ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree
of risk. You should consider carefully the risks described below, together with the other information included or incorporated by reference
in this Annual Report. If any of the following risks occur, our business, financial condition, results of operations and future growth
prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline. Other
events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition
and results of operations.
Risks Related to Our Financial Position and Capital
Requirements
Our independent registered
public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue
as a “going concern.”
The Company
has incurred recurring net losses, including a net loss of $48.5 million for the year ended March 31, 2025, compared to $64.3 million
for the year ended March 31, 2024 and the Company’s operations have not provided net positive cash flows in the year ended March
31, 2025. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s
continuation as a going concern is dependent upon its ability to generate positive cash flows from operations and to secure additional
sources of equity and/or debt financing. Despite the Company’s intent to fund operations through equity and debt financing arrangements,
there is no assurance that such financing will be available on terms acceptable to the Company, if at all.
Our independent
auditors have included an explanatory paragraph in their audit report, included in this Annual Report on Form 10-K, regarding the Company’s
ability to continue as a going concern. This going concern risk may materially limit our ability to raise additional funds through the
issuance of new debt or equity or may adversely affect the terms upon which such capital may be available. The inability to obtain sufficient
financing on acceptable terms could have a material adverse effect on the Company’s financial condition, results of operations,
and business prospects.
The Company
is actively pursuing strategies to mitigate these risks. However, there can be no assurance that these efforts will prove successful or
that the Company will achieve its intended financial stability. The failure to successfully address these going concern risks may materially
and adversely affect the Company’s business, financial condition, and results of operations. Investors should consider the substantial
risks and uncertainties inherent in the Company’s business before investing in the Company’s securities.
Numerous factors, including the incurring of
significant losses, are relevant to our financial success and any or all such factors could have a disproportionate impact on our bottom
line.
Our ability to implement our business
strategy is subject to numerous risks that you should be aware of before making an investment decision. These are not the only risks we
face. These risks include, among others, that:
Because of the numerous risks
and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount
of expenses or when, or if, we will be able to achieve profitability. If we are required by regulatory authorities to perform studies
in addition to those expected or if there are any delays in the initiation and completion of our clinical trials or the development of
any of our product candidates, our expenses could increase.
We will need to raise additional capital to
meet our business requirements in the future, and such capital raising may be costly or difficult to obtain, and could dilute current
stockholders’ ownership interests.
Our future capital requirements
will depend on many factors, including the success and costs of our commercialization activities, including product marketing, sales,
and distribution progress, the results of our clinical trials, the timing and outcome of regulatory review of our product candidates,
commercial manufacturing success, and the number and development requirements of product candidates that we pursue. Because of the numerous
risks and uncertainties associated with the development and commercialization of our approved product and product candidates, we are unable
to reasonably estimate the amounts of additional capital outlays and operating expenditures that our business will require. We will need
to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited to:
● expanding commercialization of our approved product;
● clinical trials for our product candidates;
● researching and developing new products;
● pursuing growth opportunities, including more rapid expansion;
● acquiring complementary businesses or technologies;
● making capital improvements to improve our infrastructure;
● hiring qualified management and key employees;
● responding to competitive pressures;
● complying with regulatory requirements; and
● maintaining compliance with applicable laws.
Any additional capital raised
through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership in us and could also result
in a decrease in the market price of our common stock. The terms of those securities issued by us in future capital transactions may be
more favorable to new investors and may include preferences, superior voting rights and the issuance of warrants or other derivative securities,
which may have a further dilutive effect.
Furthermore, any debt or equity
financing that we may need may not be available on terms favorable to us, or at all.
Additionally, we may incur substantial
costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain
securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
If we are unable to obtain required
additional capital, we may have to curtail our growth plans or cut back on existing business, and we may not be able to continue operating
if we do not generate sufficient revenues from operations needed to stay in business.
Our failure to comply with the covenants or
other terms of the Loan Agreement, including as a result of events beyond our control, could result in a default under the Loan Agreement
that could materially and adversely affect the ongoing viability of our business.
On November 1, 2024, the Company
entered into a loan and security agreement (the “Loan Agreement”) for a secured loan with certain lenders including its Chief
Executive Officer and Chairman Steven Lisi and director Robert Carey. The Loan Agreement provides for a $11,500,000 loan. The loan bears
interest at a rate per annum (subject to increase during an event of default) equal to 15% of which 3% shall be payable in cash and 12%
payable in kind through June 30, 2026 and thereafter all in cash. If not earlier repaid in full, the outstanding principal amount of the
loan, together with any accrued and unpaid interest, shall be due and payable on October 4, 2034. The Company’s obligations under
the Loan Agreement are secured by substantially all of the Company’s assets.
The Loan Agreement contains affirmative
and negative covenants customary for financings of this type that, among other things, limit the ability of the Company and its subsidiaries
to incur additional debtor or pay any dividends.
The Loan Agreement also includes
events of default customary for financings of this type, in certain cases subject to customary periods to cure, following which the lenders
may accelerate all amounts outstanding under the loan. Events of default include, among other things:
● certain specified insolvency and bankruptcy-related events.
Subject to any applicable cure
period set forth in the Loan Agreement, all amounts outstanding with respect to the loan (principal and accrued interest), as well as
any other obligations and amounts owing under the Loan Agreement, would become due and payable at the option of the lenders. Our assets
or cash flow may not be sufficient to fully repay our obligations under the Loan Agreement if the obligations thereunder are accelerated
upon any events of default. Further, if we are unable to repay, refinance or restructure our obligations, the lenders could proceed to
protect and enforce their rights under the Loan Agreement by exercising such remedies (including foreclosure on the assets securing our
obligations under the Loan Agreement) as are available to the lenders and in respect thereof under applicable law, either by suit in equity
or by action at law, or both, whether for specific performance of any covenant or other agreement contained in the Loan Agreement or the
other loan documents or in aid of the exercise of any power granted in the Loan Agreement or other loan documents. The foregoing would
materially and adversely affect the ongoing viability of our business.
Our Loan Agreement contains restrictions that limit our flexibility
in operating our business.
The Loan Agreement contains various
covenants that limit our ability to engage in specified types of transactions without the prior consent of the lenders. These covenants
limit our ability to, among other things:
● create, incur or assume additional indebtedness;
The covenants in the Loan Agreement
may limit our ability to take certain actions that may be in our long-term best interests. In the event that we breach one or more covenants,
the lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement,
plus penalties and interest and foreclose on the collateral granted to them to secure the obligations under the Loan Agreement. Such repayment
could have a material adverse effect on our business, operating results and financial condition.
Risks Related to Commercialization of Our Approved
Product or Product Candidates
If the market opportunities for our approved
product or product candidates are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer.
Our projections of both the number
of people who have our target diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment
with LungFit® PH and our product candidates, are based on our beliefs and estimates. These estimates have been derived
from a variety of sources, including scientific literature, surveys of clinics, patient foundations or market research and may prove to
be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn
out to be lower than expected. The effort to identify patients with diseases we seek to treat is in early stages, and we cannot accurately
predict the number of patients for whom treatment might be possible. Additionally, the potentially addressable patient population for
LungFit® PH and each of our product candidates may be limited or may not be amenable to treatment with LungFit®
PH or our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely
affect our results of operations and our business.
The insurance coverage and reimbursement status
of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current products
could limit our ability to market those products and decrease our ability to generate revenue.
The pricing, coverage and reimbursement
of our approved product and product candidates, if approved, must be adequate to support our commercial infrastructure. Our per-patient
prices must be sufficient to recover our development and manufacturing costs and potentially achieve profitability. Accordingly, the availability
and adequacy of coverage and reimbursement by governmental and private payors are essential for most patients to be able to afford expensive
treatments such as ours, assuming certification or approval. Sales of our approved product and product candidates will depend substantially,
both domestically and abroad, on the extent to which the costs of our approved product and product candidates will be paid for by health
maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government authorities,
private health insurers and other third-party payors. If coverage and reimbursement are not available, or are available only to limited
levels, we may not be able to successfully commercialize our approved product and product candidates. Even if coverage is provided, the
approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a return on our
investment.
There is significant uncertainty
related to the insurance coverage and reimbursement of newly approved products. In the U.S., there is no uniform system among payors for
making coverage and reimbursement decisions. In addition, the process for determining whether a payor will provide coverage for a product
or service may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product or service
once coverage is approved. Payors may limit coverage to specific products or services on an approved list, or formulary, which might not
include all of the FDA-approved or -cleared products for a particular indication. In the U.S., the principal decisions about Medicare
coverage and reimbursement for new medical devices are typically made by the Centers for Medicare & Medicaid Services (“CMS”),
an agency within the U.S. Department of Health and Human Services, or Medicare contractors that process and pay claims, as CMS and/or
the contractors decide whether and to what extent a new device will be covered and reimbursed under Medicare. Private payors tend to,
but are not required to, follow the coverage and reimbursement policies established by CMS to a substantial degree. It is difficult to
predict what CMS or the Medicare contractors will decide with respect to reimbursement for products such as ours.
Outside the U.S., international
operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing
emphasis on cost-containment initiatives in the EEA, Canada and other countries has and will continue to put pressure on the pricing and
usage of our approved product or product candidates. In many countries, the prices of medical products are subject to varying price control
mechanisms as part of national health systems. In general, the prices of medical devices under such systems are substantially lower than
in the U.S. Other countries allow companies to fix their own prices for medical products, but monitor and control company profits. Additional
foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our approved product
or product candidates. Accordingly, in markets outside the U.S., the reimbursement for our products may be reduced compared with the U.S.
and may be insufficient to generate commercially reasonable revenue and profits.
Moreover, increasing efforts by
governmental and third-party payors in the U.S. and abroad to cap or reduce healthcare costs may cause such organizations to limit both
coverage and the level of reimbursement for new products approved and, as a result, they may not cover or provide adequate payment for
our approved product and product candidates. We expect to experience pricing pressures in connection with the sale of any of our approved
product and product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations
and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical
procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new
products.
Accordingly, the certification
or approval of our product and product candidates for insurance coverage and reimbursement by governmental and private payors may impact
our ability to generate revenues.
We face intense competition and rapid technological
change and the possibility that our competitors may discover, develop or commercialize therapies that are similar, more advanced or more
effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize LungFit®
PH and our product candidates.
We are working on PPHN which is
a highly competitive market. A delivery system with a generator of NO has never been commercialized anywhere in the world, and market
acceptance at an appropriate price is proving to be a somewhat difficult and lengthy process. The biotechnology, pharmaceutical and medical
device industries are highly competitive. There are many pharmaceutical companies, biotechnology companies, medical device companies,
public and private universities and research organizations actively engaged in the research and development of products that may be similar
to our approved product or our product candidates. We are aware of several companies currently developing and selling NO therapies for
various indications such as hypoxic respiratory failure (HRF). For example, Mallinckrodt commercializes INOMAX® (nitric
oxide) for inhalation, which is approved for use to treat newborns suffering from HRF-PPHN in the U.S., Canada, Australia, Mexico and
Japan. Linde Group markets a generic version of the Mallinckrodt offering with their delivery system called NOxBOX®. The
Linde Group has marketing rights to INOMAX® in Europe. Air Liquide sells a similar product in Europe, called KINOXTM,
together with their delivery platform called SoKINOXTM, for the treatment of pulmonary hypertension of the newborn. In Europe, EKU,
International Biomedical, Cahouet and ITC each have a device that delivers nitric oxide. VERO Biotech LLC received FDA approval for their
delivery system GENOSYL DS for HRF associated with PPHN in 2019 and received FDA approval for a third generation of that delivery system
in 2023. In addition, other companies may be developing inhaled NO delivery systems at various concentrations. Novan Inc. has recently
received approval for a nitric oxide-based prescription treatment called berdazimer for molluscum, a contagious skin infection. SaNOtize
has an NO nasal spray that has received approval in India, Israel, and eight other countries for preventing COVID-19 after exposure. NovLead
Biotechnology (Nanjing, China) has approval in China for a device that produces nitric oxide through a process of passing an electric
charge into an electrolyte solution and Shenzhen Respomed Medical Technology (Shenzhen, China) also has approval in China for a device
that uses electrical discharge to generate nitric oxide gas. Neither of these devices have approval outside of China. Third Pole has reported
the development of an NO generator and delivery system, but we are not aware of any display of any product at any medical/scientific conference
in recent years. Our patents surrounding LungFit® have priority date over those of Third Pole.
In addition to NO treatments currently
available or under development, we also face competition from non-NO-based drugs and therapies. For example, the successful development
of immunizations for bronchiolitis may render useless any product we develop for that indication. Also, antibiotic treatments for infections
associated with CF and other underlying lung conditions may be preferred over any product that we develop. Even if we successfully develop
our product candidates, and obtain certification or approval for them, other treatments may be preferred and we may not be successful
in commercializing our product candidates.
Some of our competitors have substantially
greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing
organizations. Additional mergers and acquisitions in the medical device, biotechnology and pharmaceutical industries may result in even
more resources being concentrated in our competitors. As a result, these companies may obtain certification or regulatory approval more
rapidly than we are able to and may be more effective in selling and marketing their products as well. Smaller or early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition
may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment
in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are more effective
or less costly than LungFit® PH or any product candidate that we may develop, or achieve earlier patent protection, certification
or regulatory approval, product commercialization and market penetration than we do. Additionally, technologies developed by our competitors
may render LungFit® PH or our potential product candidates uneconomical or obsolete, and we may not be successful in marketing
LungFit® PH or our product candidates against competitors.
We currently have a limited marketing
and sales organization. If we are unable to scale sales and marketing capabilities or enter into agreements with third parties to market
and sell LungFit® PH or our product candidates, we may be unable to generate revenue
Although some of our employees
may have sold other similar products in the past while employed at other companies, we as a company have limited experience selling and
marketing our product candidates and we currently have a nascent marketing and sales organization. To successfully commercialize LungFit®
PH or any other products that may result from our development programs, we will need to further develop these capabilities, either on
our own or with others. We continue to refine our commercialization efforts for LungFit® PH and intend to establish a more
complete sales and marketing organization with technical expertise to potentially reach all U.S. hospitals using or capable of using NO.
This will be an expensive, difficult and time-consuming endeavor. Any failure or delay in the development of our internal sales, marketing
and distribution capabilities would adversely impact the commercialization of our products.
Further, given our limited experience
in marketing and selling medical device products, our estimate of the size of the required sales force may be materially more or less
than the size of the sales force actually required to effectively commercialize LungFit® PH and our product candidates.
As such, we may be required to hire substantially more sales representatives to adequately support the commercialization of LungFit®
PH and our product candidates, or we may incur excess costs as a result of hiring more sales representatives than necessary. With respect
to certain geographical markets, we may enter into collaborations with other entities to utilize their local marketing and distribution
capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If our future collaborators do not commit
sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing capabilities on
our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing with companies that currently
have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing
and sales functions, we may be unable to compete successfully against these more established companies.
The commercial success of LungFit®
PH and any current or future product candidate will depend upon the degree of market acceptance by physicians, patients, third-party payors
and others in the medical community.
Even with approval from the FDA
and potential future certification or approvals from comparable foreign regulatory authorities, the commercial success of LungFit®
PH and our product candidates will depend in part on the medical community, patients and third-party payors accepting LungFit®
PH and our product candidates as medically useful, cost-effective and safe. Any product that we bring to the market may not gain market
acceptance by physicians, patients, third-party payors and others in the medical community. The degree of market acceptance of LungFit®
PH and any of our product candidates that become approved for commercial sale will depend, in part, on a number of factors, including:
● the clinical indications for which certification or approval is granted;
● relative convenience and ease of administration;
● familiarity of group purchasing organizations with our products;
● the cost of treatment, particularly in relation to competing treatments;
● publicity concerning our products or competing products and treatments; and
● sufficient third-party insurance coverage and reimbursement.
Even if a potential product displays
a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully
known until after it is launched. Our efforts to educate the medical community and third-party payors on the benefits of the product candidates
may require significant resources and may never be successful. If the LungFit® PH or our product candidates are approved
for commercialization but fail to achieve an adequate level of acceptance by physicians, patients, third-party payors and others in the
medical community, we will not be able to generate sufficient revenue to become or remain profitable.
If we fail to properly manage our anticipated
growth, our business could suffer.
Our rapid growth has placed, and
will continue to place, a significant strain on our management and on our operational and financial resources and systems. Failure to
manage our growth effectively could cause us to over-invest or under-invest in infrastructure, and result in losses or weaknesses in our
infrastructure, which could materially adversely affect us. Additionally, our anticipated growth will increase the demands placed on our
suppliers, resulting in an increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively
could have an adverse effect on our ability to achieve our development and commercialization goals.
Pricing pressure from our competitors and our
customers may impact our ability to sell our products at prices necessary to support our current business strategies.
The industry in which we operate
is characterized by intense competition, and the market continues to attract numerous new companies and technologies, which has encouraged
more established companies to intensify competitive pricing pressure. As a result of this increased competition, as well as the challenges
of third-party coverage and reimbursement practices, we believe there will be continued pricing pressure in the future. If competitive
forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability
to maintain our profitability and to invest in and grow our business.
Cybersecurity risks and the failure to maintain
the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions
could result in harm to our business and/or subject us to costs, fines or lawsuits.
We rely on sophisticated information
technology systems and network infrastructure to operate and manage our business. We also maintain personally identifiable information
(“PII”) about our employees, and given the nature of our business, we have access to protected health information (“PHI”).
Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks,
Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal
personnel, suppliers or customers through the Internet is interrupted or compromised, our business could suffer.
The integrity and protection of
our customer, personnel, financial, research and development, and other confidential data is critical to our business, and our customers
and employees have a high expectation that we will adequately protect their personal information. The regulatory environment governing
information, security and privacy laws is increasingly demanding and continues to evolve and a number of states have adopted laws and
regulations that may affect our privacy and data security practices regarding the use, disclosure and protection of PII. For example,
the California Consumer Privacy Act (“the CCPA”), among other things, creates individual privacy rights and imposes increased
obligations on companies handling PII.
Although our computer and communications
hardware are protected through physical and software safeguards, they are still vulnerable to system malfunction, computer viruses, malware
and ransomware, and other cybersecurity threats such as phishing and social engineering attacks. These events could lead to the unauthorized
access of our information technology systems and result in financial loss and the misappropriation or unauthorized disclosure of confidential
information belonging to us, our employees, partners, customers, or suppliers. The techniques used by criminal elements to attack computer
systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may
not be able to address these techniques proactively or implement adequate preventative measures. If our information technology systems
are compromised, we could be subject to fines, damages, litigation and enforcement actions, incur financial losses, suffer reputational
damage, and lose trade secrets or other confidential information, each of which could significantly harm our business.
Healthcare legislative or regulatory reform
measures, including government restrictions on pricing and reimbursement, may have a negative impact on our business and results of operations.
In the U.S., there have been and
continue to be a number of legislative and regulatory changes and proposed changes to contain healthcare costs. For example, in March
2010, the Patient Protection and Affordable Care Act (“ACA”) was enacted, which, among other things, substantially changes
the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. medical device industry.
Some of the provisions of the ACA have been subject to judicial challenges as well as efforts to modify them or alter their interpretation
or implementation. For example, the Tax Cuts and Jobs Act of 2017 (“Tax Act”), includes a provision that eliminated the tax-based
shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part
of a year, commonly referred to as the “individual mandate,” effective January 1, 2019. It is unclear how efforts to modify
or invalidate the ACA or its implementing regulations, or portions thereof, will affect our business. Additional legislative changes,
regulatory changes and judicial challenges related to the ACA remain possible. We cannot predict what effect further changes related to
the ACA would have on our business.
We cannot be sure whether additional
legislative changes will be enacted, or whether government regulations, guidance or interpretations will be changed, or what the impact
of such changes would be on the certification or marketing approvals, sales, pricing, or reimbursement of our approved product or product
candidates, if any, may be. We expect that any such healthcare reform measures that may be adopted in the future, may result in more rigorous
coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement
from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost
containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize
our approved product or product candidates.
Moreover, in order to obtain reimbursement
for our products in some EEA countries, including some EU Member States, we may be required to compile additional data comparing the cost-effectiveness
of our products to other available therapies. Health Technology Assessment (“HTA”) of both medicinal products and medical
devices is becoming an increasingly common part of the pricing and reimbursement procedures in some EU Member States, including those
representing the larger markets. The HTA process, which is currently governed by national laws in each EU Member State, is the procedure
to assess therapeutic, economic and societal impact of a given medical product in the national healthcare systems of the individual country.
The outcome of an HTA will often influence the pricing and reimbursement status granted to these medical products by the competent authorities
of the respective EU Member State. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medical
product currently varies between EU Member States. On December 13, 2021, the EU adopted a new HTA Regulation which entered into force
on January 11, 2022 and will become applicable to all EU Member States from January 12, 2025. The new EU HTA regulation aims to harmonize
the clinical benefit assessment of HTA across the EU and provides the basis for permanent and sustainable cooperation at the EU level
for joint clinical assessments in these areas.
We are subject to additional federal and state
laws and regulations relating to our business, and our failure to comply with those laws could have a material adverse effect on our results
of operations and financial conditions.
We are subject to additional health
care regulation and enforcement by the federal government and the states in which we conduct our business. Of note, regulations that may
relate to our operations include the following:
Efforts to ensure that our business
arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Because of
the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business
activities could be subject to challenge under one or more of such laws. The scope and enforcement of these laws is uncertain and subject
to change in the current environment of health care reform. We cannot predict the impact on our business of any changes in these laws.
Federal or state regulatory authorities may challenge our current or future activities under these laws. Any such challenge, even if we
are able to successfully defend against it, could have a material adverse effect on our reputation, business, results of operations, and
financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming. If our
operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we
may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health
care programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations, any of which could
adversely affect our ability to operate our business and our results of operations.
If we fail to comply with
applicable privacy, data protection and data security laws and regulations, we could face substantial penalties, liability and adverse
publicity and our business, operations and financial condition could be adversely affected.
We are subject to various laws
and regulations globally regarding privacy and data protection, including laws and regulations relating to the collection, storage, handling,
use, disclosure, transfer and security of personal data. The restrictions under applicable privacy, data protection and data security
laws and regulations that may affect our ability to operate include but are not limited to:
These privacy and data security
laws and regulations could increase our cost of doing business, and failure to comply with these laws and regulations could result in
government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity and could
materially and negatively affect our operating results and business. Although a thorough privacy compliance program could mitigate the
risk of investigation and prosecution for violations of these laws and regulations, the risks cannot be entirely eliminated. Any action
against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant
legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance
with applicable federal, state, and foreign privacy and data security laws and regulations may prove costly.
If we or our suppliers fail to comply with ongoing
FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could
be subject to restrictions or withdrawal from the market.
Any product for which we obtain
FDA certification, clearance or approval, and the manufacturing processes, post-market surveillance, post-certification/approval clinical
data and promotional activities for such product, remain subject to continued regulatory review, oversight, requirements, and periodic
inspections by the FDA and other domestic and foreign regulatory authorities and notified bodies. For such products, we must also comply
with equivalent standards in non-U.S. countries should we choose to engage in comparable activity in those jurisdictions. These obligations
extend to our third-party suppliers as well.
In particular, we and our suppliers
are required to comply with the FDA’s QSR in the U.S. and other regulations enforced outside the United States which cover the manufacture
of our products and the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging,
storage and shipping of medical devices. Regulatory authorities, such as the FDA, and notified bodies enforce the QSR in the U.S. and
other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations
administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues,
could result in, among other things, any of the following enforcement actions:
● unanticipated expenditures to address or defend such actions;
● customer notifications for repair, replacement, refunds;
● recall, detention or seizure of our products;
● operating restrictions or partial suspension or total shutdown of production;
● operating restrictions;
● refusal to grant export approval for our products; or
● criminal prosecution.
If any of these actions were to
occur, it would harm our reputation and cause our product sales and profitability to suffer and may prevent us from generating revenue.
Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements
which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
In addition, we are required to
conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our approved products, and we must comply
with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later
discovery of previously unknown problems with such products, including unanticipated adverse events or adverse events of unanticipated
severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to
labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory
recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of
certification or regulatory approval, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely
affect our business, operating results and prospects.
Moreover, we may be required to
conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products in the EEA. We must comply
with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later
discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated
severity or frequency, manufacturing problems, or failure to comply with regulatory requirements may result in changes to labeling, restrictions
on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement
to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of certification, regulatory
clearances or approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our
business, operating results and prospects.
Our products may cause or contribute to adverse
medical events or be subject to failures or malfunctions that we are required to report to the FDA or comparable foreign regulatory authorities,
and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of
operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction
of the FDA or comparable foreign regulatory authorities, could have a negative impact on us.
As a commercial-stage company,
we are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to
the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed
to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death
or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the
nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to
recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it
is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations,
the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil
monetary penalties, revocation of our device clearance or approval, seizure of our products or delay in clearance or approval of future
products.
The FDA and comparable foreign
regulatory authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects
in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to
require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death.
We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us
could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design
deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors
may occur in the future.
Depending on the corrective action
we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new clearances
or approvals for the device before we may market or distribute the corrected device. Seeking such clearances or approvals may delay our
ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices,
we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties
or civil or criminal fines.
Companies are required to maintain
certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections
for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations,
it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could
harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective
action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital,
will distract management from operating our business and may harm our reputation and financial results.
All manufacturers placing medical
devices on the market in the EEA are legally bound to report to the relevant competent authorities (a) any serious incident involving
devices made available on the EEA market, except expected side-effects which are clearly documented in the product information and quantified
in the technical documentation and are subject to trend reporting, and (b) any field safety corrective action in respect of devices made
available on the EEA market, including any field safety corrective action undertaken in a third country in relation to a device which
is also legally made available on the EEA market, if the reason for the field safety corrective action is not limited to the device made
available in the third country. Reports should be submitted through the electronic system set up and managed by the European Commission
in collaboration with EEA countries. Reports of serious incidents will be automatically transmitted to the competent authority of the
EEA country in which the incident occurred and reports on field safety corrections actions will be automatically transmitted to the competent
authority of the EEA country in which the field safety corrective action is being or is to be undertaken and the EEA country in which
the manufacturer has its registered place of business.
Under the EU MDR, a “serious
incident” means any incident that directly or indirectly led, might have led or might lead to any of the following: (a) the death
of a patient, user or other person; (b) the temporary or permanent serious deterioration of a patient’s, user’s or other person’s
state of health; or (c) a serious public health threat. A “field safety corrective action” means corrective action taken by
a manufacturer for technical or medical reasons to prevent or reduce the risk of a serious incident in relation to a device made available
on the market.
Malfunction of our products could
result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such
as inspection or enforcement actions. If malfunctions do occur, we may be unable to correct the malfunctions adequately or prevent further
malfunctions, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and
redesign the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the
affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract
management from operating our business, and may harm our reputation and financial results.
Our approved product or product candidates may
in the future be subject to product recalls that could harm our reputation, business and financial results.
Medical devices can experience
performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing
errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary
recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications
of recalls be reported to the FDA within 10 working days after the recall is initiated. Comparable foreign regulatory authorities impose
similar deadlines. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or to comparable
foreign regulatory authorities. We may initiate voluntary recalls involving our products in the future that we determine do not require
notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. Product
recalls may divert management attention and financial resources, expose us to product liability or other claims, harm our reputation with
customers and adversely impact our business, financial condition and results of operations.
We may be subject to regulatory or enforcement
actions if we engage in improper marketing or promotion of our approved product or product candidates.
Our educational and promotional
activities and training methods must comply with FDA and other applicable laws, including the prohibition of the promotion of a medical
device for a use that has not been cleared or approved by the FDA. Use of a device outside of its cleared or approved indications is known
as “off-label” use. Physicians may use our products off-label in their professional medical judgment, as the FDA does not
restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our
educational and promotional activities or training constitutes promotion of an off-label use, it could request that we modify our training
or promotional materials or subject us to regulatory or enforcement actions, including the issuance of warning letters, untitled letters,
fines, penalties, injunctions, or seizures, any of which could have an adverse impact on our reputation and financial results.
It is also possible that other
federal, state or comparable foreign regulatory authorities might take action if they consider our educational and promotional activities
or training methods to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory
authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged, and adoption of
the products could be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our
products, the FDA or comparable foreign regulatory authorities could disagree and conclude that we have engaged in off-label promotion.
It is also possible that other federal, state or comparable foreign regulatory authorities might take action, including, but not limited
to, through a whistleblower action under the FCA, if they consider our business activities constitute promotion of an off-label use, which
could result in significant penalties, including, but not limited to, criminal, civil or administrative penalties, treble damages, fines,
disgorgement, exclusion from participation in government healthcare programs, reporting requirements and compliance oversight if we become
subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment
or restructuring of our operations. In addition, the off-label use of our products may increase the risk of product liability claims.
Product liability claims are expensive to defend and could divert our management’s attention, result in substantial damage awards
against us, and harm our reputation.
The advertising and promotion
of our products in the EEA is subject to EEA countries’ national laws implementing Directive 2006/114/EC concerning misleading and
comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other national legislation of individual
EEA country governing the advertising and promotion of medical devices. EEA country legislation may also restrict or impose limitations
on our ability to advertise our products directly to the general public. In addition, voluntary EU and national Codes of Conduct provide
guidelines on the advertising and promotion of our products to the general public and may impose limitations on our promotional activities
with healthcare professionals.
We face extensive, ongoing regulatory requirements
and review, and our products may face future development and regulatory difficulties.
The holder of an approved PMA,
de novo authorization, or cleared 510(k) is subject to obligations to monitor and report adverse events and instances of the failure of
a product to meet the specifications in the marketing application. Application holders must submit new or supplemental applications and
obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. Legal requirements have also
been enacted to require disclosure of clinical trial results on publicly available databases.
In addition, manufacturers of
FDA regulated products and their facilities are subject to continual review and periodic inspections by the FDA and comparable foreign
regulatory authorities for compliance with the FDA’s QSR and, as applicable, cGMP regulations. Our relationships with healthcare
providers, physicians and third-party payors must comply with FDA laws and regulations, the AKS, the FCA, HIPAA, various transparency
laws, and similar state and foreign laws. If products are made available to authorized users of the Federal Supply Schedule of the General
Services Administration and to low-income patients of certain hospitals, additional laws and requirements apply. Our activities are also
potentially subject to federal and state consumer protection and unfair competition laws. If we or our third-party collaborators fail
to comply with applicable regulatory requirements, a regulatory authority may take any of the following actions:
● conduct an investigation into our practices and any alleged violation of law;
● seek an injunction or impose civil or criminal penalties or monetary fines;
● suspend or withdraw certification or regulatory approval;
● require that we suspend or terminate any ongoing clinical trials;
The occurrence of any of the foregoing
events or penalties may force us to expend significant amounts of time and money and may significantly inhibit our ability to bring to
market or continue to market our products and generate revenue. Similar regulations apply in foreign jurisdictions.
Risks Related to the Discovery and Development
of Our Product Candidates
We are heavily dependent on the success of our
product candidates, which are in various stages of clinical development. We cannot give any assurance that any of our product candidates
will receive certification or regulatory approval, which is necessary before they can be commercialized.
To date,
we have invested substantially all of our efforts and financial resources to design and develop our product candidates, including conducting
clinical trials and providing general and administrative support for these operations. Our future success is dependent on our ability
to successfully develop, obtain regulatory certification or approval for, and then successfully commercialize one or more product candidates.
Several
of our product candidates are in the early stages of development and will require additional clinical development (and in some cases additional
preclinical development), management of nonclinical, clinical and manufacturing activities, certification or regulatory approval, obtaining
adequate manufacturing supply, building of a commercial organization and significant marketing efforts before we generate any revenue
from product sales. To date, we have conducted 3 pilot clinical trials involving 198 patients with bronchiolitis (mainly caused by RSV)
and a pilot clinical trial in nine patients with CF. In addition, Rambam healthcare campus in Israel conducted a compassionate treatment
for two patients with CF who suffer from NTM infections (specifically M. abscessus). Additionally, two pilot clinical trials were completed
in 2022, one in viral pneumonia and one in NTM lung infection. Both of these studies were using our LungFit® system (PRO and GO, respectively).
Although the results of these trials demonstrated improvements in various endpoints and clinical outcomes which we believe support our
efforts towards obtaining FDA approval, these trials were small and conducted outside the US, so it is unlikely that the FDA will view
them as significant because of their size and scope. Therefore, we intend to conduct larger clinical trials aiming for statistically and
clinically significant favorable results, or we will not be able to obtain certification or regulatory approval to market such product
candidates. It may be some time before a pivotal trial is initiated, if at all, for such product candidates. Before a medical device clinical
trial can be undertaken in the U.S., the sponsor of the trial must submit an IDE application for a medical device and the FDA must permit
the trial to go forward. We cannot assure that we will obtain such agency acquiescence in a timely manner, or at all. In addition to our
respiratory program using the LungFit® device, we have programs in Cancer and Autism which require significant further development
before submission to the FDA.
Although
we received approval of LungFit® PH from the FDA, we can make no assurances as to what any other comparable foreign regulatory
authorities and notified bodies where we are seeking certification or regulatory approval will do. We are expending significant resources
to commercialize LungFit® PH in the U.S. and we can make no assurances that our efforts will be successful. We cannot be
certain that any of our product candidates will be successful in clinical trials or receive certification or regulatory approval. Further,
our product candidates may not receive certification or regulatory approval even if they are successful in clinical trials. If we do not
receive certification or regulatory approvals for our other product candidates, we may not be able to continue our operations.
We generally
plan to seek certification or regulatory approval to commercialize our approved product and product candidates in the U.S., the EU and
in additional foreign countries, as applicable. To obtain certification or regulatory approvals we must comply with the numerous and varying
regulatory requirements of such countries regarding safety, efficacy, chemistry, manufacturing and controls, clinical trials, commercial
sales, pricing and distribution of our approved product and product candidates. Even if we are successful in obtaining marketing certification
or regulatory approval in one jurisdiction, we cannot ensure that we will obtain certification or regulatory approval in any other jurisdictions.
If we are unable to obtain certification, clearance or approval for our product candidates in multiple jurisdictions, our revenue and
results of operations would be negatively affected.
Some
of our product candidates may be considered a drug/device combination and the process for obtaining regulatory approval in the U.S. on
our product candidates will require compliance with complex procedures because concordance between two centers of the FDA (CDRH and CDER)
is necessary for approval of this combination product. A change in the FDA’s prior determination that CDRH would lead the review
of a marketing application for our product candidates would adversely impact our development timeline and significantly raise our costs
to complete clinical development and obtain regulatory approvals.
The success of our business may also depend
upon our ability to identify, license or discover additional product candidates.
Although a substantial amount
of our effort will focus on the continued clinical testing, potential certification, regulatory approval and commercialization of LungFit®
PH and our existing product candidates, the success of our business may also depend upon our ability to identify, license or discover
additional product candidates. Our research programs or licensing efforts may fail to yield additional product candidates for clinical
development for a number of reasons, including but not limited to the following:
● our product candidates may not succeed in preclinical or clinical testing;
If any of these events occur,
we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify, license or discover
additional product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations.
Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts
and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
The certification or regulatory approval processes
of the FDA and comparable foreign regulatory authorities and notified bodies are lengthy, time-consuming and inherently unpredictable.
If we are ultimately unable to obtain certification or regulatory approval for our product candidates, our business will be substantially
harmed.