Item 1A. Risk Factors
Item 1A. Risk Factors.
You should consider
carefully the risks and uncertainties described below, together with all of the other information contained in this Annual Report. If
any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that
event, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe
are not material, may also become important factors that adversely affect our business or results of operations. For a summary of these
Risk Factors, see “Summary Risk Factors.”
Risks Related to the Equity
Subscription Line and Shares Sold by the Selling Stockholders
It is not possible
to predict the actual number of shares of Common Stock, if any, we will sell under the Common Stock Purchase Agreement to White Lion or
the actual gross proceeds resulting from those sales.
On April 14, 2023, we entered
into the Common Stock Purchase Agreement, pursuant to which White Lion has committed to purchase up to the lesser of (i) $50,000,000 in
aggregate gross purchase price of newly issued shares of Common Stock and (ii) the Exchange Cap, in each case, subject to certain limitations
and conditions set forth in the Common Stock Purchase Agreement.
Subject to the satisfaction
of certain customary conditions including, Estrella’s right to sell shares to White Lion commenced on July 11, 2023 and extend until
December 31, 2024. During such term, subject to the terms and conditions of the Common Stock Purchase Agreement, Estrella shall notify
White Lion when Estrella exercises its right, in its sole discretion, to sell shares.
We generally have the right
to control the timing and amount of any sales of our shares of Common Stock to White Lion under the Common Stock Purchase Agreement. Sales
of our shares of Common Stock, if any, to White Lion under the Common Stock Purchase Agreement will depend upon market conditions and
other factors to be determined by us. We may ultimately decide to sell to White Lion all, some or none of the shares of Common Stock that
may be available for us to sell to White Lion pursuant to the Common Stock Purchase Agreement.
Because the purchase price
per share of Common Stock to be paid by White Lion for the shares of Common Stock that we may elect to sell to White Lion under the Common
Stock Purchase Agreement, if any, will fluctuate based on the market prices of the Common Stock at the time we elect to sell shares of
Common Stock to White Lion pursuant to the Common Stock Purchase Agreement, if any, it is not possible for us to predict, prior to any
such sales, the number of shares of Common Stock that we will sell to White Lion under the Common Stock Purchase Agreement, the purchase
price per share that White Lion will pay for shares of Common Stock purchased from us under the Common Stock Purchase Agreement, or the
aggregate gross proceeds that we will receive from those purchases by White Lion under the Common Stock Purchase Agreement.
The number of shares of Common
Stock ultimately offered for sale by White Lion is dependent upon the number of shares of Common Stock, if any, we ultimately elect to
sell to White Lion under the Common Stock Purchase Agreement. However, even if we elect to sell shares of Common Stock to White Lion pursuant
to the Common Stock Purchase Agreement, White Lion may resell all, some or none of such shares at any time or from time to time in its
sole discretion and at different prices.
Because the market price of
our shares of Common Stock may fluctuate from time to time, the actual purchase price to be paid by White Lion for our shares of Common
Stock that we elect to sell to White Lion under the Common Stock Purchase Agreement, if any, also may fluctuate because they will be based
on such fluctuating market price of our shares of Common Stock, it is possible that we would need to issue and sell more than the number
of shares of Common Stock that were registered for resale by White Lion in order to receive aggregate gross proceeds of $50.0 million
under the Common Stock Purchase Agreement.
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Accordingly, if it becomes
necessary for us to issue and sell to White Lion under the Common Stock Purchase Agreement more than the 7,036,726 shares of Common Stock
that were registered for resale, in addition to obtaining stockholder approval to exceed the Exchange Cap in accordance with Nasdaq listing
rules, we must file with the SEC one or more additional registration statements to register under the Securities Act the resale by White
Lion of any such additional shares of Common Stock we wish to sell from time to time under the Common Stock Purchase Agreement, which
the SEC must declare effective, in each case before we may elect to sell any additional shares of Common Stock to White Lion under the
Common Stock Purchase Agreement. Any issuance and sale by us under the Common Stock Purchase Agreement of a substantial amount of shares
of Common Stock in addition to the 7,036,726 shares of Common Stock being registered for resale by White Lion could cause additional substantial
dilution to our stockholders.
The sale and issuance
of shares of Common Stock to White Lion will cause dilution to our existing securityholders, and the resale of the shares of Common Stock
by White Lion, or the perception that such resales may occur, could cause the price of our securities to fall.
The purchase price per share
of Common Stock to be paid by White Lion for the shares of Common Stock that we may elect to sell to White Lion under the Common Stock
Purchase Agreement, if any, will fluctuate based on the market prices of our shares of Common Stock at the time we elect to sell shares
of Common Stock to White Lion pursuant to the Common Stock Purchase Agreement. Depending on market liquidity at the time, resales of such
shares of Common Stock by White Lion may cause the trading price of our shares of Common Stock to fall.
If and when we elect to sell
shares of Common Stock to White Lion, sales of newly issued shares of Common Stock by us to White Lion could result in substantial dilution
to the interests of existing holders of our shares of Common Stock. If all of the 7,036,726 shares of Common Stock offered for resale
by White Lion (without regard to the $50.0 million aggregate purchase price limit pursuant to the Common Stock Purchase Agreement) were
issued and outstanding as of the Closing, such shares of Common Stock would represent approximately 19.99% of the total number of our
shares of Common Stock outstanding as of the Closing Date. Additionally, the sale of a substantial number of shares of Common Stock to
White Lion, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the
future at a time and at a price that we might otherwise wish to effect sales.
Investors who buy
shares of Common Stock from White Lion at different times will likely pay different prices.
Pursuant to the Common Stock
Purchase Agreement, we will have discretion to vary the timing, price and number of shares sold to White Lion, if any. If and when we
elect to sell shares of Common Stock to White Lion pursuant to the Common Stock Purchase Agreement, after White Lion has acquired such
shares of Common Stock, White Lion may resell all, some or none of such shares at any time or from time to time in its sole discretion
and at different prices. As a result, investors who purchase shares from White Lion at different times will likely pay different prices
for those shares, and so may experience different levels of dilution and in some cases substantial dilution and different outcomes in
their investment results. Investors may experience a decline in the value of the shares they purchase from White Lion in this offering
as a result of future sales made by us to White Lion at prices lower than the prices such investors paid for their shares in this offering.
In addition, if we sell a substantial number of shares to White Lion under the Common Stock Purchase Agreement, or if investors expect
that we will do so, the actual sales of shares or the mere existence of our arrangement with White Lion may make it more difficult for
us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect such sales.
Sales of a substantial
number of our securities in the public market by the Selling Stockholders or by our other existing securityholders could cause the price
of our Common Stock and Warrants to fall.
The shares that were registered
for resale represent approximately 37.2% of our total outstanding shares as of the Closing Date. The sale or availability for sale of
these shares could adversely affect the prevailing market price of our Common Stock and could impair our ability to raise capital through
future sales of our securities. In addition, the PIPE investors who acquired the shares being registered pursuant to the Subscription
Agreements purchased their shares at a price of $4.15 per share, the Selling Stockholders who hold an aggregate of 240,000 Founder Shares
acquired at a purchase price of $0.001 per share, and the Selling Stockholders who hold an aggregate of 867,500 Founder Shares acquired
at a purchase price of $0.022 per share, each of which is significantly lower than the initial public offering price of $10.00 per share
of our Common Stock. Therefore, these Selling Stockholders may have an incentive to sell their shares before our public stockholders who
purchased shares in the initial public offering, because they could still realize a profit even if the market price of our Common Stock
is below the initial public offering price of our Common Stock. For example, on December 14, 2023, our Common Stock closed at $1.25 per
share on the Nasdaq Capital Market. If the Selling Stockholders who hold an aggregate of 240,000 Founder Shares acquired for $0.001 per
share sold any of their Founder Shares at this price, they would realize a profit of $1.249 per share and an aggregate profit of $299,760
if they each sold all of their Founder Shares. If the Selling Stockholders who hold an aggregate of 867,500 Founder Shares acquired for
$0.022 per share sold any of their Founder Shares at this price, they would realize a profit of $1.228 per share and an aggregate profit
of $1,065,290 if they each sold all of their Founder Shares. Such sales could create additional downward pressure on the market price
of our Common Stock and could cause our stock price to decline.
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Risks Related to Estrella’s
Operating History and Financial Condition
We are a clinical
stage biotechnology company with a history of losses. We expect to continue to incur significant losses for the foreseeable future and
may never achieve or maintain profitability.
We are a clinical-stage biotechnology
company with a history of losses. Since our inception, we have devoted substantially all of our resources to preparing for the Business
Combination, drafting regulatory filings (including the INDs), planning and conducting preclinical and clinical studies, and building
our management team, and we have incurred significant operating losses. Our net losses were approximately $7.3 million and $11.1 million
for the years ended June 30, 2024 and 2023, respectively. As of June 30, 2024, and June 30, 2023, we had an accumulated deficit of approximately
$19.5 million and $12.2 million, respectively. Substantially all of our losses have resulted from expenses incurred in connection with
preparing for the Business Combination, regulatory filings, and from general and administrative costs associated with our operations.
To date, we have not generated any revenue from product sales, and we have not sought or obtained regulatory approval for any product
candidate. Furthermore, we do not expect to generate any revenue from product sales for the foreseeable future, and we expect to continue
to incur significant operating losses for the foreseeable future due to the cost of research and development, preclinical studies, clinical
trials, and the regulatory approval process for our current and potential future product candidates.
We expect our net losses to
increase substantially as we:
● commence clinical trials of EB103;
● continue preclinical development of EB104;
● acquire and license technologies, if any are discovered, that are aligned with our product candidates;
● seek regulatory approval of current EB103 and EB104;
● incur expenses related to the discovery and development of any potential future product candidates;
● expand our operational, financial, and management systems and increase personnel, including personnel
to support our preclinical and clinical development and commercialization efforts;
● continue to develop, perfect, and defend our intellectual property portfolio; and
● incur additional legal, accounting, or other expenses in operating our business, including the additional
costs associated with operating as a public company.
However, the amount of our
future losses is uncertain. Our ability to achieve or sustain profitability, if ever, will depend on, among other things, successfully
developing product candidates, obtaining regulatory approvals to market and commercialize product candidates, manufacturing any approved
products on commercially reasonable terms, entering into potential future alliances, establishing a sales and marketing organization or
suitable third-party alternatives for any approved product, and raising sufficient funds to finance business activities. If we, or our
potential future collaborators, are unable to commercialize one or more of our product candidates, or if sales revenue from any product
candidate that receives approval is insufficient, we will not achieve or sustain profitability, which could have a material adverse effect
on our business, financial condition, results of operations, and prospects.
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We will need substantial
additional funds to advance development of product candidates, and we cannot guarantee that we will have sufficient funds available in
the future to develop and commercialize our current or potential future product candidates and technologies.
The development of biotechnology
product candidates is capital-intensive. If any of our current or potential future product candidates enter and advance through preclinical
studies and clinical trials, we will need substantial additional funds to expand our development, regulatory, manufacturing, marketing,
and sales capabilities. We will require significant funds to continue to develop our product candidates and conduct further research and
development, including preclinical studies and clinical trials. In addition, we expect to incur significant additional costs associated
with operating as a public company.
As of June 30, 2024 and June
30, 2023, we had approximately $4.2 million and $2.5 million, respectively, in cash and cash equivalents. Our future capital requirements
and the period for which our existing resources will support our operations may vary significantly from what we expect. Because the length
of time and activities associated with successful research and development of platform technologies and product candidates is highly uncertain,
we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities.
The timing and amount of our operating expenditures will depend largely on:
● the timing and progress of preclinical and clinical development of our current and potential future product
candidates;
● the timing and progress of our research of the use of EB103 in conjunction with CF33-CD19t;
● the number and scope of preclinical and clinical programs we decide to pursue;
● the terms of any third-party manufacturing contract or biomanufacturing partnership we may enter into;
● our ability to maintain our current licenses and collaborations, conduct our research and development
programs and establish new strategic partnerships and collaborations;
● the progress of the development efforts of our existing strategic partners and third parties with whom
we may in the future enter into collaboration and research and development agreements;
● the costs involved in obtaining, maintaining, enforcing, and defending patents and other intellectual
property rights;
● the impact of the COVID-19 pandemic on our business;
● the cost and timing of regulatory approvals; and
● our efforts to enhance operational systems and hire additional personnel, including personnel to support
development of our product candidates and satisfy our obligations as a public company.
To date, we have primarily
financed our operations through the sale of equity securities. We may seek to raise any necessary additional capital through a combination
of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, grants, and other
marketing and distribution arrangements. We cannot assure you that we will be successful in acquiring additional funding at levels sufficient
to fund our operations or on terms favorable to us. If we are unable to obtain adequate financing when needed, we may have to delay, reduce
the scope of or suspend one or more of our preclinical studies, clinical trials, research and development programs or commercialization
efforts. Because of the numerous risks and uncertainties associated with the development and commercialization of our current and potential
future product candidates and the extent to which we may enter into collaborations with third parties to participate in their development
and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our
current and anticipated preclinical studies and clinical trials, including related manufacturing costs. To the extent that we raise additional
capital through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable
rights to our current and potential future product candidates, future revenue streams or research programs or grant licenses on terms
that may not be favorable to us. If we do raise additional capital through public or private equity or convertible debt offerings, the
ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences
that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants
limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring
dividends.
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We do not expect to realize
revenue from product sales or royalties from licensed products for the foreseeable future, if at all, and unless and until our current
and potential future product candidates are clinically tested, approved for commercialization, and successfully marketed.
Members of our management
team have limited experience in managing the day-to-day operations of a public company and, as a result, we may incur additional expenses
associated with the management of our company.
Members of our management
team have limited experience in managing the day-to-day operations of a public company. As a result, we may need to obtain outside assistance
from legal, accounting, investor relations, or other professionals that could be more costly than planned. We may also hire additional
personnel to comply with additional SEC reporting requirements. These compliance costs will make some activities significantly more time-consuming
and costly. If we lack cash resources to cover these costs in the future, our failure to comply with reporting requirements and other
provisions of securities laws could negatively affect our stock price and adversely affect our potential results of operations, cash flow
and financial condition.
Our financial statements
expressing substantial doubt about our ability to continue as a going concern due to our history of recurring losses and our expectation
that negative cash flows from operations will continue until we can generate sufficient revenue. Our ability to continue as a going concern
requires that we obtain sufficient funding to finance our operations.
We have incurred significant
operating losses to date, and it is possible we may never generate a profit. Our consolidated financial statements included elsewhere
in this Annual Report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
in the ordinary course of business. These consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these
uncertainties related to our ability to operate on a going concern basis.
We have concluded that our
recurring losses from operations and need for additional financing to fund future operations raise substantial doubt about our ability
to continue as a going concern. Similarly, our independent registered public accounting firm has included an explanatory paragraph in
its report on our financial statements expressing substantial doubt about our ability to continue as a going concern. We believe that
the financing proceeds raised at Closing will eliminate this doubt and enable us to continue as a going concern; however, we may need
to obtain alternative financing or significantly modify our operational plans for us to continue as a going concern. Based upon our current
operating plan and assumptions, we believe that our existing cash and cash equivalents will be sufficient to fund our operations for at
least the next 12 months. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources
sooner than we expect. Changes may occur beyond our control that would cause us to consume our available capital before that time, including
changes in and progress of our development activities and changes in regulation. Our future capital requirements will depend on many factors,
including:
● the scope, rate of progress, results, and costs of preclinical studies, laboratory testing, and clinical
trials for our product candidates;
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● the number and development requirements of product candidates that we may pursue, and other indications
for our current product candidates that we may pursue;
● the costs, timing and outcome of regulatory review of our product candidates;
● the scope and costs of manufacturing arrangements;
● the cost associated with commercializing any approved product candidates;
● the cost and timing of developing our ability to establish sales and marketing capabilities, if any;
● the costs of preparing, filing and prosecuting patent applications, maintaining, enforcing, and protecting
our intellectual property rights, defending intellectual property-related claims, and obtaining licenses to third-party intellectual property;
● the timing and amount of any milestone and royalty payments we are required to make under our present
or future license agreements;
● our ability to establish and maintain strategic partnerships and collaborations, including any biomanufacturing
partnerships or collaborations involving the use of our products, on favorable terms, if at all; and
● the extent to which we acquire or in-license other product candidates and technologies and associated
intellectual property.
We will require additional
capital to complete our planned clinical development programs for our current product candidates to obtain regulatory approvals. Any additional
capital raising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop
and commercialize our current and future product candidates, if approved.
In addition, we cannot guarantee
that future financing will be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Moreover, the
terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities by
us, whether equity or debt, or the market perception that such issuances are likely to occur, could cause the market price of Common Stock
to decline. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will
be harmed, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue
as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could
be significantly lower than the values reflected in our consolidated financial statements. We were required to make significant payments
to Eureka in connection with the Closing of the Business Combination, which could adversely affect our liquidity and financial condition.
Under the terms of our agreements
with Eureka, following closing of the Business Combination, significant payments to Eureka became due and payable under our agreements
with Eureka. Accordingly, on October 9, 2023, we used a portion of the $19.6 million net proceeds from the Business Combination to pay
approximately $8.3 million due to Eureka under the Services Agreement and approximately $0.9 million aggregate amount due to Eureka under
the License Agreement, comprised of the remainder of the upfront fee as well as a milestone payment in connection with the submission
of the IND application for EB103, which reduced our available capital resources. Furthermore, as the majority shareholder of Estrella,
Eureka may have significant control over our management and operations, which could affect our ability to negotiate or modify future payment
terms in our favor.
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Risks Related to the Development
and Clinical Testing of Our Product Candidates
Our current product
candidates are in either preclinical or clinical development. One or all of our current product candidates may fail in clinical development
or suffer delays that materially and adversely affect their commercial viability.
We have no products on the
market or that have gained regulatory approval or that have entered clinical trials. Our ability to achieve and sustain profitability
depends on obtaining regulatory approvals for and successfully commercializing product candidates, either with Eureka pursuant to the
Services Agreement or with other collaborators.
Before obtaining regulatory
approval for the commercial distribution of our product candidates, we or a collaborator must conduct extensive preclinical studies, followed
by clinical trials to demonstrate the safety, purity and potency, or efficacy of our product candidates in humans. There is no guarantee
that the U.S. Food and Drug Administration (the “FDA”) will permit us to conduct clinical trials. Further, we cannot be certain
of the timely completion or outcome of our preclinical studies and cannot predict if the FDA or other regulatory authorities will accept
our proposed clinical programs, our clinical protocols or if the outcome of our preclinical studies will ultimately support the further
development of our preclinical programs or testing in humans. As a result, we cannot be sure that we will be able to submit investigational
new drug applications (“INDs”) or similar applications for our proposed clinical programs on the timelines we expect, if at
all, and we cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing
clinical trials for any of our product candidates to begin.
Our current product candidates
are in either preclinical or clinical development and we are subject to the risks of failure inherent in the development of product candidates
based on novel approaches, targets, and mechanisms of action. Although we have initiated a clinical trial for EB103 and anticipate initiating
clinical trials for our other product candidates, there is no guarantee that we will be able to proceed with clinical development of any
of these product candidates or that any product candidate will demonstrate a clinical benefit once we advance these candidates to testing
in patients. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered
by clinical stage biotechnology companies such as ours.
We may not be able to access
the financial resources to continue development of, or to enter into any collaborations for, any of our current or potential future product
candidates. This may be exacerbated if we experience any issues that delay or prevent regulatory approval of, or our ability to commercialize,
a product candidate, such as:
● negative or inconclusive results from our preclinical studies or clinical trials or the clinical trials
of others for product candidates similar to ours, leading to a decision or requirement to conduct additional preclinical studies or clinical
trials or abandon any or all of our programs;
● product-related side effects experienced by participants in our clinical trials or by individuals using
therapeutics similar to our product candidates;
● delays in submitting INDs (other than the IND for EB103, which was cleared by the FDA on March 2, 2023)
or comparable foreign applications, or delays or failures to obtain the necessary approvals from regulatory authorities to commence a
clinical trial, or a suspension or termination of a clinical trial once commenced;
● conditions imposed by the FDA or other regulatory authorities regarding the scope or design of our clinical
trials;
● delays in enrolling research subjects in clinical trials;
● high drop-out rates of research subjects;
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● inadequate supply or quality of product candidate components or materials or other supplies necessary
for the conduct of our clinical trials;
● chemistry, manufacturing, and control (“CMC”) challenges associated with the manufacturing
and scaling up product candidates to ensure consistent quality, stability, purity, and potency among different batches used in clinical
trials;
● greater-than-anticipated clinical trial costs;
● poor effectiveness of our product candidates during clinical trials;
● unfavorable FDA or other regulatory authority inspection and review of a clinical trial or manufacturing
site;
● delays as a result of the COVID-19 pandemic or events associated with the pandemic;
● failure of Eureka or our third-party contractors or investigators to comply with regulatory requirements
or otherwise meet their contractual obligations in a timely manner, or at all;
● delays and changes in regulatory requirements, policies and guidelines; or
● the FDA or other regulatory authorities interpreting our data differently than we do.
Further, we, Eureka, and any
existing or potential future collaborator may never receive approval to market and commercialize any product candidate. Even if we, Eureka,
or any existing or potential future collaborator obtains regulatory approval, the approval may be for targets, disease indications or
patient populations that are not as broad as we intended or desired or may require labeling that includes significant use or distribution
restrictions or safety warnings. We, Eureka, or an existing or potential future collaborator may also be subject to post-marketing testing
requirements to maintain regulatory approval.
We may not be successful
in our efforts to use and expand our use of the ARTEMIS ® platform to expand our pipeline of product candidates.
A key element of our strategy
is to use and advance our use of the ARTEMIS® platform to design, test, and build our portfolio of product candidates focused on the
treatment of cancer. Our and Eureka’s research and development efforts to date have resulted in our discovery and preclinical development
of EB103 and other potential product candidates. We received IND clearance from the FDA for EB103 on March 2, 2023, and dosed our first
patient in the STARLIGHT-1 clinical trial (NCT06343311) for EB103 in July 2024. However, we cannot assure you that EB103 or any of our
other existing or future product candidates will successfully complete clinical trials or demonstrate these product candidates to be safe
or effective therapeutics, and we may not be able to successfully develop any product candidates. Even if we are successful in expanding
our pipeline of product candidates, any additional product candidates that we identify may not be suitable for clinical development or
generate acceptable clinical data, including as a result of being shown to have unacceptable effects or other characteristics that indicate
that they are unlikely to be products that will receive marketing approval from the FDA or other regulatory authorities or achieve market
acceptance. If we do not successfully develop and commercialize product candidates, we will not be able to generate product revenue in
the future. Moreover, our ability to complete the clinical trial for EB103 or commence and complete a clinical trial for any other product
candidate may depend on our ability to obtain sufficient funding from various sources. If we fail to obtain adequate funding we may have
to delay, reduce, or terminate our clinical development programs.
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Although we intend
to explore other therapeutic opportunities in addition to the product candidates that we are currently developing, we may fail to identify
viable new product candidates for clinical development for a number of reasons. If we fail to identify additional potential product candidates,
our business could be materially harmed.
Although a substantial amount
of our efforts will focus on the planned clinical trials and potential approval of the current and potential future product candidates
we are evaluating, we also intend to discover, develop, and globally commercialize additional targeted therapies beyond our current product
candidates to treat various forms of cancer and in a variety of therapeutic areas. Even if we identify investigational therapies that
initially show promise, we may fail to successfully develop and commercialize such products for many reasons, including the following:
● the research methodology used may not be successful in identifying potential investigational therapies;
● competitors may develop alternatives that render our investigational therapies obsolete;
● investigational therapies we develop may nevertheless be covered by third parties’ patents or other
exclusive rights;
● an investigational therapy may, on further study, be shown to have harmful side effects or other characteristics
that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
● it may take greater human and financial resources than we will possess to identify additional therapeutic
opportunities for our product candidates or to develop suitable potential product candidates through internal research programs, thereby
limiting our ability to develop, diversify and expand our product portfolio;
● an investigational therapy may not be capable of being produced in clinical or commercial quantities at
an acceptable cost, or at all; and
● an approved product may not be accepted as safe and effective by trial participants, the medical community
or third-party payors.
Identifying new investigational
therapies requires substantial technical, financial, and human resources, whether or not any investigational therapies are ultimately
identified. Because we have limited financial and human resources, we may initially focus on research programs and product candidates
for a limited set of indications. As a result, we may forgo or delay pursuit of opportunities with other product candidates or for other
indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions
may cause us to fail to capitalize on viable commercial products or profitable market opportunities. For example, if we do not accurately
evaluate the commercial potential or target market for a particular product candidate or technology, we may relinquish valuable rights
to that product candidate or technology through collaborations, 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 technology.
Accordingly, there can be
no assurance that we will ever be able to identify additional therapeutic opportunities for our product candidates or to develop suitable
potential product candidates through internal research programs, which could materially adversely affect our future growth and prospects.
We may focus our efforts and resources on potential product candidates or other potential programs that ultimately prove to be unsuccessful.
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The occurrence of
serious complications or side effects in connection with use of our product candidates, either in clinical trials or post-approval, could
lead to discontinuation of our clinical development programs, refusal of regulatory authorities to approve our product candidates or,
post-approval, revocation of marketing authorizations or refusal to approve applications for new indications, which could severely harm
our business, prospects, operating results and financial condition.
Undesirable side effects caused
by any of our current or potential future product candidates could cause 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 our product candidates, it is likely that there will be side effects associated with
their use. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of these side effects. It is possible
that safety events or concerns such as these or others could negatively affect the development of our product candidates, including adversely
affecting patient enrollment among the patient populations that we intend to treat. In such an event, our trials could be suspended or
terminated, and the FDA or other regulatory authorities could order us to cease further development of or deny approval of a product candidate
for any or all targeted indications. Such side effects could also affect patient recruitment or the ability of enrolled patients to complete
the trial or result in potential product liability claims. There can be no guarantee that our current or future product candidates will
not cause such effects in clinical trials. Any of these occurrences may materially and adversely affect our business and financial condition
and impair our ability to generate revenues.
Further, clinical trials by
their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure,
rare and severe side effects of a product candidate may only be uncovered when a significantly larger number of patients are exposed to
the product candidate or when patients are exposed for a longer period of time.
In the event that any of our
current or potential future product candidates receives regulatory approval and we or others identify undesirable side effects caused
by one of these products, any of the following events could occur, which could result in the loss of significant revenue to us and materially
and adversely affect our results of operations and business:
● regulatory authorities may withdraw their approval of the product or seize the product;
● we may be required to recall the product or change the way the product is administered to patients;
● additional restrictions may be imposed on the marketing of the particular product or the manufacturing
processes for the product or any component thereof;
● we may be subject to fines, injunctions, or the imposition of civil or criminal penalties;
● regulatory authorities may require the addition of labeling statements, such as a “black box”
warning or a contraindication;
● we may be required to create a medication guide outlining the risks of such side effects for distribution
to patients;
● we could be sued and held liable for harm caused to patients;
● the product may become less competitive; and
● our reputation may suffer.
Any of these events could
prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm
our business, results of operations and prospects.
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While our IND for
EB103 was cleared by the FDA on March 2, 2023 and we believe our pipeline will yield additional INDs, we may not be able to file additional
INDs to commence clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us to proceed.
While we expect our pipeline
to yield multiple INDs in addition to the IND for EB103, which was cleared by the FDA on March 2, 2023, we cannot be sure that submission
of future INDs will result in the FDA allowing testing and clinical trials to begin, or that, once clinical trials for EB103 or other
product candidates begin, issues will not arise that suspend or terminate such clinical trials. The manufacturing of our product candidates,
including EB104, remain an emerging and evolving field. Accordingly, we expect CMC-related topics, including product specifications, will
be a focus of IND reviews, which may delay the clearance of INDs.
Additionally, even if such
regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND or clinical trial application,
we cannot guarantee that such regulatory authorities will not change their requirements in the future.
In addition to the submission
of an IND to the FDA before initiation of a clinical trial in the United States, certain human clinical trials involving recombinant or
synthetic nucleic acid molecules are subject to oversight of institutional biosafety committees (“IBCs”), as set forth in
the National Institutes of Health (“NIH”) Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules
(“NIH Guidelines”). Under the NIH Guidelines, recombinant and synthetic nucleic acids are defined as: (i) molecules that are
constructed by joining nucleic acid molecules and that can replicate in a living cell (i.e., recombinant nucleic acids); (ii) nucleic
acid molecules that are chemically or by other means synthesized or amplified, including those that are chemically or otherwise modified
but can base pair with naturally occurring nucleic acid molecules (i.e., synthetic nucleic acids); or (iii) molecules that result from
the replication of those described in (i) or (ii). Specifically, under the NIH Guidelines, supervision of human gene transfer trials includes
evaluation and assessment by an IBC, a local institutional committee that reviews and oversees research utilizing recombinant or synthetic
nucleic acid molecules at that institution. The IBC assesses the safety of the research and identifies any potential risk to public health
or the environment, and such review may result in some delay before initiation of a clinical trial. While the NIH Guidelines are not mandatory
unless the research in question is being conducted at or sponsored by institutions receiving NIH funding of recombinant or synthetic nucleic
acid molecule research, many companies and other institutions not otherwise subject to the NIH Guidelines voluntarily follow them.
Interim, topline
and preliminary data that we announce or publish from time to time for any clinical trials that we initiate may change as more patient
data become available or as additional analyses are conducted, and as the data are subject to audit and verification procedures that could
result in material changes in the final data.
From time to time, we may
publicly disclose interim, preliminary, or topline data from our preclinical studies and clinical trials, which is based on a preliminary
analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive
review of the data related to the particular trial. We also make assumptions, estimations, calculations, and conclusions as part of our
analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim,
preliminary, or topline results that we report may differ from future results of the same trials, or different conclusions or considerations
may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification
procedures that may result in the final data being materially different from the preliminary data we previously published. As a result,
topline data should be viewed with caution until the final data are available. From time to time, we may also disclose interim, preliminary,
or topline data from our clinical studies. Interim, topline, or preliminary data from clinical trials that we may complete are subject
to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become
available. Adverse differences between preliminary, topline, or interim data and final data could significantly harm our business prospects.
Further, others, including
regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions, or analyses or may interpret
or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization
of the particular product candidate or product and the value of our company in general. In addition, the information we choose to publicly
disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not
agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we
determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise
regarding a particular product, product candidate or our business. If the topline data that we report differ from actual results, or if
others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize,
our product candidates may be harmed, which could harm our business, operating results, prospects, or financial condition.
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We and our collaborators
may not achieve projected discovery and development milestones and other anticipated key events in the time frames that we or they announce,
which could have an adverse impact on our business and could cause our stock price to decline.
From time to time, we expect
that we will make public statements regarding the expected timing of certain milestones and key events, such as the commencement and completion
of preclinical and IND-enabling studies in our product candidate discovery programs with collaborators as well as the commencement and
completion of planned clinical trials in those programs. The actual timing of these events can vary dramatically due to a number of factors
such as delays or failures in our or any current or future collaborators’ product candidate discovery and development programs,
the amount of time, effort and resources committed by us and any current or future collaborators, and the numerous uncertainties inherent
in the development of therapies. As a result, there can be no assurance that our or any current or future collaborators’ programs
will advance or be completed in the time frames we or they announce or expect. If we or any collaborators fail to achieve one or more
of these milestones or other key events as planned, our business could be materially adversely affected, and the price of our Common Stock
could decline.
Clinical trials
are expensive, time-consuming, and difficult to design and implement.
Human clinical trials are
expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Because our current
and potential future product candidates are based on new technologies and discovery approaches, we expect that they will require extensive
research and development and have substantial manufacturing and processing costs. In addition, the FDA or other regulatory authorities
may require us to perform additional testing before commencing clinical trials and be hesitant to allow us to enroll patients impacted
with our targeted disease indications in our future clinical trials. If we are unable to enroll patients impacted by our targeted disease
indications in our future clinical trials, we would be delayed in obtaining potential proof-of-concept data in humans, which could extend
our development timelines. In addition, costs to treat patients and to treat potential side effects that may result from our product candidates
may be significant. Accordingly, our clinical trial costs are likely to be high and could have a material adverse effect on our business,
financial condition, results of operations and prospects.
If we encounter
difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We may not be able to initiate
or continue any clinical trials for our current or potential future product candidates if we are unable to locate and enroll a sufficient
number of eligible patients to participate in these trials as required by the FDA or other regulatory authorities. We cannot predict how
difficult it will be to enroll patients for trials in the indications we are studying. We may experience difficulties in patient enrollment
in our clinical trials for a variety of reasons. The enrollment of patients depends on many factors, including:
● the severity of the disease under investigation;
● patient eligibility criteria defined in the clinical trial protocol;
● the size of the patient population required for analysis of the trial’s primary endpoints;
● the proximity and availability of clinical trial sites for prospective patients;
● willingness of physicians to refer their patients to our clinical trials;
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● our ability to recruit clinical trial investigators with the appropriate competencies and experience;
● clinicians’ and patients’ perceptions as to the potential advantages of the product candidate
being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;
● our ability to obtain and maintain patient consents;
● the risk that patients enrolled in clinical trials will drop out of the trials before completion; and
● factors we may not be able to control, such as current or potential pandemics, including the COVID-19
pandemic, that may limit the availability of patients, principal investigators or staff or clinical sites to participate in our clinical
trials.
In addition, our future clinical
trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates,
and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll
in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators
is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which
will reduce the number of patients who are available for our clinical trials at such clinical trial sites. Additionally, because some
of our clinical trials will be in patients with advanced disease who may experience disease progression or adverse events independent
from our product candidates, such patients may be unevaluable for purposes of the trial and, as a result, we may require additional enrollment.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could
prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.
If clinical trials
for our product candidates are prolonged, delayed, or stopped, we may be unable to seek or obtain regulatory approval and commercialize
our product candidates on a timely basis, or at all, which would require us to incur additional costs and delay our receipt of any product
revenue.
We may experience delays in
our ongoing or future preclinical studies or clinical trials, and we do not know whether future preclinical studies or clinical trials
will begin on time, need to be redesigned, enroll an adequate number of patients on time, or be completed on schedule, if at all. The
commencement or completion of these clinical trials could be substantially delayed or prevented by many factors, including:
● further discussions with the FDA or comparable foreign regulatory authorities regarding the scope or design
of our clinical trials, including the endpoint measures required for regulatory approval and our statistical plan;
● the limited number of, and competition for, suitable study sites and investigators to conduct our clinical
trials, many of which may already be engaged in other clinical trial programs with similar patients, including some that may be for the
same indications as our product candidates;
● any delay or failure to obtain timely approval or agreement to commence a clinical trial in any of the
countries where enrollment is planned;
● inability to obtain sufficient funds required for a clinical trial;
● clinical holds on, or other regulatory objections to, a new or ongoing clinical trial;
● delay or failure to manufacture sufficient quantities or inability to produce quantities of consistent
quality, purity and potency of the product candidate for our clinical trials;
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● delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols
with prospective sites or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different
sites or CROs;
● delay or failure to obtain institutional review board (“IRB”) or ethics committee approval
to conduct a clinical trial at a prospective site;
● the FDA or other comparable foreign regulatory authorities may require us to submit additional data or
impose other requirements before permitting us to initiate a clinical trial;
● slower than expected rates of patient recruitment and enrollment;
● failure of patients to complete the clinical trial;
● the inability to enroll a sufficient number of patients in studies to ensure adequate statistical power
to detect statistically significant treatment effects;
● unforeseen safety issues, including severe or unexpected drug-related adverse effects experienced by patients,
including possible deaths;
● lack of efficacy or failure to measure a statistically significant clinical benefit within the dose range
with an acceptable safety margin during clinical trials;
● termination of our clinical trials by one or more clinical trial sites;
● inability or unwillingness of patients or clinical investigators to follow our clinical trial protocols;
● inability to monitor patients adequately during or after treatment by us or our CROs;
● our CROs or clinical study sites failing to comply with regulatory requirements or meet their contractual
obligations to us in a timely manner, or at all, deviating from the protocol or dropping out of a study;
● inability to address any noncompliance with regulatory requirements or safety concerns that arise during
the course of a clinical trial;
● the impact of, and delays related to, health epidemics such as the COVID-19 pandemic;
● the need to suspend, repeat or terminate clinical trials as a result of non-compliance with regulatory
requirements, inconclusive or negative results or unforeseen complications in testing; and
● the suspension or termination of our clinical trials upon a breach or pursuant to the terms of any agreement
with, or for any other reason by, any future strategic collaborator that has responsibility for the clinical development of any of our
product candidates.
Changes in regulatory requirements,
policies, and guidelines may also occur and we may need to significantly modify our clinical development plans to reflect these changes
with appropriate regulatory authorities. These changes may require us to renegotiate terms with CROs or resubmit clinical trial protocols
to IRBs for re-examination, which may impact the costs, timing, or successful completion of a clinical trial. Our clinical trials may
be suspended or terminated at any time by us, the FDA, other regulatory authorities, the IRB overseeing the clinical trial at issue, any
of our clinical trial sites with respect to that site, or us.
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Any failure or significant
delay in commencing or completing clinical trials for our product candidates, any failure to obtain positive results from clinical trials,
any safety concerns related to our product candidates, or any requirement to conduct additional clinical trials or other testing of our
product candidates beyond those that we currently contemplate would adversely affect our ability to obtain regulatory approval and our
commercial prospects and ability to generate product revenue will be diminished.
If we decide to
seek orphan drug designation for one or more of our product candidates, we may be unsuccessful or may be unable to maintain the benefits
associated with orphan drug designation for our current or future product candidates that we may develop.
Under the Orphan Drug Act,
the FDA may designate a product candidate as an orphan drug if it is a drug or biologic product intended to treat a rare disease or condition,
which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or where there is
no reasonable expectation that the cost of developing the product will be recovered from sales in the United States. We may seek orphan
drug designation for certain indications for our product candidates in the future. Orphan drug designation neither shortens the development
time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. Orphan drug designation
can entitle a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee
waivers.
In addition, if a product
candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation,
the product is entitled to a period of marketing exclusivity, which precludes the FDA from approving another marketing application for
the same drug for the same indication for seven years. The FDA may reduce the seven-year exclusivity if the same drug from a competitor
demonstrates clinical superiority to the product with orphan exclusivity or if the FDA finds that the holder of the orphan exclusivity
has not shown that it can assure the availability of sufficient quantities of the orphan product to meet the needs of patients with the
disease or condition for which the drug was designated. Even if one of our product candidates receives orphan exclusivity, the FDA can
still approve other drugs that have a different active ingredient for use in treating the same indication or disease.
In addition, exclusive marketing
rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may
be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure
sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if we obtain orphan
drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs with
different active moieties can be approved for the same condition, and while we may seek orphan drug designation for our product candidates,
we may never receive such designations. In addition, the FDA may reevaluate the Orphan Drug Act and its regulations and policies. We do
not know if, when, or how the FDA may change the orphan drug regulations and policies in the future, and it is uncertain how any changes
might affect our business. Depending on what changes the FDA may make to its orphan drug regulations and policies, our business could
be adversely impacted.
We may not be able
to conduct, or contract with others to conduct, animal testing in the future, which could harm our research and development activities.
Certain laws and regulations
relating to drug development require us to test our product candidates on animals before initiating clinical trials involving humans.
Animal testing activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and
individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas and by disrupting
these activities through protests and other means. To the extent the activities of these groups are successful, our research and development
activities may be interrupted or delayed.
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Risks Related to Third
Parties
We rely on third
parties to conduct our preclinical studies and our clinical trial for EB103, and plan to rely on third parties to conduct any clinical
trials for our other product candidates, and those third parties may not perform satisfactorily.
We expect to rely on third-party
clinical investigators, CROs, clinical data management organizations, and consultants to design, conduct, supervise, and monitor certain
preclinical studies and any clinical trials. Because we intend to rely on these third parties and will not have the ability to conduct
certain preclinical studies or clinical trials independently, we will have less control over the timing, quality, and other aspects of
such preclinical studies and clinical trials than we would have had we conducted them on our own. These investigators, CROs, clinical
data management organizations, and consultants will not be our employees and we will have limited control over the amount of time and
resources that they dedicate to our programs. Some of these third parties may terminate their engagements with us at any time. We also
expect to have to negotiate budgets and contracts with CROs, clinical trial sites and contract manufacturing organizations and we may
not be able to do so on favorable terms, which may result in delays to our development timelines and increased costs. If we need to enter
into alternative arrangements with, or replace or add any third parties, it would involve substantial cost and require extensive management
time and focus, or involve a transition period, and may delay our drug development activities, as well as materially impact our ability
to meet our desired clinical development timelines. These third parties may have contractual relationships with other entities, some of
which may be our competitors, which may draw time and resources from our programs. The third parties with which we may contract might
not be diligent, careful, or timely in conducting our preclinical studies or clinical trials, resulting in the preclinical studies or
clinical trials being delayed or unsuccessful.
Our reliance on these third
parties for such drug development activities will reduce our control over these activities. As a result, we will have less direct control
over the conduct, timing, and completion of preclinical studies and clinical trials and the management of data developed through preclinical
studies and clinical trials than would be the case if we were relying entirely upon our own staff. Nevertheless, we will be responsible
for ensuring that each of our studies and trials is conducted in accordance with applicable protocol, legal, and regulatory requirements
and scientific standards, including good laboratory practice (“GLP”), good clinical practice (“GCP”), Current
Good Manufacturing Practice (“cGMP”), and Current Good Tissue Practice (“cGTP”), and our reliance on third parties
does not relieve us of our regulatory responsibilities. For example, we will remain responsible for ensuring that each of our clinical
trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA and other regulatory
authorities require us to comply with GCP standards, regulations for conducting, recording, and reporting the results of clinical trials
to assure that data and reported results are reliable and accurate and that the rights, integrity, and confidentiality of trial participants
are protected. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators,
and trial sites. If we or any of our CROs, clinical sites and investigators fail to comply with applicable GCP requirements, the clinical
data generated in our clinical trials may be deemed unreliable and the FDA, European Medicines Agency (“EMA”), or other regulatory
authorities may require us to perform additional clinical trials before approving our marketing applications. There can be no assurance
that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials substantially
comply with GCP regulations. In addition, our clinical trials must be conducted with product candidates produced under cGMP regulations
and will require a large number of test patients. Our failure or any failure by these third parties to comply with these regulations or
to recruit a sufficient number of patients, may require us to repeat clinical trials, which would delay the regulatory approval process.
Moreover, our business may be implicated if any of these third parties violates FDA regulatory requirements as well as federal or state
healthcare laws and regulations or healthcare privacy and security laws.
If these third parties do
not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory
requirements or our stated protocols, or if these third parties need to be replaced, we will not be able to obtain, or may be delayed
in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully
commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would
be harmed, our costs could increase and our ability to generate revenue could be delayed.
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We depend on strategic
partnerships and collaboration arrangements, such as the Collaboration Agreement with Imugene and the Licensing Agreement with Eureka,
for the development and commercialization of EB103, EB104, and future product candidates in certain indications, and if these arrangements
are unsuccessful, this could impair our ability to generate revenues and materially harm our results of operations.
Our business strategy for
the research of EB103’s use in conjunction with CF33-CD19t is dependent upon maintaining our current arrangements and potentially
establishing new arrangements with strategic partners, research collaborators, and other third parties. The Collaboration Agreement with
Imugene allows us to investigate the use of EB103 in conjunction with CF33-CD19t in the treatment of solid tumors and to discuss the development
and commercialization of collaboration results. The Licensing Agreement with Eureka grants us an exclusive license to use ARTEMIS ®
technology in connection with CD19 and CD22 in the Licensed Territory. These agreements provide for, among other things, intellectual
property rights and significant future payments should certain development, regulatory, and commercial milestones be achieved.
As a result, we may not be
able to conduct these collaborations in the manner or on the time schedule we currently contemplate, which may negatively impact our business
operations.
Additionally, the development
and commercialization of potential product candidates under our collaboration agreements could be substantially delayed, and our ability
to receive future funding could be substantially impaired if one or more of our collaborators:
● shifts its priorities and resources away from our collaborations due to a change in business strategies,
or a merger, acquisition, sale, or downsizing of its company or business unit;
● ceases development in therapeutic areas which are the subject of our collaboration;
● fails to select a product candidate for advancement into preclinical development, clinical development,
or subsequent clinical development into a marketed product;
● changes the success criteria for a particular product candidate, thereby delaying or ceasing development
of such product candidate;
● significantly delays the initiation or conduct of certain activities which could delay our receipt of
milestone payments tied to such activities, thereby impacting our ability to fund our own activities;
● develops a product candidate that competes, either directly or indirectly, with our product candidates;
● does not obtain the requisite regulatory approval of a product candidate;
● does not successfully commercialize a product candidate;
● encounters regulatory, resource or quality issues and is unable to meet demand requirements;
● exercises its rights under the agreement to terminate the collaboration, or otherwise withdraws support
for, or otherwise impairs development under the collaboration;
● disagrees on the research, development or commercialization of a product candidate resulting in a delay
in milestones, royalty payments, or termination of research and development activities for such product candidate; and
● uses our proprietary information or intellectual property in such a way as to jeopardize our rights in
such property.
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In addition, the termination
of our existing collaborations or any future strategic partnership or collaboration arrangement that we enter into may prevent us from
receiving any milestone, royalty payment, sharing of profits, and other benefits under such agreement. Furthermore, disagreements with
these parties could require or result in litigation or arbitration, which would be time-consuming and expensive. Any of these events could
have a material adverse effect on our ability to develop and commercialize any of our product candidates and may adversely impact our
business, prospects, financial condition, and results of operations.
We may not realize
the anticipated benefits of our collaboration agreement with Imugene.
Our collaboration with Imugene
will explore therapeutic potential of a combination of Imugene’s CF33-CD19t in conjunction with EB103 for the treatment of solid
tumors. However, Imugene could develop therapies outside of our collaboration that do not utilize EB103. For example, Imugene could develop
an oncolytic virus that forces tumors to express a protein other than CD19 for a “mark and kill” approach to treating solid
tumors, which would require a combination with a T-cell therapy other than EB103.
We may not be able
to enter into additional strategic transactions on acceptable terms, if at all, which could adversely affect our ability to develop and
commercialize current and potential future product candidates and technologies, impact our cash position, increase our expenses and present
significant distractions to our management.
From time to time, we consider
strategic transactions, such as collaborations, geographic partnerships for the co-development and/or co-commercialization of our product
candidates in selected territories, acquisitions of companies, asset purchases, joint ventures, out- or in-licensing of product candidates
or technologies and biomanufacturing partnerships. For example, we will evaluate and, if strategically attractive, seek to enter into
collaborations, including with biotechnology or biopharmaceutical companies, contract development manufacturing organizations, or hospitals.
The competition for collaborators is intense, and the negotiation process is time-consuming and complex. If we are not able to enter into
strategic transactions, we may not have access to required liquidity or expertise to further develop our current or potential future product
candidates. Any such collaboration, or other strategic transaction, may require us to incur non-recurring or other charges, increase our
near- and long-term expenditures and pose significant integration or implementation challenges or disrupt our management or business.
We also may acquire additional
technologies and assets, form strategic alliances, or create joint ventures with third parties that we believe will complement or augment
our existing business, but we may not be able to realize the benefit of acquiring such assets. Conversely, any new collaboration that
we do enter into may be on terms that are not optimal for us, our product candidates, or our technologies. These transactions would entail
numerous operational and financial risks, including:
● exposure to unknown liabilities;
● disruption of our business and diversion of our management’s time and attention in order to negotiate
and manage a collaboration or develop acquired products, product candidates, or technologies;
● incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration
or costs;
● higher-than-expected collaboration, acquisition or integration costs, write-downs of assets or goodwill
or impairment charges, or increased amortization expenses;
● difficulty and cost in facilitating the collaboration or combining the operations and personnel of any
acquired business;
● impairment of relationships with key suppliers, manufacturers, or customers of any acquired business due
to changes in management and ownership; and
● the inability to retain key employees of any acquired business.
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Accordingly, although there
can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that
we do complete may be subject to the foregoing or other risks and our business could be materially harmed by such transactions. Conversely,
any failure to enter any collaboration or other strategic transaction that would be beneficial to us could delay the development and potential
commercialization of our product candidates and technologies and have a negative impact on the competitiveness of any product candidate
or technology that reaches market.
In addition, to the extent
that any future collaborators terminate a collaboration agreement, we may be forced to independently develop our current and future product
candidates and technologies, including funding preclinical studies or clinical trials, assuming marketing and distribution costs and maintaining,
enforcing and defending intellectual property rights, or, in certain instances, abandon product candidates and technologies altogether,
any of which could result in a change to our business plan and have a material adverse effect on our business, financial condition, results
of operations and prospects.
The manufacturing
of our product candidates is complex. We may encounter difficulties in production. If we encounter any such difficulties, our ability
to supply our product candidates for clinical trials or, if approved, for commercial sale, could be delayed or halted entirely.
The manufacture of biopharmaceutical
products is complex and requires significant expertise, including the development of advanced manufacturing techniques and process controls.
The process of manufacturing our product candidates is also extremely susceptible to product loss due to contamination, equipment failure
or improper installation or operation of equipment, operator error, contamination and inconsistency in yields, variability in product
characteristics and difficulties in scaling the production process. Even minor deviations from normal manufacturing processes could result
in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered
in our product candidates or the manufacturing facilities in which they are made, the facilities may need to be closed for an extended
period of time to investigate and remedy the contamination. As a result of the complexities, the cost to manufacture biologics in general,
and our cell-based product candidates in particular, is generally higher than traditional small molecule chemical compounds, and the manufacturing
process is less reliable and is more difficult to reproduce.
Any adverse developments affecting
manufacturing operations for our product candidates, if any are approved, may result in shipment delays, inventory shortages, lot failures,
product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and
incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts, or seek more costly
manufacturing alternatives. Furthermore, it is too early to estimate our cost of goods sold. The actual cost to manufacture our product
candidates could be greater than we expect because we are early in our development efforts.
Changes in methods
of product candidate manufacturing or formulation may result in the need to perform new clinical trials, which would require additional
costs and cause delay.
As product candidates are
developed through preclinical to late-stage clinical trials towards approval and commercialization, it is common that various aspects
of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize yield and
manufacturing batch size, minimize costs and achieve consistent quality and results. Such changes carry the risk that they will not achieve
these intended objectives. Any of these changes could cause our product candidates to perform differently and affect the results of ongoing,
planned, or future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the conduct
of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product
candidates and jeopardize our ability to commence product sales and generate revenue.
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Risks Related to Our Business
and Operations
If the market opportunities
for our current and potential future product candidates, are smaller than we believe they are, our future product revenues may be adversely
affected, and our business may suffer.
Our understanding of the number
of people who suffer from diseases that our current product candidates may be able to treat are based on estimates. These estimates may
prove to be incorrect, and new studies may reduce the estimated incidence or prevalence of these diseases. The number of patients in the
United States or elsewhere may turn out to be lower than expected, may not be otherwise amenable to treatment with our current or potential
future product candidates or patients may become increasingly difficult to identify and access, all of which would adversely affect our
business prospects and financial condition. In particular, the treatable population for our candidates may further be reduced if our estimates
of addressable populations are erroneous or sub-populations of patients do not derive benefit from our product candidates.
Further, there are several
factors that could contribute to making the actual number of patients who receive our current or potential future product candidates less
than the potentially addressable market. These include the lack of widespread availability of, and limited reimbursement for, new therapies
in many underdeveloped markets.
We face competition
from companies that have developed or may develop product candidates for the treatment of the diseases that we may target, including companies
developing novel therapies and platform technologies. If these companies develop therapies or platform technologies more rapidly than
we do, or if their therapies or platform technologies are more effective or have fewer side effects, our ability to develop and successfully
commercialize therapies may be adversely affected.
The development and commercialization
of T-cell therapies is highly competitive. We compete with a variety of large pharmaceutical companies, multinational biopharmaceutical
companies, other biopharmaceutical companies, and specialized biotechnology companies, as well as technology and therapeutics being developed
at universities and other research institutions. Our competitors are often larger and better funded than we are. Our competitors have
developed, are developing, or will develop product candidates and processes competitive with ours. Competitive therapeutic treatments
include those that have already been approved and accepted by the medical community and any new treatments that are currently in development
or that enter the market. We believe that a significant number of product candidates are currently under development, and may become commercially
available in the future, for the treatment of conditions for which we may try to develop product candidates. There is intense and rapidly
evolving competition in the biotechnology and biopharmaceutical fields. We believe that while EB103, EB104, and research relating to the
use of EB103 in conjunction with CF33-CD19t, their associated intellectual property, the characteristics of our current and potential
future product candidates, and our scientific and technical know-how together give us a competitive advantage in this space, competition
from many sources remains.
Many of our competitors have
significantly greater financial, technical, manufacturing, marketing, sales, and supply resources or experience than we do. If we successfully
obtain approval for any product candidate, we will face competition based on many different factors, including the safety and effectiveness
of our product candidates, the ease with which our product candidates can be administered, the timing and scope of regulatory approvals
for these product candidates, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage,
and patent position. Competing products and product candidates could present superior treatment alternatives, including by being more
effective, safer, less expensive, or marketed and sold more effectively than any products we may develop. Competitive products and product
candidates may make any product we develop obsolete or noncompetitive before we recover the expense of developing and commercializing
such product. Such competitors could also recruit our employees, which could negatively impact our level of expertise and our ability
to execute our business plan.
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Any inability to
attract and retain qualified key management, technical personnel and employees would impair our ability to implement our business plan.
Our success largely depends
on the continued service of our and Eureka’s key executive management, advisors, and other specialized personnel. Our and Eureka’s
senior management may terminate their employment with us and Eureka, as applicable, at any time. We do not maintain “key person”
insurance for any of our employees. The loss of one or more members of our or Eureka’s executive team, management team, or other
key employees or advisors could delay our research and development programs and have a material adverse effect on our business, financial
condition, results of operations, and prospects.
Recruiting and retaining qualified
scientific and clinical personnel and, if we progress the development of any of our product candidates, commercialization, manufacturing,
and sales and marketing personnel, will be critical to our success. The loss of the services of members of our or Eureka’s senior
management or other key employees could impede the achievement of our research, development, and commercialization objectives and seriously
harm our ability to successfully implement our business strategy. Furthermore, replacing members of our or Eureka’s senior management
and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry
with the breadth of skills and experience required to successfully develop, gain regulatory approval of, and commercialize our product
candidates. Our success also depends on our and Eureka’s ability to continue to attract, retain, and motivate highly skilled junior,
mid-level, and senior managers, as well as and Eureka’s junior, mid-level, and senior scientific and medical personnel. Competition
to hire from this limited candidate pool is intense, and we and Eureka may be unable to hire, train, retain or motivate these key personnel
on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We and Eureka
also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.
In addition, through the Services
Agreement with Eureka, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our
research and development and commercialization strategy. Such consultants and advisors are also consultants and advisors to Eureka, and
may have additional commitments under consulting or advisory contracts with other entities, that may limit their availability to us and
adversely impact the benefits we realize from the Services Agreement and our research and development and commercialization strategy
We may experience
difficulties in managing our growth and expanding our operations.
As our current and potential
future product candidates enter and advance through preclinical studies and any clinical trials, we will need to expand our development,
regulatory, and manufacturing capabilities or contract with other organizations to provide these capabilities for us.
To manage our anticipated
future growth, we will continue to implement and improve our managerial, operational, and financial systems and continue to recruit and
train additional qualified personnel. Due to our limited financial resources and the complexity in managing a company with such anticipated
growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel.
The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability
to manage growth could delay the execution of our business plans or disrupt our operations.
In addition, future growth
imposes significant added responsibilities on members of management, including: identifying, recruiting, integrating, maintaining, and
motivating additional employees; managing our internal development efforts effectively, including the clinical and FDA review process
for our product candidates, while complying with our contractual obligations to contractors and other third parties; and improving our
operational, financial and management controls, reporting systems and procedures.
We may also experience difficulties
in the discovery and development of potential future product candidates if we are unable to meet demand as we grow our operations. In
the future, we also expect to have to manage additional relationships with collaborators, suppliers, and other organizations. Our ability
to manage our operations and future growth will require us to continue to improve our operational, financial, and management controls,
reporting systems, and procedures, and to secure adequate facilities for our operational needs. We may not be able to implement improvements
to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and
controls.
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If any of our product
candidates is approved for marketing and commercialization in the future and we are unable to develop sales, marketing, and distribution
capabilities on our own or enter into agreements with third parties to perform these functions on acceptable terms, we will be unable
to successfully commercialize any such future products.
We will need to develop internal
sales, marketing, and distribution capabilities to commercialize each current and potential future product candidate that gains, if ever,
FDA or other regulatory authority approval, which would be expensive and time-consuming, or enter into collaborations with third parties
to perform these services. If we decide to market any approved products directly, we will need to commit significant financial and managerial
resources to develop a marketing and sales force with technical expertise and supporting distribution, administration, and compliance
capabilities. If we rely on third parties with such capabilities to market any approved products or decide to co-promote products with
third parties, we will need to establish and maintain marketing and distribution arrangements with third parties, and there can be no
assurance that we will be able to enter into such arrangements on acceptable terms or at all. In entering into third-party marketing or
distribution arrangements, any revenue we receive will depend upon the efforts of the third parties and we cannot assure you that such
third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for any approved
product. If we are not successful in commercializing any product approved in the future, either on our own or through third parties, our
business and results of operations could be materially and adversely affected.
Public opinion and
scrutiny of immunotherapy approaches may impact public perception of Estrella and product candidates, or may adversely affect our ability
to conduct our business and our business plans.
Public perception may be influenced
by claims, such as claims that immunotherapies are unsafe, unethical, or immoral and, consequently, our approach may not gain the acceptance
of the public or the medical community. Negative public reaction to immunotherapy in general could result in greater government regulation
and stricter labeling requirements of immunotherapy products, including any of our product candidates, and could cause a decrease in the
demand for any products we may develop. Adverse public attitudes may adversely impact our ability to enroll clinical trials. Moreover,
our success will depend upon physicians specializing in the treatment of those diseases that our product candidates target prescribing,
and their patients being willing to receive, treatments that involve the use of our product candidates in lieu of, or in addition to,
existing treatments they are already familiar with and for which greater clinical data may be available. More restrictive government regulations
or negative public opinion could have an adverse effect on our business or financial condition and may delay or impair the development
and commercialization of our product candidates or demand for any products we may develop. Adverse events in our clinical trials, even
if not ultimately attributable to our product candidates, and the resulting publicity could result in increased governmental regulation,
unfavorable public perception, potential regulatory delays in the testing or approval of our potential product candidates, stricter labeling
requirements for those product candidates that are approved and a decrease in demand for any such product candidates.
Our potential future
international operations may expose us to business, political, operational, and financial risks associated with doing business outside
of the United States.
Our business is subject to
risks associated with conducting business internationally. Some of our future clinical trials may be conducted outside of the United States
and we may enter into key supply arrangements or do other business with persons outside of the United States. Furthermore, if we or any
future collaborator succeeds in developing any products, we anticipate marketing them in the European Union and other jurisdictions in
addition to the United States. If approved, we or any future collaborator may hire sales representatives and conduct physician and patient
association outreach activities outside of the United States. Doing business internationally involves a number of risks, including but
not limited to:
● multiple, conflicting, and changing laws and regulations such as those relating to privacy, data protection
and cybersecurity, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals,
permits and licenses;
● failure by us to obtain and maintain regulatory approvals for the commercialization of our product candidates
in various countries;
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● rejection or qualification of foreign clinical trial data by the competent authorities of other countries;
● additional potentially relevant third-party patent rights;
● complexities and difficulties in obtaining, maintaining, protecting and enforcing our intellectual property
rights;
● difficulties in staffing and managing foreign operations;
● complexities associated with managing multiple payor reimbursement regimes, government payors or patient
self-pay systems;
● limits in our ability to penetrate international markets;
● financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact
of local and regional financial crises on demand, and payment for our products and exposure to foreign currency exchange rate fluctuations;
● natural disasters, political and economic instability, including wars, terrorism and political unrest,
outbreak of disease (including the COVID-19 pandemic), boycotts, curtailment of trade, and other business restrictions;
● certain expenses including, among others, expenses for travel, translation, and insurance; and
● regulatory and compliance risks that relate to anti-corruption compliance and record-keeping that may
fall within the purview of the U.S. Foreign Corrupt Practices Act, its accounting provisions or its anti-bribery provisions or provisions
of anti-corruption or anti-bribery laws in other countries.
Any of these factors could
harm our ongoing international operations and supply chain, as well as any future international expansion and operations and, consequently,
our business, financial condition, prospects and results of operations.
Our business entails
a significant risk of product liability, and our inability to obtain sufficient insurance coverage could have a material adverse effect
on our business, financial condition, results of operations and prospects.
As we conduct preclinical
studies and future clinical trials of our current and potential future product candidates, we will be exposed to significant product liability
risks inherent in the development, testing, manufacturing, and marketing of these product candidates. Product liability claims could delay
or prevent completion of our development programs. If we succeed in marketing products, such claims could result in an FDA investigation
of the safety and effectiveness of our products, our manufacturing processes and facilities or our marketing programs and potentially
a recall of our products or more serious enforcement action, limitations on the approved indications for which they may be used or suspension
or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our
products, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and our resources,
substantial monetary awards to trial participants or patients and a decline in our stock price. Any insurance we have or may obtain may
not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming
increasingly expensive. As a result, we or any future collaborators may be unable to obtain sufficient insurance at a reasonable cost
to protect us against losses caused by product liability claims that could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Our employees, principal
investigators, consultants, and commercial collaborators may engage in misconduct or other improper activities, including noncompliance
with regulatory standards and requirements.
We are exposed to the risk
of fraud or other misconduct by our employees, principal investigators, consultants, and commercial collaborators. Misconduct by employees
could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing
standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information
or data accurately or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices.
These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the
course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to
identify and deter 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 be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a material adverse effect on our business and financial condition, including
the imposition of significant criminal, civil and administrative fines or other sanctions, such as monetary penalties, damages, fines,
disgorgement, imprisonment, exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, integrity
obligations, reputational harm and the curtailment or restructuring of our operations.
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We depend on
sophisticated information technology systems and data processing to operate our business. If we experience security or data privacy
breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data
or personal data, we may face costs, significant liabilities, harm to our brand, and business disruption.
We rely on information technology
systems and data processing that we or our service providers, collaborators, consultants, contractors, or partners operate to collect,
process, transmit and store electronic information in our day-to-day operations, including a variety of personal data, such as name, mailing
address, email addresses, phone number and potentially clinical trial information. Additionally, we, and our service providers, collaborators,
consultants, contractors or partners, do or will collect, receive, store, process, generate, use, transfer, disclose, make accessible,
protect, and share personal information, health information, and other information to host or otherwise process some of our anticipated
future clinical data and that of users, to develop our products, to operate our business, for clinical trial purposes, for legal and marketing
purposes, and for other business-related purposes. Our internal computer systems and data processing and those of our third-party vendors,
consultants, collaborators, contractors, or partners, including future CROs may be vulnerable to a cyber-attack (including supply chain
cyber-attacks), malicious intrusion, breakdown, destruction, loss of data privacy, actions or inactions by our employees or contractors
that expose security vulnerabilities, theft, or destruction of intellectual property or other confidential or proprietary information,
business interruption or other significant security incidents. As the cyber-threat landscape evolves, these attacks are growing in frequency,
level of persistence, sophistication, and intensity, and are becoming increasingly difficult to detect. In addition to traditional computer
“hackers,” threat actors, software bugs, malicious code (such as viruses and worms), employee theft or misuse, denial-of-service
attacks (such as credential stuffing), phishing and ransomware attacks, sophisticated nation-state and nation-state supported actors now
engage in attacks (including advanced persistent threat intrusions). These risks may be increased as a result of COVID-19, owing to an
increase in personnel working remotely and higher reliance on internet technology. Furthermore, because the techniques used to obtain
unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may
be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may
remain undetected for an extended period.
To date, we have only implemented
limited privacy, data protection or cybersecurity policies, have not implemented any physical, technical, organizational, and administrative
security measures and policies, and have not been, to our knowledge, in compliance in all material respects with all Privacy and Security
Requirements (as that term is defined in the Merger Agreement) relating to data loss, theft, and breach of security notification obligations.
There can be no assurance
that we, our service providers, collaborators, consultants, contractors, or partners will be successful in efforts to detect, prevent
or fully recover systems or data from all breakdowns, service interruptions, attacks or breaches of systems that could adversely affect
our business and operations and/or result in the loss of critical or sensitive data. Any failure by us or our service providers, collaborators,
consultants, contractors or partners to detect, prevent, respond to or mitigate security breaches or improper access to, use of, or inappropriate
disclosure of any of this information or other confidential or sensitive information, including patients’ personal data, or the
perception that any such failure has occurred, could result in claims, litigation, regulatory investigations and other proceedings, significant
liability under state, federal and international law, and other financial, legal or reputational harm to us. Further, such failures or
perceived failures could result in liability and a material disruption of our development programs and our business operations, which
could lead to significant delays or setbacks in our research, delays to commercialization of our product candidates, lost revenues, or
other adverse consequences, any of which could have a material adverse effect on our business, results of operations, financial condition,
prospects and cashflow. For example, the loss or alteration of clinical trial data from future clinical trials could result in delays
in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.
Additionally, applicable laws
and regulations relating to privacy, data protection or cybersecurity, external contractual commitments, and internal privacy and security
policies may require us to notify relevant stakeholders if there has been a security breach, including affected individuals, business
partners and regulators. Such disclosures are costly, and the disclosures or any actual or alleged failure to comply with such requirements
could lead to a materially adverse impact on the business, including negative publicity, a loss of confidence in our services or security
measures by our business partners or breach of contract claims. There can be no assurance that the limitations of liability in our contracts
would be enforceable or adequate or would otherwise protect us from liabilities or damages if we fail to comply with applicable data protection
laws, privacy policies or other data protection obligations related to information security or security breaches.
If we do not comply
with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
We are subject to numerous
environmental, health, and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage,
treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous materials, including chemicals and
biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal
of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination
or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed
our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with
such laws and regulations.
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Although we maintain insurance
to cover us for costs and expenses, we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance
may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort
claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials. In addition, we
may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current
or future laws and regulations may impair our research, development, or production efforts. Our failure to comply with these laws and
regulations also may result in substantial fines, penalties, or other sanctions.
Our business, operations
and clinical development plans and timelines could be adversely affected by the effects of health epidemics, including the ongoing COVID-19
pandemic, on the manufacturing, clinical trial, and other business activities performed by us or by third parties with whom we may conduct
business, including our anticipated contract manufacturers, CROs, shippers, and others.
Health epidemics could cause
significant disruption in our operations and the operations of third-party manufacturers, CROs and other third parties upon whom we rely.
For example, in March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Since then, COVID-19 has spread to
most countries and all 50 states within the United States, and the U.S. government has, at various times, ordered the closure of all non-essential
businesses, and imposed social distancing measures, “shelter-in-place” orders and restrictions on travel between the United
States, Europe, and certain other countries. The global pandemic and government measures taken in response have also had a significant
impact on businesses and commerce worldwide, as worker shortages have occurred, supply chains have been disrupted, facilities and production
have been suspended across a variety of industries, and demand for certain goods and services, such as medical services and supplies,
has spiked, while demand for other goods and services, such as travel, has fallen. The effects of government orders may negatively impact
productivity, disrupt our business and delay our clinical programs and timelines, the magnitude of which will depend, in part, on the
length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course.
If our relationships with
our suppliers or other vendors are terminated or scaled back as a result of the COVID-19 pandemic or other health epidemics, we may not
be able to enter into arrangements with alternative suppliers or vendors or do so on commercially reasonable terms or in a timely manner.
Switching or adding additional suppliers or vendors involves substantial cost and requires management time and focus. In addition, there
is a natural transition period when a new supplier or vendor commences work. As a result, delays may occur, which could adversely impact
our ability to meet our desired clinical development and any future commercialization timelines. Although we carefully manage our relationships
with our suppliers and vendors, there can be no assurance that we will not encounter challenges or delays in the future or that these
delays or challenges will not harm our business.
In addition, our preclinical
studies and future clinical trials may be affected by the COVID-19 pandemic or other health epidemics. Clinical site initiation, patient
enrollment and activities that require visits to clinical sites, including data monitoring, may be delayed due to prioritization of hospital
resources towards the COVID-19 pandemic or concerns among patients about participating in clinical trials during a pandemic. Some patients
may have difficulty following certain aspects of clinical trial protocols if quarantines impede patient movement or interrupt healthcare
services. These challenges may also increase the costs of completing our clinical trials. Similarly, if we are unable to successfully
recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19
or experience additional restrictions by their institutions, city or state, our preclinical studies and future clinical trial operations
could be adversely impacted.
The spread of COVID-19, which
has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration
of, COVID-19 may be difficult to assess or predict, a widespread pandemic has resulted in significant volatility for global financial
markets, resulting in economic uncertainty that could continue to significantly impact our business and operations and may reduce our
ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting
from the spread of COVID-19 could materially affect our business and the value of our Common Stock. In addition, any recurrence or new
increases in the rates and severity of COVID-19 infection could cause other widespread or more severe impacts depending on where infection
rates are highest.
Our business, operations,
financial position and clinical development plans and timelines, could be materially adversely affected by the continuing military action
in Ukraine and the war between Israel and Hamas.
As a result of the military
action commenced in February 2022 by the Russian Federation and Belarus in Ukraine and the war between Israel and Hamas commenced in October
2023, and related economic sanctions imposed or that may in the future be imposed by certain governments, our financial position and operations
may be materially and adversely affected. As our ability to continue to operate will be dependent on raising debt and equity finance,
any adverse impact to those markets as a result of these conflicts, including due to increased market volatility, decreased availability
in third-party financing and/or a deterioration in the terms on which it is available (if at all), could negatively impact our business,
results of operations, cash flows, financial condition, and/or prospects. The extent of any potential impact is not yet determinable,
however.
Recent volatility
in capital markets and lower market prices for our securities may affect our ability to access new capital through sales of shares of
our Common Stock or issuance of indebtedness, which may harm our liquidity, limit our ability to grow our business, pursue acquisitions
or improve our operating infrastructure and restrict our ability to compete in our markets.
Our operations consume substantial
amounts of cash, and we intend to continue to make significant investments to support our business growth, respond to business challenges
or opportunities, develop new solutions, retain or expand our current levels of personnel, improve our existing solutions, enhance our
operating infrastructure, and potentially acquire complementary businesses and technologies. Our future capital requirements may be significantly
different from our current estimates and will depend on many factors, including the need to:
● finance unanticipated working capital requirements;
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● develop or enhance our technological infrastructure and our existing solutions;
● pursue acquisitions or other strategic relationships; and
● respond to competitive pressures.
Accordingly, we may need to
pursue equity or debt financings to meet our capital needs. With uncertainty in the capital markets and other factors, such financing
may not be available on terms favorable to us or at all. If we raise additional funds through further issuances of equity or convertible
debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights,
preferences, and privileges superior to those of holders of Estrella common stock. Any debt financing secured by us in the future could
involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which
may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
If we are unable to obtain adequate financing or financing on terms satisfactory to us, we could face significant limitations on our ability
to invest in our operations and otherwise suffer harm to our business.
Rising inflation
rates could negatively impact our revenues and profitability if increases in the prices of our products or a decrease in consumer spending
results in lower sales. In addition, if our costs increase and we are not able to pass along these price increases to our customers, our
net income would be adversely affected, and the adverse impact may be material.
Inflation rates, particularly
in the United States, have increased recently to levels not seen in years. Increased inflation may result in decreased demand for our
products and services, increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access
credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest
rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and
volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks.
Risks Related to the Separation
and Our Relationship with Eureka
We incurred significant
costs in connection with the Business Combination and will incur incremental costs as a standalone public company.
We incurred approximately
$1.6 million in transaction costs in connection with the Business Combination, including accounting, legal, underwriting, financial and
capital markets advisory, and other fees and expenses. For operational matters outside of the scope of the Services Agreement, we may
hire additional employees, or out-source certain functions, systems, and infrastructure through contracts with third parties. These initiatives
may be costly to implement. To the extent we implement any of these initiatives, we may incur additional operating costs, and the amount
and timing of such costs is uncertain.
Eureka currently performs
or supports many important corporate functions for us pursuant to the Services Agreement. The Services Agreement may be terminated by
mutual agreement at any time. Following the termination of, or the expiration of the term of, the Services Agreement, we may not be able
to replace the services or enter into appropriate third-party arrangements on terms and conditions, including cost, comparable to those
that we will receive from Eureka under our Services Agreement. Additionally, after the Services Agreement terminates, we may be unable
to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from Eureka.
If we are required to operate these functions separately in the future, and we do not have our own adequate systems and business functions
in place at that time, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at
comparable costs, and our profitability may decline.
We also share office space
with Eureka pursuant to an office sharing agreement that commenced in August 2022. If Eureka were to leave or lose its office space, we
may not have adequate facilities to operate our business effectively and as required by the Collaboration Agreement or the costs of our
office space could increase.
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Certain of our officers
or directors may have actual or potential conflicts of interest because of their equity interests in or positions with Eureka.
Our CEO, President, and director,
Dr. Liu, currently serves as the CEO and President of Eureka. As a result, Dr. Liu devotes less than full time to the operation of our
business. Pursuant to his employment agreement, Dr. Liu is expected to fulfill his duties as our CEO, but is not required to provide a
specific number of hours to our business per week or per month.
Dr. Liu’s position at
Eureka and the ownership by our officers and directors of any Eureka equity or equity awards, or Estrella equity awards the vesting for
which is based in part on the total stockholder return of Eureka, creates, or may create the appearance of, conflicts of interest when
these officers or directors are faced with decisions that could have different implications for Eureka than for us. These potential conflicts
could arise, for example, over matters such as the desirability of changes in our business and operations, funding and capital matters,
regulatory matters, intellectual property-related conflicts, including those relating to potential improvements to the ARTEMIS ®
platform, possible acquisitions or other corporate opportunities, and agreements with Eureka relating to the Separation or otherwise,
allocation of resources and personnel pursuant to the Services Agreement, employee retention or recruiting, or our dividend policy.
In addition, our officers
or directors may own Eureka common stock or equity awards. Certain of our officers, including Dr. Liu, and our director nominees have
holdings of Eureka common stock or equity awards that have a material monetary value.
We rely on Eureka
for our research and development efforts.
Pursuant to the Services Agreement,
Eureka currently performs or supports our important research and development activities. The Services Agreement may be terminated by mutual
agreement at any time. Following the termination of, or the expiration of the term of, the Services Agreement, we may not be able to replace
the research and development-related services that Eureka provides or enter into appropriate third-party arrangements on terms and conditions,
including cost, comparable to those that we will receive from Eureka. Additionally, after the Services Agreement terminates, we may be
unable to sustain the research and development-related services at the same levels or obtain the same benefits as when we were receiving
such services and benefits from Eureka. If we are required to operate these research and development functions separately in the future,
and we do not have our own adequate systems and business functions in place at that time, or are unable to obtain them from other providers,
we may not be able to operate our business effectively.
Additionally, our CEO and
President, Dr. Liu, currently serves as the CEO and President of Eureka. Dr. Liu may have a conflict of interest in allocating resources
and personnel between Estrella and Eureka, including pursuant to the Services Agreement, which may adversely impact the benefits we realize
from the Services Agreement and our research and development and commercialization strategy.
Risks Related to Our Intellectual
Property
If we are unable
to obtain or protect intellectual property rights related to our in-licensed technology, future technologies and current or future product
candidates, or if our intellectual property rights are inadequate, our competitors could develop and commercialize products and technology
similar or identical to ours, and we may not be able to compete effectively in our market or successfully commercialize any product candidates
we may develop.
Our success depends in part
on our ability to obtain and maintain protection for our in-licensed intellectual property rights and proprietary technology. We rely
on a combination of patents, trademarks, trade secret protection and confidentiality agreements, including in-licenses of intellectual
property rights and biologic materials of others, to protect our current or future product candidates, methods used to manufacture our
current or future product candidates and methods for treating patients using our current or future product candidates.
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We in-license patents and
patent applications relating to our product candidates. There is no guarantee that any patents covering our product candidates will issue
from the patent applications we in-license, or from any patent applications that we may file in the future, or, if they do, that the issued
claims will provide adequate protection for our product candidates, or any meaningful competitive advantage. Further, there is no assurance
that any such patents issued will not be infringed, designed around, invalidated by third parties or effectively prevent others from commercializing
competitive technologies, products or product candidates.
The patent prosecution process
is expensive, complex and time-consuming. Patent license negotiations also can be complex and protracted, with uncertain results. We may
not be able to file, prosecute, maintain, enforce or license all necessary or desirable patents and patent applications at a reasonable
cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output
before it is too late to obtain patent protection. The patent applications that we in-license may fail to result in issued patents, and,
even if they do issue as patents, such patents may not cover our current or future technologies or product candidates in the United States
or in other countries or provide sufficient protection from competitors. In addition, the coverage claimed in a patent application can
be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. We do not have exclusive control
over the preparation, filing and prosecution of patent applications under certain of our in-license agreements, and we may not have the
right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents, that we may file
and then out-license to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent
with the best interests of our business. Even if our in-licensed patent applications issue as patents, they may not issue in a form that
will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive
advantage. Our competitors may be able to circumvent our in-licensed patents by developing similar or alternative product candidates in
a non-infringing manner.
Further, although we make
reasonable efforts to ensure patentability of our in-licensed inventions and our future inventions, we cannot guarantee that all of the
potentially relevant prior art relating to our in-licensed patents and any patent applications that we may file in the future has been
or will be found. For example, publications of discoveries in scientific literature often lag behind the actual discoveries, and patent
applications in the United States and other jurisdictions are typically not published until 18 months after filing, and in some cases
not at all. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in
a manner that could cover our licensed platform technologies, our product candidates, or the use of our technologies. We thus cannot know
with certainty whether our licensors were the first to file for patent protection of our licensors’ inventions. In addition, the
United States Patent and Trademark Office (“USPTO”) might require that the term of a patent issuing from a pending patent
application be disclaimed and limited to the term of another patent that is commonly owned or that names a common inventor. There is no
assurance that all potentially relevant prior art relating to our in-licensed patents has been found. For this reason, and because there
is no guarantee that any prior art search is absolutely correct and comprehensive, we may be unaware of prior art that could be used to
invalidate an issued patent that we license or to prevent any patent applications that we may file in the future from issuing as patents.
Invalidation of any patent rights with respect to our in-licensed patents could materially harm our business.
Moreover, the patent positions
of biotechnology companies like ours are generally uncertain because they may involve complex legal and factual considerations that have,
in recent years, been the subject of legal development and change. The relevant patent laws and their interpretation, both inside and
outside of the United States, is also uncertain. Changes in either the patent laws or their interpretation in the United States and other
jurisdictions may diminish our ability to protect our platform technology or product candidates and could affect the value of such intellectual
property. In particular, our ability to stop third parties from making, using, selling, offering to sell or importing products that infringe,
misappropriate or otherwise violate our intellectual property will depend in part on our success in obtaining and enforcing patent claims
that cover our in-licensed platform technology and inventions, our product candidates, future inventions and improvements. We cannot guarantee
that patents will be granted with respect to any patent applications we may file or in license in the future, nor can we be sure that
any patents that may be granted to us or our licensors in the future will be commercially useful in protecting our products, or the methods
of use or manufacture of those products. Additionally, third parties, including our former employees and collaborators, may challenge
the ownership or inventorship of our licensed or future patent rights to claim that they are entitled to ownership and inventorship interest,
and we may not be successful in defending against such claims. However, we are not currently facing any such challenges. Moreover, issued
patents do not guarantee the right to practice our in-licensed or owned technology or inventions in relation to the commercialization
of our products. Issued patents only allow us to block — in some cases — potential competitors from practicing the claimed
inventions of the issued patents.
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The standards applied by the
USPTO and foreign patent offices in granting patents are not always certain and moreover, are not always applied uniformly or predictably.
For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in patents. The
in-licensed patents and patent applications, and our potential future patent applications, if any, may not result in patents being issued
in the United States or in other jurisdictions which protect our technology or products or which effectively prevent others from commercializing
competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and
other countries may diminish the value of any patent applications we may file in the future or narrow the scope of any patent protection
we may obtain from any such patent applications. In addition, the laws of foreign countries may not protect our rights to the same extent
as the laws of the United States.
Further, patents and other
intellectual property rights in the pharmaceutical and biotechnology space are evolving and involve many risks and uncertainties. For
example, third parties may have blocking patents that could be used to prevent us from commercializing our product candidates and any
future product candidates and practicing the in-licensed proprietary technology, and any issued patents may be challenged, invalidated
or circumvented, which could limit our ability to stop competitors from marketing related products or could limit the term of patent protection
that otherwise may exist for our product candidate and any future product candidates. In addition, the scope of the rights granted under
any issued patents may not provide us with protection or competitive advantages against competitors or other parties with similar technology.
Additionally, our competitors may initiate legal proceedings, such as declaratory judgment actions in federal court or reexaminations
or an inter partes review at the USPTO in an attempt to invalidate or narrow the scope of our in-licensed patents. However, neither
we nor our licensors are currently facing any such proceedings. Furthermore, our competitors or other parties may independently develop
similar technologies that are outside the scope of the rights granted under any issued patents. For these reasons, we may face competition
with respect to our product candidates and any future product candidates. Moreover, because of the extensive time required for development,
testing and regulatory review of a potential product, it is possible that, before any particular product candidate can be commercialized,
any patent protection for such product candidate may expire or remain in force for only a short period following commercialization, thereby
reducing the commercial advantage the patent provides.
Even if patents do successfully
issue from any patent applications we may file in the future, and even if such patents cover our in-licensed current technologies or any
future technologies or product candidates, third parties may challenge their validity, enforceability or scope, which may result in such
patents being narrowed, invalidated, or held unenforceable. Any successful challenge to these patents or to any other patents licensed
to us could deprive us of rights necessary for the successful commercialization of any current or future technologies or product candidates
that we may develop. Likewise, if such patent applications with respect to our development programs and current or future technologies
or product candidates fail to issue, if their breadth or strength is threatened, or if they fail to provide meaningful exclusivity, other
companies could be dissuaded from collaborating with us to develop current or future technologies or product candidates. Lack of valid
and enforceable patent protection could threaten our ability to commercialize current or future products and could prevent us from maintaining
exclusivity with respect to the invention or feature claimed in the patent applications. Any failure to obtain or any loss of patent protection
could have a material adverse impact on our business and ability to achieve profitability. We may be unable to prevent competitors from
entering the market with a product that is similar or identical to any of our current or potential future product candidates or from utilizing
technologies similar to those in our in-licensed T-cell immunotherapy technologies.
The filing of a patent application
or the issuance of a patent is not conclusive as to its ownership, inventorship, scope, patentability, validity or enforceability. Issued
patents and patent applications may be challenged in the courts and in the patent office in the United States and abroad. For example,
any potential future patent applications filed by us or our licensors, or any patents that issue therefrom, may be challenged through
third-party submissions, opposition or derivation proceedings. By further example, any such issued patents may be challenged through reexamination,
inter partes review or post-grant review proceedings before the USPTO, or in declaratory judgment actions or counterclaims. An
adverse determination in any such submission, proceeding or litigation could prevent the issuance of, reduce the scope of, invalidate
or render unenforceable our in-licensed patent rights or any patent rights arising from issuance of a patent based on an application that
we may file in the future, result in the loss of exclusivity, limit our ability to stop others from using or commercializing similar or
identical platforms and product candidates, or allow third parties to compete directly with us without payment to us. In addition, if
the breadth or strength of protection provided by any patents that might result from our in-licensed patent applications or any patent
applications that we may file in the future is threatened, it could dissuade companies from collaborating with us to license, develop
or commercialize current or future platforms or product candidates. Any of the foregoing could have a material adverse effect on our business,
financial condition, results of operations and prospects.
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Moreover, the Collaboration
Agreement allows us to co-own with Imugene patent applications relating to inventions jointly developed under the Collaboration Agreement,
and we may in the future co-own additional patents and patent applications with third parties pursuant to agreements that we may enter
into. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent application,
such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market
competing products and technology. We may need the cooperation of any such co-owners to enforce such patents against third parties, and
such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business
prospects and financial conditions.
Our in-licensed patent rights
may be subject to a reservation of rights by one or more third parties, such as the U.S. government. In addition, our rights in such inventions
may be subject to certain requirements to manufacture product candidates embodying such inventions in the United States. Any exercise
by the U.S. government of such rights could harm our competitive position, business, financial condition, results of operations and prospects.
Our in-licensed
patent rights may not cover our products or processes, including ARTEMIS ® , or any otherwise viable commercial products
or processes and/or may be invalid or unenforceable
We have not specifically evaluated
the scope of coverage, validity, or enforceability of our in-licensed patent rights. These patents may not cover any of our current or
future products or processes, including ARTEMIS ® platform technology, or any otherwise viable commercial products or processes.
Even if the patents do cover any of our current or future products, we have not evaluated whether and how easily a competitor may be able
to design and market a competing product that does not infringe on any of our in-licensed patent rights. The in-licensed patent rights
may have no commercial value. The in-licensed patent rights may be invalid or unenforceable for a variety of reasons including, non-patentable
subject matter, anticipation, on-sale bar, public use bar, public disclosure, obviousness, inadequate written description, inadequate
disclosure, lack of enablement, estoppel, laches, implied license, failure to mark, misuse, and/or inequitable conduct.
Our licenses and
other material contracts may be invalid, unenforceable, or limited as to intellectual property and/or may impede, limit, or eliminate
our ability to secure or protect our intellectual property, including in-licensed patent rights and any future developments.
We have not specifically evaluated
the scope, validity, or enforceability of Eureka’s license of patent rights to Estrella. The license may not be valid, may be unenforceable,
may have a limited scope, and may not confer adequate rights or standing. These risks may undermine our ability to enforce, control, and
protect our in-licensed patent rights. We have not specifically evaluated the scope, validity, enforceability, or commercial usefulness
of materials contracts as they relate to intellectual property. These contracts may not enable development of commercially valuable intellectual
property and may materially limit or eliminate our ability to secure or protect our intellectual property, including in-licensed patent
rights.
The patent protection
and patent prosecution for some of our product candidates and technologies may be dependent on third parties.
While we normally seek to
obtain the right to control prosecution, maintenance and enforcement of the patents relating to our product candidates and technologies,
there may be times when the filing and prosecution activities for patents and patent applications relating to our product candidates and
technologies are controlled by our licensors or collaborators. Our licensors may not successfully prosecute the patent applications to
which we are licensed. Even if patents are issued in respect of these patent applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively
than we would.
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If any of our licensors or
collaborators fail to prosecute, maintain and enforce such patents and patent applications in a manner consistent with the best interests
of our business, including by payment of all applicable fees for patents covering our product candidates and technologies, we could lose
our rights to the intellectual property or our exclusivity with respect to those rights, our ability to develop and commercialize those
product candidates and technologies may be adversely affected and we may not be able to prevent competitors from making, using and selling
competing product candidates. In addition, even where we have the right to control the prosecution of patents and patent applications
we have licensed from third parties, we may still be adversely affected or prejudiced by actions or inactions of our licensees, our current
and future licensors and their counsel that took place prior to the date upon which we assumed control over patent prosecution.
Further, we may have limited
control over the manner in which our licensors initiate an infringement proceeding against a third-party infringer of the intellectual
property rights, or defend certain of the intellectual property that is licensed to us. It is possible that the licensors’ infringement
proceeding(s) or defense activities may be less vigorous than had we conducted them ourselves.
We may be unable
to acquire or in-license any relevant third-party intellectual property rights that we identify as necessary or important to our business
operations.
Because our development programs
may in the future require the use of proprietary rights held by third parties, the growth of our business may depend in part on our ability
to acquire, in-license or use these third-party proprietary rights. We may be unable to acquire or in-license any compositions, methods
of use, processes or other third-party intellectual property rights from third parties that we identify as necessary for our product candidates.
The licensing of third-party intellectual property rights is a competitive area, and more established companies may pursue strategies
to license or acquire third-party intellectual property rights that we may consider attractive or necessary. More established companies
may have a competitive advantage over us due to their size, capital resources and greater clinical development and commercialization capabilities.
In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to
license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment
or at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies
licensed to us. If we are unable to license such technology, or if we are forced to license such technology on unfavorable terms, our
business could be materially harmed. If we are unable to obtain a necessary license, we may be unable to develop or commercialize the
affected current or future product candidates, which could materially harm our business, and the third parties owning such intellectual
property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay
royalties or other forms of compensation. Any of the foregoing could harm our competitive position, business, financial condition, results
of operations and prospects.
Further, our licensors may
retain certain rights under their agreements with us, including the right to use the underlying technology for noncommercial academic
and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and
scholarly disclosures of information relating to the technology. It is difficult to monitor whether our licensors limit their use of the
technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse.
Additionally, some intellectual
property that we have in-licensed may have been discovered through government funded programs and thus may be subject to federal regulations
such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such
regulations may limit our exclusive rights, and limit our ability to contract with non-U.S. manufacturers. As a result, the U.S. government
may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of
1980 (“Bayh-Dole Act”) and implementing regulations. These U.S. government rights in certain inventions developed under a
government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental
purpose. In addition, the U.S. government may have the right to require us or our licensors to grant exclusive, partially exclusive, or
non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize
the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet
requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has
the right to take title to these inventions made through government funded programs if we, or the applicable licensor, fail to disclose
the invention to the government and fail to file an application to register the intellectual property within specified time limits. These
time limits have recently been changed by regulation, and may change in the future. Intellectual property generated under a government-funded
program is also subject to certain reporting requirements, compliance with which may require us or the applicable licensor to expend substantial
resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of
the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the
owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms
to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic
manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product
manufacturers for products covered by such intellectual property. To the extent any of our current or future intellectual property is
generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply.
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We currently, and
in the future may continue to, enter into agreements involving licenses or collaborations that provide for access or sharing of intellectual
property. These intellectual property-related agreements may impose certain obligations and restrictions on our ability to develop and
commercialize our product candidates and technologies that are the subject of such licenses.
We license rights from third
parties to use certain intellectual property relevant to one or more of our current and future product candidates. In the future, we may
need to obtain additional licenses from others to advance our research and development activities or allow the commercialization of our
current and future product candidates we may identify and pursue. These existing license agreements impose, and any future license agreements
we enter into are likely to impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing, insurance,
patent prosecution and enforcement or other obligations on us. For example, we are a party to the License Agreement with Eureka and Eureka
Therapeutics (Cayman), Inc. For a more detailed description of the License Agreement, see the section titled “ Business —
Intellectual Property .”
In addition, certain of our
future agreements with third parties may limit or delay our ability to consummate certain transactions, may impact the value of those
transactions, or may limit our ability to pursue certain activities. For example, we may in the future enter into license agreements that
are not assignable or transferable, or that require the licensor’s express consent in order for an assignment or transfer to take
place.
Further, we or our licensors,
if any, may fail to identify patentable aspects of inventions made in the course of development and commercialization activities before
it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to strengthen our patent position.
It is possible that defects of form in the preparation or filing of our in-licensed patents may exist, or may arise in the future, for
example with respect to proper priority claims, inventorship, claim scope, or requests for patent term adjustments. If we or our licensors
fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated.
If our licensors are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights,
such patent rights could be compromised. If there are material defects in the form, preparation, prosecution, or enforcement of our in-licensed
patents, such patents may be invalid and/or unenforceable, and such applications may never result in valid, enforceable patents. Any of
these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial
conditions, results of operations and prospects.
Furthermore, we may not have
the right to control the preparation, filing, prosecution, maintenance, enforcement and defense of patents and patent applications that
we license from third parties. In certain circumstances, our licensed patent rights are subject to our reimbursing our licensors for their
patent prosecution and maintenance costs. If our licensors and future licensors fail to prosecute, maintain, enforce and defend patents
we may license, or lose rights to licensed patents or patent applications, our licensed rights may be reduced or eliminated. In such circumstances,
our right to develop and commercialize any of our products or product candidates that is the subject of such licensed rights could be
materially adversely affected. Even where we have the right to control prosecution of patents and patent applications under license from
third parties, we may still be adversely affected or prejudiced by actions or inactions of our predecessors or licensors and their counsel
that took place prior to us assuming control over patent prosecution.
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Our technology acquired or
licensed currently or in the future from various third parties is or may be subject to retained rights. Our predecessors or licensors
do and may retain certain rights under their agreements with us, including the right to use the underlying technology for non-commercial
academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific
and scholarly disclosures of information relating to the technology. It is difficult to monitor whether our predecessors or licensors
limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology
in the event of misuse.
If we are limited in our ability
to utilize acquired or licensed technologies, or if we lose our rights to critical in-licensed technology, we may be unable to successfully
develop, out-license, market and sell our product candidates, which could prevent or delay new product introductions. Our business strategy
depends on the successful development of acquired technologies and licensed technology into commercial product candidates. Therefore,
any limitations on our ability to utilize these technologies may impair our ability to develop, out-license or market and sell our product
candidates.
If we fail to comply
with our obligations under any existing or future license, collaboration or other intellectual property-related agreements, we may be
required to pay damages and could lose intellectual property rights that may be necessary for developing, commercializing and protecting
our current or future technologies or product candidates or we could lose certain rights to grant sublicenses.
We have certain obligations
to third-party licensors from whom we license certain patent rights that are relevant to one or more current and future product candidates.
In the future, we may need to obtain additional licenses from other third parties to advance our research and development activities or
allow the commercialization of our current and future product candidates. Our existing license agreements impose, and any future license
agreements we enter into are likely to impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing,
insurance, patent prosecution and enforcement or other obligations on us. For a more detailed description of our existing license agreements,
see the section titled “ Business — License Agreement .” If we breach any of these obligations, including diligence
obligations with respect to development and commercialization of product candidates covered by the intellectual property licensed to us,
or use the intellectual property licensed to us in an unauthorized manner or we are subject to bankruptcy-related proceedings, we may
be required to pay damages and the licensor may have the right to terminate the respective agreement or materially modify the terms of
the license, such as by rendering currently exclusive licenses non-exclusive. License termination or modification could result in our
inability to develop, manufacture and sell products that are covered by the licensed intellectual property or could enable a competitor
to gain access to the licensed intellectual property.
In certain circumstances,
our licensed patent rights are subject to our reimbursing our licensors for their patent prosecution and maintenance costs. If our licensors
and future licensors fail to prosecute, maintain, enforce and defend patents we may license, or lose rights to licensed patents or patent
applications, our licensed rights may be reduced or eliminated. In such circumstances, our right to develop and commercialize any of our
products or product candidates that are the subject of such licensed rights could be materially adversely affected.
Our current or future licensors
may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of
their merit, that we are infringing, misappropriating or otherwise violating the licensor’s intellectual property rights. In addition,
while we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future products if infringement
or misappropriation were found, those amounts could be significant. The amount of our future royalty obligations will depend on the technology
and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully
develop and commercialize products, we may be unable to achieve or maintain profitability.
Disputes may arise between
us and our present and future licensors regarding intellectual property subject to a licensing agreement, including:
● the scope of rights granted under the license agreement and other interpretation-related issues, including
but not limited to our right to transfer or assign the license;
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● whether and the extent to which our product candidates, technology and processes infringe on intellectual
property of the licensor that is not subject to the licensing agreement;
● our right to sublicense patents and other rights to third parties, including the terms and conditions
thereof;
● our diligence obligations with respect to the development and commercialization of our product candidates
that are covered by the license agreement, and what activities satisfy those diligence obligations;
● our right to transfer or assign the license;
● the inventorship and ownership of inventions and know-how resulting from the joint creation or use of
intellectual property by our licensors and us and our collaborators; and
● the priority of invention of patented technology.
If disputes over intellectual
property that we license in the future prevent or impair our ability to maintain our licensing arrangements on acceptable terms, we may
not be able to successfully develop and commercialize the affected product candidates, which would have a material adverse effect on our
business, financial condition, results of operations and prospects.
In addition, the agreements
under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements
may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow
what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our
financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial
condition, results of operations and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair
our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop
and commercialize the affected product candidates, which could have a material adverse effect on our business, financial condition, results
of operations and prospects.
In addition, while we currently
do not have any liens, security interests, or other encumbrances on the intellectual property that we own, we may, in the future, need
to obtain a loan or a line of credit that will require that we put up our intellectual property as collateral to our lenders or creditors.
If we do so, and we violate the terms of any such loan or credit agreement, our lenders or creditors may take possession of such intellectual
property, including the rights to receive proceeds derived from such intellectual property.
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Patent terms may
not be able to protect our competitive position for an adequate period of time with respect to our current or future technologies or product
candidates.
Patents have a limited lifespan.
The term of individual patents and applications in-licensed to us and in our portfolio in the future depends upon the legal term of patents
in the countries in which they are obtained. In most countries in which we would file, including the United States, the patent term is
20 years from the earliest date of filing a non-provisional patent application. Extensions of a patent term may be available, but there
is no guarantee that such patents may be eligible for extension, or that we would succeed in obtaining any particular extension, and no
guarantee any such extension would confer a patent term for a sufficient period of time to exclude others from commercializing product
candidates similar or identical to ours. In the United States, the term of a patent may be eligible for patent term adjustment, which
permits patent term restoration as compensation for delays incurred at the USPTO during the patent prosecution process. In addition, for
patents that cover an FDA-approved drug, the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”)
permits a patent term extension of up to five years beyond the expiration of the patent. While the length of the patent term extension
is related to the length of time the drug is under regulatory review, patent term extension cannot extend the remaining term of a patent
beyond a total of 14 years from the date of product approval, and only one patent per approved drug — and only those claims covering
the approved drug, a method for using it or a method for manufacturing it — may be extended under the Hatch-Waxman Act. Similar
provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the
future, if and when our products receive FDA approval or applicable approval in other jurisdictions, we expect to apply for patent term
extensions on any issued patents covering those products in the United States and other jurisdictions where such extensions are available;
however, there is no guarantee that the applicable authorities, including the FDA in the United States, will agree with our assessment
of whether such extensions should be granted, and if granted, the length of such extensions. An extension may not be granted because of,
for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable
deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. If a patent
term extension is not granted or the term of any such extension is less than requested, the period during which we can enforce such patent
rights for the applicable product candidate will be shortened and our competitors may obtain approval to market competing products sooner.
As a result, our revenue from applicable products could be reduced. Further, if this occurs, our competitors may be able to launch their
products earlier by taking advantage of our investment in development and clinical trials along with our clinical and preclinical data.
This could have a material adverse effect on our business and ability to achieve profitability.
The life of a patent and the
protection it affords are limited. As a result, our in-licensed patent portfolio provides us with limited rights that may not last for
a sufficient period of time to exclude others from commercializing product candidates similar or identical to ours. Even if patents covering
our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including
generics or biosimilars. For example, given the large amount of time required for the research, development, testing and regulatory review
of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.
As a result, our in-licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products
similar or identical to ours.
Changes in U.S.
patent law or the patent law of other countries or jurisdictions could diminish the value of patents in general, thereby impairing our
ability to protect our current or any future technologies or product candidates.
Changes in either the patent
laws or interpretation of the patent laws in the United States or elsewhere could increase the uncertainties and costs surrounding the
prosecution of patent applications and the enforcement or defense of issued patents. The United States has enacted and implemented wide-ranging
patent reform legislation. On September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”) was signed into
law, which could increase the uncertainties and costs surrounding the prosecution of any potential future owned patents and our in-licensed
patents and the enforcement or defense of any potential future owned patents or our in-licensed patents. The Leahy-Smith Act includes
a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine
prior art, may affect patent litigation and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file”
system. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application
generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. A third
party that files a patent application in the USPTO after March 16, 2013, but before us, could therefore be awarded a patent covering an
invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant of the
time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential
for a period of time after filing or until issuance, we cannot be certain that we or our licensors were the first to either (i) file any
patent application related to our product candidates or (ii) invent any of the inventions claimed in our or our licensor’s patents
or patent applications. The Leahy-Smith Act also allows third-party submission of prior art to the USPTO during patent prosecution and
sets forth additional procedures to challenge the validity of a patent by USPTO-administered post-grant proceedings, including derivation,
reexamination, inter partes review, post-grant review and interference proceedings. The USPTO developed additional regulations
and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the
Leahy-Smith Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Accordingly, it is not clear what,
if any, impact the Leahy-Smith Act will have on the operation of our business. The Leahy-Smith Act and its implementation could increase
the uncertainties and costs surrounding the prosecution of our in-licensed patents and any patent applications we may file in the future
and the enforcement or defense of our in-licensed patents and any patents we may own in the future, all of which could have a material
adverse impact on our business prospects and financial condition.
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As referenced above, for example,
courts in the U.S. continue to refine the heavily fact-and-circumstance-dependent jurisprudence defining the scope of patent protection
available for therapeutics, narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent
owners in certain situations. This creates uncertainty about our ability to obtain patents in the future and the value of such patents.
In addition, the patent positions of companies in the development and commercialization of pharmaceuticals are particularly uncertain.
Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights
of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability
of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations
governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our
ability to protect and enforce our intellectual property in the future. We cannot provide assurance that future developments in U.S. Congress,
the federal courts and the USPTO will not adversely impact any patents we may own in the future or our in-licensed patents or any patent
applications we may file in the future. The laws and regulations governing patents could change in unpredictable ways that could weaken
our and our licensors’ ability to obtain new patents or to enforce our existing in-licensed patents and patents that we might obtain
or in-license in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental
bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may have a material
adverse effect on our and our licensors’ ability to obtain new patents or to protect and enforce our in-licensed patents or patents
that we may obtain or in-license in the future.
We or our licensors
may be subject to lawsuits or litigation to protect or enforce our in-licensed patents or other intellectual property, which could result
in substantial costs and liability and prevent us from commercializing our potential products.
Third parties may attempt
to invalidate our or our licensors’ intellectual property rights via procedures including but not limited to patent infringement
lawsuits, declaratory judgment actions, interferences, oppositions and inter partes reexamination proceedings before the USPTO,
U.S. courts and foreign patent offices or foreign courts. An adverse determination in any such submission or proceeding could reduce the
scope or enforceability of, or invalidate, our licensor’s patent rights, which could adversely affect our competitive position.
Because of a lower evidentiary standard necessary to invalidate a patent claim in USPTO proceedings compared to the evidentiary standard
in United States federal courts, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold
a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action.
Accordingly, a third party may attempt to use the USPTO procedures to invalidate our licensors’ patent claims that would not have
been invalidated if first challenged by the third party in a district court action. Even if such rights are not directly challenged, disputes
could lead to the weakening of our or our licensors’ intellectual property rights. Our defense against any attempt by third parties
to circumvent or invalidate our intellectual property rights could be costly to us, could require significant time and attention of our
management, and could have a material and adverse impact on our profitability, financial condition and prospects or ability to successfully
compete.
We or our licensors may find
it necessary to pursue claims or to initiate lawsuits to protect or enforce our in-licensed patent or other intellectual property rights.
The cost to us in defending or initiating any litigation or other proceedings relating to our in-licensed patent or other intellectual
property rights, even if resolved in our favor, could be substantial, particularly in a foreign jurisdiction, and any litigation or other
proceeding would divert our management’s attention. Such litigation or proceedings could materially increase our operating losses
and reduce the resources available for development activities or any future sales, marketing or distribution activities. Some of our competitors
may be able to more effectively sustain the costs of complex patent litigation because they have substantially greater resources. Uncertainties
resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts
and materially limit our ability to continue our operations.
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If we or our licensors were
to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates or our technology, the
defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims
alleging invalidity or unenforceability of the asserted patent are commonplace. Grounds for a validity challenge could be an alleged failure
to meet any of several statutory requirements, for example, claiming patent-ineligible subject matter, lack of novelty, indefiniteness,
lack of written description, non-enablement, anticipation or obviousness. Grounds for an unenforceability assertion could be an allegation
that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during
prosecution. The outcome of such invalidity and unenforceability claims is unpredictable. With respect to the validity question, for example,
we cannot be certain that there is no invalidating prior art of which we or our licensors and the patent examiner were unaware during
prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps
all, of the patent protection for one or more of our product candidates or certain aspects of our platform technologies. Such a loss of
patent protection could have a material adverse effect on our business, financial condition, results of operations and prospects. Patents
and other intellectual property rights also will not protect our product candidates and technologies if competitors or third parties design
around such product candidates and technologies without legally infringing, misappropriating or violating our in-licensed patents or other
intellectual property rights.
We may not be able
to protect our intellectual property rights throughout the world, which could negatively impact our business.
Filing, prosecuting and defending
patents on current or future technologies or product candidates in all countries throughout the world would be prohibitively expensive,
and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States.
In addition, the laws of some countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently,
we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other countries. Competitors or other third parties may
use our licensed technologies to develop their own products in jurisdictions where our licensors or we have not obtained patent protection
and, further, may export infringing product candidates to territories where our licensors or we may in the future have patent protections,
but enforcement is not as strong as that in the United States. These product candidates may compete with our products, and our in-licensed
patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered
significant difficulties in protecting and defending such rights in such jurisdictions. The legal systems of certain countries, including
certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating
to biotechnology, which could make it difficult for us to stop the infringement of any in-licensed patents or patents that we may obtain
in the future in other countries, or the marketing of competing products in violation of our intellectual property and proprietary rights
generally. Proceedings to enforce our in-licensed intellectual property and other proprietary rights in foreign jurisdictions could result
in substantial costs and could divert our efforts and attention from other aspects of our business. Such proceedings could also put any
in-licensed patents or patents that we may hold in the future at risk of being invalidated or interpreted narrowly, could put our in-licensed
patent applications or patent applications that we may file in the future at risk of not issuing, and could provoke third parties to assert
claims against us or our licensors. We or our licensors may not prevail in any lawsuits or other adversarial proceedings that we or our
licensors initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our and our licensors’
efforts to enforce such intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property that we develop or in-license.
Further, many countries have
compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries
limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have
limited remedies, which could materially diminish the value of its patents. If we or any of our licensors are forced to grant a license
to third parties with respect to any patents relevant to our business, our competitive position in the relevant jurisdiction may be impaired
and our business prospects may be materially adversely affected.
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Third parties may
initiate legal proceedings alleging that we are infringing, misappropriating or violating their intellectual property rights, or seeking
to invalidate or avoid our in-licensed patent rights, the outcome of which would be uncertain and could have a material adverse impact
on the success of our business.
Our commercial success depends,
in part, upon our ability or the ability of our potential future collaborators to develop, manufacture, market and sell our current or
any future product candidates and to use our proprietary technologies without infringing, misappropriating or violating the proprietary
and intellectual property rights of third parties. There is a substantial amount of litigation, both within and outside the United States,
involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement
lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, U.S. courts, foreign patent offices
or foreign courts. As the field of cell therapies advances, patent applications are being processed by national patent offices around
the world. There is uncertainty about which patents will issue, and, if they do, there is uncertainty as to when, to whom, and with what
claims. Any claims of patent infringement, or claims asserting invalidity, unenforceability, or invalidity of our in-licensed patent rights,
asserted by third parties would be time consuming and could:
● result in invalidation, unenforceability, scope limitation, or other adverse judgments against our in-licensed
patents;
● result in costly litigation that may cause negative publicity;
● divert the time and attention of our technical personnel and management;
● cause development delays;
● prevent us from commercializing any of our product candidates until the asserted patent expires or is
held finally invalid or not infringed in a court of law;
● require us to develop non-infringing technology, which may not be possible on a cost-effective basis;
● subject us to substantial damages for infringement, which we may have to pay if a court decides that the
product candidate or technology at issue infringes on or violates the third party’s rights, and, if the court finds that the infringement
was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees; or
● require us to enter into royalty or licensing agreements, which may not be available on commercially reasonable
terms, or at all, or which might be non-exclusive, which could result in our competitors gaining access to the same technology.
Some of our competitors may
be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.
In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on
our ability to raise the funds necessary to continue our operations or could otherwise have a material adverse effect on our business,
results of operations, financial condition and prospects.
Numerous U.S. and foreign
issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing development
candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that we may be subject
to claims of infringement of the patent rights of third parties. Because patent applications can take many years to issue, there may also
be currently pending patent applications that may later result in issued patents that our technology or product candidates may infringe.
Further, we cannot guarantee that we are aware of all patents and patent applications potentially relevant to our technology or products.
We may not be aware of potentially relevant third-party patents or applications for several reasons. For example, U.S. applications filed
before November 29, 2000, and certain U.S. applications filed after that date that will not be filed outside the U.S. remain confidential
until a patent issues. Patent applications filed in the United States (after November 29, 2000) and elsewhere are published approximately
18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority
date. Therefore, patent applications covering our product candidates or platform technologies could have been filed by others without
our knowledge. Any such patent application may have priority over our in-licensed patent applications or patents or any patent applications
that we may file in the future and any patents issued therefrom, which could require us to obtain rights to issued patents covering such
technologies. Additionally, claims pending in patent applications that have been published can, subject to certain limitations, be later
amended in a manner that could cover our platform, our product candidates or the use of our technologies.
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Although no third party has
asserted a claim of patent infringement against us as of the date of this Annual Report, others may hold proprietary rights that could
prevent our product candidates from being marketed. We or our licensors, or any future strategic collaborator, may be party to, or be
threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current or any potential
future product candidates and technologies, including derivation, reexamination, inter partes review or post-grant review before
the USPTO and similar proceedings in jurisdictions outside of the United States such as opposition proceedings. In some instances, we
may be required to indemnify our licensors for the costs associated with any such adversarial proceedings or litigation. Third parties
may assert infringement claims against us, our licensors or our strategic collaborators based on existing patents or patents that may
be granted in the future, regardless of their merit. There is a risk that third parties may choose to engage in litigation or other adversarial
proceedings with us, our licensors or our strategic collaborators to enforce or otherwise assert their patent rights. Even if we believe
such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are not invalid, and that they
are enforceable and have been infringed, which could have a material adverse impact on our ability to utilize our platform technologies
or to commercialize our current or any future product candidates. In order to successfully challenge the validity of any such U.S. patent
in federal court, we would need to overcome a presumption of validity by presenting clear and convincing evidence of invalidity. There
is no assurance that a court of competent jurisdiction, even if presented with evidence we believe to be clear and convincing, would invalidate
the claims of any such U.S. patent.
Further, we cannot guarantee
that we will be able to successfully settle or otherwise resolve such adversarial proceedings or litigation. If we are unable to successfully
settle future claims on terms acceptable to us, we may be required to engage in or to continue costly, unpredictable and time-consuming
litigation and may be prevented from or experience substantial delays in marketing our product candidates. If we, or our licensors, or
any future strategic collaborators are found to infringe, misappropriate or violate a third-party patent or other intellectual property
rights, we could be required to pay damages, including treble damages and attorney’s fees, if we are found to have willfully infringed.
In addition, we, or our licensors, or any future strategic collaborators may choose to seek, or be required to seek, a license from a
third party, which may not be available on commercially reasonable terms, if at all. Even if a license can be obtained on commercially
reasonable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property
rights licensed to us, and we could be required to make substantial licensing and royalty payments. Parties making claims against us may
obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our current
or future product candidates. We could be forced, including by court order, to cease utilizing, developing, manufacturing and commercializing
our platform technologies or product candidates deemed to be infringing. We may be forced to redesign current or future technologies or
products. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial
diversion of employee resources from our business. Any of the foregoing could have a material adverse effect on our ability to generate
revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations.
Thus, it is possible that
one or more third parties will hold patent rights to which we will need a license, which may not be available on reasonable terms or at
all. If such third parties refuse to grant us a license to such patent rights on reasonable terms or at all, we may be required to expend
significant time and resources to redesign our technology, product candidates or the methods for manufacturing our product candidates,
or to develop or license replacement technology, all of which may not be commercially or technically feasible. In such case, we may not
be able to market such technology or product candidates and may not be able to perform research and development or other activities covered
by these patents. This could have a material adverse effect on our ability to commercialize our product candidates and our business and
financial condition.
Lastly, if our in-licensed
technology or products are found to infringe the intellectual property rights of third parties, these third parties may assert infringement
claims against our licensees and other parties with whom we have business relationships, and we may be required to indemnify those parties
for any damages they suffer as a result of these claims. The claims may require us to initiate or defend protracted and costly litigation
on behalf of licensees and other parties regardless of the merits of these claims. If any of these claims succeed, we may be forced to
pay damages on behalf of those parties or may be required to obtain licenses for the products they use.
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Intellectual property
litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our Common Stock to decline.
During the course of any intellectual
property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on
motions and other interim proceedings or developments in the litigation. If securities analysts or investors regard these announcements
as negative, the perceived value of our existing product candidates, approved products, programs, or intellectual property could be diminished.
Accordingly, the market price of shares of our Common Stock may decline. Such announcements could also harm our reputation or the market
for our future products, which could have a material adverse effect on our business.
Intellectual property
rights of third parties could adversely affect our ability to commercialize our current in-licensed technologies or future technologies
or product candidates, and we might be required to litigate or obtain licenses from third parties to develop or market our current in-licensed
technologies or future technologies or product candidates, which may not be available on commercially reasonable terms or at all.
Because the immunotherapy
landscape is still evolving, it is difficult to conclusively assess our freedom to operate without infringing, misappropriating, or violating
third-party rights. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and
the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect.
For example, we may incorrectly determine that our products are not covered by a third-party patent or may incorrectly predict whether
a third-party’s pending application will issue with claims of relevant scope. Also, our determination of the expiration date of
any patent in the United States or abroad that we consider relevant may be incorrect.
There are numerous companies
that have pending patent applications and issued patents broadly covering cell therapy generally or covering related inventions that may
be relevant for product candidates that we wish to develop. There may be third-party patents and patent applications that claim aspects
of our current or potential future product candidates and modifications that we may need to apply to our current or potential future product
candidates. There are also many issued patents that claim inventions that may be relevant to products we wish to develop. The holders
of such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a license
or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all, or it may
be non-exclusive, which could result in our competitors gaining access to the same intellectual property.
Our competitive position may
materially suffer if patents issued to third parties or other third-party intellectual property rights cover our current in-licensed technologies
or future technologies, product candidates or elements thereof or our manufacture or uses relevant to our development plans. In such cases,
we may not be in a position to develop or commercialize current in-licensed technologies or future technologies or product candidates
unless we successfully pursue litigation to narrow or invalidate the third-party intellectual property right concerned, or enter into
a license agreement with the intellectual property right holder, if available on commercially reasonable terms. There may be issued patents
of which we are not aware, held by third parties that, if found to be valid and enforceable, could be alleged to be infringed by our current
in-licensed technologies or future technologies or product candidates. There also may be pending patent applications of which we are not
aware that may result in issued patents, which could be alleged to be infringed by our current in-licensed technologies or future technologies
or product candidates. If such an infringement claim should successfully be brought, we may be required to pay substantial damages or
be forced to abandon our current in-licensed technologies or future technologies or product candidates or to seek a license from any patent
holders. No assurances can be given that a license will be available on commercially reasonable terms, if at all.
Third-party intellectual property
right holders may also actively bring infringement, misappropriation, or other claims alleging violations of intellectual property rights
against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such claims. If we are unable to successfully
settle future claims on terms acceptable to us, we may be required to engage in or to continue costly, unpredictable, and time-consuming
litigation and may be prevented from or experience substantial delays in marketing our product candidates. If we fail in any such dispute,
in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing any of our current in-licensed
technologies or future technologies or product candidates that are held to be infringing, misappropriating, or otherwise violating third-party
intellectual property rights. We might, if possible, also be forced to redesign current or future technologies or product candidates so
that we no longer infringe, misappropriate, or violate the third-party intellectual property rights. Any of these events, even if we were
ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote
to our business, which could have a material adverse effect on our financial condition and results of operations.
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If
we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent protection for certain aspects of our current in-licensed technologies or future technologies and product candidates, we rely on trade secrets, including confidential and unpatented know-how, technology and other proprietary information, to maintain our competitive position and to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. Elements of our product candidates, including processes for their preparation and manufacture, may involve proprietary know-how, information, or technology that is not covered by patents, and thus for these aspects we may consider trade secrets and know-how to be our primary intellectual property.
Trade
secrets and know-how can be difficult to protect. We seek to protect trade secrets and confidential and unpatented know-how, in part,
by entering into non-disclosure and confidentiality agreements with parties who have access to such knowledge, such as our employees,
corporate collaborators, outside scientific collaborators, contract research organizations, contract manufacturers, consultants, advisors
and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants
under which they are obligated to maintain confidentiality and to assign their inventions to us. However, we cannot be certain that such
agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary
information will not be disclosed or that competitors will not otherwise gain access (such as through a cybersecurity breach) to our
trade secrets or independently develop substantially equivalent information and techniques. Moreover, individuals with whom we have such
agreements may not comply with their terms. Any of these parties may breach such agreements and disclose our proprietary information,
including our trade secrets, and we may not be able to obtain adequate remedies for any such breaches. In addition, we take other appropriate
precautions, such as physical and technological security measures, to guard against misappropriation of our proprietary technology by
third parties.
We
may also become involved in inventorship disputes relating to inventions and patents developed by our employees or consultants under
such agreements. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret, or securing title to an employee-
or consultant-developed invention if a dispute arises, is difficult, expensive and time-consuming, and the outcome is unpredictable.
In addition, some courts in the United States and certain foreign jurisdictions disfavor or are unwilling to protect trade secrets. We
may need to share our proprietary information, including trade secrets, with future business partners, collaborators, contractors and
others located in countries at heightened risk of theft of trade secrets, including through direct intrusion by private parties or foreign
actors, and those affiliated with or controlled by state actors. Further, if any of our trade secrets were to be lawfully obtained or
independently developed by a competitor, we would have no right to prevent that competitor from using the technology or information to
compete with us. If, in the future, any of our trade secrets were to be disclosed to or independently developed by a competitor, our
competitive position would be materially and adversely harmed.
We
may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets or other proprietary
information of third parties, including our employees’ or consultants’ former employers or their clients.
We
are party to various contracts under which we are obligated to maintain the confidentiality of trade secrets or other confidential and
proprietary information of third parties, including our licensors and strategic partners. In addition, many of our employees or consultants
and our licensors’ employees or consultants were previously employed at universities or biotechnology or biopharmaceutical companies,
including our competitors or potential competitors. We may be subject to claims that one or more of these employees or consultants or
we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of third parties, including former
employers of our employees and consultants. Litigation or arbitration may be necessary to defend against these claims. If we fail in
defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or may
be enjoined from using such intellectual property. Any such proceedings and possible aftermath would likely divert significant resources
from our core business, including distracting our technical and management personnel from their normal responsibilities. A loss of key
research personnel or their work product could limit our ability to commercialize, or prevent us from commercializing, our current in-licensed
technologies or future technologies or product candidates, which could materially harm our business. Even if we are successful in defending
against any such claims, litigation or arbitration could result in substantial costs and could be a distraction to management.
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Our
licensors or we may be subject to claims challenging the inventorship of our in-licensed patents and other intellectual property.
We
or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in our in-licensed
patents as an inventor or co-inventor, or in our trade secrets or other intellectual property as a contributor to its development. The
failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship
disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign
laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties
involved in developing our product candidates or as a result of questions regarding co-ownership of potential joint inventions. For example,
we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved
in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or
our licensors’ ownership of our in-licensed patents, our trade secrets or other intellectual property. Alternatively, or additionally,
we may enter into agreements to clarify the scope of our rights in such intellectual property. If we or our licensors fail in defending
any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership
of, or right to use, intellectual property that is important to our product candidates. Even if we are successful in defending against
such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Also,
our licensors may have relied on third-party consultants or collaborators or on funds from third parties, such as the U.S. government,
such that our licensors are not the sole and exclusive owners of the patents we in-licensed. If other third parties have ownership rights
or other rights to our in-licensed patents, they may be able to license such patents to our competitors, and our competitors could market
competing products and technology. This could have a material adverse effect on our competitive position, business, financial condition,
results of operations and prospects.
Further,
while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual
property to execute agreements assigning such intellectual property to us, we may be unsuccessful in obtaining such executed agreements
with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property
rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties,
or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims
could have a material adverse effect on our business, financial condition, results of operations and prospects.
Obtaining
and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by government patent agencies, and our licensors’ patent protection could be reduced or eliminated for non-compliance with
these requirements.
Periodic
maintenance fees, renewal fees, annuity fees and various other government fees on patents or patent applications will be due to be paid
to the USPTO and various government patent agencies outside of the United States over the lifetime of our in-licensed patents and any
patent rights we may own or in-license in the future. The USPTO and various non-U.S. patent offices require compliance with several procedural,
documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other
professionals to help us comply with these requirements, and we are also dependent on our licensors to take the necessary action to comply
with these requirements with respect to our in-licensed intellectual property. In many cases, an inadvertent lapse, including due to
the effect of the COVID-19 pandemic on us, our patent counsel or other applicable patent maintenance vendors, can be cured by payment
of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result
in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.
Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure
to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal
documents. In such an event, potential competitors might be able to enter the market with similar or identical product candidates or
platforms, which could have a material adverse effect on our business prospects and financial condition.
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If
our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest
and our business may be adversely affected.
We
use and will continue to use registered and/or unregistered trademarks or trade names to brand and market ourselves and our products.
Our trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks.
We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we use
for name recognition by potential collaborators or customers in our markets of interest. At times, competitors may adopt trade names
or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition,
there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trademarks that incorporate
variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition
based on our trademarks and trade names, we may not be able to compete effectively, and our business may be materially adversely affected.
We
may also license our trademarks and trade names to third parties, such as distributors. Though these license agreements may provide guidelines
for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and trade names by our licensees
may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names.
Intellectual
property rights do not necessarily address all potential threats to our business.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations
and may not adequately protect our business. The following examples are illustrative:
● others
may be able to create T-cell therapies that are similar to our product candidates, but that
are not covered by the claims of any patents that we own, license or control;
● we,
our licensors, or any strategic collaborators might not have been the first to make the inventions
covered by the issued patents or pending patent applications that we own, license or control
or may own, license or control in the future;
● we
or our licensors might not have been the first to file patent applications covering certain
of our in-licensed inventions;
● others
may independently develop the same, similar, or alternative technologies without infringing,
misappropriating, or violating our in-licensed intellectual property rights;
● it
is possible that any patent applications we may file in the future will not lead to issued
patents;
● issued
patents that we in-license, control or may own in the future may not provide us with any
competitive advantages, or may be narrowed or held invalid or unenforceable, including as
a result of legal challenges;
● our
competitors might conduct research and development activities in the United States and other
countries that provide a safe harbor from patent infringement claims for certain research
and development activities, as well as in countries where we do not have patent rights, and
may then use the information learned from such activities to develop competitive products
for sale in our major commercial markets;
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● we
may choose not to file a patent application in order to maintain certain trade secrets or
know-how, and a third party may subsequently file a patent application covering such trade
secrets or know-how; and
● the
patents of others may have an adverse effect on our business.
Should
any of these events occur, they could have a material adverse impact on our business, financial condition, results of operations and
prospects.
If
any negative data were to arise with respect to the use of our licensed technology in territories where such technology is licensed to
a third party, it could negatively affect our ability to develop our product candidates in territories where we license such technology.
Pursuant
to the Syracuse License Agreement, Eureka licensed to JW Therapeutics (Cayman) Co. Ltd (“JW”) the rights to use ARTEMIS ®
technology in connection with CD19 and CD22 in Greater China and the ASEAN countries (the “JW Territory”). The JW License
allows JW to conduct research and development (but not commercialize) in the U.S., and for Eureka and Estrella to conduct research and
development (but not commercialize) in the JW Territory. Accordingly, we may experience conflicts or have potential intellectual property-related
disputes with JW in connection with the development of our product candidates. Additionally, if any negative data were to arise from
the JW Territory with respect to the use of ARTEMIS ® technology in the JW Territory, it could negatively affect our ability
to develop our product candidates and adversely impact our success in the Licensed Territory.
Risks
Related to Government Regulation
Clinical
development includes a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results.
All
of our current product candidates are in preclinical or clinical development and their risk of failure is high. It is impossible to predict
when or if our candidates or any potential future product candidates will prove effective in humans or will receive regulatory approval.
Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical studies
for our current product candidates and then conduct extensive clinical trials to demonstrate the safety, purity and potency, or efficacy
of that product candidate in humans. Clinical testing is expensive and can take many years to complete, and its outcome is inherently
uncertain. Failure can occur at any time during the development process. The results of preclinical studies and clinical trials of any
of our current or potential future product candidates may not be predictive of the results of later-stage clinical trials. Product candidates
in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical
studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials due to lack of efficacy or safety profiles, notwithstanding promising results in earlier trials.
We
may experience delays in completing our preclinical studies and initiating or completing our clinical studies. We do not know whether
planned preclinical studies and clinical trials will be completed on schedule or at all, or whether planned clinical trials will begin
on time, need to be redesigned, enroll patients on time or be completed on schedule, if at all. Our development programs may be delayed
for a variety of reasons, including delays related to:
● the
FDA or other regulatory authorities requiring us to submit additional data or imposing other
requirements before permitting us to initiate a clinical trial;
● obtaining
regulatory approval to commence a clinical trial;
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● reaching
agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of
which can be subject to extensive negotiation and may vary significantly among different
CROs and clinical trial sites;
● obtaining
IRB or ethics committee approval at each clinical trial site;
● recruiting
suitable patients to participate in a clinical trial;
● having
patients complete a clinical trial or return for post-treatment follow-up;
● clinical
trial sites deviating from trial protocol or dropping out of a trial;
● the
FDA placing the clinical trial on hold;
● subjects
failing to enroll or remain in our trial at the rate we expect;
● subjects
choosing an alternative treatment for the indication for which we are developing or other
product candidates, or participating in competing clinical trials;
● lack
of adequate funding to continue the clinical trial;
● subjects
experiencing severe or unexpected drug-related adverse events;
● any
changes to our manufacturing process that may be necessary or desired;
● adding
new clinical trial sites; and
● manufacturing
sufficient quantities of our product candidates for use in clinical trials.
Furthermore,
we expect to rely on our CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and, while we expect
to enter into agreements governing their committed activities, we have limited influence over their actual performance.
We
could encounter delays if prescribing physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials
of our current or potential future product candidates in lieu of prescribing existing treatments that have established safety and efficacy
profiles. Further, a clinical trial may be suspended or terminated by us, our collaborators, the IRBs of the institutions in which such
trials are being conducted, the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities due to a number
of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection
of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold,
unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug or therapeutic biologic, changes
in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
Moreover,
principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash
or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual
conflicts of interest, or a regulatory authority concludes that the financial relationship may have affected the interpretation of the
trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial
itself may be jeopardized, which could result in the delay or rejection of the marketing application we submit. Any such delay or rejection
could prevent or delay us from commercializing our current or future product candidates.
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If
we experience delays in the completion of, or termination of, any clinical trial of any of our current or potential future product candidates,
the commercial prospects of such product candidate will be harmed, and our ability to generate product revenue from such product candidates
will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow our product development and
approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may have a material
adverse effect on our business, financial condition, results of operations and prospects. In addition, many of the factors that cause,
or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval
of our current or potential future product candidates.
We
may be unable to obtain U.S. or foreign regulatory approval and, as a result, be unable to commercialize our current or potential future
product candidates.
Our
current and any potential future product candidates are subject to extensive governmental regulations relating to, among other things,
research, testing, development, manufacturing, safety, efficacy, approval, recordkeeping, reporting, labeling, storage, packaging, advertising
and promotion, pricing, marketing, and distribution of therapeutic biologics. Rigorous preclinical testing and clinical trials and an
extensive regulatory approval process are required to be successfully completed in the U.S. and in many foreign jurisdictions before
a new drug or therapeutic biologic can be marketed in the U.S. or foreign jurisdictions. Satisfaction of these and other regulatory requirements
is costly, time-consuming, uncertain and subject to unanticipated delays. It is possible that none of the product candidates we may develop
will obtain the regulatory approvals necessary for us or our potential future collaborators to begin selling them.
The
time required to obtain FDA and other approvals is unpredictable but typically takes many years following the commencement of clinical
trials, depending upon the type, complexity, and novelty of the product candidate. The standards that the FDA and its foreign counterparts
use when regulating us require judgment and can change, which makes it difficult to predict with certainty how they will be applied.
Any analysis we perform of data from preclinical and clinical activities is subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays or increased costs due
to new government regulations, for example, from future legislation or administrative action, or from changes in regulatory policy during
the period of product development, clinical trials and regulatory review in the United States and other jurisdictions. It is impossible
to predict whether legislative changes will be enacted, or whether FDA or foreign regulations, guidance or interpretations will be changed,
or what the impact of such changes, if any, may be.
Any
delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from the particular
product candidate for which we are seeking approval. Further, we and our potential future collaborators may never receive approval to
market and commercialize any product candidate. Even if we or a potential future collaborator obtains regulatory approval, the approval
may be for targets, disease indications or patient populations that are not as broad as we intended or desired or may require labeling
that includes significant use or distribution restrictions or safety warnings.
Once
a product obtains regulatory approval, numerous post approval requirements apply, including periodic monitoring and reporting obligations,
review of promotional material, reports on ongoing clinical trials and adverse events and inspections of manufacturing facilities. In
addition, material changes to approved products, including any changes to the manufacturing process or labeling, require further review
by the appropriate authorities before marketing. Approvals may also be withdrawn or revoked due to safety, effectiveness, or potency
concerns, including as a result of adverse events reported in patients or ongoing clinical trials, or failure to comply with cGMP. In
addition to revocation or withdrawal of approvals, we and our partners may be subject to warnings, fines, recalls, criminal prosecution
or other sanctions if we fail to comply with regulatory requirements. If we or our partners are unable to obtain or maintain regulatory
approvals for our products and product candidates, our business, financial position, results of operations and future growth prospects
will be negatively impacted and we or our partners may be subject to sanctions. If any of our product candidates prove to be ineffective,
unsafe, or commercially unviable, we may have to re-engineer our current or potential future product candidates, and our entire pipeline
could have little, if any, value, which could require us to change our focus and approach to product candidate discovery and therapeutic
development, which would have a material adverse effect on our business, financial condition, results of operations and prospects.
We
will also be subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing
and marketing authorization, pricing, and third-party reimbursement. The foreign regulatory approval process varies among countries and
may include all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local
regulations in foreign jurisdictions. Moreover, the time required to obtain approval in a foreign jurisdiction may differ from that required
to obtain FDA approval.
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Obtaining
and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining
regulatory approval of our product candidates in other jurisdictions.
If
we succeed in developing any products, we intend to market them in the United States, as well as the European Union and other foreign
jurisdictions. In order to market and sell our products in other jurisdictions, we must obtain separate marketing approvals and comply
with numerous and varying regulatory requirements.
Obtaining
and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or
maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may
have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval of a product
candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of
the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative
review periods different from those in the United States, including additional preclinical studies or clinical trials as clinical trials
conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the
United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some
cases, the price that we intend to charge for our products is also subject to approval.
Obtaining
foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and
costs for us and could delay or prevent the introduction of our products in certain countries. If we or any partner we work with fails
to comply with the regulatory requirements in international markets or fails to receive applicable marketing approvals, our target market
will be reduced, and our ability to realize the full market potential of our product candidates will be harmed.
In
the past, Eureka has conducted proof-of-concept studies outside of the United States and collaborated with third parties on investigator-initiated
studies (“IIS”). We may in the future conduct certain of our clinical trials for our product candidates outside of the United
States or use data from proof of concept or IIS studies from outside the United States to support our IND applications and design clinical
development programs. However, the FDA and other foreign equivalents may not accept data from such trials, in which case our development
plans will be delayed, which could materially harm our business.
In
the past, Eureka has conducted proof-of-concept studies outside of the United States and collaborated with third parties on investigator-initiated
studies (“IIS”). We may in the future conduct certain of our clinical trials for our product candidates outside of the United
States or use data from proof of concept or IIS studies from outside the United States to support our IND applications and design clinical
development programs. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data
is subject to certain conditions imposed by the FDA. In cases where data from foreign clinical trials are intended to serve as the basis
for marketing approval in the United States, the FDA will not approve the application on the basis of foreign data alone unless (i) those
data are applicable to the U.S. population and U.S. medical practice; (ii) the studies were performed by clinical investigators of recognized
competence; and (iii) the data are considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such
an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. For studies
that are conducted only at sites outside of the United States and not subject to an IND, the FDA requires the clinical trial to have
been conducted in accordance with GCPs, and the FDA must be able to validate the data from the clinical trial through an on-site inspection
if it deems such inspection necessary. For such studies not subject to an IND, the FDA generally does not provide advance comment on
the clinical protocols for the studies, and therefore there is an additional potential risk that the FDA could determine that the study
design or protocol for a non-U.S. clinical trial was inadequate, which could require us to conduct additional clinical trials. There
can be no assurance the FDA will accept data from clinical trials conducted outside of the United States. If the FDA does not accept
data from our clinical trials of our product candidates, it would likely result in the need for additional clinical trials, which would
be costly and time consuming and delay or permanently halt our development of our product candidates.
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Many
foreign regulatory bodies have similar approval requirements. In addition, such foreign trials would be subject to the applicable local
laws of the foreign jurisdictions where the trials are conducted. There can be no assurance that the FDA or any similar foreign regulatory
authority will accept data from trials conducted outside of the United States or the applicable jurisdiction. If the FDA or any similar
foreign regulatory authority does not accept such data, it would result in the need for additional trials, which would be costly and
time-consuming and delay aspects of our business plan, and which may result in our product candidates not receiving approval or clearance
for commercialization in the applicable jurisdiction.
Conducting
clinical trials outside of the United States also exposes us to additional risks, including risks associated with:
● additional
foreign regulatory requirements;
● foreign
exchange fluctuations;
● compliance
with foreign manufacturing, customs, shipment and storage requirements;
● cultural
differences in medical practice and clinical research; and
● diminished
protection of intellectual property in some countries.
Even
if we receive regulatory approval for any of our current or potential future product candidates, we will be subject to ongoing regulatory
obligations and continued regulatory review, which may result in significant additional expense. Additionally, our current or potential
future product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject
to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.
Any
regulatory approvals that we or potential future collaborators obtain for any of our current or potential future product candidates will
be subject to limitations on the approved indicated uses for which a product may be marketed or may be subject to the conditions of approval,
or contain requirements for potentially costly post-marketing testing, and surveillance to monitor the safety and efficacy of such product
candidate. In addition, if the FDA or any other regulatory authority approves any of our current or potential future product candidates,
the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, import, export, advertising, promotion
and recordkeeping for such product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions
of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP and good clinical
practices for any clinical trials that we conduct post-approval. In addition, manufacturers and manufacturers’ facilities are required
to comply with extensive FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing
procedures conform to cGMP and cGTP regulations and applicable product tracking and tracing requirements.
Later
discovery of previously unknown problems with a product candidate, including adverse events of unanticipated severity or frequency, or
with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among
other things:
● restrictions
on the marketing or manufacturing of the product candidate, withdrawal of the product candidate
from the market or voluntary or mandatory product recalls;
● fines,
warning letters, untitled letters or holds on clinical trials;
● refusal
by the FDA to approve pending applications or supplements to approved applications filed
by us or our strategic collaborators;
● suspension
or revocation of product approvals;
● suspension
of any ongoing clinical trials;
● product
seizure or detention or refusal to permit the import or export of products; and
● injunctions
or the imposition of civil or criminal penalties or monetary fines.
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The
occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue.
The
FDA has the authority to require a risk evaluation and mitigation strategy (“REMS”) as part of a biologics license application
(“BLA”) or after approval, which may impose further requirements or restrictions on the distribution or use of an approved
product, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment
to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.
Furthermore,
the FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Products may be
promoted only for the approved indications and in accordance with the provisions of the approved label. While physicians may prescribe,
in their independent professional medical judgment, products for off-label uses as the FDA does not regulate the behavior of physicians
in their choice of drug treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use of their
products. Companies may only share truthful and not misleading information that is otherwise consistent with a product’s FDA approved
labeling. The FDA and other authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses and a company
that is found to have improperly promoted off-label uses may be subject to significant liability including, among other things, adverse
publicity, warning letters, corrective advertising and potential civil and criminal penalties. The federal government has levied large
civil and criminal fines against companies for alleged improper promotion of off-label use and has enjoined companies from engaging in
off-label promotion. The FDA and other regulatory authorities have also required that companies enter into consent decrees or permanent
injunctions under which specified promotional conduct is changed or curtailed.
Occurrence
of any of the foregoing could have a material adverse effect on our business and results of operations. The FDA’s and other regulatory
authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory
approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future
legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing
requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any
marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business.
Any
product candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated.
The
Affordable Care Act includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) which
created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference
biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following
the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made
effective by the FDA until twelve years from the date on which the reference product was first licensed. During this twelve-year period
of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the
competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate
the safety, purity and potency of its product. The law is complex. The BPCIA could have a material adverse effect on the future commercial
prospects for our biological products.
We
believe that any of our future product candidates approved as a biological product under a BLA should qualify for the twelve-year period
of exclusivity. However, there is a risk that this exclusivity could be shortened due to Congressional action or otherwise, or that the
FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for
generic competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have
also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, could be substituted for any one
of our reference products in a way that is similar to traditional generic substitution for non-biological products will depend on a number
of marketplace and regulatory factors that are still developing.
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Healthcare
legislative reform measures may have a material adverse effect on our business and results of operations.
In
the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in
March 2010, the Patient Protection and Affordable Care Act (the “ACA”) was enacted, which substantially changed the way healthcare
is financed by both governmental and private insurers, and significantly impacted the U.S. pharmaceutical industry. Among the provisions
of the ACA, of greatest importance to the pharmaceutical and biotechnology industry are the following:
● an
annual, nondeductible fee on any entity that manufactures or imports certain specified branded
prescription drugs and biologic agents apportioned among these entities according to their
market share in some government healthcare programs;
● an
increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug
Rebate Program to 23.1% and 13% of the average manufacturer price for most branded and generic
drugs, respectively, and a cap on the total rebate amount for innovator drugs at 100% of
the Average Manufacturer Price;
● a
new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program
are calculated for certain drugs and biologics that are inhaled, infused, instilled, implanted
or injected;
● extension
of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals
who are enrolled in Medicaid managed care organizations;
● expansion
of eligibility criteria for Medicaid programs by, among other things, allowing states to
offer Medicaid coverage to additional individuals and by adding new mandatory eligibility
categories for individuals with income at or below 133% of the federal poverty level, thereby
potentially increasing manufacturers’ Medicaid rebate liability;
● a
new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
50% (and 70% as of January 1, 2019) point-of-sale discounts off negotiated prices of applicable
brand drugs to eligible beneficiaries during their coverage gap period, as a condition for
the manufacturer’s outpatient drugs to be covered under Medicare Part D;
● expansion
of the entities eligible for discounts under the Public Health program;
● a
new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and
conduct comparative clinical effectiveness research, along with funding for such research;
● establishment
of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services (“CMS”)
to test innovative payment and service delivery models to lower Medicare and Medicaid spending;
and
● implementation
of the federal physician payment transparency requirements, sometimes referred to as the
“Physician Payments Sunshine Act.”
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Since
its enactment, there have been judicial, congressional, and executive challenges to certain aspects of the ACA. On June 17, 2021, the
U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the
constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order to initiate a special
enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA
marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules
that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include
work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or
the ACA. It is unclear how other healthcare reform measures of the Biden administration or other efforts, if any, to challenge, repeal
or replace the ACA will impact our business. In addition, other legislative changes have been proposed and adopted in the United States
since the ACA was enacted.
● On
August 2, 2011, the Budget Control Act of 2011 among other things, included aggregate reductions
of Medicare payments to providers of 2% per fiscal year. These reductions went into effect
on April 1, 2013 and will remain in effect through 2030.
● On
January 2, 2013, the American Taxpayer Relief Act of 2012 among other things, reduced Medicare
payments to several providers, including hospitals and increased the statute of limitations
period for
● On
April 13, 2017, CMS published a final rule that gives states greater flexibility in setting
benchmarks for insurers in the individual and small group marketplaces, which may have the
effect of relaxing the essential health benefits required under the ACA for plans sold through
such marketplaces.
● On
May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides
a federal framework for certain patients to access certain investigational new drug products
that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA
approval. Under certain circumstances, eligible patients can seek treatment without enrolling
in clinical trials and without obtaining FDA permission under the FDA expanded access program.
There is no obligation for a pharmaceutical manufacturer to make its drug products available
to eligible patients as a result of the Right to Try Act.
● On
May 23, 2019, CMS published a final rule to allow Medicare Advantage Plans the option of
using step therapy for Part B drugs beginning January 1, 2020.
● On
December 20, 2019, former President Trump signed into law the Further Consolidated Appropriations
Act (H.R. 1865), which repealed the Cadillac tax, the health insurance provider tax, and
the medical device excise tax. It is impossible to determine whether similar taxes could
be instated in the future.
Recently
there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which
has resulted in several presidential executive orders, Congressional inquiries and proposed and enacted federal and state legislation
designed to, among other things, bring more transparency to product pricing, reduce the costs of drugs under Medicare, and reform government
program reimbursement methodologies for drug products. For example, in July 2021, President Biden issued an executive order pertaining
to drug pricing, which expressed support for legislation allowing direct negotiation in Medicare Part D and inflationary rebates and
directed various executive branch agencies to take actions to lower drug prices and promote generic competition. In response to Biden’s
executive order, on September 9, 2021, HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for
drug pricing reform and sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative
actions HHS can take to advance these principles.
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These
initiatives recently culminated in the enactment of the Inflation Reduction Act, or IRA, in August 2022, which, among other things, will
allow HHS to negotiate the selling price of certain drugs and biologics that CMS reimburses under Medicare Part B and Part D, although
this will only apply to high-expenditure single-source drugs that have been approved for at least 7 years (11 years for biologics). The
negotiated prices, which will first become effective in 2026, will be capped at a statutory ceiling price representing a significant
discount from average prices to wholesalers and direct purchasers. The law will also, beginning in October 2023, penalize drug manufacturers
that increase prices of Medicare Part B and Part D drugs at a rate greater than the rate of inflation. In addition, the law eliminates
the “donut hole” under Medicare Part D beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket
cost and requiring manufacturers to subsidize, through a newly established manufacturer discount program, 10% of Part D enrollees’
prescription costs for brand drugs below the out-of-pocket maximum, and 20% once the out-of-pocket maximum has been reached. Although
these discounts represent a lower percentage of enrollees’ costs than the current discounts required below the out-of-pocket maximum
(that is, in the “donut hole” phase of Part D coverage), the new manufacturer contribution required above the out-of-pocket
maximum could be considerable for very high-cost patients and the total contributions by manufacturers to a Part D enrollee’s drug
expenses may exceed those currently provided. Further, the law incentivizes the manufacture of biosimilars and vaccine uptake, and limits
the Part B or Part D insulin copayment to $35 per month. The IRA also extends enhanced subsidies for individuals purchasing health insurance
coverage in ACA marketplaces through plan year 2025. These provisions will take effect progressively starting in 2023, although they
may be subject to legal challenges.
At
the state level, individual states are increasingly aggressive in passing legislation and implementing 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, designed to encourage importation from other
countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding
procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health
care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing,
which could negatively affect our business, financial conditions, results of operation and prospects.
We
expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our current
or future product candidates or additional pricing pressures. Further, it is possible that additional governmental action is taken in
response to the COVID-19 pandemic. Any denial in coverage or reduction in reimbursement from Medicare or other government-funded programs
may result in a similar denial or reduction in payments from private payors, which may prevent us from being able to generate sufficient
revenue, attain profitability or commercialize our products. It is not clear how other future potential changes to the ACA will change
the reimbursement model and market outlook for our current and future product candidates.
Failure
to comply with health and data protection laws and regulations could lead to government enforcement actions (which could include civil
or criminal penalties), private litigation or adverse publicity and could negatively affect our operating results and business.
We
may collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect and share personal information, health
information and other sensitive information to develop our products, to operate our business, for clinical trial purposes, for legal
and marketing purposes, and for other business-related purposes.
To
date, we have only implemented limited privacy, data protection, or cybersecurity policies, have not implemented any commercially reasonable
physical, technical, organizational, and administrative security measures and policies, and have not been, to the Estrella’s knowledge,
in compliance in all material respects with all Privacy and Security Requirements relating to data loss, theft, and breach of security
notification obligations.
We
and any potential future collaborators, partners, or service providers may be subject to federal, state, and foreign data protection
laws, regulations, and regulatory guidance, the number and scope of which is changing, subject to differing applications and interpretations,
and which may be inconsistent among jurisdictions, or in conflict with other rules, laws, or contractual obligations. In the United States,
numerous federal and state laws and regulations, including federal health information privacy laws, such as the Health Insurance Portability
and Accountability Act (“HIPAA”), state data breach notification laws, state health information privacy laws and federal
and state consumer protection laws, that govern the collection, use, disclosure and protection of health-related and other personal information
could apply to our operations or the operations of any future potential collaborators or service providers. In addition, we may obtain
health information from third parties (including research institutions from which we obtain clinical trial data) that are subject to
privacy and security requirements under HIPAA, or other privacy and data security laws. Depending on the facts and circumstances, we
could be subject to civil or criminal penalties if we obtain, use, or disclose individually identifiable health information maintained
by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA, or if we otherwise violate applicable privacy and
data security laws.
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International
data protection laws, including the EU’s General Data Protection Regulation (“GDPR”), may also apply to health-related
and other personal information obtained outside of the United States. The GDPR went into effect on May 25, 2018, and imposes stringent
data protection requirements for processing of personal data of individuals within the European Economic Area (“EEA”) as
well as potential fines for noncompliant companies of up to the greater of €20 million or 4% of annual global revenue. The GDPR
imposes numerous requirements for the collection, use and disclosure of personal data, including stringent requirements relating to consent
and the information that must be shared with data subjects about how their personal information is used, the obligation to notify regulators
and affected individuals of personal data breaches, extensive internal privacy governance obligations and obligations to honor expanded
rights of individuals in relation to their personal information.
In
addition, the GDPR places restrictions on cross-border data transfers. A decision by the Court of Justice of the European Union (“CJEU”)
in 2020 invalidated the EU-U.S. Privacy Shield Framework, which was one of the primary mechanisms used by U.S. companies to import personal
information from Europe in compliance with the GDPR’s cross-border data transfer restrictions, and raised questions about whether
the European Commission’s Standard Contractual Clauses, one of the primary alternatives to the Privacy Shield, can lawfully be
used for personal information transfers from Europe to the United States or most other countries. Similarly, the Swiss Federal Data Protection
and Information Commissioner has opined that the Swiss-U.S. Privacy Shield is inadequate for transfers of data from Switzerland to the
U.S. Furthermore, on June 4, 2021, the European Commission issued new forms of standard contractual clauses for data transfers from controllers
or processors in the EEA (or otherwise subject to the GDPR) to controllers or processors established outside the EEA (and not subject
to the GDPR). The new forms of standard contractual clauses have replaced the standard contractual clauses that were adopted previously
under the Data Protection Directive. We will be required to transition to the new forms of standard contractual clauses and doing so
will require significant effort and cost. The new standard contractual clauses may also impact our business as companies based in Europe
may be reluctant to utilize the new clauses to legitimize transfers of personal information to third countries given the burdensome requirements
of transfer impact assessments and the substantial obligations that the new standard contractual clauses impose upon exporters. If we
are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by
European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new
clients or pharmaceutical partners. We may also experience hesitancy, reluctance, or refusal by European or multi-national clients or
pharmaceutical partners to continue to use our products due to the potential risk exposure as a result of the current (and, in particular,
future) data protection obligations imposed on them by certain data protection authorities in interpretation of current law, including
the GDPR. Such clients or pharmaceutical partners may also view any alternative approaches to compliance as being too costly, too burdensome,
too legally uncertain, or otherwise objectionable and therefore decide not to do business with us. Any of the foregoing could materially
harm our business, prospects, financial condition, and results of operations.
The
GDPR has increased our responsibilities and potential liability in relation to personal data processed subject to the GDPR, and we may
be required to put in place additional mechanisms to ensure compliance with the GDPR, including as implemented by individual countries.
Companies now have to comply with the GDPR and also the United Kingdom GDPR (“UK GDPR”), which, together with the amended
UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, i.e., fines up to the
greater of £17.5 million or 4% of global turnover. In addition, on June 28, 2021, the European Commission adopted an adequacy decision
in respect of transfers of personal data to the UK for a four-year period (until June 27, 2025). Similarly, the UK has determined that
it considers all of the EEA to be adequate for the purposes of data protection. This ensures that data flows between the UK and the EEA
remain unaffected. Compliance with the GDPR and applicable laws and regulations relating to privacy and data protection of EEA Member
States and the UK is a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business
practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation and reputational harm
in connection with our European activities. In addition, any failure by us (or our business partners who handle personal data) to comply
with GDPR and applicable laws and regulations relating to privacy and data protection of EEA member states and the UK may result in regulators
prohibiting our processing of the personal data of EEA data subjects, which could impact our operations and ability to develop our products
and provide our services, including interrupting or ending EEA clinical trials.
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In
addition, states are constantly adopting new laws or amending existing laws, requiring attention to frequently changing regulatory requirements.
For example, California enacted the California Consumer Privacy Act (the “CCPA”) on June 28, 2018, which took effect on January
1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal
information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide
new disclosures to California consumers (as that term is broadly defined and can include any of our current or future employees who may
be California residents) and provide such residents new ways to opt-out of certain sales of personal information. The CCPA provides for
civil penalties for violations, as well as a private right of action for data breaches and statutory damages, which is expected to increase
data breach class action litigation and result in significant exposure to costly legal judgments and settlements. Although the law includes
limited exceptions for health-related information, including clinical trial data, such exceptions may not apply to all of our operations
and processing activities. As we expand our operations and trials (both preclinical and clinical), the CCPA may increase our compliance
costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend towards more stringent privacy
legislation in the United States. In November 2020, California passed the California Privacy Rights Act (the “CPRA”) which
amends and expands the CCPA. The CPRA will impose additional data protection obligations on covered businesses, including additional
consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive
data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased
privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance
investment and potential business process changes may be required. The CPRA has created additional uncertainty and may increase our cost
of compliance. Other states are beginning to pass similar laws. In the event that we are subject to or affected by HIPAA, the GDPR, the
CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these
laws could adversely affect our financial condition.
Compliance
with U.S. and international data protection laws and regulations could require us to take on more onerous obligations in our contracts,
restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. Laws
and regulations worldwide relating to privacy, data protection and cybersecurity are, and are likely to remain, uncertain for the foreseeable
future. While we strive to comply with applicable laws and regulations relating to privacy, data protection and cybersecurity, external
and internal privacy and security policies and contractual obligations relating to privacy, data protection and cybersecurity to the
extent possible, we may at times fail to do so, or may be perceived to have failed to do so. Moreover, despite our efforts, we may not
be successful in achieving compliance if our personnel, collaborators, partners or vendors do not comply with applicable laws and regulations
relating to privacy, data protection and cybersecurity, external and internal privacy and security policies and contractual obligations
relating to privacy, data protection and cybersecurity. Actual or perceived failure to comply with any laws and regulations relating
to privacy, data protection or cybersecurity in the U.S. or foreign jurisdictions could result in government enforcement actions (which
could include civil or criminal penalties), private litigation or adverse publicity and could negatively affect our operating results
and business. Moreover, clinical trial subjects about whom we or our potential collaborators or service providers obtain information,
as well as the providers who share this information with us, may contractually limit our ability to use and disclose the information.
Claims that we have violated individuals’ privacy rights, failed to comply with applicable laws or regulations, or breached our
contractual obligations, even if we are not found liable, could be expensive and time consuming to defend, result in regulatory actions
and proceedings, in addition to private claims and litigation, and could result in adverse publicity that could harm our business.
We
also are, or may be asserted to be, subject to the terms of our external and internal privacy and security policies, representations,
certifications, publications, and frameworks and contractual obligations to third parties related to privacy, data protection, information
security, and processing. Failure to comply or the perceived failure to comply with any of these, or if any of these policies or any
of our representations, certifications, publications, or frameworks are, in whole or part, found or perceived to be inaccurate, incomplete,
deceptive, unfair, or misrepresentative of our actual practices, could result in reputational harm, result in litigation, cause a material
adverse impact to business operations or financial results, and otherwise result in other material harm to our business.
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If
we or our existing or potential future collaborators, manufacturers or service providers fail to comply with healthcare laws and regulations,
we or they could be subject to enforcement actions, which could affect our ability to develop, market and sell our product candidates
and may harm our reputation.
Healthcare
providers, physicians, and third-party payors, among others, will play a primary role in the prescription and recommendation of any product
candidates for which we obtain marketing approval. Our current and future arrangements with third-party payors, providers, and customers,
among others, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business
or financial arrangements and relationships through which we market, sell, and distribute our product candidates for which we obtain
marketing approval. Restrictions under applicable federal and state healthcare laws and regulations in the United States and other countries,
include the following:
● the
federal Anti-Kickback Statute, which prohibits, among other things, a person or entity from
knowingly and willfully soliciting, offering, paying, receiving or providing remuneration,
directly or indirectly, in cash or in kind, to induce or reward either the referral of an
individual for, or the purchase, lease order, arranging for or recommendation of, any good,
facility, item or service, for which payment may be made, in whole or in part, by a federal
healthcare program, such as Medicare or Medicaid. A person or entity does not need to have
actual knowledge of the statute or specific intent to violate it in order to have committed
a violation;
● federal
civil and criminal false claims laws, including the federal False Claims Act, which provides
for civil whistleblower or qui tam actions, and civil monetary penalties laws, that impose
penalties against individuals or entities for knowingly presenting, or causing to be presented,
to the federal government, claims for payment that are false or fraudulent or making a false
statement to avoid, decrease or conceal an obligation to pay money to the federal government.
In addition, the government may assert that a claim including items and services resulting
from a referral made in violation of the federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the False Claims Act;
● HIPAA,
which imposes criminal and civil liability for executing a scheme to defraud any healthcare
benefit program, or knowingly and willfully falsifying, concealing, or covering up a material
fact or making any materially false statement in connection with the delivery of or payment
for healthcare benefits, items, or services. Similar to the federal Anti-Kickback Statute,
a person or entity does not need to have actual knowledge of the statute or specific intent
to violate it in order to have committed a violation;
● HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”)
and its implementing regulations, including the Final Omnibus Rule published in January 2013,
which impose obligations on certain covered entity healthcare providers, health plans and
healthcare clearinghouses as well as their business associates and their subcontractors that
perform certain services involving the use or disclosure of individually identifiable health
information, including mandatory contractual terms, with respect to safeguarding the privacy,
security and transmission of individually identifiable health information, and require notification
to affected individuals and regulatory authorities of certain breaches of security of individually
identifiable health information. HITECH also created new tiers of civil monetary penalties,
amended HIPAA to make civil and criminal penalties directly applicable to business associates,
and gave state attorneys general new authority to file civil actions for damages or injunctions
in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs
associated with pursuing federal civil actions. In addition, there may be additional federal,
state, and non-U.S. laws which govern the privacy and security of health and other personal
information in certain circumstances, many of which differ from each other in significant
ways and may not have the same effect, thus complicating compliance efforts;
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● the
federal false statements statute, which prohibits knowingly and willfully falsifying, concealing,
or covering up a material fact or making any materially false statement in connection with
the delivery of or payment for healthcare benefits, items, or services;
● the
federal physician payment transparency requirements, sometimes referred to as the “Sunshine
Act” under the Affordable Care Act, require certain manufacturers of drugs, devices,
biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s
Health Insurance Program to report to the CMS information related to transfers of value made
to physicians (currently defined to include doctors, dentists, optometrists, podiatrists
and chiropractors) and teaching hospitals, as well as ownership and investment interests
of such physicians and their immediate family members. Effective January 1, 2022, these reporting
obligations extend to include payments and transfers of value, made during the previous year
to certain non-physician providers, including physician assistants, nurse practitioners,
clinical nurse specialists, certified registered nurse anesthetists, anesthesiologist assistants
and certified nurse midwives; and
● analogous
local, state and foreign laws and regulations, such as state anti-kickback and false claims
laws that may apply to healthcare items or services reimbursed by third party payors, including
private insurers, local, state and foreign transparency laws that require manufacturers to
report information related to payments and transfers of value to other healthcare providers
and healthcare entities, marketing expenditures, or drug pricing, state laws that require
pharmaceutical companies to register certain employees engaged in marketing activities in
the location and comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government, and state and
foreign laws governing the privacy and security of health information in certain circumstances,
many of which differ from each other in significant ways and often are not preempted by HIPAA,
thus complicating compliance efforts.
Ensuring
that our future business arrangements with third parties comply with applicable healthcare laws and regulations could involve substantial
costs. It is possible that governmental authorities will conclude that our business practices, including our relationships with physicians
and other healthcare providers, some of whom are compensated in the form of stock options for consulting services provided, may not comply
with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws
and regulations. If our operations are found to be in violation of any such requirements, we may be subject to penalties, including criminal
and significant civil monetary penalties, damages, fines, imprisonment, disgorgement, contractual damages, reputational harm, exclusion
from participation in government healthcare programs, integrity obligations, injunctions, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of pre-marketing product approvals, private qui tam actions brought by individual whistleblowers
in the name of the government, refusal to allow us to enter into supply contracts, including government contracts, additional reporting
requirements and oversight if subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance
with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations. Although effective compliance programs can mitigate the risk of investigation and prosecution
for violations of these laws, these risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation
could cause us to incur significant legal expenses and could divert our management’s attention from the operation of our business,
even if our defense is successful. Therefore, even if we are successful in defending against any such actions that may be brought against
us, our business may be impaired. If any of the above occur, our ability to operate our business and our results of operations could
be adversely affected. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly to us in terms
of money, time, and resources.
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If
we fail to comply with U.S. and foreign regulatory requirements, regulatory authorities could limit or withdraw any marketing or commercialization
approvals we may receive and subject us to other penalties that could materially harm our business.
Even
if we receive marketing and commercialization approval of a product candidate, we will be subject to continuing regulatory requirements,
including in relation to adverse patient experiences with the product and clinical results that are reported after a product is made
commercially available, both in the United States and any foreign jurisdiction in which we seek regulatory approval. The FDA and other
regulatory authorities have significant post-market authority, including the authority to require labeling changes based on new safety
information and to require post-market studies or clinical trials to evaluate safety risks related to the use of a product or to require
withdrawal of the product candidate from the market. The FDA and other regulatory authorities also have the authority to require a REMS
after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug or therapeutic biologic.
The manufacturer and manufacturing facilities we use to make a future product, if any, will also be subject to periodic review and inspection
by the FDA and other regulatory authorities, including for continued compliance with cGMP and cGTP requirements. The discovery of any
new or previously unknown problems with our third-party manufacturers, manufacturing processes or facilities may result in restrictions
on the product candidate, manufacturer, or facility, including withdrawal of the product candidate from the market. We intend to rely
on third-party manufacturers and we will not have control over compliance with applicable rules and regulations by such manufacturers.
Any product promotion and advertising will also be subject to regulatory requirements and continuing regulatory review. If we or our
existing or future collaborators, manufacturers or service providers fail to comply with applicable continuing regulatory requirements
in the U.S. or foreign jurisdictions in which we seek to market our products, we or they may be subject to, among other things, fines,
warning letters, holds on clinical trials, delay of approval or refusal by the FDA, or other regulatory authorities to approve pending
applications or supplements to approved applications, suspension or withdrawal of regulatory approval, product recalls and seizures,
administrative detention of products, refusal to permit the import or export of products, operating restrictions, injunction, civil penalties,
and criminal prosecution.
Even
if we are able to commercialize any product candidate, such product candidate may become subject to unfavorable pricing regulations or
third-party coverage and reimbursement policies, which would harm our business.
In
the United States and markets in other countries, patients generally rely on third-party payors to reimburse all or part of the costs
associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid,
and private health insurers is critical to new product acceptance.
There
is also significant uncertainty related to the insurance coverage and reimbursement of newly approved products and coverage may be more
limited than the purposes for which the medicine is approved by the FDA or comparable foreign regulatory authorities. In the United States,
the principal decisions about reimbursement for new medicines are typically made by the CMS, an agency within the U.S. Department of
Health and Human Services. CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare and private
payors tend to follow CMS to a substantial degree.
Our
ability to commercialize any products successfully will depend, in part, on the extent to which coverage and adequate reimbursement for
these products and related treatments will be available from third-party payors, such as government authorities, private health insurers
and health maintenance organizations. Patients who are prescribed medications for the treatment of their conditions generally rely on
third-party payors to reimburse all or part of the costs associated with their prescription drugs. Coverage and adequate reimbursement
from government healthcare programs, such as Medicare and Medicaid, and private health insurers are critical to new product acceptance.
Patients are unlikely to use our future products, if any, unless coverage is provided and reimbursement is adequate to cover a significant
portion of the cost. Obtaining coverage and adequate reimbursement for our product candidates may be particularly difficult because of
the higher prices often associated with drugs administered under the supervision of a physician. Similarly, because our product candidates
are physician-administered, separate reimbursement for the product itself may or may not be available. Instead, the administering physician
may or may not be reimbursed for providing the treatment or procedure in which our product is used.
Cost-containment
is a priority in the U.S. healthcare industry and elsewhere. As a result, government authorities and other third-party payors have attempted
to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are
requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical
products. Third-party payors also may request additional clinical evidence beyond the data required to obtain marketing approval, requiring
a company to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of its product.
Commercial third-party payors often rely upon Medicare coverage policy and payment limitations in setting their reimbursement rates,
but also have their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement for pharmaceutical
products in the U.S. can differ significantly from payor to payor. We cannot be sure that coverage and adequate reimbursement will be
available for any product that we commercialize and, if reimbursement is available, that the level of reimbursement will be adequate.
Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval.
If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize
any product candidate for which we obtain marketing approval.
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Additionally,
the regulations that govern regulatory approvals, pricing and reimbursement for new drugs and therapeutic biologics vary widely from
country to country. Some countries require approval of the sale price of a drug or therapeutic biologic before it can be marketed. In
many countries, the pricing review period begins after marketing approval is granted. In some foreign markets, prescription pharmaceutical
pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain regulatory
approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product,
possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country.
Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates
obtain regulatory approval.
We
are subject to U.S. and foreign anti-corruption and anti-money laundering laws with respect to our operations and non-compliance with
such laws can subject us to criminal or civil liability and harm our business.
We
are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. domestic bribery statute
contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other state and national anti-bribery and anti-money
laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and
their employees, agents, third-party intermediaries, joint venture partners and collaborators from authorizing, promising, offering or
providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We interact with officials
and employees of government agencies and government-affiliated hospitals, universities, and other organizations. In addition, we may
engage third-party intermediaries to promote our clinical research activities abroad or to obtain necessary permits, licenses and other
regulatory approvals. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees,
representatives, contractors, collaborators, and agents, even if we do not explicitly authorize or have actual knowledge of such activities.
In
connection with the Business Combination, Estrella adopted a Code of Business Conduct and Ethics and we expect to prepare and implement
policies and procedures to ensure compliance with such code. The Code of Business Conduct and Ethics mandates compliance with the FCPA
and other anti-corruption laws applicable to our business throughout the world. However, we cannot assure you that our employees and
third-party intermediaries will comply with the Code of Business Conduct and Ethics or such anti-corruption laws. Noncompliance with
anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements,
prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions,
suspension, or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage
and other collateral consequences. If any subpoenas, investigations, or other enforcement actions are launched, or governmental or other
sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and
financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant
diversion of management’s attention and resources and significant defense and compliance costs and other professional fees. In
certain cases, enforcement authorities may even cause us to appoint an independent compliance monitor which can result in added costs
and administrative burdens.
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General
Risk Factors
Disruptions
at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain
or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved, or commercialized
in a timely manner or at all, which could negatively impact our business.
The
ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding
levels, statutory, regulatory and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of
user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the
FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and
development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other
agencies may also slow the time necessary for new drugs and biologics or modifications to approved drugs and biologics to be reviewed
and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years,
including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies,
such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Since
March 2020 when foreign and domestic inspections of facilities were largely placed on hold, the FDA has been working to resume routine
surveillance, bioresearch monitoring and pre-approval inspections on a prioritized basis. Since April 2021, the FDA has conducted limited
inspections and has employed remote interactive evaluations, using risk management methods, to meet user fee commitments and goal dates.
Ongoing travel restrictions and other uncertainties continue to impact oversight operations both domestic and abroad and it is unclear
when standard operational levels will resume. The FDA is continuing to complete mission-critical work, prioritize other higher-tiered
inspectional needs (e.g., for-cause inspections), and carry out surveillance inspections using risk-based approaches for evaluating public
health. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle
due to restrictions on travel, and the FDA does not determine a remote interactive evaluation to be adequate, the agency has stated that
it generally intends to issue, depending on the circumstances, a complete response letter or defer action on the application until an
inspection can be completed. During the COVID-19 public health emergency, a number of companies announced receipt of complete response
letters due to the FDA’s inability to complete required inspections for their applications. Regulatory authorities outside the
U.S. may adopt similar restrictions or other policy measures in response to the ongoing COVID-19 pandemic and may experience delays in
their regulatory activities.
We
or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery
plans may not adequately protect us from a serious disaster.
We
share our facilities with Eureka (“Facilities”) located in Emeryville, California, near major earthquake faults, fire zones
and the shore of San Francisco Bay. Any unplanned event, such as earthquake, flood, fire, explosion, extreme weather condition, medical
epidemics, including any potential effects from the current global spread of COVID-19, power shortage, telecommunication failure, or
other natural or man-made accidents or incidents that result in us being unable to fully utilize the Facilities may have a material adverse
effect on our ability to operate our business, particularly on a daily basis and have significant negative consequences on our financial
and operating conditions. Loss of access to the Facilities may result in increased costs, delays in the development of our product candidates,
or interruption of our business operations. Natural disasters or pandemics such as the COVID-19 outbreak could further disrupt our operations
and have a material adverse effect on our business, financial condition, results of operations, and prospects. If a natural disaster,
power outage or other event occurred that prevented us from using all or a significant portion of the Facilities, that damaged critical
infrastructure, such as research facilities or the manufacturing facilities of our third-party contract manufacturers, or that otherwise
disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period
of time. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans,
which could have a material adverse effect on our business. In the event of an accident or incident at the Facilities, we cannot assure
our investors that the amounts of insurance payable, if any, will be sufficient to satisfy any damages and losses. If the Facilities
or the manufacturing facilities of our third-party contract manufacturers are unable to operate because of an accident or incident or
for any other reason, even for a short period of time, any or all of our research and development programs may be harmed. Any business
interruption may have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Our
quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each
of which may cause our stock price to fluctuate or decline.
We
expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous
factors, including:
● variations
in the level of expense related to the ongoing development of our product candidates or future
development programs;
● results
of preclinical studies and clinical trials, or the addition or termination of preclinical
studies and clinical trials or funding support by us or potential future collaborators;
● our
execution of any collaboration, licensing, or similar arrangements, and the timing of payments
we may make or receive under potential future arrangements or the termination or modification
of any of our existing or potential future collaboration, licensing, or similar arrangements;
● any
intellectual property infringement, misappropriation or violation lawsuit or opposition,
interference or cancellation proceeding in which we may become involved;
● additions
and departures of key personnel;
● strategic
decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint
ventures, strategic investments, or changes in business strategy;
● if
any of our product candidates receives regulatory approval, the terms of such approval and
market acceptance and demand for such product candidates;
● regulatory
developments affecting our product candidates or those of our competitors; and
● changes
in general market and economic conditions.
If
our quarterly operating results fall below the expectations of investors or securities analysts, the price of our Common Stock could
decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to
fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not
be relied upon as an indication of our future performance.
We
may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information
of third parties.
We
have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed
at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants, or independent
contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’
former employers, or that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation
may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result
in substantial cost and be a distraction to our management and employees. If our defenses to these claims fail, in addition to requiring
us to pay monetary damages, a court could prohibit us from using technologies or features that are essential to our product candidates,
if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the
former employers. Moreover, any such litigation or the threat thereof may adversely affect our reputation, our ability to form strategic
alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which
would have an adverse effect on our business, results of operations, financial condition, and prospects. Even if we are successful in
defending against such claims, litigation could result in substantial costs and be a distraction to management.
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Our
management team is not subject to non-competition restrictions if they terminate their employment with us.
The
employment agreements with Dr. Liu and Mr. Xu do not contain non-competition covenants limiting their ability to compete with us if they
terminate their employment. Although the employment agreements contain customary confidentiality and non-solicitation covenants, the
departure of one or more of the members of our management team, followed by such departing member competing with us could diminish our
strategic advantages and could have an adverse effect on our business, results of operations, financial condition, and prospects. In
addition, Dr. Liu’s employment agreement does not contain invention assignment provisions. As a result, any invention by Dr. Liu
would remain his intellectual property and we would have no right to ownership of such invention.
Risks
Related to our Securities
Our
Common Stock price may be volatile.
Our
Common Stock price is likely to be volatile. The market price for our Common Stock may be influenced by many factors, including the other
risks described in this section of the Annual Report entitled “ Risk Factors ” and the following:
● Estrella’s
ability to advance its current or potential future product candidates into the clinic;
● results
of preclinical studies and clinical trials for Estrella’s current or potential future
product candidates, or those of its competitors or potential future collaborators;
● the
impact of the ongoing COVID-19 pandemic on Estrella’s business;
● regulatory
or legal developments in the United States and other countries, especially changes in laws
or regulations applicable to Estrella’s future products;
● the
success of competitive products or technologies;
● introductions
and announcements of new products by Estrella, its future commercialization collaborators,
or its competitors, and the timing of these introductions or announcements;
● actions
taken by regulatory authorities with respect to Estrella future products, clinical trials,
manufacturing process or sales and marketing terms;
● actual
or anticipated variations in Estrella’s financial results or those of companies that
are perceived to be similar to Estrella;
● the
success of Estrella’s efforts to acquire or in-license additional technologies, products,
or product candidates;
● developments
concerning any future collaborations, including, but not limited to, those with any sources
of manufacturing supply and future commercialization collaborators;
● market
conditions in the pharmaceutical and biotechnology sectors;
● market
conditions and sentiment involving companies that have recently completed a business combination
with a special purpose acquisition company (“SPAC”);
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● announcements
by Estrella or its competitors of significant acquisitions, strategic alliances, joint ventures
or capital commitments;
● developments
or disputes concerning patents or other proprietary rights, including patents, litigation
matters and Estrella’s ability to obtain patent protection for its products;
● Estrella’s
ability or inability to raise additional capital and the terms on which it is raised;
● the
recruitment or departure of key personnel;
● changes
in the structure of healthcare payment systems;
● actual
or anticipated changes in earnings estimates or changes in stock market analyst recommendations
regarding our Common Stock, other comparable companies or the industry generally;
● Estrella’s
failure or the failure of its competitors to meet analysts’ projections or guidance
that Estrella or its competitors may give to the market;
● fluctuations
in the valuation of companies perceived by investors to be comparable to Estrella;
● announcement
and expectation of additional financing efforts;
● speculation
in the press or investment community;
● trading
volume of our Common Stock;
● sales
of our Common Stock by Estrella or its stockholders, including the negative pressure potential
sales of shares issued in the deSPAC transaction and registered pursuant to the registration
statement relating to the offer and resale from time to time of an aggregate of 3,829,338
shares of Common Stock;
● the
concentrated ownership of our Common Stock;
● changes
in accounting principles;
● terrorist
acts, acts of war or periods of widespread civil unrest;
● natural
disasters, public health crises and other calamities; and
● general
economic, industry and market conditions.
In
addition, the stock markets in general, and the markets for SPAC post-business combination businesses, pharmaceutical, biopharmaceutical
and biotechnology stocks in particular, have experienced extreme volatility, including since the public announcement of the Merger Agreement
in October 2022. This volatility can often be unrelated to the operating performance of the underlying business. These broad market and
industry factors may seriously harm the market price of our Common Stock, regardless of Estrella’s operating performance.
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Estrella
may incur significant costs from class action litigation due to the expected stock volatility.
Estrella’s
stock price may fluctuate for many reasons, including as a result of public announcements regarding the progress of development efforts
for Estrella’s platform and product candidates, the development efforts of future collaborators or competitors, the addition or
departure of key personnel, variations in quarterly operating results and changes in market valuations of biopharmaceutical and biotechnology
companies. This risk is especially relevant to Estrella because biopharmaceutical and biotechnology companies have experienced significant
stock price volatility in recent years, including since the public announcement of the Merger Agreement in October 2022. In addition,
recently there has been significant stock price volatility involving the shares of companies that have recently completed a business
combination with a SPAC. When the market price of a stock has been volatile, as Estrella’s stock price may be, holders of that
stock have occasionally brought securities class action litigation against the company that issued the stock. Additionally, there has
recently been a general increase in litigation against companies that have recently completed a business combination with a SPAC alleging
fraud and other claims based on inaccurate or misleading disclosures. If any Estrella stockholders were to bring a lawsuit of this type
against Estrella, even if the lawsuit is without merit, Estrella could incur substantial costs defending the lawsuit. The lawsuit could
also divert the time and attention of management.
We
are a “controlled company” within the meaning of Nasdaq listing rules and, as a result, can rely on exemptions from certain
corporate governance requirements that provide protection to shareholders of other companies.
As
a result of Eureka Therapeutics, Inc. holding more than 50% of the voting power of our board of directors, we will be a “controlled
company” within the meaning of Nasdaq’s listing rules. Therefore, we are not required to comply with certain corporate governance
rules that would otherwise apply to us as a listed company on Nasdaq including the requirement that compensation committee and nominating
and corporate governance committee be composed entirely of “independent” directors (as defined by Nasdaq’s listing
rules). As a “controlled company” the Estella Board is not required to include a majority of “independent” directors.
We do not intend to rely on those exemptions. However, we cannot guarantee that this may not change going forward.
Should
the interests of Eureka Therapeutics, Inc. differ from those of other stockholders, it is possible that the other shareholders might
not be afforded such protections as might exist if the board of directors of us, or such committees, were required to have a majority,
or be composed exclusively, of directors who were independent of Eureka Therapeutics, Inc. or our management.
Estrella
is an “emerging growth company” and it cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our Common Stock less attractive to investors and may make it more difficult to compare performance with other public
companies.
Estrella
is an emerging growth company as defined in the JOBS Act, and it intends to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on
executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors may find our Common
Stock less attractive because Estrella will continue to rely on these exemptions. If some investors find our Common Stock less attractive
as a result, there may be a less active trading market for our Common Stock, and the stock price may be more volatile.
An
emerging growth company may elect to delay the adoption of new or revised accounting standards. Section 102(b)(2) of the JOBS Act allows
Estrella to delay adoption of new or revised accounting standards until those standards apply to non-public business entities. As a result,
the financial statements contained in this Annual Report and those that Estrella will file in the future may not be comparable to companies
that comply with the effective dates of revised accounting standards for public entities.
Future
sales and issuances of Common Stock or rights to purchase Common Stock could result in additional dilution of the percentage ownership
of Estrella stockholders and could cause Common Stock price to fall.
Significant
additional capital will be needed in the future to continue Estrella’s planned operations, including further development of Estrella’s
product candidates, payments under the Services Agreement in connection with preparing regulatory filings, conducting preclinical studies
and clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public
company. To raise capital, Estrella may sell Common Stock, convertible securities, or other equity securities in one or more transactions
at prices and in a manner as determined from time to time. If Estrella sells Common Stock, convertible securities, or other equity securities,
investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to existing stockholders, and
new investors could gain rights, preferences, and privileges senior to the holders of Common Stock.
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Pursuant
to the Incentive Plan, the Estrella Board or a committee appointed by the Estrella Board to administer the Incentive Plan (the “Incentive
Plan Administrator”), is authorized to grant stock options to Estrella’s employees, directors, and consultants. Initially,
the maximum aggregate number of shares of Common Stock that may be issued pursuant to stock awards under the Incentive Plan will be equal
to the number of shares of Common Stock initially reserved under the Incentive Plan. The number of shares authorized for issuance under
the Incentive Plan is approximately 3,520,123 shares of Common Stock. In addition, annually on the first trading day of the calendar
year beginning in calendar year 2024, such share reserve will automatically increase by 10% of the total number of shares of Common Stock
outstanding as of the last day of the immediately preceding calendar year, unless the Incentive Plan Administrator acts prior to January
1 of such year to provide that there will be no increase or a lesser increase in the share reserve for that year. Unless the Incentive
Plan Administrator acts not to increase the number of shares available for issuance under the Incentive Plan, Estrella stockholders may
experience additional dilution, which could cause Estrella’s stock price to fall.
Estrella’s
issuance of additional shares of common stock or other equity securities of equal or senior rank would, all else being equal, have the
following effects:
● existing
stockholders’ proportionate ownership interest in Estrella would decrease;
● the
amount of cash available per share, including for payment of dividends in the future, may
decrease;
● the
relative voting strength of each previously outstanding share of common stock would be diminished;
and
● the
market price of shares of Common Stock may decline.
The
exercise by Estrella of its right to issue Common Stock pursuant to the Common Stock Purchase Agreement could cause substantial dilution,
which could materially affect the trading price of Common Stock.
In
connection with the closing of the Business Combination, the Common Stock Purchase Agreement granted Estrella the right, but not the
obligation, to require White Lion to purchase, from time to time, up to the lesser of (i) $50,000,000 of newly issued shares of Common
Stock and (ii) the Exchange Cap, subject to satisfaction of certain conditions. To the extent Estrella exercises its right to sell such
shares under the Common Stock Purchase Agreement, Estrella will need to issue new shares to White Lion. Although we cannot predict the
number of shares of Common Stock that would actually be issued in connection with any such sales, such issuances could result in substantial
dilution and decreases to the stock price of Common Stock.
We
may be unable to sell shares to White Lion pursuant to the Common Stock Purchase Agreement if our Common Stock is delisted.
One
of the conditions precedent to the commencement of the Common Stock Purchase Agreement is that Common Stock must be listed on a Principal
Market and must not be suspended from trading or delisted. If our Common Stock is delisted, we will not be able to sell Equity Line Shares
to White Lion and Estrella will lose a significant source of potential financing for its business. This could adversely affect our ability
to fund our operations and obtain regulatory approval for our product candidates and could materially harm our business, financial condition
and results of operations. Furthermore, if our Common Stock is delisted, we may face other negative consequences, such as reduced liquidity
and trading volume of our shares, lower investor interest and confidence in our company, decreased analyst coverage and market making
activity, limited availability of capital or financing options, and increased volatility in our stock price.
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Our
Warrants may never be in the money, and they may expire worthless.
The
exercise price for our Private Warrants is $11.50 per-share (subject to adjustment as described herein), which exceeds the market price
of our Common Stock, which was $1.01 per share based on the closing price of our Common Stock on the Nasdaq Capital Market on July 1,
2024. If all of our Warrants were exercised in full for cash, we would receive an aggregate of approximately $25,472,500. We do not expect
warrant holders to exercise their Warrants and, therefore, we do not expect to receive cash proceeds from any such exercise, for so long
as the Warrants remain out-of-the money. There can be no assurance that the Warrants will ever be in the money prior to their expiration
and, as such, the Warrants may expire worthless.
We
may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to investors, thereby making our Warrants worthless.
We
have the ability to redeem outstanding Warrants at any time after they become exercisable and prior to their expiration, at $0.01 per
warrant, provided that the last reported sales price (or the closing bid price of our Common Stock in the event the shares of our Common
Stock are not traded on any specific trading day) of the Common Stock equals or exceeds $16.50 per share (as adjusted for stock splits,
stock dividends, reorganizations and the like) on each of 20 trading days within the 30 trading-day period ending on the third business
day prior to the date on which we send proper notice of such redemption, provided that on the date we give notice of redemption and during
the entire period thereafter until the time we redeem the warrants, we have an effective registration statement under the Securities
Act covering the Common Stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The registration
statement registering the shares of Common Stock issuable upon exercise of the Warrants was declared effective on December 28, 2023.
If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the
underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a warrant
holder: (i) to exercise its warrants and pay the exercise price therefor at a time when it may be disadvantageous for it to do so, (ii)
to sell its warrants at the then-current market price when it might otherwise wish to hold its Warrants or (iii) to accept the nominal
redemption price which, at the time the outstanding Public Warrants are called for redemption, will be substantially less than the market
value of its Warrants.
Our
warrant agreement designates the courts of the State of New York or the United States District Court for the Southern District of New
York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of our Warrants, which
could limit the ability of warrant holders to obtain a favorable judicial forum for disputes with us.
Our
warrant agreement provides that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating
in any way to the warrant agreement including under the Securities Act, will be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York, and (ii) that we irrevocably submit to such jurisdiction,
which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. We will waive any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum.
Notwithstanding
the foregoing, these provisions of the warrant agreement will not apply to suits brought to enforce any liability or duty created by
the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive
forum. Any person or entity purchasing or otherwise acquiring any interest in any of our Warrants shall be deemed to have notice of and
to have consented to the forum provisions in our warrant agreement. If any action, the subject matter of which is within the scope the
forum provisions of the warrant agreement is filed in a court other than a court of the State of New York or the United States District
Court for the Southern District of New York (for purposes of this subsection, a “foreign action”) in the name of any holder
of our Warrants such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located
in the State of New York in connection with any action brought in any such court to enforce the forum provisions (for purposes of this
subsection, an “enforcement action”), and (y) having service of process made upon such warrant holder in any such enforcement
action by service upon such warrant holder’s counsel, as applicable, in the foreign action as agent for such warrant holder.
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This
choice-of-forum provision may limit the ability of warrant holders to bring a claim in a judicial forum that they find favorable for
disputes with our company, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our warrant agreement
inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs
associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition
and results of operations and result in a diversion of the time and resources of our management and the Estrella Board.
Our
Warrants are exercisable for our Common Stock, which, upon exercise, would increase the number of shares eligible for future resale in
the public market and result in dilution to our shareholders.
Outstanding
Warrants to purchase an aggregate of 2,215,000 shares of Common Stock became exercisable on the completion of the Business Combination
and the registration statement registering the shares of Common Stock underlying the Warrants becoming effective on December 28, 2023.
Each Warrant entitles the holder thereof to purchase one share of our Common Stock at a price of $11.50 per whole share, subject to adjustment.
Warrants
may be exercised only for a whole number of shares of Common Stock. To the extent such Warrants are exercised, additional shares of Common
Stock will be issued, which will result in dilution to the then existing holders of our Common Stock and increase the number of shares
eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the
market price of our Common Stock.
Estrella’s
internal control over financial reporting may not prevent or detect all errors or acts of fraud.
Estrella
must design its internal control over financial reporting to reasonably assure that information we must disclose in reports we file or
submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls
and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to
disclose a new relationship or arrangement causing us to fail to make a required related party transaction disclosure. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override
of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur
and not be detected.
Estrella
has identified material weaknesses in its internal control over financial reporting which, if not corrected, could affect the reliability
of Estrella’s consolidated financial statements, and have other adverse consequences.
In connection with the audits
of Estrella’s financial statements for the years ended June 30, 2023 and 2024, material weaknesses in Estrella’s internal
control over financial reporting were identified in relation to: (i) Estrella’s lack of qualified full-time personnel with appropriate
levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements
and related disclosures under U.S. GAAP. A material weakness is a deficiency or combination of deficiencies in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not
be prevented or detected on a timely basis.
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The
identified material weaknesses, if not corrected, could result in a material misstatement to Estrella’s consolidated financial
statements that may not be prevented or detected.
The Company has implemented
certain changes in its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
to remediate the material weaknesses identified in fiscal year 2023. The implementation of the material aspects of this plan took place
during the second and third quarters of fiscal year 2024. Additional qualified out-sourced personnel with appropriate levels of accounting
knowledge and experience to address U.S. GAAP accounting issues have been added to prepare and review financial statements and related
disclosures under U.S. GAAP. Non-routine transactions are analyzed by the chief financial officer and third-party consultants to ensure
proper accounting treatment. Narratives and policies for business processes that relate to financial statements have been put in place
to establish proper segregation of duties and internal controls. While the Company has remediated certain previously identified material
weaknesses, our chief executive officer and chief financial officer concluded that as of June 30, 2024, our disclosure controls and procedures
were not effective at the reasonable assurance level. If Estrella fails to establish and maintain proper internal financial reporting
controls, its ability to produce accurate financial statements or comply with applicable regulations could be impaired.
Estrella
is a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or
Section 404, requires that Estrella include a report from management on Estrella’s internal control over financial reporting in
Estrella’s annual report on Form 10-K beginning with Estrella’s annual report for the fiscal year ended June 30, 2024. In
addition, if Estrella ceases to be an “emerging growth company,” Estrella’s independent registered public accounting
firm may be required to attest to and report on the effectiveness of Estrella’s internal control over financial reporting.
If
Estrella fails to implement any required improvements to its disclosure controls and procedures to address any material weaknesses in
its internal control over financial reporting, such material weaknesses could result in inaccuracies in Estrella’s financial statements
and could also impair its ability to comply with applicable financial reporting requirements and related regulatory filings on a timely
basis.
In
addition, Estrella’s reporting obligations may place a significant strain on its management, operational, and financial resources
and systems for the foreseeable future. Estrella may be unable to timely complete its evaluation testing and any required remediation.
Reports
published by analysts, including projections in those reports that differ from Estrella’s actual results, could adversely affect
the price and trading volume of our Common Stock.
Estrella
currently expects that securities research analysts will establish and publish their own periodic financial projections for the business
of Estrella. These projections may vary widely and may not accurately predict the results that Estrella will actually achieve. Estrella’s
stock price may decline if its actual results do not match the projections of these securities research analysts. Similarly, if one or
more of the analysts who write reports on Estrella downgrades its stock or publishes inaccurate or unfavorable research about its business,
Estrella’s stock price could decline. If one or more of these analysts ceases coverage of Estrella or fails to publish reports
on Estrella regularly, its stock price or trading volume could decline. If no analysts commence coverage of Estrella, the trading price
and volume for our Common Stock could be adversely affected.
The
obligations associated with being a public company will involve significant expenses and will require significant resources and management
attention, which may divert from Estrella’s business operations.
As
a public company, Estrella is subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act
requires the filing of annual, quarterly, and current reports with respect to a public company’s business and financial condition.
The Sarbanes-Oxley Act requires, among other things, that a public company establish and maintain effective internal control over financial
reporting. As a result, Estrella will incur significant legal, accounting, and other expenses that Estrella did not previously incur
as a private company prior to the Business Combination. Estrella’s entire management team and many of its other current or future
employees will be required to devote substantial time to compliance, and Estrella may not effectively or efficiently manage its transition
into a public company.
These
rules and regulations have and will continue to result in Estrella incurring substantial legal and financial compliance costs and will
make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive
for Estrella to obtain and maintain director and officer liability insurance, and it may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain or maintain the same or similar coverage in the future. As a result, it may
be difficult for Estrella to attract and retain qualified people to serve on its board of directors, its board committees, or as executive
officers.
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Provisions
in Estrella’s Amended Charter Estrella’s amended and restated bylaws (the “Amended Bylaws”) and Delaware law
may have anti-takeover effects that could discourage an acquisition of Estrella by others, even if an acquisition would be beneficial
to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management, which could depress the
trading price of our Common Stock.
Estrella’s
Amended Charter, the Amended Bylaws, and Delaware law contain provisions that may have the effect of discouraging, delaying, or preventing
a change in control of us or changes in our management that stockholders may consider favorable, including transactions in which you
might otherwise receive a premium for your shares. Estrella’s Amended Charter and the Amended Bylaws include provisions that:
● permit
the Estrella Board to issue up to 10,000,000 shares of preferred stock, with any rights,
preferences, and privileges as they may designate, including the right to approve an acquisition
or other change of control;
● provide
that the number of directors of Estrella may be changed only by resolution of Estrella Board;
● provide
that, subject to the rights of any series of preferred stock to elect directors, directors
may be removed only for cause by the holders of two-thirds (66 and 2/3%) of the voting power
of all of the then outstanding shares of voting stock of Estrella entitled to vote generally
at an election of directors;
● provide
that all vacancies, subject to the rights of any series of preferred stock, including newly
created directorships, may, except as otherwise required by law, be filled exclusively by
the affirmative vote of a majority of the directors then in office, even though less than
a quorum, or by a sole remaining director;
● provide
that stockholders seeking to present proposals before a meeting of stockholders or seeking
to nominate candidates for election as directors at a meeting of stockholders must provide
advance notice in writing, and specify requirements as to the form and content of such notice;
● provide
that special meetings of Estrella’s stockholders may be called by the Estrella Board;
and
● provide
that the Estrella Board will be divided into three classes of directors, with only one class
of directors being elected each year and each individual director serving a three-year term,
therefore making it more difficult for stockholders to change the composition of the board
of directors.
These
provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. These provisions
could also limit the price that investors might be willing to pay in the future for shares of our Common Stock, thereby depressing the
market price of our Common Stock.
In
addition, because we are incorporated in the State of Delaware, we are governed by the provisions of Section 203 of the General Corporation
Law of the State of Delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining
with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner.
Any
provision of Estrella’s Amended Charter, Amended Bylaws or Delaware law that has the effect of delaying or deterring a change in
control could limit the opportunity for our stockholders to receive a premium for their shares of our Common Stock, and could also affect
the price that some investors are willing to pay for our Common Stock.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.