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Item 1A. Risk Factors

2021-03-01 compared with 2020-03-16 · 259 added, 135 removed, 621 unchanged (39% of the section changed)

Risk Factors.

In conducting our business, we face many risks that may interfere with our business objectives.

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In any such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risk Factor Summary

The following is a summary of certain important factors that may make an investment in our company speculative or risky.

You should carefully consider the fuller risk factor disclosure set forth in this Annual Report, in addition to the other information herein, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.

We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We have never generated any revenue from product sales, have generated only limited revenue since inception, and may never be profitable.

The recent coronavirus outbreak has caused interruptions or delays of our business plan and may have a significant adverse effect on our business.

We may need to seek and secure significant funding through financings or from other sources to complete Phase 3 studies of ARCT-021, our LUNAR-COV19 vaccine candidate.

If we are unable to generate successful results in our Phase 2 clinical trial for ARCT-021, our LUNAR-COV19 vaccine candidate, or experience significant delays in doing so, or are unable to develop a vaccine that does not require a booster shot, we may be unable to market and sell a COVID-19 vaccine.

There is significant competition in the development of a vaccine against COVID-19, and many of our competitors have substantially greater financial, scientific and other resources than us.

We are relying on advance purchase commitments of ARCT-021, our LUNAR-COV19 vaccine candidate, from certain foreign governmental agencies.

Our ability to produce a successful vaccine may be curtailed by one or more government actions or interventions, which may be more likely during a global health crisis such as COVID-19.

Our business may be harmed if we are unable to generate successful and timely clinical trials for our product candidates.

The approach we are taking to discover and develop drugs is novel and may never lead to marketable products.

We may not be successful in our efforts to identify or discover potential product candidates.

We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates if our clinical trials are not successful.

We may find it difficult to identify and enroll patients in our clinical studies due to the rollout of competing vaccines for COVID-19.

In addition, the rollout of competing vaccines for COVID-19 may make it more difficult for us to achieve approval of certain clinical trial designs for our LUNAR-COV19 vaccine.

Difficulty in enrolling patients, or in seeking approval for certain clinical trial designs could delay or prevent clinical studies of certain of our product candidates.

Any of our product candidates may cause undesirable side effects or have other properties impacting safety that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Even if we complete the necessary preclinical studies and clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize a product candidate.

Even if we obtain regulatory approval for a product candidate, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

We may fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success than a particular program where we allocate resources.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

If certain third-party alliances are unsuccessful or are terminated, we may be unable to commercialize certain product candidates and we may be unable to generate revenues from our development programs.

Certain agreements with our alliance partners may impair or prevent entirely our ability to generate revenues from the development, manufacture and commercialization of certain product candidates.

We rely on third-party manufacturers to produce the supply of our product candidates, and we intend to rely on third parties to produce future clinical supplies of product candidates.

We rely on limited sources of supply for the drug substance of product candidates and any disruption in the chain of supply may cause a delay in developing and commercializing these product candidates.

Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.

If we are unable to obtain or protect intellectual property rights related to our future products and product candidates, we may not be able to compete effectively in our markets.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

We could lose license rights that are important to our business for failure to comply with such agreements under which we license intellectual property.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensees, which could be expensive, time consuming and unsuccessful.

If our alliance partners are unable or unwilling to perform in accordance with the terms of our agreements, our potential to generate future revenue from these programs would be significantly reduced

If we are unable to obtain regulatory approvals for a manufacturing facility for ARCT-021, our LUNAR-COV19 vaccine candidate, we may experience delays in product development, clinical trials, regulatory approval and commercial distribution.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The commercial success of our product candidates will depend upon the acceptance of these product candidates by the medical community, including physicians, patients and healthcare payors.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenues.

If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

Coverage and adequate reimbursement may not be available for our product candidates, if approved.

We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs.

RISKS RELATED TO OUR FINANCIAL CONDITION AND NEED FOR ADDITIONAL CAPITAL

We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a preclinical nucleic acid medicines company with a limited operating history.

Since inception, our operations have been primarily limited to acquiring and licensing intellectual property rights, developing our nucleic acid product platform, undertaking basic research around nucleic acid targets and conducting preclinical studies for our initial programs.

We are a global clinical-stage messenger RNA medicines company with a limited operating history.

We have not yet obtained regulatory approval for any product candidates.

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As of December 31, 2020, we had an accumulated deficit of $143.8 million.

We have devoted most of our financial resources to research and development, including our preclinical development activities.

We have devoted most of our financial resources to research and development, including our preclinical and clinical development activities.

To date, we have funded our operations primarily through upfront payments, research funding and milestone payments from strategic alliances and collaborations, and through the sale of equity and convertible securities.

We expect to continue to incur substantial and increased expenses, losses and negative cash flows as we expand our development activities and advance our preclinical programs.

We expect to continue to incur substantial and increased expenses, losses and negative cash flows as we expand our development activities and advance our programs.

If our product candidates are not successfully developed or commercialized, including because of a lack of capital, or if we do not generate enough revenue following marketing approval, we will not achieve profitability and our business may fail.

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We anticipate that our expenses will increase substantially if and as we:

continue our research and preclinical development of our product candidates, both independently and under our strategic alliance agreements;

continue our research and development of our product candidates, both independently and under our strategic alliance agreements;

seek to identify additional targets and product candidates;

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create additional infrastructure to support our operations and our product development and planned future commercialization efforts.

Our auditor’s report includes a going concern paragraph.

Our auditor’s report on our financial statements for the year ended December 31, 2019 notes that based on our expected operating losses and negative cash flows, there is substantial doubt about our ability to continue as a going concern for a period of time in excess of twelve months after the date of this filing.

Our products that are being developed have not generated significant revenue.

As a result, we have suffered recurring losses and require significant cash resources to execute our business plans.

These losses are expected to continue for an extended period of time.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within one year after the date the financial statements are issued.

Historically, the major source of our cash has been from proceeds from various public and private offerings of common stock, debt issuances and through collaboration agreements .

Management’s plans to mitigate an expected shortfall of capital and to support future operations, include raising additional funds.

The actual amount of cash that it will need to operate is subject to many factors.

We also recognize that we will need to raise additional capital in order to continue to execute our business plan in the future.

There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us or that we will become profitable and generate positive operating cash flow.

If we are unable to raise sufficient additional funds, we will have to scale back our operations.

We have never generated any revenue from product sales, have generated only limited revenue since inception, and may never be profitable.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic alliance partners, to successfully complete the development of, obtain the necessary regulatory approvals for and commercialize our product candidates.

We do not anticipate generating revenues from sales of our products for the foreseeable future, if ever.

Our ability to generate future revenues from product sales depends heavily on our success in:

completing our research and preclinical development of product candidates;

Our ability to generate revenues from product sales depends heavily on our success in:

completing our research and development of product candidates;

initiating and completing clinical trials for product candidates with favorable results;

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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of increased expenses and when we will be able to achieve or maintain profitability, if ever.

In addition, our expenses could increase beyond expectations if we are required by th e FDA, or other foreign regulatory agencies to perform studies and trials in addition to those that we currently anticipate.

Even if one or more of the product candidates that we independently develop is approved for commercial sale, we anticipate inc urring significant costs associated with commercializing any approv ed product.

Even if we are able to generate revenues from the sale of any approv ed products, we may not become profitable and may need to obtain additional funding to continue operations.

In addition, our expenses could increase beyond expectations if we are required by the FDA, or other foreign regulatory agencies to perform studies and trials in addition to those that we currently anticipate.

Even if one or more of the product candidates that we independently develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product.

Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

The recent coronavirus outbreak has caused interruptions or delays of our business plan and may have a significant adverse effect on our business.

In December 2019, a strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China, and on March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic.

In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, quarantines, and other public health safety measures.

The extent to which the pandemic may impact our business will depend on future developments, which are highly uncertain and cannot be predicted, but the development of clinical supply materials have been and will continue to be delayed and enrollment of patients in our study for ARCT-810 (LUNAR-OTC) and ARCT-021 (LUNAR-COV19 Vaccine) may be delayed or suspended, as hospitals and clinics in areas where we are conducting trials shift resources to cope with the COVID-19 pandemic and may limit access or close clinical facilities due to the COVID-19 pandemic.

Additionally, if our trial participants are unable to travel to our clinical study sites as a result of quarantines or other restrictions resulting from the COVID-19 pandemic, we may experience higher drop-out rates or delays in our clinical studies.

Government-imposed quarantines and restrictions may also require us to temporarily suspend or terminate activity at our clinical sites.

Furthermore, if we determine that our trial participants may suffer from exposure to COVID-19 as a result of their participation in our clinical trials, we may voluntarily terminate certain clinical sites as a safety measure until we reasonably believe that the likelihood of exposure has subsided.

As a result, our expected development timelines for our product candidates may be negatively impacted.

We cannot predict the ultimate continued impact of the COVID-19 pandemic as consequences of such an event are highly uncertain and subject to change.

We do not yet know the full extent of potential delays or impacts on our business, our clinical studies or as a whole;

however, the COVID-19 outbreak may materially disrupt or delay our business operations, further divert the attention and efforts of the medical community to coping with COVID-19, disrupt the marketplace in which we operate, and/or have a material adverse effect on our operations.

Notwithstanding the ongoing rollout of vaccines, it will still take a substantial amount of time to produce, distribute and administer the vaccines worldwide and, as a result, to achieve broad protection of the global population.

It is also still unclear if the vaccines will enable adequate protection, as (i) some vaccinated individuals

may still become ill or transmit the virus, (ii) there are individuals who may refuse to be vaccinated or who cannot be vaccinated due to pre-existing conditions, (iii) it is unclear how long the vaccine protection will last, and (iv) genetic mutations of the virus may have an impact on the efficacy of available vaccines.

Moreover, the various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus has had and may continue to have an adverse effect on the global markets and global economy generally, including on the availability and pricing of employees, resources, materials, manufacturing and delivery efforts and other aspects of the global economy.

There have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19.

Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on the global economy as a whole.

It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels.

The COVID-19 pandemic could materially disrupt our business and operations, interrupt our sources of supply, hamper our ability to raise additional funds or sell our securities, or continue to slow down the overall economy.

We expect that we will need to raise additional capital, which may not be available on acceptable terms, or at all.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive.

Developing pharmaceutical products, including conducting studies and clinical trials, is expensive.

We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our product candidates towards or through clinical trials.

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We cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate.

For example, our preclinical trials may encounter technical or other difficulties.

For example, our trials may encounter technical or other difficulties.

Additionally, our strategic alliance partners may not elect to pursue the development and commercialization of any of our product candidates that are subject to their respective strategic alliance agreements with us.

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In any event, we will require additional capital to obtain regulatory approval for, and to commercialize, future product candidates.

A significant portion of our current cash balance of $462.9 million along with the $46.6 million from the Singapore Loan is expected to be utilized during fiscal year 2021 to fund (i) the Phase 2 trial and anticipated Phase 3 trial of our current LUNAR-COV19 vaccine candidate, (ii) the continued Phase 1 trial and anticipated Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (iii) advancing our new LUNAR-FLU program toward submission of an IND, and (iv) other programs and administrative costs.

The Phase 3 trial of our LUNAR-COV19 vaccine candidate is expected to be primarily or exclusively funded through our cash reserves.

If we achieve EUA approval to market our LUNAR-COV19 vaccine candidate, we will need to raise additional funds through equity transactions, additional debt or prepayments from potential customers, among other options, to fund commercialization of LUNAR-COV19.

Any additional fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates.

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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

We are exposed to interest rate risk, including under our existing loan agreements with our lender.

We will need to seek and secure significant funding through financings or from other sources to complete Phase 3 studies of ARCT-021, our LUNAR-COV19 vaccine candidate.

As of December 31, 2020, we had approximately $463.0 million in cash and cash equivalents.

We expect that our existing cash and cash equivalents will be sufficient to fund our current operations through at least the next twelve months.

If we have encouraging results from our current trial, we will need to seek additional funds sooner than planned, through public or private equity or debt financings, structured financings, government or other third-party funding, sales of assets, marketing and distribution arrangements, other collaborations and licensing arrangements, or a combination of these approaches.

We will require additional capital to obtain regulatory approval for, and to commercialize ARCT-021.

We are exposed to interest rate risk, including under our loan agreements.

We are exposed to market risk from changes in interest rates.

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If we were to experience a 10% adverse change in the prime rate referenced above, the annual effect such change would have on our statement of operations, based on the amount we had outstanding as of December 31, 2020, under the Western Loan Agreement, would be approximately $26,000.

Additionally, on November 7, 2020, we entered into a Manufacturing Support Agreement with the EDB.

Pursuant to the Manufacturing Support Agreement, the EDB agreed to make a term loan of up to S$62.1 million , subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (the “Singapore Loan ”).

The Singapore Loan accrues interest at a rate of 4% per annum calculated on a daily basis.

We elected to borrow the full amount available under the Support Agreement of S$62.1 million, or $46.6 million, as a result of applicable exchange rates, on January 29, 2021.

Our indebtedness could materially and adversely affect our business, financial condition and results of operations.

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Our debt contains customary default clauses, a breach of which may result in acceleration of the repayment of some or all of this debt.

The Western Loan Agreement contains customary default clauses as well as covenants which include our (i) nomination of a clinical candidate, which we are in compliance with, and (ii) acceptance of an IND application by the FDA.

The Western Loan Agreement contains customary default clauses.

In the event we were to default on our obligations under our debt and were unable to cure or obtain a waiver of such default, the repayment of our debt may be accelerated.

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RISKS RELATED TO THE DISCOVERY AND DEVELOPMENT OF PRODUCT CANDIDATES

We recently commenced a Phase 2 clinical trial for our COVID-19 vaccine candidate, ARCT-021.

If we are unable to generate successful results, experience significant delays in doing so, or are unable to develop a vaccine that does not require a booster shot, we may be unable to market and sell a COVID-19 vaccine.

We recently commenced a Phase 2 trial of ARCT-021 and expect to commence a Phase 3 trial in the second quarter of 2021.

We anticipate that the Phase 3 trial will continue through 2021, and we plan to continue to monitor subjects in the Phase 3 trial into 2022 (whether or not we receive emergency use authorization for ARCT-021 during 2021).

We will need to identify additional funding sources to continue the Phase 3 trial.

The data received to date, although providing sufficient information to allow us to proceed further is not complete enough to provide conclusive evidence with respect to safety and potential efficacy of ARCT-021.

Our IND application to proceed with our Phase 2 clinical study was accepted by the HSA in December 2020, and by the FDA in January 2021.

We are positioned to manufacture finished doses of ARCT-021 in the first quarter of 2021 for stockpiling purposes.

Clinical trial results are inherently uncertain, and a significant portion of our success and business prospects depend on the progress of this program.

Our failure to demonstrate safety or obtain positive clinical trial results, inability to meet the expected timeline for release of data for this trial, or failure to successfully develop a single-dose vaccine that does not require a booster shot could have an adverse effect on our business operations and financial condition.

Furthermore, we will not have a detailed understanding of the efficacy of ARCT-021 until infection of a sufficient number of subjects in the placebo group of a Phase 3 clinical trial, enrollment for which may be delayed by rollout of competing vaccines for COVID-19, competing clinical trials and the refusal of certain countries’ regulatory authorities to allow placebo-controlled trials for COVID-19 vaccine candidates.

If our data is not positive or inconclusive, we may not be able to continue our studies or identify additional funding to continue the studies.

No assurance can be given that the results of the trials will produce adequate results to allow us to commence or continue expected trials or that that adequate efficacy will be demonstrated such that ARCT-021 will be a viable commercial product.

There is significant competition in the development of a vaccine against COVID-19, and many of our competitors have substantially greater financial, scientific and other resources than us, and are further along in the development of their COVID-19 vaccine candidates.

A large number of vaccine manufacturers, academic institutions and other organizations currently have programs to develop COVID-19 vaccine candidates and may be further along in development of their vaccine candidates.

While we are not aware of all of our competitors’ efforts, there are reports that Johnson & Johnson/Janssen, Pfizer, GlaxoSmithKline, Moderna, Sanofi, Inovio, AstraZeneca and many other companies are all in various stages of developing vaccine candidates against COVID-19.

In particular, Pfizer, Moderna and Johnson & Johnson have received emergency use authorization from the FDA for their COVID-19 vaccines and are already commercializing them and have vaccinated millions of people.

Despite funding provided to us to date, many of our competitors pursuing vaccine candidates have significantly greater product candidate development, manufacturing and marketing resources than we do.

Larger pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for their products, and may have the resources to heavily invest to accelerate discovery and development of their vaccine candidates.

Our business could be materially and adversely affected by our competitors commercialization of their vaccines before we complete development and seek approval for our vaccine candidate;

if they develop and commercialize one or more COVID-19 vaccines that are safer, more effective, have fewer or less severe side effects, have broader market acceptance, are more convenient or are less expensive than any vaccine candidate that we may develop;

or if we are unable to achieve a competitive advantage by successfully developing a single-dose vaccine that does not require a booster shot.

Furthermore, if any competitors are successful in producing a more efficacious vaccine or other treatment for COVID-19, or if any competitors are able to manufacture and distribute any such vaccines or treatments with greater efficiency, there may be a diversion of potential governmental and other funding away from us and toward such other parties.

We are relying on advance purchase commitments of ARCT-021, our LUNAR-COV19 vaccine candidate , from certain foreign governmental agencies.

Although we have previously raised capital to support the development and manufacture of our LUNAR-COV19 vaccine, we must also secure additional funding through contractual arrangements with third parties.

We may be unable to enter into such arrangements on favorable terms, or at all, which would adversely affect our ability to develop, manufacture and distribute a potential vaccine.

Our ability to produce a successful vaccine may be curtailed by one or more government actions or interventions, which may be more likely during a global health crisis such as COVID-19.

Given the significant global impact of the COVID-19 pandemic, it is possible that one or more government entities may take actions that directly or indirectly have the effect of diminishing some of our rights or opportunities with respect to LUNAR-COV19 and the economic value of a COVID-19 vaccine to us could be limited.

In the United States, the Defense Production Act of 1950, as amended (the “Defense Production Act”) gives the U.S.

government rights and authorities that may directly or indirectly diminish our own rights or opportunities with respect to LUNAR-COV19 and the economic value of a COVID-19 vaccine to us could be limited.

Our third-party service providers may be impacted by government entities potentially invoking the Defense Production Act or other potential restrictions to all or a portion of services they might otherwise offer.

Government entities imposing restrictions or limitations on our third-party service providers may require us to obtain alternative service sources for LUNAR-COV19.

If we are unable to timely enter into alternative arrangements, or if such alternative arrangements are not available on satisfactory terms, we will experience delays in the development or production of LUNAR-COV19, increased expenses, and delays in potential distribution or commercialization of LUNAR-COV19, if approved.

Preclinical and clinical studies of our product candidates may not be successful.

If we are unable to generate successful results from preclinical and clinical studies of our product candidates, or experience significant delays in doing so, our business may be materially harmed.

We have no products approved for commercial marketing and all of our product candidates are in preclinical development.

Specifically, none of our product candidates have ever been tested in a human subject.

We have no products approved for commercial marketing and all of our product candidates are in preclinical or clinical development.

Other than our LUNAR-COV19 vaccine candidate and LUNAR-OTC, none of our product candidates have ever been tested in a human subject.

Our ability to achieve and sustain profitability depends on obtaining regulatory approvals for and, if approved, successfully commercializing our product candidates, either alone or with third parties.

Before obtaining regulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy of our product candidates.

Before obtaining regulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy of our product candidates.

The success of our product candidates will depend on several factors, including the following:

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successfully commercializing our products, if approved, including successfully establishing a sales force, marketing and distribution infrastructure, whether alone or in collaboration with others.

If we do not achieve one or more of these factors in a timely manner or at all, we coul d experience significant delays or an inability to successfully complete the development or commercialization of our product candidates, which would materially harm our business.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully complete the development or commercialization of our product candidates, which would materially harm our business.

The approach we are taking to discover and develop drugs is novel and may never lead to marketable products.

We have concentrated our therapeutic product research and development efforts on nucleic acid technology, and our future success depends on the successful development of this technology and products based on our nucleic acid product platform.

Except for Onpattro (patisiran), which is marketed by Alnylam;

Except for Moderna (CX-024414), Onpattro (patisiran), which is marketed by Alnylam;

Kynamro (mipomersen), which was marketed by Kastle Therapeutics;

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We may not be successful in our efforts to identify or discover potential product candidates.

The success of our business depends primarily upon our ability to identify, develop and commercialize nucleic acid medicines.

The success of our business depends primarily upon our ability to identify, develop and commercialize messenger RNA medicines.

Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:

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We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

If future clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of product candidates, we or our strategic alliance partners must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans.

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Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.

Furthermore, even if prior animal studies have demonstrated the potential safety and efficacy of our product candidates, there can be no guarantee that such results will be reproducible in preclinical studies and clinical trials involving human subjects.

Furthermore, even if prior animal studies have demonstrated the

potential safety and efficacy of our product candidates, there can be no guarantee that such results will be reproducible in preclinical studies and clinical trials involving human subjects.

Events which may result in a delay or unsuccessful completion of clinical development include:

delays in reaching an agreement with the FDA or other regulatory authorities on final trial design;

delays in obtaining from the FDA, or comparable foreign regulatory authority, authorization to administer an investigational new drug product to humans through the submission or acceptance of an IND application;

delays in submitting or acceptance of, an application for authorization to administer an investigational new drug product to humans through the submission or acceptance of an IND application to the FDA, or comparable foreign regulatory authority;

imposition of a clinical hold of our clinical trial operations or trial sites by the FDA or other regulatory authorities;

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delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.

Accordingly, we cannot be sure that we will submit INDs on the expected timelines and we cannot be certain the submission on an IND will be accepted by the FDA.

Accordingly, we cannot be certain the submission of an IND will be accepted by the FDA.

If we or our strategic alliance partners are required to conduct additional clinical trials or other testing of any product candidates beyond those that are currently contemplated, are unable to successfully complete clinical trials of any such product candidates or other testing, or if the results of these trials or tests are not positive, are only modestly positive or if there are safety concerns, we or our strategic alliance partners may:

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Our product development costs will also increase if we experience delays in testing or marketing approvals.

We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all.

We do not know whether any clinical trials will begin as planned, need to be restructured or will be completed on schedule, or at all.

Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

Any inability to successfully complete preclinical and clinical development,

whether independently or with our strategic alliance partners, could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

Any inability to successfully complete preclinical and clinical development, whether independently or with our strategic alliance partners, could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

We may find it difficult to identify and enroll patients in our clinical studies due to the development and rollout of competing vaccines for COVID-19 and due to the limited number of patients who have the diseases for which certain of our product candidates are being studied.

In addition, the rollout of competing vaccines for COVID-19 may make it more difficult for us to achieve approval of certain clinical trial designs for our LUNAR-COV19 vaccine.

Difficulty in enrolling patients, or in seeking approval for certain clinical trial designs, could delay or prevent clinical studies of certain of our product candidates.

Identifying and qualifying patients to participate in clinical studies of our product candidates is critical to our success.

The timing of our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product candidates, and we may experience delays in our clinical studies if we encounter difficulties in enrollment.

A number of preventative vaccines have recently been authorized for use in human populations by regulatory agencies in the U.S.

and Europe and other countries.

The rollout of these vaccines has resulted in slower than expected enrollment in the United States for the Phase 2 study of our LUNAR-COV19 vaccine candidate.

Because of the aggressive roll-out of COVID-19 vaccines, we may find it challenging to enroll sufficient subjects in our LUNAR-COV19 trials who have not otherwise received a vaccine.

Additionally, competing COVID-19 vaccine clinical trials may make it more difficult to enroll subjects in our LUNAR-COV19 trial.

We may also find it more difficult to identify subjects willing to participate in our studies.

The regulatory authorities of certain countries have restricted placebo-controlled trials in studies for COVID-19 vaccine candidates.

Such restrictions may make it more difficult to seek approval to proceed with certain clinical trial designs, and for the ultimate likelihood of approval of such candidates.

In addition, certain conditions for which we plan to evaluate our current product candidates are rare genetic diseases, and have limited patient pools from which to draw for clinical studies.

For example, we estimate that approximately 8,000 patients in the developed world suffer from late-onset OTC deficiency, for which LUNAR-OTC is being studied.

In addition to the rarity of these diseases, the eligibility criteria of our clinical studies will further limit the pool of available study participants as we will require patients to have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include them in a study.

The process of finding and diagnosing patients may prove costly, especially since the rare diseases we are studying are commonly underdiagnosed.

We also may not be able to identify, recruit, and enroll a sufficient number of appropriate patients to complete our clinical studies because of demographic criteria for prospective patients, the perceived risks and benefits of the product candidate under study, the proximity and availability of clinical study sites for prospective patients, and the patient referral practices of physicians.

The availability and efficacy of competing therapies and clinical studies can also adversely impact enrollment.

If we are unable to enroll an adequate number of patients in our studies for the foregoing or other reasons, the timeline for recruiting patients, conducting studies, and obtaining regulatory approval of potential products may be delayed, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenue from any of these product candidates could be delayed or prevented.

Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may also ultimately lead to the denial of regulatory approval of our product candidates.

Delays in achieving approval to conduct and in completing our clinical studies will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenue.

Any of these occurrences may harm our business, financial condition, and prospects significantly.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.

While we have not yet initiated clinical trials for any of our product candidates, it is likely that there will be side effects associated with their use.

It is likely that there will be side effects associated with use of our product candidates.

Results of our trials could reveal a high and unacceptable severity and prevalence of side effects.

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such authorities may find deficiencies in the manufacturing processes or facilities of our third-party manufacturers with which we contract for clinical and commercial supplies;

or the approval policies;

regulations of such authorities may significantly change in a manner rendering our or any of our potential future collaborators’ clinical data insufficient for approval.

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These requirements include monitoring and reporting of adverse events (“AEs”) and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice, or cGMP, regulations.

The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.

holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.

If we or a regulatory agency discovers previously unknown problems with a product such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

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Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

Our spending on research and development programs and product candidates for specific indications may not yield any commercially viable products.

Currently, we have allocated significant resources to the testing and development of our LUNAR-COV19 and LUNAR-OTC vaccine candidates.

Our spending on research and development programs and product candidates for COVID-19 or other specific indications may not yield any commercially viable products.

If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic alliance, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate, or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

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Our inability to realize the benefits from developing, manufacturing or marketing our development candidates with our alliance partners, including with CureVac, may have a material adverse impact on our business, financial condition and prospects.

We rely on third parties to conduct some aspects of our compound formulation, research and preclinical studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such formulation, research or testing.

We do not expect to independently conduct all aspects of our drug discovery activities, compound formulation research or preclinical studies of product candidates.

We currently rely and expect to continue to rely on third parties to conduct some aspects of our preclinical studies and formulation development.

We rely on third parties to conduct some aspects of our compound formulation, research and studies, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such formulation, research or testing.

We do not expect to independently conduct all aspects of our drug discovery activities, compound formulation research or preclinical and clinical studies of product candidates.

We currently rely and expect to continue to rely on third parties to conduct some aspects of our preclinical and clinical studies and formulation development.

Any of these third parties may terminate their engagements with us at any time.

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If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we will not be able to complete, or may be delayed in completing, the necessary preclinical studies to enable us or our strategic alliance partners to select viable product candidates for IND submissions and will not be able to, or may be delayed in our efforts to, successfully develop and commercialize such product candidates.

We rely on third- party manufacturers to produce the supply of our preclinical product candidates, and we intend to rely on third parties to produce future clinical supplies of product candidates that we advance into clinical trials and commercial supplies of any approved p roduct candidates.

We rely on third-party manufacturers to produce the supply of our preclinical and clinical product candidates, and we intend to rely on third parties to produce future clinical supplies of product candidates that we advance into clinical trials and commercial supplies of any approved product candidates.

Reliance on third-party manufacturers entails risks, including risks that we would not be subject to if we manufactured the product candidates ourselves, including:

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Also, we will not be able to ensure that the product candidates will be manufactured under the correct conditions to permit the product candidates to be used in such clinical trials.

These factors could cause the delay of clinical trials, regulatory submissions, re quired approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully.

Furthermore, if our suppliers fail to deliver the required commercial quantities of active pharma ceutical ingredients on a timely basis and at commercially reasonable prices, and we are unable to secure one or more replacement suppliers capable of production in a timely manner at a substantially equivalent cost, our clinical trials may be delayed or w e could lose potential revenue.

These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully.

Furthermore, if our suppliers fail to deliver the required commercial quantities of active pharmaceutical ingredients on a timely basis and at commercially reasonable prices, and we are unable to secure one or more replacement suppliers capable of production in a timely manner at a substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue.

We currently have one supplier for two important components in our LUNAR-COV19 drug candidate, which supplier is located in China.

Our dependence upon a single supplier located outside of the United States could place our commercialization efforts at risk.

Currently, we have one supplier for two important components in our LUNAR-COV19 drug candidate, which supplier is located in China.

This supplier may only have a limited supply of such essential materials, may encounter unexpected delays, possible shutdowns, or other impediments to production, resulting in delays to our ability to manufacture and commercialize LUNAR-COV19.Further, our dependence upon a single supplier located outside of the United States could place our commercialization efforts at risk.

Manufacturing issues may arise that could increase product and regulatory approval costs or delay commercialization.

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In addition, our future clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a potential drug product.

Accordingly, if our future CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the regulatory approval process.

Our future CROs will not be our employees, and we will not be able to control whether or not they devote sufficient time and resources to our future clinical and nonclinical programs.

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If we are unable to obtain or protect intellectual property rights related to our future products and product candidates, we may not be able to compete effectively in our markets.

Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property rights, including in-licenses of intellectual property rights of others, for our product candidates, methods used to develop and manufacture our product candidates and methods for treating patients using our product candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without infringing upon the proprietary rights of others.

As of March 10, 2020, we are the sole owner of over 180 patents and pending patent applications including 29 U.S.

candidates, as well as our ability to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without infringing upon the proprietary rights of others.

As of February 15, 2021, we are the sole owner of over 209 patents and pending patent applications including 33 U.S.

patents, 2 9 pending U.S.

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In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, including processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents.

our trade secrets and other confidential propriet ary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.

Although each of our employees agrees to assign their inventions to us through an employee inventions agreement, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology are required to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed, that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.

In addition, others may independently discover our trade secrets and proprietary information.

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Our existing license agreements impose, and we expect that future license agreements will impose, various obligations on us, as described in “Other Material Agreements” and “Collaboration Agreements” under Part I, Item 1 and elsewhere in this annual report.

We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, a nd we have done so from time to time.

We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time to time.

We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all.

In that event, we would be unable to further develop and commercialize one or more of our product candidates, which co uld harm our business significantly.

We cannot provide any assurances that third-party patents do not exist which might be enforced against our future products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obli gation on our part to pay royalties and/or other forms of compensation to third parties.

In that event, we would be unable to further develop and commercialize one or more of our product candidates, which could harm our business significantly.

We cannot provide any assurances that third-party patents do not exist which might be enforced against our future products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensees, which could be expensive, time consuming and unsuccessful.

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This could result in a limited potential to generate future revenue from such product candidates and our business could be materially and adversely affected.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to c ompete effectively.

If we are unable to manufacture our vaccines in sufficient quantities, at sufficient yields or are unable to obtain regulatory approvals for a manufacturing facility for ARCT-021, our LUNAR-COV19 vaccine candidate, we may experience delays in product development, clinical trials, regulatory approval and commercial distribution.

Completion of our clinical trials and commercialization of our vaccine candidates require access to, or development of, facilities to manufacture our LUNAR-COV19 vaccine candidate at sufficient yields and at commercial-scale.

We have limited experience manufacturing our vaccine candidates in the volumes that will be

necessary to support large-scale clinical trials or commercial sales.

Efforts to establish these capabilities may not meet initial expectations as to scheduling, scale-up, reproducibility, yield, purity, cost, stability, potency or quality.

In addition, other companies, many with substantial resources, may compete with us for access to materials needed to manufacture our vaccines.

Manufacturing our LUNAR-COV19 vaccine candidate involves a complicated process with which we have limited experience.

We are dependent on third-party organizations to conduct a portion of our vaccine manufacturing activities.

If third-party manufacturing organizations are unable to manufacture our vaccine candidates in clinical quantities or, when necessary, in commercial quantities and at sufficient yields, then we will need to identify and reach supply arrangements with additional third parties.

Third-party manufacturers must also be inspected by the FDA as part of the FDA’s review of our marketing application.

Our LUNAR-COV19 vaccine candidate may be in competition with other products for access to these facilities and may be subject to delays in manufacture if third parties give other products higher priority.

We may not be able to enter into any necessary additional third-party manufacturing arrangements on acceptable terms, or on a timely basis.

In addition, we have to enter into technical transfer agreements and share our know-how with the third-party manufacturers, which can be time-consuming and may result in delays.

Any delay in the manufacture or delivery of a vaccine could adversely affect our ability to sell the LUNAR-COV19 vaccine candidate, if approved.

Our reliance on thir d-party manufacturers may adversely affect our operations or result in unforeseen delays or other problems beyond our control.

Because of contractual restraints and the limited number of third-party manufacturers with the expertise, required regulatory approvals and facilities to manufacture our bulk vaccines on a commercial scale, replacement of a manufacturer may be expensive and time-consuming and may cause interruptions in the production of our vaccine.

A third-party manufacturer may also encounter difficulties in production.

These problems may include:

difficulties with production costs, scale up and yields;

challenges in developing a lyophilized formula of, or validating a lyophilization process for, LUNAR-COV19;

challenges in storage and cold chain distribution of LUNAR-COV19 (even with lyophilization);

availability of raw materials and supplies;

quality control and assurance;

shortages of qualified personnel;

compliance with strictly enforced federal, state and foreign regulations that vary in each country where products might be sold;

lack of capital funding.

As a result, any delay or interruption could have a material adverse effect on our business, financial condition, and results of operations.

We face significant competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

The biotechnology and pharmaceutical industries are intensely competitive.

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Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, drug products that are more effective or less costly than any product candidate that we may develop.

All of our programs are preclinical and targeted toward indications for which there are product candidates in clinical development.

We will face competition from other drugs currently approved or that may be approved in the future for the same therapeutic indications as our product candidates.

Other than our LUNAR-COV19 vaccine candidate and LUNAR-OTC, all of our programs are preclinical and targeted toward indications for which there are product candidates in clinical development.

We will face competition

from other drugs currently approved or that may be approved in the future for the same therapeutic indications as our product candidates.

For example, both Synlogic and Ultragenyx are currently conducting clinical trials with therapies to treat OTC deficiency.

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For instance, government and private payors who reimburse patients or healthcare providers are increasingly seeking greater upfront discounts, additional rebates and other concessions to reduce prices for pharmaceutical products.

If we fail to successfully secure and maintain reimbursement coverage for our future products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our future products and our business will be harmed.

to successfully secure and maintain reimbursement coverage for our future products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our future products and our business will be harmed.

In addition, in some non-U.S.

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The requirements governing drug pricing vary widely from country to country.

For example, the EU provides options for its me mber states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.

A member state may approve a specific price for the medicinal pro duct or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market.

There can be no assurance that any country that has price controls or reimbursement limitations for pharma ceutical products will allow favorable reimbursement and pricing arrangements for any of our products.

For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.

A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market.

There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.

Historically, products launched in the EU do not follow price structures of the U.S.

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Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation.

We have adopted a code of conduct, but it is not always p ossible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other action s or lawsuits stemming from a failure to comply with these laws or regulations.

If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our bu siness, including the imposition of civil, criminal and administrative penalties, damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, additional reporting requirements and/or oversight , particularly if we be come subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance, disgorgement, imprisonment, and contractual damages.

Even if we are ultimately successful in defending any such action, we could be required to d ivert financial and managerial resources in doing so and adverse publicity could result, all of which could harm our business.

We have adopted a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations.

If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, additional reporting requirements and/or oversight, particularly if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance, disgorgement, imprisonment, and contractual damages.

Even if we are ultimately successful in defending any such action, we could be required to divert financial and managerial resources in doing so and adverse publicity could result, all of which could harm our business.

Certain current and future relationships with customers and third-party payors as well as certain of our business operations may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws.

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Federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act (“FCA”), which imposes criminal or civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment to the federal government, including Medicare or Medicaid, that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government.

FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $5,500 to $11,000 per false claim or statement ($11,665 to $23,331 per false claim or statement for penalties assessed after January 15, 2020 for violations occurring after November 2, 2015).

FCA liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties $11,665 to $23,331 per false claim or statement.

The civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

The federal Health Insurance Portability and Accountability Act of 1996 (“ HIPAA ”) , which imposes civil and criminal penalties for, among other t hings, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the custody o r control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and k nowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare.

The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes civil and criminal penalties for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare.

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and its implementing regulations, which imposes certain requirements on certain types of individuals and entities, such as healthcare providers, health plans and healthcare clearing houses, known as “covered entities,” as well as their “business associates,” independent contractors or agents of covered entities that receive or obtain individually identifiable health information in connection with providing a service on behalf of a covered entity, relating to the privacy, security and transmission of individually identifiable health information.

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The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access.

Among policymakers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access.

In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “ACA”) was enacted, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers.

and private insurers.

The ACA included a number of provisions that may reduce the profitability of drug products, including revising the rebate methodology for covered outpatient drugs under the Medicaid Drug Rebate Program, extending Medicaid rebates to individuals enrolled in Medicaid managed care plans, and requiring drug manufacturers to pay an annual fee based on their market share of prior year total sales of branded programs to certain federal health care programs.

Since its passage, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA.

Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA.

Concurrently, Congress has considered legislation that would repeal or replace all or part of the ACA.

While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law.

On December 22, 2017, President Trump signed into law H.R.

1, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” informally titled the Tax Cuts and Jobs Act, which significantly revises the U.S.

Internal Revenue Code of 1986, as amended (the “Code”).

The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, 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 that is commonly referred to as the “individual mandate.” Additionally, on December 23, 2019, President Trump signed a spending bill that repealed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices.

Further, the Bipartisan Budget Act of 2018 (the “BBA”), among other things, amended the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” Additionally, in 2019, the United States Court of Appeals for the Fifth Circuit upheld a lower court decision finding the Affordable Care Act unconstitutional and eliminating the individual mandate.

Supreme Court declined to expedite this appeal, and thus will not issue a decision until late 2020 or early 2021.

As a result, there is significant uncertainty regarding future healthcare reform and its impact on our operations.

There remain executive, legal and political challenges to certain aspects of the ACA.

For example, in December 2017, Congress repealed the tax penalty for an individual’s failure to maintain ACA-mandated health insurance as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), effective January 1, 2019.

On December 14, 2018, a Texas U.S.

District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Act.

On December 18, 2019, the U.S.

Court of Appeals for the Fifth Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well.

On March 2, 2020, the U.S.

Supreme Court granted the petitions for writs of certiorari to review the case and held oral arguments on November 10, 2020.

Although the U.S.

Supreme Court has not yet ruled on the constitutionality of the ACA, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace.

The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare.

It is unclear how the U.S.

Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and our operations.

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted.

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A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs.

This includes aggregate reductions to Medicare payments to providers of 2% per fiscal year, which started in April 2013, and, due to subsequent legislative amendments, will remain in effect through 2027 unless additional Congressional action is taken.

This includes aggregate reductions to Medicare payments to providers of 2% per fiscal year, which started in April 2013, and, due to subsequent legislative amendments, will remain in effect through 2030 unless additional Congressional action is taken, except for a temporary suspension from May 1, 2020 through March 31, 2021 due to the COVID-19 pandemic.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, also reduced Medicare payments to several categories of healthcare providers.

Additionally, the Bipartisan Budget Act of 2018, among other things, amended the ACA to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.”

Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics.

Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products.

At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contained further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to

negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients.

While any proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or admini strative measures to control drug costs.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constrain ts, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk purchasing.

At the federal level, Congress and the Biden administration may seek new legislative and/or administrative measures to control drug costs.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk purchasing.

We expect that healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product.

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In addition, any sustained disruption in internet access provided by other companies could harm our business.

General business conditions are vulnerable to the effects of epidemics, such as the coronavirus, which could materially disrupt business.

We are vulnerable to the general economic effects of epidemics and other public health crises, such as the novel strain of coronavirus reported to have surfaced in Wuhan, China in 2019.

Due to the recent outbreak of the coronavirus, there has been a curtailment of global travel and business activities.

If not resolved quickly, the impact of the epidemic could have a material adverse effect on our ability to coduct our researh and development efforts and impact our overall business.

Business interruptions could delay us in the process of developing our future products.

Our headquarters are located in San Diego, California.

We are vulnerable to natural disasters such as earthquakes and wild fires, as well as other events that could disrupt our operations.

We are vulnerable to natural disasters such as earthquakes and wildfires, as well as other events that could disrupt our operations.

We do not carry insurance for earthquakes or other natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur.

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RISKS RELATED TO OUR COMMON STOCK

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Under the Tax Cuts and Jobs Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, U.S.

federal net operating losses (“NOLs”) incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal NOLs is limited.

It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act.

To the extent that we continue to generate taxable losses for United States federal income tax purposes, unused NOLs will carry forward to offset future taxable income (subject to any applicable limitations), if any.

Under Sections 382 and 383 of the Code, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited.

We believe we may have triggered an “ownership change” limitation;

however, we have not completed a study in accordance with Sections 382 and 383 of the Code to determine whether this ownership change has occurred.

We may also experience ownership changes in the future as a result of subsequent shifts in our share ownership.

As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S.

federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Similar provisions of U.S.

state tax law may also apply to limit our use of accumulated state tax attributes, including our state NOLs.

In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could negatively impact our future cash flows .

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our shares.

We have never declared or paid any cash dividends on our common stock.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future.

General Risk Factors

The market price of our common stock may be highly volatile and investors may not be able to resell shares at or above the price at which they purchase the shares.

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For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

We are no longer an “emerging growth comp any” and are therefore subject to the auditor attestation requirement in the assessment of our internal controls over financial reporting and certain other increased disclosure and governance requirements.

At the end of fiscal year 2018, we lost our status as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

As a result, we are no longer able to take advantage of certain exemptions from various reporting requirements.

Therefore, we are now subject to certain requirements that apply to other public companies that did not previously apply to us, due to our previous status as an emerging growth company.

These requirements include:

compliance with the auditor attestation requirement in the assessment of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;

compliance with any new rules that may be adopted by the Public Company Accounting Oversight Board;

compliance with any new or revised financial accounting standards applicable to public companies without an extended transition period;

full disclosure regarding executive compensation required of larger public companies;

compliance with the requirement of holding a nonbinding advisory vote on executive compensation and obtaining shareholder approval of any golden parachute payments not previously approved.

Failure to comply with these requirements could subject us to enforcement actions by the SEC, divert management’s attention, damage our reputation, and adversely affect our business, results of operations, or financial condition.

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If common stock is sold, or if it is perceived that it will be sold, in the public market, that could create downward pressure on the trading price of our common stock and cause the trading price to decline.

Future sales and issuances of our common stock or rights to purchase common stock , including pursuant to our equity incentive plan s, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations.

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If we were not able to regain compliance within the allotted compliance period for this requirement or any other applicable listing standard, including any extensions that may be granted by Nasdaq, our common stock would be subject to delisting.

In the event that our common stock are delisted from Nasdaq and are not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only 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 the event that our common stock are delisted from Nasdaq and are not eligible for quotation or listing on another market or exchange, trading of our

common stock could be conducted only 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 also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.

The recently enacted U.S.

federal income tax reform bill could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which significantly revises the Code.

The Tax Cuts and Jobs Act, among other things, contains significant changes to U.S.

federal corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S.

tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.

Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected.

In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law.

The impact of the Tax Cuts and Jobs Act on holders of our common stock is also uncertain and could be adverse.

We urge our shareholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Under the Tax Cuts and Jobs Act, U.S.

federal net operating losses (“NOLs”) incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal NOLs is limited.

It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act.

We believe we may have triggered an “ownership change” limitation at the completion of our merger with Alcobra, Ltd.

in November 2017, however we have not completed a study in accordance with Sections 382 and 383 of the Code to determine whether this ownership change has occurred.

We may also experience ownership changes in the future as a result of subsequent shifts in our share ownership.

As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S.

federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Similar provisions of U.S.

state tax law may also apply to limit our use of accumulated state tax attributes, including our state NOLs.

In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could negatively impact our future cash flows .

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our shares.

We have never declared or paid any cash dividends on our common stock.

Unresolved Staff Comments

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors