Incorporation of | ||
| Certificate of Amendment to Articles of Incorporation of | |||
| Certificate of Amendment to Amended and Restated Articles of Incorporation of | |||
| Certificate of Correction to Certificate of Amendment to Amended and Restated Articles of Incorporation of | |||
| Certificate of Designation for Series D Junior-Participating Cumulative Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the | |||
| Certificate of Change filed with the Nevada Secretary of State (incorporated herein by reference to Exhibit 3.1 to the | |||
| Certificate of Amendment to Amended and Restated Articles of Incorporation of | |||
| Certificate of Withdrawal of Series D Junior Participating Cumulative Preferred Stock, dated May 15, 2013 (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2013). | |||
| 3.10 | Certificate of Change filed with the Nevada Secretary of State (incorporated herein by reference to Exhibit 3.1 to the | ||
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| 3.11 | Certificate of Amendment filed with the Nevada Secretary of State (incorporated herein by reference to Exhibit 3.10 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 2, 2017). | ||
| Certificate of | |||
| 3.14 | Certificate of Amendment related to the Name Change, filed January 23, 2019 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2019 at 8:05 Eastern Time). | ||
| 3.15 | Amended and Restated Bylaws, dated January 24, 2019 (incorporated herein by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2019 at 8:05 Eastern Time). | ||
| 3.16 | Certificate of Correction to Certificate of Amended and Restated Articles of Incorporation of the Company, dated March 25, 2020 (incorporated herein by reference to Exhibit 3.16 to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2020). | ||
| 3.17 | Certificate of Amendment to the Amended and Restated Articles of Incorporation of Seelos Therapeutics, Inc., filed May 18, 2020 (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May | ||
| Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the | |||
| Form of Warrant issued to the lenders under the Loan and Security Agreement, dated as of October 17, 2014, by and among | |||
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| 4.3 | |||
| Form of Warrant issued to Sarissa Capital Domestic Fund LP and Sarissa Capital Offshore Master Fund LP (incorporated herein by reference to Exhibit 4.1 to the | |||
| Form of Warrant issued to other purchasers (incorporated herein by reference to Exhibit 4.2 to the | |||
| Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the | |||
| Form of Warrant (incorporated herein by reference to Exhibit 4.9 of Amendment No. 1 to | |||
| Form of Warrant Amendment (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2017). | |||
| 4.8 | Amendment to Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.12 of Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 333-223353) filed with the Securities and Exchange Commission on March 22, 2018). | ||
| 4.9 | Amendment to Warrant to Purchase Common Stock, dated as of March 27, 2018 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2018). | ||
| 4.10 | Form of Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2018). | ||
| 4.11 | Form of Placement Agent Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2018). | ||
| 4.12 | Amendment to Warrant to Purchase Common Stock, dated as of June 22, 2018, by and between the Company and Sarissa Offshore (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2018). | ||
| 4.13 | Form of Warrant (incorporated herein by reference to Exhibit 4.1 to the | ||
| Form of | |||
| 4.15 | Form of | ||
| 4.16 | Registration Rights Agreement, dated October 16, 2018, by and among the Company and certain investors named therein (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2018). | ||
| 4.17 | Form of Series A Warrant, issued to investors on January 31, 2019 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 2019). | ||
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| 4.18 | Form of Warrant, issued to investors on August 27, 2019 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 27, 2019). | ||
| 4.19 | Form of Warrant, issued to investors on September 9, 2020 (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September | ||
| 4.21 | Amendment to Convertible Promissory Note, by and between Seelos Therapeutics, Inc. and Lind Global Asset Management V, LLC, dated December 10, 2021 (incorporated herein by reference to Exhibit 4.22 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2022). | ||
| 10.1# | Amended and Restated Employment Agreement by and between Seelos Therapeutics, Inc. and Raj Mehra, Ph.D., dated as of January 10, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on | ||
| Certification of Principal Executive Officer, | |||
| 31.2 | Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| (1) | Certification of Principal Executive Officer, | ||
| 32.2 (1) | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Inline XBRL Instance | |||
| Inline XBRL Taxonomy Extension Schema. | |||
| Inline XBRL Taxonomy Extension Calculation | |||
| Inline XBRL Taxonomy Extension Definition | |||
| Inline XBRL Taxonomy Extension Label | |||
| Inline XBRL Taxonomy Extension Presentation | |||
| Linkbase Document. | ||
| Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
(1) Furnished, not filed.
* All schedules and exhibits to the agreement have been omitted and filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | /s/ |
| Raj Mehra, Ph.D. | |
President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | |
| Date: May 10, 2022 | /s/ Michael Golembiewski |
| Michael Golembiewski | |
Chief Financial Officer (Principal Financial and Accounting Officer) | |
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