Item 1A. Risk Factors
The following information
sets forth risk factors that could cause our actual results to differ materially from those contained in the forward-looking statements
we have made in this Form 10-K and those we may make from time to time. You should carefully consider the risks described below,
in addition to the other information contained in this Form 10-K, before making an investment decision. Our business, financial
condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the
only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks
to our business at this time also may impair our business operations.
Risks Pertaining to Our Potential Merger
with InvaGen Pharmaceuticals
The fact that there is a merger
pending could have an adverse effect on our business and results of operations.
While the merger is pending,
it creates uncertainty about our future. We are subject to a number of risks that may adversely affect our business and results
of operations, including:
• continuing to incur significant legal expenses related to the merger;
In the event that we do not
receive FDA approval for IV Tramadol by April 30, 2021, and in the event that InvaGen does not exercise its right to terminate the SPMA,
these risks and restrictions could exist through October 31, 2021, the time at which we can terminate the SPMA. If the SPMA is terminated,
we will need to seek alternative financing arrangements in order to successfully commercialize IV Tramadol.
If we do not receive FDA approval
for IV Tramadol by April 30, 2021, InvaGen will have the right to terminate the SPMA and will have no further obligations to consummate
the second stage closing under the SPMA. Regardless of whether it terminates the SPMA, InvaGen will retain certain rights pursuant to
the Stockholder’s Agreement between us and InvaGen. These rights exist as long as InvaGen maintains at least 75% of the common shares
acquired in the first stage closing. The following are some of the actions that shall not be taken without the prior written consent of
InvaGen:
• increase in authorized shares of our stock;
If the proposed merger is not completed,
our business could be materially and adversely affected and our stock price could decline.
On November 12, 2018,
the Company entered into the SPMA with InvaGen, and Merger Sub, pursuant to which, among other things and subject to the satisfaction
or waiver of the conditions set forth therein, Merger Sub will merge with and into the Company, with the Company continuing as
the surviving entity and becoming a wholly-owned subsidiary of InvaGen.
Consummation of the Merger
Transaction is conditioned upon FDA approval of the application for IV Tramadol by April 30, 2021, including, without limitation, conditions
relating to IV Tramadol’s labelling and intended use, and to the absence of any REMS restrictions required by the FDA with respect
to IV Tramadol. Additionally, the SPMA contains customary representations, warranties, covenants and termination rights, as well
as certain customary conditions, including, among others, the expiration of any waiting period applicable to the acquisition under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended which filing both parties completed on March 12, 2021. Therefore, the
Merger Transaction may not be completed or may not be completed as quickly as expected. If the SPMA is terminated, the market price of
our ordinary shares will likely decline. In addition, our share price may be adversely affected as a result of the fact that we may continue
to incur significant legal expenses related to the Merger Transaction that will not be recovered if the Merger Transaction is not completed.
If the Merger Transaction does not occur, or if the SPMA is terminated, our business could be materially and adversely affected. In October
2020, InvaGen communicated to us that it believes a Material Adverse Effect (as defined in the SPMA) has occurred due to the impact of
the COVID-19 pandemic on potential commercialization and projected sales of IV Tramadol, which means it is possible InvaGen could attempt
to avoid its obligation to consummate the second stage closing under the SPMA, terminate the SPMA, and/or pursue monetary claims against
us. We disagree with InvaGen’s assertion that a Material Adverse Effect has occurred, and we have advised InvaGen of our position.
Additionally, in connection with the resubmission of our NDA in February 2021, InvaGen communicated to us that it believes the proposed
label under certain circumstances would constitute a Material Adverse Effect (as defined in the SPMA) on the purported basis that the
proposed label under certain circumstances would make the product commercially unviable, and in addition that the indication that the
FDA approves may fail to satisfy a condition precedent to InvaGen’s obligation to consummate the second stage closing of the SPMA
We notified InvaGen that we disagree with InvaGen’s assertions. Nevertheless, InvaGen may seek to avoid its obligation to
consummate the second stage closing under the SPMA, terminate the SPMA, and/or pursue monetary claims against us. During the pendency
of any dispute regarding these matters, we may be, and so long as the SPMA remains in place we will be, prohibited from engaging in a
change-of-control transaction, selling our rights to IV Tramadol, or effecting an equity or debt financing, in each case without the prior
written consent of InvaGen. In the event that the Merger Transaction does not occur, we will need to obtain additional financing.
19
If the merger occurs, our shareholders
will not be able to participate in any post-merger upside to our business other than through the CVRs; if the required commercialization
milestone under the CVRs is not achieved, shareholders may not realize any value from the CVRs.
If the merger occurs, upon
closing of the Merger Transaction our shareholders will receive a cash payment and a CVR to receive additional consideration in
cash if certain milestones related to the commercialization of IV Tramadol are achieved, but will not receive any shares of InvaGen.
Even if our business following the merger performs well, our current shareholders will not receive any additional consideration
or be able to share in the increased value of our business by virtue of being equity owners.
Risks Pertaining to the
Influence of Fortress
Fortress
controls a voting majority of our common stock.
Pursuant to the terms of
the Class A Preferred Stock held by Fortress, Fortress will be entitled to cast, for each share of Class A Preferred Stock held
by Fortress, the number of votes that is equal to 1.1 times a fraction, the numerator of which is the sum of (A) the aggregate
number of shares of outstanding common stock and (B) the whole shares of common stock into which the shares of outstanding the
Class A Preferred Stock are convertible and the denominator of which is the aggregate number of shares of outstanding Class A Preferred
Stock, or the Class A Preferred Stock Ratio. Thus, Fortress will at all times have voting control of us. Further, for a period
of ten years from the date of the first issuance of shares of Class A Preferred Stock, the holders of record of the shares of Class
A Preferred Stock (or other capital stock or securities issued upon conversion of or in exchange for the Class A Preferred Stock),
exclusively and as a separate class, shall be entitled to appoint or elect the majority of our directors. If the pending Merger
Transaction does not occur, this concentration of voting power may delay, prevent or deter a change in control, even when such
a change may be in the best interests of all stockholders, could deprive our stockholders of an opportunity to receive a premium
for their common stock as part of a sale of us or our assets, and might affect the prevailing market price of our common stock.
Fortress has the right
to receive a significant grant of shares of our common stock annually, which will result in the dilution of your holdings of common
stock upon each grant, which could reduce their value.
Under the terms of the Amended
and Restated Founders Agreement, which became effective September 13, 2016, Fortress will receive a grant of shares of our common
stock equal to 2.5% of the gross amount of any equity or debt financing. Additionally, the holders of Class A Preferred Stock,
as a class, will receive an annual dividend, payable in shares of common stock in an amount equal to 2.5% of our fully-diluted
outstanding capital stock as of the business day immediately prior to the date such dividend is payable. Fortress currently owns
all outstanding shares of Class A Preferred Stock. At our Annual Meeting of the Stockholder’s held on June 13, 2018, the
Company’s shareholders approved an amendment to the Company’s Third Amended and Restated Certificate of Incorporation,
amending the Class A Preferred dividend payment date from February 17 to January 1 of each year. This dividend was waived in connection
with the Waiver Agreement signed on November 12, 2018 between Avenue, Fortress and InvaGen These potential future share issuances
to Fortress and any other holder of Class A Preferred Stock will dilute your holdings in our common stock and, if our value has
not grown proportionately over the prior year, would result in a reduction in the value of your shares. The Amended and Restated
Founders Agreement has a term of 15 years and renews automatically for subsequent one-year periods unless terminated by Fortress
or upon a Change in Control (as defined in the Amended and Restated Founders Agreement).
We might have received
better terms from unaffiliated third parties than the terms we receive in our agreements with Fortress.
The agreements we entered
into with Fortress in connection with the separation include the Management Services Agreement, or the MSA, and the Founders Agreement.
While we believe the terms of these agreements are reasonable, they might not reflect terms that would have resulted from arm’s-length
negotiations between unaffiliated third parties. The terms of the agreements relate to, among other things, payment of a royalty
on product sales and the provision of employment and transition services. We might have received better terms from third parties
because, among other things, third parties might have competed with each other to win our business. Effective November 12, 2018,
the MSA fee and certain royalties pursuant to the Founders Agreement were waived with the Waiver Agreement signed between Avenue,
Fortress and InvaGen.
The ownership by our
executive officers and some of our directors of equity securities of Fortress and/or rights to acquire equity securities of Fortress
might create, or appear to create, conflicts of interest.
Because of their current
or former positions with Fortress, some of our executive officers and directors own shares of Fortress common stock and/or options
to purchase shares of Fortress common stock. Their individual holdings of common stock and/or options to purchase common stock
of Fortress may be significant compared to their total assets. Ownership by our directors and officers, after our separation, of
common stock and/or options to purchase common stock of Fortress create or might appear to create conflicts of interest when these
directors and officers are faced with decisions that could have different implications for Fortress than for us. For instance,
and by way of example, if there were to be a dispute between Fortress and us regarding the calculation of the royalty fee due to
Fortress under the terms of the Founders Agreement, then certain of our officers and directors may have and will appear to have
a conflict of interest with regard to the outcome of such dispute.
20
Risks Pertaining to Our
Business and Industry
We currently have no
drug products for sale, and only one drug product candidate, IV Tramadol. We are dependent on the success of IV Tramadol and cannot
guarantee that this product candidate will receive regulatory approval or be successfully commercialized.
Our business success depends
on our ability to obtain regulatory approval to successfully commercialize, market and sell our only product candidate, IV Tramadol,
and any significant delays in obtaining approval to commercialize, market and sell IV Tramadol will have a substantial adverse
impact on our business and financial condition.
If the application for IV
Tramadol is approved, our ability to generate revenues from IV Tramadol will depend on our ability to:
• hire, train, deploy and support our sales force;
• maintain patent protection and regulatory exclusivity for IV Tramadol.
We may not receive regulatory
approval for IV Tramadol or future product candidates, or its or their approvals may be delayed, which would have a material adverse
effect on our business and financial condition.
IV Tramadol and other future
product candidates and the activities associated with their development and commercialization, including their design, testing,
manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject
to premarket approval and comprehensive regulation by the FDA, DEA and other regulatory agencies in the United States. Failure
to obtain marketing approval for IV Tramadol or any future product candidates will prevent us from commercializing our product
candidates. We have not received approval to market IV Tramadol from regulatory authorities in any jurisdiction. We have only limited
experience in conducting preclinical and clinical studies and filing and supporting the applications necessary to gain marketing
approvals and expect to rely on third party contract research organizations as well as consultants and vendors to assist us in
this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information
to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing
marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing
facilities by, the regulatory authorities.
Our product candidate IV
Tramadol or any future product candidates must meet FDA’s standards for safety and efficacy, but may be determined not to
be effective, to be only moderately effective, to not be safe for use in its intended population, or may prove to have undesirable
or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or
limit commercial use.
On October 12, 2020, we
announced that we had received a Complete Response Letter (“CRL”) from the FDA regarding our New Drug Application (“NDA”)
for IV Tramadol. The CRL cited deficiencies related to the terminal sterilization validation and stated that IV Tramadol, intended
to treat patients in acute pain who require an opioid, is not safe for the intended patient population. As described above, our
ability to potentially commercialize IV Tramadol, and the timing of potential commercialization, is dependent on the FDA’s review
of our response to the CRL and approval of our resubmitted NDA, potentially the procurement of additional capital.
21
We attended a Type A Meeting
with the FDA in November 2020 to discuss the issues raised in the CRL. Our response to FDA’s CRL provided an explanation
and scientific justification to address FDA’s conclusions regarding concerns of the safety of IV tramadol for the intended
patient population, and these issues were further discussed during the meeting. We also addressed the FDA’s questions regarding
terminal sterilization validation. However, it is possible that FDA will not accept our responses in our resubmitted NDA or will
otherwise conclude that we have not fully satisfied their concerns. Furthermore, if the FDA requires that we conduct further developmental
or regulatory activities that we deem unreasonable or not commercially feasible, the likelihood of our ability to obtain regulatory
approval for IV Tramadol may be diminished, and the Merger Transaction may not occur.
If our product candidate
or any future product candidate receives marketing approval, the approved label indication and accompanying label information may
be required to contain information limiting the approved use of our drug, which could limit sales of the product. In addition,
our third-party supplier may be subject to an inspection by the FDA that identifies deficiencies in its manufacturing facilities
and concludes they are not operating in compliance with CGMP requirements, which in turn, may force us to identify, qualify and
rely upon additional suppliers.
The process of obtaining
marketing approvals, both in the United States and abroad, is expensive, may take many years if approval is granted at all, and
can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved.
Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations,
or changes in the regulatory review process for each submitted product application, may cause delays in the approval or rejection
of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application
or may decide that our data is insufficient for approval and require additional preclinical studies or clinical trials. In addition,
varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval
of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval
commitments that render the approved product not commercially viable.
If we experience delays
in obtaining approval or if we fail to obtain approval of our product candidate or any future product candidates, the commercial
prospects for our product candidates may be harmed and our ability to generate revenue will be materially impaired.
In addition, even if we
were to obtain approval, the approval of the indication for our product candidate by such regulatory authorities may, among other
things, be more limited than we request. Such regulatory authorities may not approve the price we intend to charge for our product,
may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with
a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.
These regulatory authorities may also require the label to contain warnings, contraindications, or precautions that limit the commercialization
of that product. Any of these scenarios could compromise the commercial prospects for our product candidate or any future product
candidates.
If serious adverse or
unacceptable side effects are identified during the development of IV Tramadol or our future product candidates, we may need to
abandon or limit our development of some of our product candidates.
If our product candidate
or future product candidates are associated with undesirable side effects in clinical trials or have characteristics that are unexpected,
we may need to abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side
effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In our industry,
many compounds that initially showed promise in early stage testing have later been found to cause undesirable side effects that
prevented further development of the compound. In the event that our preclinical or clinical trials reveal a high and unacceptable
severity and prevalence of side effects, our trials could be delayed, suspended or terminated and the FDA or comparable foreign
regulatory authorities could order us to cease further development or deny approval of our product candidate or future product
candidates for any or all targeted indications. The FDA could also issue a letter requesting additional data or information prior
to making a final decision regarding whether or not to approve a product candidate. The number of requests for additional data
or information issued by the FDA in recent years has increased, and resulted in substantial delays in the approval of several new
drugs. Undesirable side effects caused by our product candidate or future product candidates could also result in the inclusion
of serious risk information in our product labeling, application of burdensome post-market requirements, or the denial of regulatory
approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing
and generating revenues from the sale of our product candidate. Drug-related side effects could affect patient recruitment or the
ability of enrolled patients to complete the trial and could result in potential product liability claims.
For example, some of the
adverse events observed in the IV Tramadol clinical trials completed to date include nausea, dizziness, drowsiness, tiredness,
sweating, vomiting, dry mouth, somnolence and hypotension.
Additionally, if one or
more of our current or future product candidates receives marketing approval, and we or others later identify undesirable side
effects caused by this product, a number of potentially significant negative consequences could result, including:
22
• our reputation may suffer.
Any of these events could
prevent us from achieving or maintaining marketing approval and market acceptance of our product candidate or future product candidates
or could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating
significant revenues from its sale.
We may not be able to
manage our business effectively if we are unable to attract and retain key personnel.
We may not be able to attract
or retain qualified management and commercial, scientific and clinical personnel in the future due to the intense competition for
qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary
personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of
our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our employees, consultants,
or third-party partners may engage in misconduct or other improper activities, including those that result in noncompliance with
certain regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk
of employee fraud or other misconduct. Misconduct by employees, consultants, or third-party partners could include intentional
failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established,
comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately
or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry
are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These
laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. Employee, consultant, or third-party misconduct could also involve
the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious
harm to our reputation, as well as civil and criminal liability. The precautions we take to detect and prevent this activity may
not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other
actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted
against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact
on our business and results of operations, including the imposition of significant fines or other civil and/or criminal sanctions.
If we fail to comply
with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could
harm our business.
We are subject to numerous
environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage,
treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,
including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with
third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these
materials. Although we believe that the safety procedures for handling and disposing of these materials comply with the standards
prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials.
In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting
damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal
fines and penalties for failure to comply with such laws and regulations.
Although we maintain workers’
compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use
of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance
for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of
biological, hazardous or radioactive materials.
In addition, we may incur
substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current
or future laws and regulations may impair our research, development or production efforts. Our failure to comply with these laws
and regulations also may result in substantial fines, penalties or other sanctions.
We are an “emerging growth company”
and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies and
smaller reporting companies may make our common stock less attractive to investors.
We are an
“emerging growth company” as that term is used in the JOBS Act, and may remain an emerging growth company until the
earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the initial public offering
of our common stock, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to
be a large accelerated filer, which means the market value of our outstanding common stock that are held by non-affiliates exceeds
$700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during
the prior three year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions
from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These
exemptions include:
23
• reduced disclosure obligations regarding executive compensation; and
In addition, the JOBS Act
provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised
accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would
otherwise apply to private companies. We have elected to take advantage of this extended transition period.
We are also a smaller
reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that
our voting and non-voting common shares held by non-affiliates is more than $250 million measured on the last business
day of our second fiscal quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year
and our voting and non-voting common shares held by non-affiliates is more than $700 million measured on the last business day
of our second fiscal quarter. Similar to emerging growth companies, smaller reporting companies are able to provide simplified
executive compensation disclosure, are exempt from the auditor attestation requirements of Section 404, and have certain other
reduced disclosure obligations, including, among other things, being required to provide only two years of audited financial statements
and not being required to provide selected financial data, supplemental financial information or risk factors.
We have elected to take
advantage of certain of the reduced reporting obligations. We cannot predict whether investors will find our common stock less
attractive if we rely on 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 and our stock price may be reduced or more volatile.
We are a “controlled
company” within the meaning of NASDAQ listing standards and, as a result, qualify for, and rely on, exemptions from certain
corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject
to such requirements.
We are a “controlled
company” within the meaning of NASDAQ listing standards. Under these rules, a company of which more than 50% of the voting
power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with
certain corporate governance requirements of NASDAQ, including (i) the requirement that a majority of the Board of Directors consist
of independent directors, (ii) the requirement that we have a nominating and corporate governance committee that is composed entirely
of independent directors with a written charter addressing the committee’s purpose and responsibilities and (iii) the requirement
that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities. We intend to rely on some or all of these exemptions.
Accordingly, you will not
have the same protections afforded to stockholders of companies subject to all of the corporate governance requirements of NASDAQ.
Certain of our officers and directors
serve in similar roles with our parent company, affiliates, related parties and other parties with whom we transact business; ongoing
and future relationships and transactions between these parties could result in conflicts of interest.
We share directors and/or
officers with certain of our parent company, affiliates, related parties or other companies with which we transact business, and
such arrangements could create conflicts of interest in the future, including with respect to the allocation of corporate opportunities.
While we believe that we have put in place policies and procedures to identify such conflicts and that any existing agreements
that may give rise to such conflicts and any such policies or procedures were negotiated at arm’s length in conformity with
fiduciary duties, such conflicts of interest may nonetheless arise. The existence and consequences of such potential conflicts
could expose us to lost profits, claims by our investors and creditors, and harm to our results of operations.
24
Risks Pertaining to Our
Finances
We have incurred significant
losses since our inception. We expect to incur losses for the foreseeable future, and may never achieve or maintain profitability.
We are an emerging growth
company with a limited operating history. We have focused primarily on in-licensing and developing IV Tramadol, with the goal of
supporting regulatory approval for this product candidate. We have incurred losses since our inception in February 2015.
These losses, among other
things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to
continue to incur significant operating losses for the foreseeable future. We also do not anticipate that we will achieve profitability
for a period of time after generating material revenues, if ever. If we are unable to generate revenues, we will not become profitable
and may be unable to continue operations without continued funding. Because of the numerous risks and uncertainties associated
with developing pharmaceutical products, we are unable to predict the timing or amount of increased expenses or when or if, we
will be able to achieve profitability. In addition, the Company cannot be certain that additional funding will be available on
acceptable terms, or at all.
Our net losses may fluctuate
significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if:
Our ability to become profitable
depends upon our ability to generate revenue. To date, we have not generated any revenue from our development stage product, and
we do not know when, or if, we will generate any revenue. Our ability to generate revenue depends on a number of factors, including,
but not limited to, our ability to:
Even if we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable
would depress our value and could impair our ability to raise capital, expand our business, maintain our research and development
efforts, diversify our product offerings or even continue our operations. A decline in our value could also cause you to lose all
or part of your investment.
Our short operating history
makes it difficult to evaluate our business and prospects.
We were incorporated on
February 9, 2015, and have only been conducting operations with respect to IV Tramadol since February 17, 2015. We have not yet
demonstrated an ability to successfully obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third
party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently,
any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing
and commercializing pharmaceutical products.
25
In addition, as a young
business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will
need to expand our capabilities to support commercial activities. We may not be successful in adding such capabilities.
We expect our financial
condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety
of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any past quarterly period
as an indication of future operating performance.
There is substantial doubt about our ability to continue as
a going concern, which may hinder our ability to obtain future financing.
Our financial
statements as of December 31, 2020 have been prepared under the assumption that we will continue as a going concern for
the next twelve months. As of December 31, 2020, we had cash and cash equivalents of $3.1 million and an accumulated deficit of $73.3 million. We do not believe that
our cash and cash equivalents are sufficient for the next twelve months. As a result of our financial condition and other
factors described herein, there is substantial doubt about our ability to continue as a going concern. Our ability to
continue as a going concern will depend on our ability to obtain additional funding, as to which no assurances can be given.
We continue to analyze various alternatives, including amending existing lines of credit, debt or equity financings or other
arrangements. Our future success depends on our ability to raise capital and/or implement the various strategic alternatives
discussed above. We cannot be certain that these initiatives or raising additional capital, whether through selling
additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available,
will be on terms acceptable to us. If we issue additional securities to raise funds, these securities may have rights,
preferences, or privileges senior to those of our common stock, and our current shareholders may experience dilution. If we
are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current development
programs, cut operating costs, forego future development and other opportunities or even terminate our operations.
We do not have any products
that are approved for commercial sale and therefore do not expect to generate any revenues from product sales in the foreseeable
future, if ever.
We have not generated any
product related revenues to date. To obtain revenues from sales of our product candidates, we must succeed, either alone or with
third parties, in developing, obtaining regulatory approval for, manufacturing and marketing products with commercial potential.
We may never succeed in these activities, and we may not generate sufficient revenues to continue our business operations or achieve
profitability.
We will require substantial
additional funding, which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary additional
capital, we may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development
programs or commercialization efforts.
Our operations have consumed
substantial amounts of cash since inception. We expect to significantly increase our spending to advance the clinical development
of IV Tramadol and launch and commercialize any additional product candidates for which we receive regulatory approval, including
building our own commercial organizations to address certain markets. We will require additional capital for the further development
and potential commercialization of IV Tramadol or other potential product candidates, as well as to fund our other operating expenses
and capital expenditures, and cannot provide any assurance that we will be able to raise funds to complete the development of our
product.
We cannot be certain that
additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient
amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization
of one or more of our product candidates. We may also seek collaborators for product candidates at an earlier stage than otherwise
would be desirable or on terms that are less favorable than might otherwise be available. Any of these events could significantly
harm our business, financial condition and prospects.
Our future funding requirements
will depend on many factors, including, but not limited to:
26
• the effect of competing technological and market developments;
• the success of the commercialization of one or more of our product candidates.
In order to carry out our
business plan and implement our strategy, we may need to obtain additional financing and may choose to raise additional funds through
strategic collaborations, licensing arrangements, public or private equity or debt financing, bank lines of credit, asset sales,
government grants, or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms
favorable to us or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders,
and debt or equity financing, if available, may subject us to restrictive covenants and significant interest costs. If we obtain
funding through a strategic collaboration or licensing arrangement, we may be required to relinquish our rights to our product
candidate or marketing territories.
Our inability to raise capital
when needed would harm our business, financial condition and results of operations, and could cause our stock value to decline
or require that we wind down our operations altogether.
Raising additional capital
may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.
Until such time, if ever,
as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings,
debt financings, grants and license and development agreements in connection with any collaborations. To the extent that we raise
additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the
terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt
financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our
ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds
through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have
to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses
on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed,
we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights
to develop and market any potential product candidates that we would otherwise prefer to develop and market ourselves.
We will continue to incur
significant increased costs as a result of operating as a public company, and our management will be required to devote substantial
time to new compliance initiatives.
We are a listed and traded
public company. As a public company, we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of
2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the rules of any stock exchange
on which we may become listed. These rules impose various requirements on public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and appropriate corporate governance practices. Our management and other
personnel have devoted and will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these
rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our
Board of Directors, our Board committees or as executive officers.
The Sarbanes-Oxley Act of
2002 requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls
and procedures. As a result, we are required to periodically perform an evaluation of our internal controls over financial reporting
to allow management to report on the effectiveness of those controls, as required by Section 404 of the Sarbanes-Oxley Act. However,
while we remain either a non-accelerated filer and/or an emerging growth company, we will not be required to include an attestation
report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance
with Section 404 within the prescribed period, we have engaged in a process to document and evaluate our internal control over
financial reporting. These efforts to comply with Section 404 and related regulations have required, and continue to require, the
commitment of significant financial and managerial resources. While we anticipate maintaining the integrity of our internal controls
over financial reporting and all other aspects of Section 404, we cannot be certain that a material weakness will not be identified
when we test the effectiveness of our control systems in the future. If a material weakness is identified, we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management
resources, costly litigation or a loss of public confidence in our internal controls, which could have an adverse effect on the
market price of our stock.
27
Risks Pertaining to Reliance
on Third Parties
If the Merger Transaction
does not occur and if IV Tramadol is approved and our contract manufacturer fails to produce the product in the volumes that we
require on a timely basis, to produce the product according to the applicable quality standards and requirements, or to comply
with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the commercialization of this
product candidate, lose potential revenues or be unable to meet market demand.
The manufacture of pharmaceutical
products requires significant expertise and capital investment, including the development of advanced manufacturing techniques
and process controls, and the use of specialized processing equipment. We have entered into a development and supply agreement
for the completion of pre-commercialization manufacturing development activities and the manufacture of commercial supplies of
IV Tramadol. Any termination or disruption of this relationship may materially harm our business and financial condition, and impact
any commercialization efforts for this product candidate.
In order to meet anticipated
demand for IV Tramadol, if this product candidate is approved, we currently have one manufacturer to provide us clinical and commercial
supply of IV Tramadol in accordance with the CGMP requirements. We also may plan to qualify a backup manufacturer, in order to
ensure an alternative source and to mitigate any potential supply issues.
All of our contract manufacturers
must comply with strictly enforced federal, state and, where applicable, foreign regulations, including CGMP requirements enforced
by the FDA through its inspectional authority over facilities under the FDCA, as well requirements for controlled substance handling
and security requirements enforced by DEA, and while we exercise oversight of our suppliers, we have limited direct control over
their compliance with these regulations, as reflected in day-to-day operations. Any failure to comply with applicable regulations
may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or
recall, or withdrawal of product approval, and would limit the availability of our product. Any quality or compliance issue, manufacturing
defect or error discovered after products have been produced and distributed could result in even more significant consequences,
including costly recall procedures, re-stocking costs, damage to our reputation and potential for product liability claims.
If the commercial manufacturers
upon whom we rely to manufacture IV Tramadol, and any other product candidates we may in-license, fail to deliver sufficient commercial
quantities on a timely basis at commercially reasonable prices, we would likely be unable to meet demand for our products and we
would lose potential revenues.
We rely, and expect to
continue to rely, on third parties to conduct our preclinical studies and clinical trials, and those third parties may not perform
satisfactorily, including failing to meet deadlines for the completion of such trials or complying with applicable regulatory requirements.
We have relied on third
party contract research organizations and clinical research organizations to conduct some of our preclinical studies and all of
our clinical trials for IV Tramadol and may do so any future product candidates. We may continue to rely on third parties, such
as contract research organizations, clinical research organizations, clinical data management organizations, medical institutions
and clinical investigators, to conduct preclinical studies and clinical trials. The agreements with these third parties might terminate
for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements,
that could delay our product development activities.
Our reliance on these third
parties for research and development activities will reduce our control over these activities but will not relieve us of our legal
and regulatory product development responsibilities. For example, we will remain responsible for ensuring that each of our preclinical
studies and clinical trials are conducted in accordance with the general investigational plan and protocols for the trial and
for ensuring that our preclinical studies are conducted in accordance with good laboratory practice, or GLP, as appropriate. Moreover,
the FDA requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. Regulatory authorities enforce these requirements through periodic
inspections of trial sponsors, clinical investigators and trial sites. If we or any of our clinical research organizations fail
to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable or unacceptable, and
the FDA or comparable foreign regulatory authorities may require us to perform additional 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 complies with GCP regulations. In addition, our clinical trials must be conducted using
products manufactured and produced in accordance with CGMP regulations. Our failure to comply with these regulations may require
us to repeat clinical trials, which would delay the regulatory approval process. We also are required to register ongoing clinical
trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified
timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
28
The third parties with whom
we have contracted to help perform our preclinical studies or clinical trials may also have relationships with other entities,
some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected
deadlines or conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our stated protocols,
we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidate and will not be able
to, or may be delayed in our efforts to, potentially successfully commercialize our product candidate.
If any of our relationships
with these third-party contract research organizations or clinical research organizations terminates, we may not be able to enter
into arrangements with alternative contract research organizations or clinical research organizations or to do so on commercially
reasonable terms. Switching or adding additional contract research organizations or clinical research organizations involves additional
cost and requires extensive training and management time and focus. In addition, there is a natural transition period when a new
contract research organization or clinical research organization commences work. As a result, delays could occur, which could compromise
our ability to meet our desired development timelines. Though we carefully manage our relationships with our contract research
organizations or clinical research organizations, there can be no assurance that we will not encounter challenges or delays in
the future.
We contract with third
parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for
potential commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our
potential product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development
or commercialization efforts.
We do not own any manufacturing
facilities or personnel. We rely, and expect to continue to rely, on third party manufacturers to manufacture our product candidate
for preclinical and clinical testing, as well as for commercial manufacture, once our product candidate receives marketing approval.
This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidate or products
or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or potential commercialization
efforts.
We may be unable to establish
any agreements with such third party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements
with third party manufacturers, reliance on third party manufacturers entails additional risks, including, but not necessarily
limited to:
• reliance on the third party for regulatory compliance and quality assurance;
• the possible breach of the manufacturing agreement by the third party;
The facilities used by our
contract manufacturers to manufacture our product candidate is subject to registration requirements, and inspection by the FDA.
A pre-approval inspection may be conducted after the submission of an application to the FDA. Although we will have oversight over
our suppliers and manufacturers, we do not directly control the manufacturing operations and processes at these facilities, and
therefore rely on, our contract manufacturers to ensure full compliance with CGMP regulations with respect to the day-to-day operations
related to the manufacture of our product candidates. Third party manufacturers may, following an inspection, be subject to a Form
FDA-483 or similar inspectional findings, or a Warning Letter, or may not otherwise be able to comply with the CGMP regulations
or similar regulatory requirements outside the United States. The failure of our third-party manufacturers to comply with applicable
regulations directly impacts our compliance and could result in sanctions being imposed on us, including clinical holds, fines,
injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect
supplies of our products.
29
IV Tramadol and any products
that we may develop may compete with other product candidates and products for access to manufacturing facilities. There may be
a limited number of manufacturers that both operate under CGMP regulations and are capable of manufacturing for us. Any performance
failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently
have arrangements in place for redundant supply or a second source for bulk drug substance. If our current contract manufacturers
cannot perform as agreed, we may be required to replace such manufacturers. We may incur added costs and delays in identifying
and qualifying any replacement manufacturers.
The DEA restricts the importation
of a controlled substance finished drug product when the same substance is commercially available in the United States, which could
reduce the number of potential alternative manufacturers for IV Tramadol.
Our current and anticipated
future dependence upon others for the manufacture of our product candidate may adversely affect our future profit margins and our
ability to potentially commercialize any products that receive marketing approval on a timely and competitive basis.
We also expect to rely on
other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors
could delay clinical development or marketing approval of our product candidates or potential commercialization of our products,
producing additional losses and depriving us of potential product revenue.
We rely on clinical data
and results obtained by third parties that could ultimately prove to be inaccurate or unreliable.
As part of our strategy
to mitigate development risk, we sought to develop a product candidate with a validated mechanism of action, and we utilize biomarkers
to assess potential clinical efficacy early in the development process. This strategy necessarily relies upon clinical data and
other results obtained by third parties that may ultimately prove to be inaccurate or unreliable. Further, such clinical data and
results may be based on products or product candidates that are significantly different from our product candidate or future product
candidates. If the third-party data and results we rely upon prove to be inaccurate, unreliable or not applicable to our product
candidate or future product candidate, we could make inaccurate assumptions and conclusions about our product candidates and our