Item 1A. Risk Factors
As
discussed immediately prior to Item 1 of Part I, “Business” under “Cautionary Note Regarding Forward-Looking
Statements,” our actual results could differ materially from those expressed in our forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited to, those discussed below. Additional risks and
uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. If any
of the following risks occur, our business, financial condition, operating results, cash flows and the trading price of our common
stock could be materially adversely affected.
Risks
Relating to our Business
The
impacts of the coronavirus pandemic could adversely affect our business, and other similar crises could result in similar or other
harms.
The
outbreak of the novel coronavirus (COVID-19) pandemic has resulted in widespread travel and transportation restrictions and closures
of commercial spaces, industrial facilities and other spaces and businesses in and across the United States and the world, including
in the locations we operate or target sales. As a result, our business has been impacted and we could face continued or more adverse
effects. In addition, our results and financial condition may be adversely affected by federal or state legislation, or other
similar laws, regulations, orders or other governmental or regulatory actions or best practices, that would impose new restrictions
on our ability to operate our business or customers to operate their businesses. For example, our sales and technical field forces
have been restricted from traveling or limited in travel, which adversely affects our ability to sell our products and complete
field studies. While we have implemented cautionary procedures at our manufacturing facility, there may be disruptions to our
ability to manufacture due to current and additional workplace controls. Our customers may be less inclined or unable to purchase
our products or continue product studies due to restrictions under which they may be operating. Those restrictions have been and
are more severe in some jurisdictions, such as California. If financial markets tighten, we may have more limited ability to raise
necessary financing. The COVID-19 pandemic is also placing a significant budgetary burden on federal, state and local governments,
which may impede or delay their ability to purchase our products. We source some of our critical raw materials from Asia, and
the coronavirus has caused supply chain disruptions, which could limit a timely supply of materials. Each of these could have
negative effects on our business, results of operations, financial condition and cash flows. Even if the coronavirus pandemic
passes, another crisis with similar effects could develop and harm our business, financial results and liquidity. The degree to
which the COVID-19 pandemic may impact our results of operations and financial condition is unknown at this time and will depend
on future developments, including the ultimate severity and the duration of the pandemic, and further actions that may be taken
by governmental authorities or businesses or individuals on their own initiatives in response to the pandemic.
Our
success is dependent on the successful commercialization of ContraPest.
The
EPA granted registration approval for ContraPest effective August 2, 2016, and as of July 12, 2018, we have received registration
for ContraPest in all 50 states and the District of Columbia. However, we have not yet had significant sales of ContraPest, which
is our only product to date that is available for commercialization and the generation of revenue.
ContraPest
and our other product candidates, if approved, may not achieve adequate market acceptance necessary for commercial success.
Even
following receipt of regulatory approval for ContraPest or future regulatory approval of our other product candidates, such products
may not gain market acceptance. Market acceptance of any of our product candidates for which we receive approval depends on a
number of factors, including:
● The efficacy and safety of such product candidates as demonstrated in trials;
● Relative convenience and ease of use; and
● Unfavorable publicity relating to the product.
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If
we cannot successfully commercialize our products, especially ContraPest, we will not become profitable.
If
any of our approved product candidates fail to achieve sufficient market acceptance, we will not be able to generate significant
revenues or become profitable. The commercial success of ContraPest will depend on a number of factors, including the following:
● Establishment of commercially viable pricing;
● A continued acceptable safety profile of ContraPest.
Many
of these factors are beyond our control. If we are unable to successfully commercialize ContraPest, we may not be able to earn
sufficient revenues or profits to continue our business.
We
will require additional capital to fund our operations. Failure to obtain this necessary capital if needed may force us to delay,
limit, or terminate our product development efforts or other operations.
Commercialization
of ContraPest and developing further product candidates, including conducting experiments and field studies, obtaining and maintaining
regulatory approval and commercializing any products approved for sale, is a time-consuming, expensive and uncertain process that
takes years to complete. We expect our expenses to continue and to increase in connection with our ongoing activities, particularly
as we advance our commercialization activities. We may expand our operations, and as a result of many factors, some of which may
be currently unknown to us, our expenses may be higher than expected. Securing additional financing may divert our management
from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates,
including ContraPest. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required
to:
The
occurrence of any of the events described above would have a material adverse effect on our business, operating results and prospects
and on our ability to develop our product candidates.
ContraPest
is the first product we have marketed, and if we are unable to establish and maintain an effective sales force and marketing and
distribution infrastructures, or enter into and rely upon acceptable third-party relationships, we may be unable to generate any
revenue.
We
continue to develop a functional infrastructure for the sales, marketing, and distribution of our products and the cost of establishing
and maintaining such an infrastructure may exceed the cost-effectiveness of doing so. In order to market ContraPest and any other
products that may be approved by the EPA and comparable foreign regulatory authorities, we must continue to build our sales, marketing,
managerial and other non-technical capabilities or make arrangements with third parties to perform these services for which we
would incur substantial costs. If we are unable to establish and maintain adequate sales, marketing, and distribution capabilities,
whether independently or with third parties, we may not be able to generate product revenue and become profitable. Without an
effective internal commercial organization or the support of a third party to perform sales and marketing functions, we may be
unable to compete successfully.
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Risks
Regulations Have on Our Business
Regulatory
approval processes of the EPA and comparable foreign regulatory authorities are lengthy, time-consuming and unpredictable, and
if we are ultimately unable to obtain regulatory approval for our product candidates, our business may fail.
The
EPA review process for a product with one or more new active ingredients typically takes approximately two years to complete and
approval is never guaranteed. In addition, we continue to seek approvals to expand labels and use designations for ContraPest
to broaden its market and usability. Our efforts could fail to receive marketing approval from the EPA or, with respect to ContraPest
or our product candidates, from a comparable foreign regulatory authority for many reasons, including:
● Disagreement over the design or implementation of our trials;
● Failure to demonstrate a product candidate’s benefits outweigh its risks;
● Disagreement over our interpretation of data;
● Disagreement over whether to accept efficacy results from trials;
● The insufficiency of data collected from trials to obtain regulatory approval;
Any
of these factors, some of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully
market any of our product candidates. Any such setback in our pursuit of regulatory approval could have a material adverse effect
on our business and prospects.
Even
following receipt of any regulatory approval for ContraPest and our other product candidates, we will continue to face extensive
regulatory requirements and our products may face future development and regulatory difficulties.
Even
following receipt of any regulatory approval for ContraPest or our product candidates, our products will be subject to ongoing
requirements by the EPA and comparable state and foreign regulatory authorities governing the manufacture, quality control, further
development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping
and reporting of safety and other post-market information.
The safety profile of any product will continue to be closely
monitored by the EPA and comparable foreign regulatory authorities after approval. In addition, we may be required, from time
to time, to provide further testing results and certifications to the EPA and state regulatory agencies for ContraPest.
For instance, we have found it challenging to produce applicable
stability test results for certain of our active ingredients, due in part to the small quantities used in the final product, and
continue to work with the EPA to develop appropriate biological or chemical measurements of product stability. Because
our data continue to demonstrate the long-term efficacy of ContraPest, we believe that the testing is a matter we will resolve.
If the EPA or comparable foreign regulatory authorities
become aware of new information after approval of ContraPest or any other product candidate, or we are unable to adequately complete
required testing and certification requirements, a number of potentially significant negative consequences could result, including:
● We may be forced to suspend marketing of such product;
● We could be sued and held liable for harm caused;
● We may be subject to litigation or product liability claims; and
● Our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining
market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations
and prospects.
Moreover, existing government regulations may change, and additional
government regulations may be enacted that could prevent, limit or delay regulatory approval of ContraPest or any other product
candidates. If we are slow 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/or be
subject to different marketing requirements or fines or enhanced government oversight and reporting obligations, which would adversely
affect our business, prospects, and ability to achieve or sustain profitability.
Our
future success is also dependent on regulatory approval and commercialization of our other product candidates.
We
are working on a semi-solid product as well as an alternative dispenser. We cannot commercialize our product candidates in the
United States without first obtaining regulatory approval for each product and each use pattern from the EPA or, if applicable,
the Food and Drug Administration, or FDA, and from any related applicable state authorities. Before obtaining regulatory approvals
for the commercial sale of any product candidate for a target indication, the law requires that applicants demonstrate through
laboratory and field studies and related data showing that the product candidate will perform its intended function without causing
unreasonable adverse effects on the environment. The EPA or a comparable foreign regulatory authority may require more information,
including additional data to support approval that may delay or prevent approval.
Even
following receipt of any regulatory approval for ContraPest and our other product candidates, we will continue to be subject to
regulation of our manufacturing processes and advertising practices.
As
a manufacturer of pest control products, we are subject to continual government oversight and periodic inspections by the EPA
and other regulatory authorities. If we or a regulatory agency discover problems with a facility where our products are manufactured,
a regulatory agency may impose restrictions on the manufacturing facility, including requiring recall or withdrawal of the product
from the market or suspension of manufacturing until certain procedural requirements have been met. The occurrence of any such
event or penalty could limit our ability to market ContraPest or any other product candidates and generate revenue.
In
addition, the EPA strictly regulates the advertising and promotion of pest control products, and these pest control products may
only be marketed or promoted for their EPA approved uses, consistent with the product’s approved labeling. Advertising and
promotion of any product candidate that obtains approval in the U.S. will be heavily scrutinized by the EPA, other applicable
state regulatory agencies and the public. Violations, including promotion of our products for unapproved or off-label uses, are
subject to enforcement actions, inquiries and investigations, and civil, criminal and/or administrative sanctions imposed by the
EPA.
Failure
to obtain regulatory approval in foreign jurisdictions would prevent ContraPest or any other product candidates from being marketed
in those jurisdictions.
To
market and sell our products globally, we must obtain separate marketing approvals and comply with numerous and varying regulatory
requirements. The approval procedure varies among countries and can involve additional testing. Obtaining foreign regulatory approvals
and maintaining compliance with foreign regulatory requirements could result in significant delays, difficulties, and cost for
us and could delay or prevent the introduction of our products in certain countries. Approval by the EPA does not ensure approval
by regulatory authorities in other countries or jurisdictions, but EPA approval may influence decisions by the foreign regulatory
authority. If we are unable to obtain approval of ContraPest or for any of our other product candidates by regulatory authorities
in the world market, the commercial prospects of that product candidate may be significantly diminished and our business prospects
could decline.
Risks
Related to our Operations and Supply Chain
We
depend on key personnel to operate our business. If we are unable to retain, attract and integrate qualified personnel, our ability
to develop and successfully grow our business could be harmed.
We
believe that our success is highly dependent on our ability to attract and retain highly skilled and experienced sales, research
and development, and other personnel. If one or more of our executive officers or key employees terminates employment or becomes
disabled or experiences long-term illness, we may not be able to replace their expertise, fully integrate new personnel or replicate
the prior working relationships, and the loss of their services might significantly delay or prevent the achievement of our research,
development and business objectives. Qualified individuals with the breadth of skills and experience in our industry that we require
are in high demand, and we may incur significant costs to attract them. Many of the other companies that we compete against for
qualified personnel have greater financial and other resources, different risk profiles and a more established history in the
industry. They also may provide more diverse opportunities and better chances for career advancement. Our failure to attract or
retain key personnel could impede the achievement of our research, development and commercialization objectives.
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We
have internal manufacturing capabilities to meet our current and near term forecasted demand for ContraPest, however, we must develop
additional manufacturing capability or rely upon third parties to manufacture our products to meet future demand and our single location
manufacturing operations could be disrupted.
Our existing internal manufacturing platform is adequate for
meeting our current and near term forecasted demand for ContraPest. We may be required to spend significant time and resources
to expand these manufacturing facilities to fully meet future demand. If we are unable to develop full-scale manufacturing capabilities,
we may not be able to meet demand of our products without relying on third party manufacturers, which could adversely affect our
operations or financial condition.
In addition, if our manufacturing operations fail or becomes disrupted
for any reason, including because of labor, disasters, and equipment malfunctions, among others, our ability to timely produce ContraPest
may be adversely affected, which would harm our sales and reputation. We only operate in single location, which means we do not
have back-up facilities to produce our products during a time when our manufacturing facility becomes unavailable.
We
will need to expand our operations and grow the size of our organization, and we may experience difficulties in managing this
growth.
As
of December 31, 2020, we had 29 full-time employees. As our development and commercialization plans and strategies develop, we
will need additional managerial, operational, sales, marketing, scientific, financial headcount and other resources. Our management,
personnel, and systems currently in place may not be adequate to support this future growth. Future growth would impose significant
added responsibilities on members of management, including:
● Expanding our facilities.
Our
failure to accomplish any of these tasks could prevent us from successfully growing our business.
Business
or supply chain disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses,
particularly because we have limited suppliers and a critical ingredient is sourced from China.
Our
operations could be subject to a variety of potential business disruptions, including power shortages, telecommunications failures,
water shortages, floods, fires, earthquakes, extreme weather conditions, medical epidemics and other natural or manmade disasters
or other interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that
our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial
condition and increase our costs and expenses. Moreover, we rely on third parties to supply various ingredients and other items
which are critical for producing our product candidates.
We
currently use one supplier for each of our two active ingredients, triptolide and VCD. Our ability to produce our product candidates
would be disrupted if the operations of these suppliers are affected by a manmade or natural disaster or other business interruption.
Because triptolide is sourced from China and other Asian countries, we have a greater risk of supply interruption, including as
a result of tariff and trade disputes, or disruptive events like the outbreak of the Coronavirus. The ultimate impact on our operations
from any business interruption impacting us or any of our significant suppliers is unknown, but our operations and financial condition
would likely suffer adverse consequences. Further, any significant uninsured liability may require us to pay substantial amounts,
which would adversely affect our business, results of operations, financial condition and cash flows from future prospects.
We
are dependent on triptolide, a key ingredient for ContraPest, which has limited sources and must be in a very refined condition.
If
we are unable to develop additional sources of or alternatives to triptolide, a key ingredient for ContraPest, our long-term ability
to produce ContraPest at a cost effective price could be in jeopardy. If market demand for triptolide causes the price to increase
beyond our ability to market at a competitive price or causes the quality of the refined ingredient to be less than needed for
our production, our ability to commercialize ContraPest could be limited or delayed, which would adversely affect our business,
results of operations and financial condition.
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A
variety of risks associated with marketing our product candidates internationally could materially adversely affect our business.
We
may seek regulatory approval of our product candidates outside of the U.S. and, in that case, we expect that we will be subject
to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:
● Differing regulatory requirements in foreign countries;
● Foreign taxes, including withholding of payroll taxes;
● Difficulties staffing and managing foreign operations;
These
and other risks associated with our international operations may materially adversely affect our ability to attain or maintain
profitable operations.
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Risks
Relating to Protections of our Intellectual Property and Legal Actions
If
we fail to obtain or protect intellectual property rights, our competitive position could be harmed.
We
depend on our ability to protect our proprietary 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 commercial success will depend in part on our ability to obtain and maintain intellectual property protection in the United
States and other countries with respect to our proprietary technology and products. Where we deem appropriate, we seek to protect
our proprietary position by filing patent applications in the United States and internationally related to our novel technologies
and products that are important to our business. However, our financial resources constrain us from seeking protection in every
instance, so we may rationalize and selectively pursue expensive patent protection. Patent positions can be highly uncertain,
involve complex legal and factual questions and be the subject of litigation. As a result, the issuance, scope, validity, enforceability
and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.
The
steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information
or infringement of our intellectual property rights, both inside and outside the United States. The rights already granted under
any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary
protection or competitive advantages we are seeking. If we are unable to obtain and maintain protection for our technology and
products, or if the scope of the protection obtained is not sufficient, our competitors could develop and commercialize technology
and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely
affected.
With
respect to patent rights, we do not know whether any of our pending patent applications for any of our technologies or products
will result in the issuance of patents that protect such technologies or products, or if our licensed patent will effectively
prevent others from commercializing competitive technologies and products. Our pending patent applications cannot be enforced
against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications.
Further, the examination process may require us to narrow the claims for our pending patent applications, which may limit the
scope of patent protection that may be obtained if these applications issue. Because the issuance of a patent is not conclusive
as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may
be challenged in the courts or patent offices in the U.S. and internationally. Such challenges may result in the loss of patent
protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit
our ability to stop others from using or commercializing similar or identical technology and products or limit the duration of
the patent protection for our technology and products. Protecting against the unauthorized use of our patented technology, trademarks
and other intellectual property rights, is expensive, difficult, and in some cases, may not be possible. In some cases, it may
be difficult or impossible to detect third party infringement or misappropriation of our intellectual property rights, even in
relation to issued patent claims, and proving any such infringement may be even more difficult.
Intellectual
property rights do not necessarily address all potential threats to any competitive advantage we may have.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
● The patents of others may have an adverse effect on our business.
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Our
technology may be found to infringe third party intellectual property rights.
Third
parties may in the future assert claims or initiate litigation related to their patent, copyright, trademark and other intellectual
property rights in technology that is important to us. The asserted claims and/or litigation could include claims against us,
our licensors, or our suppliers alleging infringement of intellectual property rights with respect to our product candidates or
components of those products. Regardless of the merit of the claims, they could be time consuming, resulting in costly litigation
and diversion of technical and management personnel, or require us to develop non-infringing technology or enter into license
agreements. We cannot assure you that licenses will be available on acceptable terms, if at all. Furthermore, because of the potential
for significant damage awards, which are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims
resulting in large settlements. If any infringement or other intellectual property claim made against us by any third party is
successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms
and conditions, our business, operating results and financial condition could be materially adversely affected.
If
our product candidates, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur
substantial costs and we may have to:
● Redesign our product candidates or processes to avoid infringement;
● Stop using the subject matter claimed to be held by others;
● Pay damages; or
We
may need to license intellectual property from third parties, and such licenses may not be available or may not be available on
commercially reasonable terms.
A
third party may hold intellectual property, including patent rights that are important or necessary to the development of our
product candidates. It may be necessary for us to use the patented or proprietary technology of a third party to manufacture or
otherwise commercialize our own technology or products, in which case we would be required to obtain a license from such third
party. Licensing such intellectual property may not be available or may not be available on commercially reasonable terms, which
could have a material adverse effect on our business and financial condition.
We
may be subject to legal proceedings in the ordinary course of our business that could result in significant harm to our business,
financial condition and operating results.
We
could be subject to legal proceedings and claims from time to time in the ordinary course of our business, including actions arising
from tort, contract or other claims. See “Legal Proceedings” elsewhere in this filing for more information. Litigation
is expensive, time consuming, and could divert management’s attention away from running our business. The outcome of litigation
or other proceedings is subject to significant uncertainty, and it is possible that an adverse resolution of one or more such
proceedings could result in reputational harm and/or significant monetary damages, injunctive relief or settlement costs that
could adversely affect our results of operations or financial condition as well as our ability to conduct our business as it is
presently being conducted. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs
to resolve one or more such claims and might not be available on terms acceptable to us. In addition, regardless of merit or outcome,
claims brought against us that are uninsured or underinsured could result in unanticipated costs, which could harm our business,
financial condition and operating results and reduce the trading price of our stock.
For
example, we have become aware that we were involved in a transaction in which an investor of the Company may have resold approximately
175,000 shares of our common stock pursuant to a registration statement that was not declared effective by the Securities and
Exchange Commission (SEC). As a result, it is possible that the SEC brings an action against us, or we may ultimately be responsible
for an action for rescission by purchasers of the securities that were resold. If the SEC were to bring such an enforcement action
against us, or if purchasers were to bring such an action for rescission, it may have a material adverse effect on our financial
position.
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Product
liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that
we may develop.
We
face an inherent risk of product liability exposure related to the use of ContraPest and any of our other products. If we cannot
successfully defend ourselves against claims from our product users, we could incur substantial liabilities. Regardless of merit
or eventual outcome, liability claims may result in:
● Decreased demand for any product that we may develop;
● Termination of field studies or other research and development efforts;
● Injury to our reputation and significant negative media attention;
● Significant costs to defend the related litigation;
● Substantial monetary awards to plaintiffs;
● Loss of revenue;
● The inability to commercialize our product candidates.
We
may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments
have been awarded in class action lawsuits based on products that had unanticipated side effects, including, without limitation,
any potential adverse effects of our products on humans or other species. A successful product liability claim or series of claims
brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our
business.
Risks
Related to our Reporting and Cybersecurity
We
have not fully assessed our internal control over financial reporting. If we experience material weaknesses in the future or otherwise
fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition
or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our Common Stock.
A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely
basis.
This
Annual Report on Form 10-K for the year ended December 31, 2020 does not include an attestation report of the company’s
registered public accounting firm due to a transition period established by rules of the SEC for smaller reporting companies and
emerging growth companies. As a result, we have not yet fully assessed our internal control over financial reporting and are unable
to assure that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to
remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting, or to
avoid potential future material weaknesses.
If
we are unable to develop and maintain an effective system of internal control over financial reporting, successfully remediate
any existing or future material weaknesses in our internal control over financial reporting, or identify any additional material
weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance
with securities law requirements regarding timely filing of periodic reports and Nasdaq listing requirements, investors may lose
confidence in our financial reporting, and our stock price may decline as a result.
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Privacy
breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
We
expect to begin making direct-to-consumer sales through our new e-Commerce tool, which depends on information technology systems
and networks. We are also responsible for storing data relating to our customers and employees and rely on third party vendors
for the storage, processing and transmission of personal and Company information. Consumers, lawmakers and consumer advocates
alike are increasingly concerned over the security of personal information transmitted over the Internet, consumer identity theft
and privacy. We do not control our third-party service providers and cannot guarantee that they have implemented reasonable security
measures to protect our employees’ and customers’ identity and privacy, or that no electronic or physical computer
break-ins or security breaches will occur in the future. Our systems and technology are vulnerable from time-to-time to damage,
disruption or interruption from, among other things, physical damage, natural disasters, inadequate system capacity, system issues,
security breaches, “hackers,” email blocking lists, computer viruses, power outages and other failures or disruptions
outside of our control. A significant breach of customer, employee or Company data could damage our reputation and our relationship
with customers, and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits, as well as
adversely affect our results of operations. We may also incur additional costs in the future related to the implementation of
additional security measures to protect against new or enhanced data security and privacy threats, or to comply with state, federal
and international laws that may be enacted to address those threats.
Risks
Related to our Capital Stock, Funding and Trading in our Stock
We
have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant
operating losses in the future.
Investment
in product development is highly speculative because it entails substantial upfront capital expenditures and significant risk
that any potential product candidate will fail to become commercially viable or gain regulatory approval. To date, we have financed
our operations primarily through the sale of equity securities and debt financings as well as research grants. We have generated
minimal revenue from product sales to date. We continue to incur significant sales, marketing, research, development, and other
expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period
since our inception. For the years ended December 31, 2020 and 2019, we reported net losses of $8.4 million and $10.0 million,
respectively. As of December 31, 2020, we had an accumulated deficit since inception of $104.2 million.
Since
inception, we have dedicated a majority of our resources to the discovery and development and marketing of our proprietary product
candidates. We expect to continue to incur significant expenses and operating losses for the foreseeable future. The size of our
losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. In particular, we expect
to incur substantial and increased expenses as we:
● Attempt to achieve market acceptance for our products;
● Maintain, expand and protect our intellectual property portfolio; and
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We
may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our
financial condition. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our
financial condition. If ContraPest or any other product candidate does not gain or maintain sufficient regulatory approval, or
if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future,
we may not be able to sustain profitability in subsequent periods. Our failure to become and remain profitable would decrease
the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or
continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.
If
we are unable to continue as a going concern, our securities will have little or no value.
We
have incurred operating losses since our inception, and we expect to continue to incur significant expenses and operating losses
for the foreseeable future. Our financial statements as of December 31, 2020 and 2019 have been prepared under the assumption
that we will continue as a going concern. Our independent registered public accounting firm included in its opinion for the years
ended December 31, 2020 and 2019 an explanatory paragraph referring to our net loss from operations and net capital deficiency
and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available.
If we encounter continued issues or delays in the commercialization of ContraPest or greater than anticipated expenses, our prior
losses and expected future losses could have an adverse effect on our financial condition and negatively impact our ability to
fund continued operations, obtain additional financing in the future and continue as a going concern. There are no assurances
that such financing, if necessary, will be available to us at all or will be available in sufficient amounts or on reasonable
terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are
unable to generate additional funds in the future through financings, sales of our products, licensing fees, royalty payments
or from other sources or transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue
as a going concern, our stockholders would likely lose most or all of their investment in us.
Raising
additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights
to our technologies or product candidates.
Until
such time, if ever, as we can generate sufficient product revenues, we expect to finance our cash needs primarily through the
sale of equity securities and debt financings, and possibly through credit facilities and government and foundation grants. We
may also seek to raise capital through third party collaborations, strategic alliances and similar arrangements. We currently
do not have any committed external source of funds.
Raising
funds in the future may present additional challenges and future financing may not be available in sufficient amounts or on terms
acceptable to us, if at all. The terms of any financing arrangements we enter into may adversely affect the holdings or the rights
of our stockholders and the issuance of additional securities by us, or the possibility of such issuance, may cause the market
price of our shares to decline. For example, during 2020, we completed equity financings that resulted in the issuance of shares
of Common Stock and warrants to purchase Common Stock, resulting in substantial dilution to the existing stockholders. Similarly,
in the first quarter of 2021, we again issued shares of Common Stock and warrants to purchase Common Stock, resulting in additional
substantial dilution to the existing stockholders. We generally have raised capital as the opportunity arises.
Certain
of our agreements with investors and our outstanding warrants contain provisions that impose limitations on our ability to participate
in certain variable rate transactions, including at-the-market transactions, which may limit our opportunities to obtain financing
in sufficient amounts or on acceptable terms. The sale of additional equity or convertible debt securities would dilute all of
our stockholders, and if such sales occur at a deemed issuance price that is lower than the current exercise price of our outstanding
warrants sold to investors in November 2017, the exercise price for those warrants would adjust downward to the deemed issuance
price pursuant to price adjustment protection contained within those warrants. Our various warrants contain other terms that may
affect our fundraising.
The
incurrence of indebtedness through credit facilities would result in increased fixed payment obligations and, potentially, the
imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt, making capital
expenditures or declaring dividends, and may impose limitations on our ability to acquire, sell, or license intellectual property
rights and other operating restrictions that could adversely impact our ability to conduct our business.
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If
we raise additional funds through collaborations, strategic alliances, or licensing arrangements or other marketing or distribution
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 expand our operations
or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially
adversely affected.
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 commercialization efforts, or grant others rights to develop and market product candidates
that we would otherwise prefer to develop and market ourselves.
Our
share price may be volatile, which could subject us to securities class action litigation and your investment in our securities
could decline in value.
Our
stock could be subject to wide fluctuation in response to many risk factors listed in this section, and others beyond our control,
including:
● Market acceptance and commercialization of our products;
● Our ability to remain listed on The Nasdaq Capital Market;
● Results and timing of our submissions with the regulatory authorities;
● Failure or discontinuation of any of our development programs;
● Failure to achieve pricing acceptable to the market;
● Regulatory actions with respect to our products or our competitors’ products;
● Competition from existing products or new products that may emerge;
● Issuance of new or updated research or reports by securities analysts;
● Entry by us into any material litigation or other proceedings;
● Sales of our Common Stock by us, our insiders, or our other stockholders;
● Exercise of outstanding warrants;
● Market conditions for equity securities; and
● General economic and market conditions unrelated to our performance.
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Furthermore,
the capital markets can experience extreme price and volume fluctuations that may affect the market prices of equity securities
of many companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions
such as recessions, interest rate changes, or international currency fluctuations, may negatively impact the market price of shares
of our Common Stock. In addition, such fluctuations could subject us to securities class action litigation, which could result
in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our
business. You may not realize any return on your investment in us and may lose some or all of your investment.
Future
sales, or the possibility of future sales, of a substantial number of our common shares could adversely affect the price of the
shares and dilute stockholders.
Future sales of a substantial number of shares of our Common
Stock, or the perception that such sales will occur, could cause a decline in the market price of our Common Stock. This is particularly
true if we sell our stock at a discount. As of March 29, 2021, we had 143,501 shares of our Common Stock subject to outstanding
warrants that contain anti-dilution adjustments that provide for an adjustment to the exercise price for certain dilutive issuances
of securities. If we offer or issue additional securities at a deemed price lower than the current exercise price of these outstanding
warrants, these warrants will adjust pursuant to the price adjustment protection contained within these warrants. For example,
our January 2020 registered direct offering resulted in an additional downward adjustment of the exercise price of these warrants
from $19.00 per share to $7.126 per share and our inducement offering in October 2020 resulted in an additional downward adjustment
of the exercise price of these warrants from $7.126 per share to $1.3659 per share. Any future issuance of Common Stock or securities
convertible or exercisable into our Common Stock could cause a further downward adjustment of the exercise price of these warrants
to the deemed issuance price if the issuance price is less than the exercise price of the warrants at the time of the new issuance.
Also,
in the future, we may issue additional shares of our Common Stock or other equity or debt securities convertible into Common Stock
in connection with a financing, acquisition, litigation settlement, employee arrangements, or otherwise. Any such issuance could
result in substantial dilution to our existing stockholders and could cause our common share price to decline.
An
active market in the shares may not continue to develop in which investors can resell our Common Stock.
We
cannot predict the extent to which an active market for our Common Stock will continue to develop or be sustained, or how the
development of such a market might affect the market price for our Common Stock. Market conditions in effect at the time you acquire
our stock may not be indicative of the price at which our Common Stock will trade in the future. Investors may not be able to
sell their Common Stock at or above the price they acquired it.
If
securities or industry analysts, or other sources of information, do not publish research, or publish inaccurate or unfavorable
research or other information about our business, our stock price and trading volume could decline.
The
trading market for our Common Stock may depend on the research, reports and other information that securities or industry
analysts, or other third-party sources of information, publish about us or our business. We do not have any control over these
analysts or other third-party sources of information. From time to time inaccurate or unfavorable research or other information
about our business, financial condition, results of operations and stock ownership may be published. We cannot assure that
analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change
their opinion of our stock, our share price could decline. If one or more of these analysts cease coverage of us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume
to decline. If incorrect or misleading information is disseminated publicly by third parties about us, our stock price could decline.
We
may not be able to comply with all applicable listing requirements or standards of The Nasdaq Capital Market and Nasdaq could
delist our Common Stock.
Our
Common Stock is listed on The Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and
other continued listing requirements and standards. On November 12, 2019, we received an initial deficiency letter from the
listing qualifications staff of The Nasdaq Stock Market (“Nasdaq”) providing notification that the bid price for our
Common Stock had closed below $1.00 per share for the previous 30 consecutive business days and that as a result our Common Stock
no longer met the minimum bid price requirement for listing on The Nasdaq Capital Market. We were provided with an initial compliance
period of 180 calendar days, or until May 11, 2020, to regain compliance with the minimum bid price requirement. We implemented
a 1-for-20 reverse stock split on February 4, 2020. On February 20, 2020 we received notification from Nasdaq that we had regained
compliance with the minimum bid price requirement. However, we can provide no assurance that we will be able to maintain compliance
with the minimum bid price requirement.
In
the event that we are unable to maintain compliance with the applicable Nasdaq listing requirements or standards of The Nasdaq
Capital Market, our Common Stock could be delisted from The Nasdaq Capital Market, which could have a material adverse effect
on our financial condition and which could cause the value of our Common Stock to decline. If our Common Stock is not eligible
for listing or quotation on another market or exchange, trading of our Common Stock could be conducted in the over-the-counter
market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or 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 be a reduction in our coverage by security analysts and the news media, which could cause the price of our Common
Stock to decline further. In addition, it may be difficult for us to raise additional capital if we are not listed on a national
securities exchange.
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Our
corporate documents, Delaware law and certain warrants contain provisions that could discourage, delay or prevent a change in
control of our company.
Provisions
in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger or acquisition involving us that
our stockholders may consider favorable. For example, our certificate of incorporation currently provides for a staggered board
of directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for reelection
each year. Having a staggered board will make it more difficult for a third party to obtain control of our board of directors
through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our board of directors.
Additionally, most of our warrants provide a Black Scholes value-based payment to the warrant holders in connection with certain
transactions that may discourage, delay or prevent a merger or acquisition.
We
are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions,
if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that