S-1/A 1 d280401ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on May 4, 2022.

Registration No. 333-264219

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Intrinsic Medicine, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2836   83-4622006

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Intrinsic Medicine, Inc.

500 Yale Avenue North

Seattle, WA 98109

(206) 426-3624

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Alexander Martinez

Chief Executive Officer

Intrinsic Medicine, Inc.

500 Yale Avenue North

Seattle, WA 98109

(206) 426-3624

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Thomas A. Coll, Esq.

Karen E. Deschaine, Esq.

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

(858) 550-6000

 

Ross David Carmel, Esq.

Philip Magri, Esq.

Carmel, Milazzo & Feil LLP

55 West 39th Street, 18th Floor

New York, New York 10018

(212) 658-0458

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED, MAY 4, 2022

PRELIMINARY PROSPECTUS

4,166,667 Shares

 

 

LOGO

Common Stock

 

 

This is the initial public offering of Intrinsic Medicine, Inc. We are offering (a) 4,166,667 shares of our common stock in an underwritten offering as described below, and (b) a common stock purchase warrant, or the Representative’s Warrant, to be issued to Spartan Capital Securities, LLC, or the Representative, acting as representative of the several underwriters in connection with this offering and up to 919,117 shares of common stock upon exercise of the Representative’s Warrant. In addition, the selling stockholders identified herein as the Selling Stockholders, are offering up to 13,615,470 shares of our common stock. The common stock offered by the Selling Stockholders includes: (i) 233,333 shares of common stock held by a single Selling Stockholder (including 98,000 shares currently issued and outstanding and the issuance of an additional 135,333 in connection with the closing of this offering (based on the assumed initial offering price per share equal to the midpoint price per share of the range set forth on this cover page to the prospectus), (ii) up to 8,643,009 shares of common stock issuable upon the conversion of the principal and interest (including pay-in-kind interest) outstanding under the Amended and Restated 12% Senior Secured Convertible Promissory Notes which we initially sold from August 2021 to October 2021 and amended and restated in March 2022, or the Amended Notes, following which we sold additional 12% Senior Secured Convertible Promissory Notes on the same terms as the Amended Notes from March 2022 to April 2022, or the Subsequent Notes and collectively with the Amended Notes, the Bridge Notes, and held by 12 Selling Stockholders, including SOSV IV, LLC and Dustin Crawford, our General Counsel and Vice President, Legal and Corporate Development, assuming interest continues to accrue on the principal outstanding under the Bridge Notes through December 31, 2023 at 12% per annum and a conversion price of $1.105 per share of common stock, other than in respect of SOSV IV, LLC and Dustin Crawford who have irrevocably elected to convert their Bridges Notes in full in connection with the closing of this offering, (iii) up to 2,961,545 shares of common stock issuable upon the exercise of the Amended and Restated Common Stock Purchase Warrants which we initially issued with the Amended Notes and amended and restated in March 2022, or the Amended Warrants, following which we issued additional common stock purchase warrants on the same terms as the Amended Warrants in connection with the sale of the Subsequent Notes or the Subsequent Warrants and collectively with the Amended Warrants, the Bridge Warrants, and held by all Selling Stockholders assuming an exercise price of $1.70 per share of common stock, (iv) up to 1,094,153 shares of common stock of a common stock purchase warrant issued to SOSV IV, LLC, or the SOSV Warrant, assuming an exercise price of $1.70 per share of common stock, (v) up to 683,430 shares of common stock issuable upon the exercise of the common stock purchase warrant issued to the Representative, or the Placement Agent Warrant, in connection with the Representative acting as our exclusive placement agent in connection with the issuance and sale of the Bridge Notes and Bridge Warrants, assuming an exercise price of $1.70 per share of common stock. The 13,615,470 shares of common stock being offered by the Selling Stockholders are referred to herein as the Selling Stockholder Shares. For a more detailed description, see “Description of Capital Stock—Bridge Notes”.

We will not receive any of the proceeds from the sale of common stock by the Selling Stockholders. However, upon any exercise of the warrants held by the Selling Stockholders or the Representative’s Warrant held by the Representative, we will receive cash proceeds per share equal to the exercise price of such warrants. The Selling Stockholder Shares will not be purchased by the underwriters or otherwise included in the underwritten offering of our common stock in this initial public offering. The Selling Stockholders may sell or otherwise dispose of their shares in a number of different ways and at varying prices, but will not sell any Selling Stockholder Shares until after the closing of this offering. See “Selling Stockholders—Plan of Distribution.” We will pay all expenses (other than discounts, concessions, commissions and similar selling expenses, if any) relating to the registration of the Selling Stockholders’ shares of common stock with the Securities and Exchange Commission.

Prior to this offering, there has been no public market for our common stock. We currently expect that the initial public offering price of our common stock will be between $5.00 and $7.00 per share. The actual public offering price of the common stock will be determined between the underwriters and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business.

We have applied to list our common stock on the Nasdaq Capital Market under the symbol “INRX”.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 16.

Pursuant to the terms of the Bridge Notes, each holder of a Bridge Note has the option to convert all or a portion of the principal and interest outstanding under the Bridge Note in connection with this offering or at any time following the closing of this offering through December 31, 2023. If converted in connection with this offering, the Bridge Notes will convert at a price per share equal to 65% of the initial public offering price of our common stock. If converted following the closing of this offering, the Bridge Notes will convert at the lower of (1) 65% of the initial public offering price of our common stock, and (2) the greater of (x) 65% of the closing price per share of common stock as reported by Nasdaq Capital Market on the trading day immediately prior to the date we receive the holder’s conversion notice, and (y) $1.105 per share of common stock. If the principal and interest underlying the Bridge Notes are not converted in full by December 31, 2023, all amounts then outstanding under the Bridge Notes will be due and payable in full. Any prepayment of the principal and interest under the Bridge Notes is subject to a 20% premium payment on the amount prepaid. The Bridge Notes are secured against substantially all of our assets.

In connection with the sale of the Bridge Notes, we issued the Bridge Warrants, which provide the holders the right to purchase the number of shares of common stock equal to 50% of the shares issued assuming full conversion of the Bridge Note associated with such Bridge Warrant at the closing of this offering. The exercise price per share of the Bridge Warrants is 81.25% of the initial public offering price per share of common stock. The exercise price of the Bridge Warrants is subject to full-ratchet anti-dilution protection and a minimum exercise price of $1.70 per share. The Bridge Warrants are exercisable for five years from the date of issuance.

Additionally, we issued (i) the SOSV Warrant to SOSV IV, LLC, or SOSV, which is exercisable for 381,551 shares of common stock on the same terms as the Bridge Warrants, and (ii) the Placement Agent Warrant and Representative’s Warrant to Representative, which in aggregate are exercisable for 363,244 shares of common stock on the same terms as the Bridge Warrants, but with a per share exercise price of 125% of the initial public offering price.

The Bridge Notes, Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant subject any investment in our common stock to a high degree of risk, including leading to significant dilution, fluctuation in stock price, and, if we fail to pay our obligations owed under the Bridge Notes as they come due, the potential loss of all or material portion of your investment. For further discussion of the risks in investing in our common stock, see “Risk Factors” beginning on page 16.

 

     PER
SHARE
     TOTAL  

Initial Public Offering Price

   $                    $                

Underwriting Discounts and Commissions(1)

   $        $    

Proceeds to Intrinsic Medicine, Inc. (before expenses)(2)

   $        $    

 

(1)

See the section titled “Underwriting” for a complete description of the compensation payable to the underwriters.

(2)

The amount of offering proceeds to us presented in this table does not give effect to any exercise of the shares issuable upon the exercise of the Bridge Warrants, Placement Agent Warrant, SOSV Warrant or the Representative’s Warrant. We will receive no proceeds from the sale of any Selling Stockholder Shares.

We have granted the underwriters a 45-day option to purchase up to a total of 625,000 additional shares of common stock from us at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of common stock to purchasers on or about                , 2022 through the book-entry facilities of The Depository Trust Company.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Joint Book-Running Managers

 

Spartan Capital Securities, LLC   Revere Securities, LLC

The date of this prospectus is                 , 2022


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     16  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     88  

USE OF PROCEEDS

     91  

DIVIDEND POLICY

     96  

CAPITALIZATION

     97  

DILUTION

     100  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     103  

BUSINESS

     120  

MANAGEMENT

     158  

EXECUTIVE COMPENSATION

     166  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     180  

PRINCIPAL STOCKHOLDERS

     185  

SELLING STOCKHOLDERS

     187  

DESCRIPTION OF CAPITAL STOCK

     194  

SHARES ELIGIBLE FOR FUTURE SALE

     203  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

     206  

UNDERWRITING

     211  

LEGAL MATTERS

     219  

EXPERTS

     219  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     219  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-2  

 

 

This prospectus describes our business, our financial condition, and our results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision. You should rely only on the information contained in this prospectus or in any related free- writing prospectus.

We are responsible for the information contained in this prospectus and in any free-writing prospectus we prepare or authorize. We have not, the Selling Stockholders have not, and the underwriters have not, authorized anyone to provide you with different information, and we take no, the Selling Stockholders take no, and the underwriters take no, responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, the Selling Stockholders are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

For investors outside of the United States: We have not, the Selling Stockholders have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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Until                , 2022 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade the common stock, whether participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions.

TRADEMARKS

This prospectus includes our trademarks which are our property and are protected under applicable intellectual property laws. This prospectus also includes trademarks and trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without the ® and symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, before deciding to invest in shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Intrinsic Medicine,” “the Company,” “we,” “us” and “our” refer to Intrinsic Medicine, Inc. and our consolidated subsidiary, Intrinsic Medicine AU Pty LTD.

“HMO” is used to refer to an oligosaccharide found naturally in human milk, and also can be present in maternal circulation from the first trimester of pregnancy, fetal circulation in utero as well as surrounding the fetus in the amniotic fluid. The scientific community also uses the term HMO interchangeably in reference to such oligosaccharides that have been isolated from human milk or synthetically-produced, whether by chemical synthesis, synthetic-biology or otherwise.

“HiMO” is used to refer to a human-identical milk oligosaccharide which is a synthetically-produced oligosaccharide, whether by chemical synthesis, synthetic-biology, or otherwise, that has a chemically identical structure as a corresponding oligosaccharide identified in human milk.

“oligosaccharide” is used to refer to a sugar molecule which can be of different lengths and configurations comprised of monosaccharide subunits.

“Oligosaccharide Medicine”, or OM, is the term we use to refer to our HiMO drug candidates, including OM001 (HiMO 3’sialyllactose), or 3’SL, OM002 (HiMO 2’-fucosyllactose), or 2’FL, and OM003 (HiMO 6’-sialyllactose), or 6’SL.

“Synthetic biology” refers to novel organisms designed with genetic engineering to perform a specific function, including having the ability to produce specific molecules.

“Synthetic biology-manufactured” or “synthetic biology-produced” refers to molecules manufactured or produced using synthetic biology.

Overview

We are a preclinical-stage therapeutics company leveraging synthetic biology-manufactured human identical milk oligosaccharide, or HiMO, molecules as new medicines to treat large patient populations underserved by current treatment options. In the first half of 2023, we plan to initiate a Phase 2 clinical trial under an approved protocol in Australia to test our lead drug candidate in over 400 patients with the constipation dominant form of irritable bowel syndrome, or IBS-C, which is estimated to affect approximately five million patients in the United States alone. On this basis, we anticipate disclosing top-line data from this study in the first half of 2024. Our initial drug candidates are based on bioactive oligosaccharides naturally produced in human milk, called human milk oligosaccharides, or HMOs, which modulate both the bacteria in the gut, or the gut microbiome, and human cells. We believe HMOs exert beneficial effects through multiple mechanisms of action. In particular, HMOs beneficially shift the composition of the gut microbiome, increase the microbiome’s production of beneficial metabolites, and directly modulate the immune system. HMOs are the third most abundant solid component of human milk after fats and lactose, and over 200 distinct HMOs have been identified by the scientific community to date. Because HMOs have been selected and conserved over millions of years of mammalian evolution, with all human beings exposed before birth and during early life development, we believe

 

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HiMO drugs can have a favorable toxicity and tolerability profile in the therapeutic context. Our pipeline currently consists of HiMO drug candidates we call OMs based on some of the most abundant and well-characterized HMOs, including OM001 (HiMO 3’sialyllactose), or 3’SL, OM002 (HiMO 2’-fucosyllactose), or 2’FL, and OM003 (HiMO 6’-sialyllactose), or 6’SL, each of which we believe has the potential to treat gut-brain axis disorders, or GBA, and certain inflammatory disorders. We selected these drug candidates based on published third-party clinical, preclinical and toxicology data indicating the potential for disease-modifying HMO bioactivity combined with a low risk of dose-limiting toxicity.

Our OMs are produced via synthetic biology and are identical in chemical structure to their equivalent HMOs. Therefore, we believe our OMs will reproduce the multiple beneficial effects observed with HMOs and have the potential to affect multiple pathways implicated in GBA disorders and certain inflammatory disorders. These disorders are complex and often involve multiple pathways involving the central nervous system, or CNS, and the enteric nervous system controlling the gut, or ENS, as well as other organ systems including the immune, endocrine and autonomic systems. We initially intend to target GBA disorders and certain inflammatory disorders, such as irritable bowel syndrome, or IBS, inflammatory bowel disease, or IBD, rheumatoid arthritis, or RA, oligoarticular juvenile idiopathic arthritis, or oJIA, atopic dermatitis, or AD, and autism spectrum disorder, or ASD. We plan to prioritize the development of our drug candidates for disorders where available treatment options are inadequately serving patients due to safety or tolerability issues, where regulators have indicated that medical foods and supplements cannot be legally marketed for disease or symptom treatment, and where we have the potential to redefine the standard of care. We continuously evaluate expansion opportunities for our pipeline including new indications and new HiMO drug candidates. We believe HiMO-based medicines are a novel treatment approach to diseases which are being more frequently classified as GBA disorders by the scientific and medical communities because they operate via diverse mechanisms affecting gut somatic cells, the microbiome and the human immune system. To our knowledge, there have been no therapeutic compounds to date that have been approved to treat GBA through this multifaceted mechanistic approach.

In addition to our plan to initiate our first clinical trial in Australia, in accordance with the feedback we received during a pre-investigational new drug, or IND, interaction with the U.S. Food and Drug Administration, or the FDA, Division of Gastroenterology, we plan to undertake a confirmatory, IND-enabling toxicology study, to be commenced following the closing of this offering, prior to expanding this clinical trial under an IND from the FDA in the United States. The FDA provided us guidance related to the third-party published toxicology studies, suggesting that we must conduct our own confirmatory toxicology studies under Good Laboratory Practices, or GLP, to include in our IND, which indicates that they consider HiMOs as new molecular entities, or NMEs, when being developed as therapeutics. Subsequently, we plan to evaluate OM002 for the treatment of the diarrhea predominant form of IBS, or IBS-D. We believe the clinical, preclinical and toxicology third-party published data on 2’FL, which reports both preclinical and exploratory clinical data in infants, healthy volunteers and IBS patients, support our therapeutic rationale for the clinical development of OM002 as a potential new medicine for the treatment of both IBS-C and IBS-D. To date, there has been no reported toxicities in human and animal studies of 2’FL. We believe OM002 has the potential to be the first drug, if approved, to treat both IBS-C and IBS-D, which, based on the estimated adult population reported in the 2020 U.S. Census and an approximately 5.0% prevalence rate among adults, is estimated to affect over 10 million patients in the United States, alone.

 

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The following chart summarizes our current drug pipeline:

 

 

LOGO

Unlike other oligosaccharides in development, our OM drug candidates are based on HMOs that all humans have been exposed to in utero and, if breastfed, through mother’s milk. We believe the key characteristics of HMOs confer key advantages to our drug candidates as described below:

 

   

Optimized by Nature – HMOs have been conserved through millions of years of mammalian evolution to benefit human health through their prebiotic effects that shift the microbiome, modulate the immune system, and maintain the health of cells in the body. As a result, we believe that our HiMO drug candidates will not need further optimization using medicinal chemistry.

 

   

Orally Bioavailable – HMOs are highly water soluble and resistant to gastric acid digestive enzymes degradation in the proximal gastrointestinal tract, or GI, and therefore, reach the colon intact where they can exert local effects with a small amount absorbed into circulation. As a result, we believe our HiMO drug candidates will be suitable for convenient oral administration.

 

   

Diverse Effects – Over 200 distinct, structurally similar HMOs have been identified by the scientific community to date. Individual HMOs have not only been observed to have multiple mechanisms of action, but they have also been observed to have distinct mechanisms of action from each other. HMOs may also operate synergistically when present together. Therefore, in contrast with predominant drug development practices, where potential drug candidates are screened and developed based on the modulation of a single therapeutic target, we believe development of HiMO drug candidates enables a diverse pipeline of addressable diseases, both within a single HiMO drug candidate and across multiple HiMO drug candidates. Further, while our initial focus is on the development of individual HiMO drug candidates, we believe there is an opportunity to explore the development of next-generation combination HiMOs to leverage mechanistic synergies between individual HiMOs.

We believe HMOs exert beneficial effects through multiple mechanisms of action. In particular, HMOs beneficially shift the composition of the gut microbiome, increase the microbiome’s production of beneficial metabolites, and directly modulate the immune system.

 

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Our drug candidates are identical to HMOs that are naturally found in human milk, maternal circulation from the first trimester of pregnancy, fetal circulation in utero as well as surrounding the fetus in the amniotic fluid, and ingested by infants who continue breastfeeding. As a result, we believe the likelihood of on and/or off target toxicity is low and is supported by published toxicology data which has shown no toxicity, even at high doses. Since we believe there is a reduced risk that our drug candidates will fail due to nonclinical toxicity prior to reaching the clinic, and no optimization of our drug candidates are required, we are anticipating a more predictable preclinical development cost and timeline. Clinically, the low probability of toxicity may ultimately broaden the eligible patient population to include the full spectrum of severity of various GBA and certain inflammatory disorders, and particularly, the pediatric population where the risk-benefit ratio may not be as favorable for drugs with significant side effects or toxicities.

We prioritize our drug candidates for multi-indication potential via their mechanisms to modulate the gut microbiome, promote healing and/or health of the body’s own cells, and have local as well as systemic anti-inflammatory effects. These features have been implicated and are believed to be common drivers for numerous diseases, which we believe enables us to develop each drug for multiple indications.

We hold an exclusive, sublicensable, worldwide license to our main drug candidates, OM001, OM002 and OM003, for the therapeutic treatment of inflammatory and autoimmune disorders, including COVID-19, RA, JIA, IBD, IBS, AD, alopecia areata and pain, under our license and supply agreement, or the Glycosyn License Agreement, with Glycosyn, LLC, or Glycosyn, a small biotechnology company developing synthetic biology to produce oligosaccharide molecules equivalent to those found naturally in human milk. Certain of these therapeutic rights Glycosyn itself has acquired via an exclusive, sublicensable, worldwide in-license from the patent owners, Cincinnati Children’s Hospital Medical Center, or Cincinnati Children’s, and the other licensors thereunder. We also hold an exclusive, sublicensable, worldwide license to OM001 and OM003 as therapeutic products for the treatment of inflammatory or autoimmune disorders, including RA, juvenile arthritis, alopecia areata and AD, among many others, as well as atherosclerosis or hyperlipidemia, from the patent owner, The Regents of the University of California, through its San Diego campus, The University of California San Diego, or UC San Diego.

Pursuant to the Glycosyn License Agreement, Glycosyn has agreed to enable a contract manufacturer we select with manufacturing and analytical technology, including intellectual property rights and know-how for the manufacture of our OM drug candidates. We currently intend to rely on Royal FrieslandCampina N.V., a Dutch multinational dairy cooperative based in Amersfoort, Netherlands, and its subsidiaries, or, collectively, Friesland, to supply food grade 2’FL produced under Glycosyn’s and Friesland’s patents and know-how for our initial clinical trial of OM002. Friesland and Glycosyn hold the know-how regarding the fermentation processes for the specific Glycosyn strains that produce the HiMOs that are licensed to us. In addition, Friesland and Glycosyn hold the know-how necessary to process and purify the product of fermentation, or down-stream process, to produce our purified drug candidates. In light of existing production capacity by Friesland using Glycosyn’s synthetic biology, we believe our pipeline of drug candidates are capable of being manufactured reproducibly and at large scale and that this scalable synthetic biology platform can be readily applied to other potential HiMO drug candidates.

Our OM drug candidates are protected by a patent portfolio consisting of a combination of issued patents and pending patent applications that are owned by us or for which we have exclusively licensed therapeutic rights from third parties. Our portfolio covers therapeutic and human health supporting methods of use encompassing certain HMOs and/or combinations thereof. As of March 15, 2022, our intellectual property portfolio consisted of three U.S. patents, a European Patent Office, or EPO, patent, a Canadian patent, six Patent Cooperation Treaty, or PCT, applications, 16 non-provisional applications pending worldwide, and one pending U.S. provisional application.

 

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We have not conducted our own research and have relied on independent, published research to arrive at our development thesis and plan our clinical trial protocol for our drug candidates. As such, we have not generated any data as of the date of this prospectus. Furthermore, none of our drug candidates have received IND approval from the FDA or similar foreign regulatory agency, but we plan to initiate a Phase 2 clinical trial under an approved protocol in Australia to test OM002 in over 400 patients with IBS-C. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our drug candidates. We have incurred significant operating losses since our inception in 2018 and expect to continue to incur significant and increasing operating losses for the foreseeable future. As a result of these conditions, management has concluded that substantial doubt about our ability to continue as a going concern exists as conditions and events, considered in the aggregate, indicate that it is probable that we will be unable to meet our obligations as they become due within one year after the date that the financial statements are issued. The financial information throughout this prospectus and the consolidated financial statements included elsewhere in this prospectus have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business which cannot be assured.

Management

We are led by an experienced management team with an unwavering commitment to developing OMs to treat diseases and improve human health. Our management team is comprised of Alexander Martinez, co-founder, Chairman and Chief Executive Officer, Jason Ferrone, co-founder, Chief Operating Officer and President, and Emil Chuang, M.B., B.S. (Syd) FRACP, our Chief Medical Officer. Mr. Martinez’s over 16 years of healthcare experience spans health policy, corporate law, government affairs, corporate development, competitive intelligence, investor relations and commercial launch, with most of his biopharmaceutical experience at Ionis Pharmaceuticals, Inc., or Ionis, and Akcea Therapeutics, Inc. Mr. Ferrone has been in drug discovery and development for more than 20 years, leading the Ionis patent group for nearly a decade. Also, while at Ionis, Mr. Ferrone served as a clinical lead for a program from the research phase to Phase 2 as well as heading up regulatory affairs for the organization. Dr. Chuang is a pediatric gastroenterologist who graduated medical school from the University of Sydney and has completed specialty training in three disciplines, including pediatrics, pediatric gastroenterology, and nutrition. He began his academic career at Duke University and then the University of Pennsylvania, followed by over 20 years of industry experience including Centocor Biotech, Inc. (now known as Janssen Biotech, Inc.), Nestle Health Science S.A., Takeda Pharmaceutical Company, Ltd. and Progenity, Inc.

Risks Associated with Our Business

Our business and our ability to implement our business strategy are subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include:

 

   

We have incurred losses in every year since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, which could harm our business and future prospects.

 

   

We may never generate any revenue or become profitable or, if we achieve profitability, we may not be able to sustain it.

 

   

We will require substantial additional capital to finance our operations, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our drug development programs, commercialization efforts or other operations.

 

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We have concluded that we do not have sufficient cash to fund our operations through 12 months from the issuance date of our consolidated financial statements, and as a result, there is substantial doubt about our ability to continue as a going concern.

 

   

We have recently issued senior secured convertible promissory notes and warrants that are convertible into and exercisable for our common stock and could cause substantial dilution to investors and a decline in our stock price.

 

   

Our obligations under the Bridge Notes are secured by security interests in substantially all of our assets and our failure to comply with the terms and covenants of the Bridge Notes could result in our loss of substantially all of our assets.

 

   

As an organization, we have never successfully completed any clinical trials, and we may be unable to do so for any drug candidates we may develop.

 

   

All of our initial drug candidates, including those targeting IBS will require significant preclinical and clinical development before we can seek regulatory approval for and launch a therapeutic drug commercially.

 

   

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals for our drug candidates, we will not be able to commercialize, or will be delayed in commercializing, our drug candidates, and our ability to generate revenue will be materially impaired.

 

   

Our drug candidates require specialized manufacturing capabilities. If we or any of our third-party manufacturers encounter difficulties in manufacturing our drug candidates, our ability to provide supply of our drug candidates for clinical trials or our drugs for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.

 

   

We may depend on third parties for clinical and commercial supplies and services, including, in some instances, a single supplier or service provider.

 

   

We were not involved in the early development of our lead drug candidates or in the development of third-party agents used in combination with our drug candidates; therefore, we are dependent on third parties having accurately generated, collected, interpreted and reported data from certain preclinical studies and clinical trials for our drug candidates.

 

   

HMO therapies are a novel approach and negative public perception of any drug candidates that we develop could adversely affect our ability to conduct our business, obtain regulatory approvals to market for such drug candidates.

 

   

We face significant competition from other larger and better financed private and public healthcare companies, and our operating results will suffer if we fail to compete effectively.

 

   

If we are unable to obtain and maintain patent protection for any drug candidates we develop, our competitors could develop and commercialize drugs or technology similar or identical to ours, and our ability to successfully commercialize any drug candidates we may develop, and our technology may be adversely affected. For example, the EPO patent that protects our leading drug candidate for use in treating IBD and IBS in the European Union has been challenged via the EPO’s post-grant opposition procedure and revoked. Although the revocation is suspended pending the outcome of an appeal for which oral proceedings are scheduled for July 12, 2022, if the appeal is unsuccessful, we will have to rely upon the data exclusivity of ten years afforded to marketing authorization holders to prevent generic forms of OM002 from entering the market in the European Union.

 

   

Issued patents covering our drug candidates, and any patents that may issue covering our other technologies, have and may in the future be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or internationally.

 

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Each of our OM drug candidates is intended to be a prescription-only form of a naturally occurring HMO. Patent protection for naturally occurring compounds, such as our OM drug candidates, may be limited to method of use, therefore, our OM drug candidates may be developed by competitors as drug treatments for indications outside the scope of our patented methods. Further, certain HMOs are marketed by other companies as non-prescription dietary supplements. As a result, our OM drug candidates may face non-prescription competition and consumer substitution.

 

   

We are highly dependent on our relationship with Glycosyn as a licensor of our main drug candidates, the rights to which Glycosyn itself has acquired via an exclusive, sublicensable, worldwide in-license from the patent owners, Cincinnati Children’s Hospital Medical Center and the other licensors thereunder, or the Glycosyn In-License, and for enabling manufacturing technology related to the synthesis of OM drug candidates.

 

   

We are highly dependent on our relationship with The Regents of the University of California, through its San Diego campus, The University of California San Diego, or UC San Diego, as a licensor of certain of our main drug candidates.

 

   

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

   

If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation drug candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

 

   

The price of our stock may be volatile, and you could lose all or part of your investment.

 

   

We have identified a material weakness in our internal control over financial reporting and may identify material weaknesses in the future or otherwise fail to maintain proper and effective internal controls, which may impair our ability to produce accurate financial statements on a timely basis.

Corporate and Other Information

We were originally incorporated as Lupa Bio, Inc. in Delaware in August 2018 and subsequently changed our name to Intrinsic Medicine, Inc. in August 2020. In October 2021, we formed our wholly-owned subsidiary, Intrinsic Medicine AU Pty LTD, an Australian proprietary limited company. Our principal executive offices are located at 500 Yale Avenue North, Seattle, Washington 98109, and our telephone number is (206) 426-3624. Our corporate website address is www.intrinsicmedicine.com. Information contained on or accessible through our website shall not be deemed incorporated into and is not a part of this prospectus or the registration statement of which it forms a part, and the inclusion of our website address in this prospectus is an inactive textual reference only.

Implications of Being an Emerging Growth Company and Smaller Reporting Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and we may remain an emerging growth company for up to five years following the closing of this offering. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation-related information that would be

 

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required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected this exemption from new or revised accounting standards, and, therefore, we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have $1.07 billion or more in annual revenue; (ii) the date on which we first qualify as a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC; (iii) the date on which we have, in any three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of this offering.

We are also a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

 

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The Offering

 

Common stock offered by us

4,166,667 shares.

 

Common stock offered by the Selling Stockholders

Up to a maximum of 13,615,470 shares. See “Selling Stockholders” for a description of how we calculate the number of shares offered by the Selling Stockholders.

 

Option to purchase additional shares

The underwriters have a 45-day option to purchase up to a total of 625,000 additional shares of common stock from us.

 

Common stock to be outstanding after this offering

11,290,099 shares (or 11,915,099 shares if the underwriters exercise their option to purchase additional shares of common stock from us in full).

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $20.3 million (or approximately $23.7 million if the underwriters exercise in full their option to purchase additional shares of common stock from us), based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering, along with our existing cash, to (i) advance the development of OM002, including initiating our planned Phase 2 clinical trial in patients with IBS-C in Australia and expanding this clinical trial under an IND in the United States upon completion of our below-referenced confirmatory, IND-enabling toxicology study, (ii) complete our IND-enabling toxicology study, and (iii) continue to meet our general working capital obligations. We will not receive any proceeds from the sale of the Selling Stockholder Shares by the Selling Stockholders, if any, except for the exercise price paid by the Selling Stockholders and Representative upon exercise of the Bridge Warrants, the SOSV Warrant, the Placement Agent Warrant, and the Representative’s Warrant. See “Use of Proceeds.”

 

Dilutive effect of convertible Securities and warrants

For a discussion of the potential dilutive impact of our outstanding convertible securities and warrants, including the Bridge Notes, Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant, see “Use of Proceeds.”

 

Underwriter compensation

In connection with this offering, the underwriters will receive an underwriting discount equal to eight percent (8.0%) of the offering price of the shares of common stock in the offering. In addition, we have agreed to: (i) reimburse certain accountable expenses of the representative; (ii) reimburse the representative for certain non-accountable expenses relating to this offering equal to $50,000; (iii) reimburse the representative for legal expenses incurred in connection with this offering equal to $150,000; (iv) provide the

 

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representative with “tail” financing compensation under certain circumstances; and (v) indemnify the underwriters for certain liabilities in connection with this offering. See “Underwriting”.

 

Representative’s Warrant

Upon the closing of this offering, we will issue to Representative the representative of the underwriters, the Representative’s Warrant to acquire 208,333 shares of common stock at an exercise price of 125% of the initial public offering price. The Representative’s Warrant provides for full ratchet anti-dilution protection, a $1.70 minimum exercise price, and will be exercisable for a period of five years commencing 180 days after commencement of the sales by us of our public securities in this offering. The Representative’s Warrant and the maximum shares of common stock exercisable thereunder are registered in the registration statement of which this prospectus is a part.

 

Placement Agent Warrant

In connection with the sale and issuance of the Bridge Notes and Bridge Warrants, we issued to Representative, our exclusive placement agent with respect to the Bridge Notes and Bridge Warrants, the Placement Agent Warrant exercisable for 154,911 shares of our common stock, which represents 5% of the shares of common stock (i) issuable upon conversion of the Bridge Notes (assuming full conversion in connection with the closing of this offering, and (ii) the number of shares exercisable under the Bridge Warrants. The Placement Agent Warrant provides for full ratchet anti-dilution protection, a $1.70 minimum exercise price, and will be exercisable through August 31, 2026, commencing 180 days after the commencement of sales of the Company’s public securities. The maximum number of shares of common stock exercisable under the Placement Agent Warrant are registered in the registration statement of which this prospectus is a part.

 

Lock-Up Agreements

The Company has agreed with the underwriters that it will not for a period of 180 days after the effective date of the offering, without the Representative’s prior written consent, in general: (i) offer or sell or grant any option to buy or otherwise dispose of any shares of capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or caused to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit with a traditional bank; or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company. In addition, our executive officers, directors, and certain stockholders, including holder of 5.0% or more of our common stock prior to this offering, have agreed with the Representative not to sell, transfer or dispose of any shares or similar securities for a period of 180 days following the closing of this offering. See “Shares Eligible for Future Sales” and “Underwriting” for more information.

 

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Leak-Out Agreements

Certain of the Selling Stockholders have agreed that, without the Representative’s consent, until December 31, 2023, such Selling Stockholders will not sell, transfer, or dispose of a number of shares of common stock on any given day in excess of 10% of the prior trading day’s average trading volume of our common stock. See “Shares Eligible for Future Sales” and “Underwriting” for more information.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of certain of the factors to consider carefully, together with all the other information included in this prospectus, before deciding to purchase any shares of our common stock.

 

Proposed Nasdaq Capital Market symbol

“INRX”

The number of shares of our common stock to be outstanding after this offering is based on 4,194,914 shares of common stock outstanding as of December 31, 2021 after giving effect to the issuance of 791,102 shares of our common stock in March and April 2022, and excludes:

 

   

182,175 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2021, at an exercise price of $0.40 per share;

 

   

639,789 shares of unvested restricted common stock as of December 31, 2021;

 

   

905,400 shares of our common stock issuable upon the exercise of stock options to be granted to certain of our nonemployee directors, employees and nonemployee service providers under our 2022 Plan, contingent and effective upon the effectiveness of the registration statement of which this prospectus forms a part, with an exercise price that is equal to the price per share at which our common stock is first sold to the public in this offering;

 

   

1,094,600 shares of our common stock reserved for future issuance under our 2022 Equity Incentive Plan, or the 2022 Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our 2022 Plan, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

   

200,000 shares of common stock reserved for future issuance under our 2022 Employee Stock Purchase Plan, or the ESPP, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering.

Unless otherwise indicated, all information contained in this prospectus assumes or gives effect to:

 

   

the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on May 13, 2022;

 

   

the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any), into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), the occurrence of the conversion on May 13, 2022, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering. This assumption is based on (a) irrevocable elections

 

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from the holders of Bridge Notes of $0.3 million of aggregate principal outstanding who have irrevocably elected to convert in connection with this offering and (b) irrevocable elections from the holders of Bridge Notes of $7.3 million of aggregate principal outstanding who have irrevocably elected to not convert in connection with this offering;

 

   

no exercise of the Bridge Warrants, SOSV Warrant, Representative’s Warrant or Placement Agent Warrant to purchase up to a total of 1,777,534 shares of our common stock, assuming the exercise price is equal to the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) multiplied by the applicable discount or premium provided for in the Bridge Warrants, SOSV Warrant, Representative’s Warrant and Placement Agent Warrant;

 

   

the conversion of approximately $0.6 million, the aggregate amount purchased under the 2019 SAFEs and 2020 SAFEs, or the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus);

 

   

135,333 shares to be issued to Alchemy Advisory LLC, or Alchemy, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), pursuant to the terms of a consulting agreement we entered into with Alchemy, or, as amended, the Alchemy Consulting Agreement. Pursuant to the Alchemy Consulting Agreement, after effecting the reverse split, we agreed to issue Alchemy additional shares such that, in the aggregate, the shares issued to Alchemy under the Alchemy Consulting Agreement would equal the lesser of (i) the number of shares equal in value to $1.4 million based on the initial public offering price per share of common stock sold in this offering and (ii) 280,000 shares;

 

   

no exercise by the underwriters of their option to purchase up to a total of 625,000 additional shares of our common stock from us;

 

   

no exercise of the outstanding options referred to above;

 

   

no sale of the Selling Stockholder Shares by the Selling Stockholders;

 

   

a 1-for-2.8571 reverse stock split of our common stock effected on April 27, 2022; and

 

   

the filing of our amended and restated certificate of incorporation immediately following the closing of this offering and the adoption of our amended and restated bylaws immediately prior to the closing of this offering.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for the definitions of the SAFEs and 2020 Notes.

A $1.00 increase in the assumed initial public offering price would decrease the number of shares of our common stock issued on conversion of the 2020 Notes and Bridge Notes, or the Notes, by 159,135 shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our common stock issued on conversion of the Notes by 222,791 shares. If the closing date of this offering occurs after May 13, 2022, or the Assumed Closing Date: (i) approximately $1.4 million outstanding under certain of the Notes will continue to accrue interest at a rate of 7.0% per annum, and (ii) approximately $7.6 million outstanding under certain other Notes will continue to accrue interest at a rate of 12.0% per annum, and, in each case, 1,248 is the number of additional shares of our common stock that will be issuable per day following the Assumed Closing Date upon conversion of the additional accrued interest.

A $1.00 increase in the assumed initial public offering price would decrease the number of shares of our common stock issued under the SAFEs by 22,403 shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our common stock issued under the SAFEs by 31,362 shares. 

 

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Summary Consolidated Financial Data

The following tables set forth our summary consolidated financial data for the periods and as of the dates indicated. We derived our summary consolidated statements of operations and comprehensive loss data for the years ended December 31, 2020 and 2021 and our summary consolidated balance sheet data as of December 31, 2021 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the interim periods are not necessarily indicative of the results that may be expected for any other interim periods or any future year. You should read these data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended December 31,  
     2020      2021  
     (in thousands)  

Consolidated Statements of Operations and Comprehensive Loss Data:

     

Operating expenses

     

Research and development

   $ 539      $ 746  
  

 

 

    

General and administrative

     663        2,819  
  

 

 

    

 

 

 

Total operating expenses

     1,202        3,565  
  

 

 

    

 

 

 

Loss from operations

Other expense:

     (1,202      (3,565

Interest expense

     (289      (1,410

Change in fair value of financing derivatives

     (46      (3,502 )

Change in fair value of future equity liabilities

     (457      (2,768

Change in fair value of warrant liabilities

     —          (830

Gain on extinguishment of convertible notes payable

     —          98  

Gain on extinguishment of future equity liabilities

     —          24  
  

 

 

    

 

 

 

Total other expense

     (792      (8,388
  

 

 

    

 

 

 

Net loss before income taxes

     (1,994      (11,953

Provision for income taxes

     —          —    
  

 

 

    

 

 

 

Net loss and Comprehensive loss

   $ (1,994    $ (11,953
  

 

 

    

 

 

 

Net loss per share – basic and diluted(1)

   $ (0.93    $ (4.02
  

 

 

    

 

 

 

Weighted-average shares of common stock outstanding – basic and diluted(1)

   $ 2,149,935      $ 2,974,083  
  

 

 

    

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(1)(2)

   $ (0.48    $ (2.09
  

 

 

    

 

 

 

Pro forma weighted average shares of common stock outstanding, basic and diluted (unaudited)(1)(2)

     4,116,346        5,722,522  
  

 

 

    

 

 

 

 

(1)

See Note 9 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted net loss per share and the number of shares of common stock used in the computation of the per share amounts.

 

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(2)

The calculations for the unaudited pro forma net loss per share, basic and diluted, and the pro forma weighted average shares of common stock outstanding, basic and diluted, assume: (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on the Assumed Closing Date, (ii) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), the occurrence of the conversion on the Assumed Closing Date, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering (this assumption is based on (a) irrevocable elections from the holders of Bridge Notes of $0.3 million of aggregate principal outstanding who have irrevocably elected to convert in connection with this offering and (b) irrevocable elections from the holders of Bridge Notes of $7.3 million of aggregate principal outstanding who have irrevocably elected to not convert in connection with this offering), and (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus).

 

     As of December 31, 2021  
     Actual      Pro
Forma(1)
     Pro Forma as
Adjusted(2)(3)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash

   $ 2,774      $ 2,774      $ 23,367  

Working capital(4)(5)

     103        1,612        22,695  

Total assets

     3,763        3,763        23,558  

Convertible notes payable, net of discount

     3,914        4,509        4,509  

Financing derivatives

     4,618        1,931        1,931  

Future equity liabilities

     4,145        —          —    

Warrant liabilities

     2,156        3,640        3,640  

Other non-current liabilities

     72        72        72  

Accumulated deficit

     (14,349      (14,349      (14,349

Total stockholders’ (deficit) equity

     (14,004      (7,742      12,543  

 

(1)

Pro forma amounts reflect: (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on the Assumed Closing Date, (ii) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), assuming the occurrence of the conversion on the Assumed Closing Date, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering (this assumption is based on (a) irrevocable elections from the holders of Bridge Notes of $0.3 million of aggregate principal outstanding who have irrevocably elected

 

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  to convert in connection with this offering and (b) irrevocable elections from the holders of Bridge Notes of $7.3 million of aggregate principal outstanding who have irrevocably elected to not convert in connection with this offering), (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), (iv) the issuance of 791,102 shares of our common stock in March and April 2022, and (v) 135,333 shares to be issued to Alchemy based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), pursuant to the terms of the Alchemy Consulting Agreement.
(2)

Pro forma as adjusted amounts reflect the pro forma adjustments described in footnote (1) above, as well as the sale and issuance of 4,166,667 shares of our common stock in this offering by us based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) each of cash, working capital, total assets and total stockholders’ equity by $3.8 million, assuming the number of shares offered by us as stated on the cover page of this prospectus remain unchanged and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash, working capital, total assets and total stockholders’ equity by $5.5 million, assuming the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(4)

We define working capital as current assets less current liabilities. See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

(5)

Included in working capital is a current liability for convertible notes payable, net of discount in the amount of $1,496,000.

 

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RISK FACTORS

Investing in our common stock is speculative and involves a high degree of risk. Before investing in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below. See “Special Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

We have incurred losses in every year since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, which could harm our business and future prospects.

Therapeutic drug development is a highly speculative undertaking and involves a substantial degree of risk. We are a preclinical-stage therapeutic company, and since our inception in August 2018, we have focused primarily on organizing and staffing our company, business planning, establishing our intellectual property portfolio, raising capital, and providing general and administrative support for these operations. Our approach to the discovery and development of HiMO drug candidates is unproven, and we may not be able to develop any drug candidates that succeed in clinical development or commercial value. Our drug candidates are in the preclinical development stage. We have not yet demonstrated an ability to overcome many of the risks and uncertainties frequently encountered by companies in the therapeutics industry, including an ability to file an IND with the FDA, an ability to obtain marketing approval of a drug candidate, manufacture any drug candidate at commercial scale, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful drug commercialization. Consequently, any predictions about our future performance may not be as accurate as they would be if we had a history of successfully developing and commercializing therapeutic drugs.

Investment in drug development in the healthcare industry, including of therapeutic drugs, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential drug candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval, as necessary, and become commercially viable. We have no drugs approved for commercial sale, and have not generated any revenue from drug sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in August 2018. For the years ended December 31, 2020 and 2021, we reported net losses of $2.0 million and $12.0 million, respectively. As of December 31, 2021, we had an accumulated deficit of $14.3 million. Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. All of our drug candidates will require substantial additional development time and resources before we would be able to apply for or receive marketing approvals and begin generating revenue from drug sales. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase substantially as we continue our research and development of, seek marketing approval for and potentially commercialize any of our drug candidates, recruit and maintain key personnel and seek to identify, assess, acquire, in-license or develop additional drug candidates.

 

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We have concluded that we do not have sufficient cash to fund our operations through 12 months from the issuance date of our consolidated financial statements, and as a result, there is substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is a result of ongoing operating losses and a lack of financing commitments to meet cash requirements. We have incurred recurring losses from operations in fiscal years 2020 and 2021, and our working capital was negative as of December 31, 2020 and low positive as of December 31, 2021. If the Company is unable to obtain funding, the Company will be required to delay, reduce or eliminate some or all of its research and development programs and efforts, which would adversely affect its business prospects, and the Company may be unable to continue operations. Although management continues to pursue plans to finance its continued operations, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, or at all. After this offering, we may not raise the funding we require such that substantial doubt about our ability to continue as a going concern continues. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We may never generate any revenue or become profitable or, if we achieve profitability, we may not be able to sustain it.

To become and remain profitable, we must succeed in developing and eventually commercializing drugs that generate significant revenue. This will require us to be successful in a range of challenging activities, including preclinical studies and clinical trials, including most imminently, conducting IND-enabling confirmatory toxicology studies of our drug candidates, obtaining marketing approval for these drug candidates and manufacturing, marketing and selling any drugs for which we may obtain marketing approval. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. Because of the numerous risks and uncertainties associated with therapeutic drug development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our drug candidates or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will require substantial additional capital to finance our operations, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our drug development programs, commercialization efforts or other operations.

Since we commenced operations in 2018, we have principally financed our operations through private placements of our common stock, the Notes, SAFEs, and an accelerator contract for equity, or the ACE, entered into with SOSV. The development of therapeutic drug candidates is capital-intensive. We expect our expenses to increase substantially in connection with our ongoing and planned activities, particularly as we conduct preclinical studies and clinical trials, including more imminently, IND-enabling confirmatory toxicology studies of our drug candidates and any future drug candidates we may develop, and seek marketing approval for our current and any future drug candidates we may develop. Our expenses will increase substantially if our drug candidates successfully complete early clinical and other studies, and also could increase beyond expectations if the FDA, the European Medicines Agency, or EMA, the Australian Therapeutic Goods Association, or TGA, or other foreign regulatory authorities require us to perform clinical and other studies in addition to those that we currently anticipate. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our drug candidates. In addition, following the closing of this offering, we expect to incur additional costs associated with operating as a public company. Furthermore, if we obtain marketing approval for

 

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our drug candidates, we expect to incur significant expenses related to manufacturing, marketing, sales and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

Based on our current operating plan, we believe that our existing cash, together with the net proceeds from this offering, will be sufficient to fund our operating expenses and capital expenditure requirement through at least the next 20 months. In particular, we expect the net proceeds from this offering, together with our existing cash, will allow us to (i) advance the development of OM002, including initiating our planned Phase 2 clinical trial in patients with IBS-C in Australia and expanding this clinical trial under an IND in the United States upon completion of our below-referenced confirmatory, IND-enabling toxicology study, (ii) complete our IND-enabling toxicology study, and (iii) continue to meet our general working capital obligations. We have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through quasi-equity offerings (such as SAFEs), debt financings or other capital sources, including potentially, collaborations, licenses and other similar arrangements. Specifically, we have assumed that aggregate principal of $0.3 million, plus the accrued interest thereon (including pay-in-kind interest, if any), under the Bridge Notes that we issued to investors from the end of August 2021 through April 2022, will be converted into shares of our common stock in connection with the closing of this offering, and $7.3 million, plus accrued interest thereon (including pay-in-kind interest, if any), under the Bridge Notes, or the Outstanding Debt, will continue to remain outstanding following the closing of this offering. The Outstanding Debt will continue to incur interest at 12% per annum with a maturity date of December 31, 2023. The Outstanding Debt may be prepaid, subject to a prepayment penalty equal to 1.2 times the amount to be prepaid. Unless converted into shares of common stock at the election of the holder of Outstanding Debt, all Outstanding Debt will become due and payable in full on December 31, 2023. If we are required to repay the Outstanding Debt, based on our current operating plan, we will require additional capital resources, which may not be readily available on terms acceptable to us or at all. As a result, we could be in default under the terms of the Bridge Notes and the principal outstanding and accrued and unpaid interest (including pay-in-kind interest, if any) will automatically increase by 120%, the interest rate will increase from 12% to 15% per annum, and the holders of the Bridge Notes could foreclose on substantially all of our assets pursuant to the terms of an amended and restated security agreement, or the Security Agreement, to satisfy our payment obligations owed under the outstanding Bridge Notes. Upon the closing of this offering, (i) no shares of common stock issued upon the conversion of the Bridge Notes and exercise of the Bridge Warrants, will be freely tradable without restrictions, (ii) no shares of common stock issued upon the conversion of the Bridge Notes and exercise of the Bridge Warrants will be freely tradable, subject only to volume restrictions related to leak-out agreements entered into by certain holders of Bridge Notes and Bridge Warrants with the Representative of the several underwriters, and (iii) 41,478 shares of common stock issued upon the conversion of the Bridge Notes and exercise of the Bridge Warrants and SOSV Warrant will be freely tradable, subject to a 180 day lock-up from the closing date pursuant to the Lock-Up Agreement entered into by SOSV and certain holders of Bridge Notes and Bridge Warrants with the Representative of the several underwriters. See “Shares Eligible For Future Sale – Lock-Up Agreements, Leak-Out Agreements and Market Stand-Off Provisions”.

In any event, we will require substantial additional capital to support our business operations as we pursue preclinical and clinical activities and marketing approval of our current and any future drug candidates, and otherwise to support our continuing operations. In addition, if we obtain marketing approval for any of our drug candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution. Even if we believe we have sufficient capital for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the regulatory approval pathway for our drug candidates, including whether regulatory authorities will require us to conduct Phase 1 clinical trials for our drug candidates, and the resulting clinical development plans for our drug candidates;

 

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the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our drug candidates and any need to conduct additional such studies as may be required by a regulator;

 

   

the willingness of the FDA, the EMA, the TGA, or comparable foreign regulatory authorities to accept our clinical trials, as well as data from our planned and ongoing preclinical studies and clinical trials and other work, as the basis for review and approval of our drug candidates;

 

   

the outcome, timing and cost of meeting regulatory requirements established by the FDA, the EMA, the TGA and other comparable foreign regulatory authorities;

 

   

the number and characteristics of drug candidates that we develop or may in-license;

 

   

the costs of acquiring, licensing, or investing in businesses, drug candidates, and technologies;

 

   

the effect of changes in regulation or policy relating to the development and commercialization of our drug candidates by the FDA, the EMA, the TGA and other comparable foreign regulatory authorities;

 

   

the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements, or cGMPs, and a supply chain for the development and manufacture of our drug candidates in sufficient quantities;

 

   

our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense, and enforcement of any patents or other intellectual property rights;

 

   

our need and ability to retain key management and hire scientific, technical, business, and medical personnel;

 

   

the effect of competing products and drug candidates and other market developments;

 

   

our need to implement additional internal systems and infrastructure, including financial and reporting systems;

 

   

the costs associated with operating as a public company;

 

   

the costs associated with securing and establishing commercialization;

 

   

the timing, receipt, and amount of sales from our potential drugs, if approved;

 

   

the economic and other terms, timing of and success of any collaboration, licensing or other arrangements which we may enter in the future; and

 

   

costs associated with any delays or issues with any of the above, including the risk of each of which may be exacerbated by the ongoing COVID-19 pandemic.

Conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve drug sales. In addition, our drug candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if at all. Because we do not expect to generate revenue from drug candidate sales for many years, if at all, we will need to obtain substantial additional funding in connection with our continuing operations and expected increases in expenses. Until such time as we can generate significant revenue from sales of our drug candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. If we are unable to raise additional capital when needed, our ability to grow and support our business and to respond to market challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations. Any additional capital raising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and, if approved, commercialize our current and any future drug candidates. Additional funding may not be available on acceptable terms, or at all.

 

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Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our drug candidates.

Until such time, if ever, as we can generate substantial drug revenues, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Further, for so long as the lead investor in our Bridge Notes continues to hold a Bridge Note, we are not permitted to incur additional debt that is senior to or pari passu with the Bridge Notes absent the lead investor’s

prior written consent.

If we raise additional capital through future collaborations, strategic alliances or third-party licensing arrangements, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our drug candidate development process or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.

Attempting to secure additional financing may also divert our management from our day-to-day activities, which may impair or delay our ability to develop our proprietary pipeline. In addition, demands on our cash resources may change as a result of many factors currently unknown to us including, but not limited to, any unforeseen costs we may incur as a result of preclinical study or clinical trial delays, or disruptions in the manufacturing of our product candidates, due to the COVID-19 pandemic or other causes, and we may need to seek additional funds sooner than planned. If we are unable to obtain funding on a timely basis or at all, we may be required to significantly curtail or stop one or more of our research or development programs.

As an organization, we have never successfully completed any preclinical studies or clinical trials, and we may be unable to do so for any drug candidates we may develop.

We will need to successfully complete preclinical studies and clinical trials in order to obtain the approval of the FDA, EMA, TGA or comparable foreign regulatory authorities to market any drug candidates. Carrying out clinical trials, including later-stage registrational clinical trials, is a complicated process. As an organization, we have not previously completed any preclinical studies or clinical trials. In order to do so, we will need to build and expand our clinical development and regulatory capabilities, and we may be unable to recruit and train qualified personnel. We also expect to continue to rely on third parties to conduct our clinical trials. Consequently, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to NDA submission and approval of our drug candidates. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approval of any drug candidates that we develop. Failure to commence or complete, or delays in, our planned clinical trials, could prevent us from or delay us in commercializing our drug candidates.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. Further deterioration in credit and financial markets and confidence in economic conditions may occur. Our general

 

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business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

Further, as a result of the COVID-19 pandemic, actions taken to slow its spread and the conflict in Ukraine, the global credit and financial markets have and may continue to experience extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. Although these effects caused by the COVID-19 pandemic have largely subsided following the onset of the pandemic, if the equity and credit markets deteriorate, for example due to the impact of the spread of variant forms of the virus that are more transmissible and/or capable of causing severe disease, it will make any necessary debt or equity financing more difficult, more costly or more dilutive.

We have a limited operating history, which may make it difficult to evaluate our drug development capabilities and predict our future performance.

We are early in our development efforts and we have not initiated preclinical studies or clinical trials for any of our drug candidates. We were formed in August 2018, have no drugs approved for commercial sale and have not generated any revenue from drug sales. Our ability to generate drug revenue, which we do not expect will occur for many years, if ever, will depend on the successful development and eventual commercialization of our drug candidates, which may never occur. We may never be able to develop or commercialize a marketable drug.

Our current and future therapeutic drug candidates require additional discovery research, preclinical development, clinical development, regulatory approval in multiple jurisdictions to market, manufacturing validation, obtaining cGMP manufacturing supply, capacity and expertise, building of a commercial and distribution organization, substantial investment and significant marketing efforts before we generate any revenue from drug sales.

Our limited operating history may make it difficult to evaluate our drug candidates and predict our future performance. Our short history as an operating company makes any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If we do not address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.

In addition, as an early-stage company, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown circumstances. As we advance our drug candidates, we will need to transition from a company with a research focus to a company capable of supporting clinical development and if successful, commercial activities. We may not be successful in such a transition.

Our obligations under the Bridge Notes are secured by security interests in substantially all of our assets and our failure to comply with the terms and covenants of the Bridge Notes could result in our loss of substantially all of our assets.

Following the closing of this offering, we will have $7.3 million aggregate principal, plus accrued interest (including pay-in-kind interest, if any), continuing to remain outstanding under the Bridge Notes, the holders of

 

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which have been granted a security interest in substantially all of our assets pursuant to the terms of the Security Agreement. If we fail to comply with the covenants contained in such agreements or if we fail to repay the outstanding portion of the principal and accrued interest that the holders elect not to convert into shares of our common stock in connection with the closing of this offering when due, the holders could declare us in default, in which event the holders would have the right to seize our assets that secure the indebtedness, which would force us to suspend all operations. The Security Agreement terminates automatically upon the conversion of all principal and accrued interest thereon (including pay-in-kind interest, if any) into shares of our common stock or when no further amounts are owed under the Bridge Notes held by the lead investor in our Bridge Note financing.

We have identified a material weakness in our internal control over financial reporting and may identify material weaknesses in the future or otherwise fail to maintain proper and effective internal controls, which may impair our ability to produce accurate financial statements on a timely basis.

In March 2022, in connection with the preparation of our 2021 financial statements, included elsewhere in this registration statement, we identified a material weakness in our internal control over financial reporting, primarily related to a review of the valuations for certain of our financial instruments, including the ACE, SAFEs, Convertible notes, Bridge Notes, Bridge Warrants, and Placement Agent Warrant.

Specifically, our controls were not properly designed to provide reasonable assurance that we performed a detailed and precise review of the valuation reports prepared by management’s third-party experts. We believe the errors identified are due to deficiencies in our internal control environment resulting from insufficient accounting resources with appropriate technical expertise and experience or not leveraging our external accounting experts as appropriate to perform the necessary reviews to effectively execute controls over reviews of financial instrument valuations prepared by management’s external valuation experts.

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 the annual or interim financial statements will not be prevented or detected on a timely basis. This material weakness could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. To address our material weakness, we will, in connection with the closing of our initial public offering, seek to hire a chief financial officer and accounting personnel, and have already begun to implement new processes with the assistance of our third-party service providers.

Our compliance with Section 404 of Sarbanes-Oxley Act requires that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

The measures we have taken to date, and actions we may take in the future, may not be sufficient to remediate the control deficiencies that led to our material weakness in our internal control over financial reporting or to prevent or avoid potential future material weaknesses. We may not have identified all material weaknesses. Moreover, our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods, which could cause the price of our common stock to decline. In addition, if we are not able to continue to meet these requirements, we may not be able to remain listed on Nasdaq.

 

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Our business and the business or operations of third parties with whom we conduct business have and could continue to be adversely affected by the effects of health pandemics or epidemics, including the COVID-19 pandemic, in regions where we or third parties on which we rely have business operations.

Our business has and could continue to be adversely affected by health pandemics or epidemics, including the COVID-19 pandemic, in regions where we or third parties on which we rely have significant manufacturing facilities, concentrations of potential clinical trial sites or other business operations. Specifically, the effect COVID-19 has had on the global supply chain has adversely affected the development timeline of OM001. It is, however, not possible at this time to estimate the overall impact that the COVID-19 pandemic has had and could have on our business. We continue to evaluate the impact COVID-19 may have on our ability to effectively conduct our business operations as planned, and we may not be able to avoid part or all of any impact from the spread of COVID-19 or its consequences.

The COVID-19 pandemic outbreak has and continues to have the potential to cause a disruption in our supply chain and may adversely impact economic conditions in North America, Europe and elsewhere. As a result of supply chain disruptions, we may experience delays in initiating or conducting any planned or future clinical trials if product material is delayed. Additionally, toxicology studies may be delayed as a result of supply chain disruptions as third-party contract research organizations, or CROs, experience potential backlogs in slotting.

In addition, the COVID-19 pandemic initially disrupted global financial markets and may limit our ability to access capital in the future. A recession or market correction resulting from the spread of COVID-19 could adversely affect our business and the value of our common stock.

As a result of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of an infectious disease, we may experience disruptions that could severely impact our business and our planned preclinical studies and clinical trials, including:

 

   

interruption or delays in the operations of the FDA, EMA, TGA or other regulatory authorities, which may impact review and approval timelines;

 

   

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

   

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

   

delays or difficulties in enrolling patients in our clinical trials;

 

   

interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

 

   

interruption or delays in manufacturing operations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

 

   

the need for additional contract manufacturing resources and personnel;

 

   

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials; some patients may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services;

 

   

interruptions in any of our planned preclinical studies or clinical trials due to restricted or limited operations at our laboratory facilities; or

 

   

limitations on employee resources that would otherwise be focused on the conduct of our planned preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and interruption or delays to our discovery and clinical activities.

 

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If any of our clinical trials are delayed or suspended as a result of COVID-19 or for other reasons, they might not reinitiate or commence enrollment and their enrollment may not be reinitiated at all. COVID-19 may also require us to delay or pause dosing or data collection in our clinical trials as a result of negative impacts to site initiation, participant recruitment and enrollment, participant dosing, distribution of clinical trial materials, trial monitoring or data analysis. Even if we are able to collect clinical data while the pandemic is ongoing, COVID-19 may negatively affect the quality, completeness or interpretability of that clinical data as a result of deviations from clinical study protocols, disruptions in patient screening or dosing (for instance, as a result of delays in manufacturing) or disruptions in patient evaluations (for instance, as a result of inabilities to conduct study visits while following local public health requirements or inabilities to conduct remote assessments). Any of these effects could adversely affect our ability to obtain regulatory approval for and to commercialize our drug candidates, increase our operating expenses and have an adverse effect on our business and financial results.

The ultimate impact of the COVID-19 pandemic or a similar health pandemic or epidemic is highly uncertain and will depend on future developments. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole, but these delays could have a material impact on our operations.

We rely on a set of cloud-based software services and access these services via the Internet for the vast majority of our computing, storage, bandwidth, and other services. Any disruption of or interference with our use of our cloud-based services would negatively affect our operations and could seriously harm our business.

We use several distributed computing infrastructure platforms for business operations, or what is commonly referred to as “cloud” computing services and we access these services via the Internet. Any transition of the cloud services currently provided by an existing vendor to another cloud provider would be difficult to implement and will cause us to incur significant time and expense. Given this, any significant disruption of or interference with our use of these cloud computing services would negatively impact our operations and our business would be seriously harmed. If our employees or partners are not able to access our cloud computing services or encounter difficulties in doing so, we may experience business disruption. The level of service provided by our cloud computing vendors, including the ability to secure our confidential information and the confidential information of third parties that is shared with us, may also impact the perception of our company and could seriously harm our business and reputation and create liability for us. If a cloud computing service that we use experiences interruptions in service regularly or for a prolonged basis, or other similar issues, our business could be seriously harmed. We are especially susceptible to this risk as we do not have any physical office locations other than subscriptions to WeWork office space and operate almost entirely remotely. We are reliant on third-party software services in a variety of locations throughout the country which could separately or simultaneously experience disruptions.

In addition, a cloud computing service may take actions beyond our control that could seriously harm our business, including:

 

   

discounting or limiting access to our platform;

 

   

increasing pricing terms;

 

   

terminating or seeking to terminate our contractual relationship altogether;

 

   

establishing more favorable relationships with one or more of our competitors; or

 

   

modifying or interpreting its terms of service or other policies in a manner that impacts our ability to run our business and operations.

Our cloud computing services have broad discretion to change and interpret its terms of service and other policies with respect to us, and those actions may be unfavorable to us. Our cloud computing services may also alter how we are able to process data on the platform. If a cloud computing service makes changes or interpretations that are unfavorable to us, our business could be seriously harmed.

 

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Our efforts to protect the information shared with us may be unsuccessful due to the actions of third parties, software bugs or other technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information to gain access to our data or third-party data entrusted to us. If any of these events occur, our or third party information could be accessed or disclosed improperly. Some partners or collaborators may store information that we share with them on their own computing system. If these third parties fail to implement adequate data-security practices or fail to comply with our policies, our data may be improperly accessed or disclosed. Even if these third parties take all these steps, their networks may still suffer a breach, which could compromise our data.

Any incidents where our information is accessed without authorization, or is improperly used, or incidents that violate our policies, could damage our reputation and our brand and diminish our competitive position. In addition, affected parties or government authorities could initiate legal or regulatory action against us over those incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Concerns over our privacy practices, whether actual or unfounded, could damage our reputation and brand and deter users, advertisers, and partners from using our products and services. Any of these occurrences could seriously harm our business.

We are also subject to many federal, state, and foreign laws and regulations, including those related to privacy, rights of publicity, data protection, content regulation, intellectual property, health and safety, competition, protection of minors, consumer protection, employment, and taxation. These laws and regulations are constantly evolving and may be interpreted, applied, created, or amended in a manner that could seriously harm our business.

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

As of March 15, 2022, we had eight full-time employees, two of whom were primarily engaged in research and development activities. We also engage various consultants that are primarily engaged in research and development. As we advance our research and development programs, we may be required to further increase the number of our employees, particularly in the areas of clinical development, quality, regulatory affairs and, if any of our drug candidates receive marketing approval, sales, marketing and distribution. To manage any future growth, we must:

 

   

identify, recruit, integrate, maintain and motivate additional qualified personnel;

 

   

manage our development efforts effectively, including the initiation and conduct of clinical trials for our drug candidates and navigating the clinical and FDA review process for our drug candidates;

 

   

improve our operational, financial and management controls, reporting systems and procedures;

 

   

discover new drug candidates, develop the process and analytical methods for IND-enabling studies and regulatory submissions, complete the required IND-enabling studies for each, and receive approval from the FDA and other regulatory authorities to initiate clinical trials for such drug candidates;

 

   

manage any future clinical trials effectively;

 

   

identify, recruit, retain, incentivize and integrate additional employees;

 

   

maintain sufficient quantities of a drug product for clinical supply and establish manufacturing capabilities or arrangements with third-party manufacturers for commercial supply, if and when approved; and

 

   

continue to improve our operational, financial and management controls, reports systems and procedures.

Our future financial performance and our ability to develop, manufacture and commercialize our drug candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a financial and other resources, and a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

 

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We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain organizations, advisors and consultants to provide certain services, including many aspects of regulatory affairs, clinical management and manufacturing. The services of these organizations, advisors and consultants may not continue to be available to us on a timely basis when needed or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our drug candidates or otherwise advance our business. We may not be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our drug candidates and, accordingly, may not achieve our research, development and commercialization goals. While the impact of the COVID-19 pandemic initially resulted in significant unemployment, more recently, unemployment rates have decreased. The United States is currently experiencing an increasingly competitive labor market and we are uncertain as to the employment environment in the future, or how that environment will impact our workforce, including our ability to hire or retain qualified employees, consultants, contractors or other key personnel to facilitate our growth.

If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation drug candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

Our ability to compete in the highly competitive therapeutics industry depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including Alexander Martinez, our Chief Executive Officer, Jason Ferrone, our President and Chief Operating Officer, Emil Chuang, M.B.B.S. (Syd) FRACP, our Chief Medical Officer, and Dustin Crawford, our General Counsel and Vice President, Legal and Corporate Development. The loss of the services of any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in drug development and harm our business. Additionally, we currently have a small management team with no succession plan in place. While we intend to grow our management team, we may be unable to identify, recruit and hire the necessary personnel.

Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided restricted common stock and stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Employment of our key employees is at-will, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations, and those of any of our current or future CROs, contract manufacturing organizations, or CMOs, and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and

 

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other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. For materials to be used in our clinical trials, we plan to rely on an external contract manufacturing organization for the entire manufacturing supply chain. Our ability to obtain clinical supplies of our drug candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

Our computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer cybersecurity incidents and other disruptions, including the theft of our intellectual property.

In the course of our business, we collect, store and transmit proprietary, confidential and sensitive information, including personal information. The information and data processed and stored in our technology systems, and those of our research collaborators, CROs, contractors, consultants and other third parties on which we depend to operate our business, may be vulnerable to security breaches, loss, damage, corruption, unauthorized access, use or disclosure or misappropriation. Such incidents may also result from errors or malfeasance by our personnel or the personnel of the third parties with which we work, malware, viruses, software vulnerabilities, hacking, denial of service attacks, social engineering (including phishing), ransomware, credential stuffing or other cyberattacks, including attacks by state-sponsored organizations or sophisticated groups of hackers.

While we have developed systems and processes designed to protect the integrity, confidentiality and security of the confidential and personal information under our control, our security measures or those of the third parties we depend on may not be effective in preventing cybersecurity incidents. There are many different and rapidly evolving cybercrime and hacking techniques, and we may be unable to anticipate attempted security breaches, identify them before our information is exploited, or react in a timely manner.

Additionally, our workforce operates substantially remotely or in shared working locations, which may impose additional risks to our business, including increased risk of industrial espionage, phishing and other cybersecurity attacks and unauthorized dissemination of proprietary or confidential information, any of which could have a material adverse effect on our business.

Although, to our knowledge, we have not experienced a material system failure or cybersecurity incident to date, if such an event were to occur, it could result in a material disruption of our development programs and our business operations, whether due to a loss of trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed, ongoing or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third-party research institution collaborators, CROs, other contractors and consultants for many aspects of our business, including research and development activities and manufacturing of our drug candidates, and similar events relating to their computer systems could also have a material adverse effect on our business. Cybersecurity incidents and any unauthorized access or disclosure of our information or intellectual property could also compromise our intellectual property and patent portfolio, expose sensitive business information, expose the personal information of our employees, require us to incur significant remediation costs, disrupt key business operations and divert attention of management and key information technology resources. Such incidents could also subject us to significant liability, harm our competitive position and delay the further development and commercialization of our drug candidates.

Our insurance coverage may not be adequate for cybersecurity liabilities, may not continue to be available to us on economically reasonable terms, or at all, and any insurer may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, financial condition and results of operations.

 

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Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition, or results of operations.

New tax laws, statutes, rules, regulations, or ordinances, including proposals made by the current or a future presidential administration, could be enacted at any time. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted differently, changed, repealed, or modified at any time. Any such enactment, interpretation, change, repeal, or modification could adversely affect us, possibly with retroactive effect. In particular, changes in corporate tax rates, the realization of our net deferred tax assets, the taxation of foreign earnings, and the deductibility of expenses under the Tax Cuts and Jobs Act of 2017, as amended by the Coronavirus Aid, Relief, and Economic Security Act or any future tax reform legislation, could have a material impact on the value of our deferred tax assets, result in significant one-time charges, and increase our future tax expenses.

Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income or tax liabilities may be subject to certain limitations.

As of December 31, 2021, we had $4.6 million of net operating loss, or NOL, carryforwards for U.S. federal tax purposes for U.S. federal income tax purposes. Such NOL carryforwards may be carried forward indefinitely and offset up to 80% of our taxable income in each future taxable year, if we attain profitability and generate taxable income in the future. We have incurred significant net losses since our inception, anticipate that we will continue to incur significant net losses for the foreseeable future, and do not know whether or when we will generate the taxable income necessary to utilize our NOL carryforwards. In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL carryforwards and certain other tax attributes to offset its future taxable income or tax liabilities. For U.S. federal income tax purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders that own at least 5% of a corporation’s stock increases by more than 50 percentage points over their lowest aggregate ownership percentage within a specified testing period. In addition, it is uncertain whether various states will conform to current federal law, and there may be periods during which the use of NOL carryforwards is suspended or otherwise limited at the state level, which could accelerate or permanently increase state taxes owed. Our NOL carryforwards and certain other tax attributes may be subject to limitations under Sections 382 and 383 of the Code arising from previous ownership changes. If we undergo an ownership change in connection with or after this offering or as a result of future changes in our stock ownership, which may be outside of our control, our NOL carryforwards and certain other tax attributes could be further limited by Sections 382 and 383 of the Code.

We conduct certain research and development operations through our Australian wholly-owned subsidiary. If we lose our ability to operate in Australia, or if our subsidiary is unable to receive the research and development incentive payment allowed by Australian regulations, our business and results of operations could suffer.

In October 2021, we formed a wholly-owned Australian subsidiary, Intrinsic Medicine AU Pty LTD, to conduct various preclinical studies and clinical trials for our product candidates in Australia. Due to the geographical distance and lack of employees currently in Australia, as well as our lack of experience operating in Australia, we may not be able to efficiently or successfully monitor our clinical activities in Australia, including conducting preclinical studies and clinical trials. Furthermore, we have no assurance that the results of any clinical trials that we conduct for our product candidate in Australia will be accepted by the FDA or comparable foreign regulatory authorities for development and commercialization approvals.

In addition, current Australian tax regulations provide for a refundable research and development incentive payment equal to 43.5% of qualified expenditures. If our subsidiary loses its ability to operate in Australia, or if we are ineligible or unable to receive the research and development incentive payment, or the Australian government significantly reduces or eliminates the incentive program, our business and results of operation may be adversely affected.

 

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Our HiMO drug candidates rely on the availability of specialty raw materials, which may not be available to us or our vendors on acceptable terms or at all.

Our drug candidates require certain specialty raw materials, some of which we obtain from small companies with limited resources and experience to support a commercial drug. Glycosyn, for example, has developed the bacterial strains which enable the production of our drug products to supply our clinical studies and, eventually, our commercial products. The suppliers may be ill-equipped to support our needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. We do not currently have contracts in place with all of the suppliers that we may need at any point in time, and if needed, may not be able to contract with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key raw materials to support clinical or commercial manufacturing.

Our drug candidates will require specialized manufacturing capabilities. If we or any of our third-party manufacturers encounter difficulties in manufacturing our drug candidates, our ability to provide supply of our drug candidates for clinical trials or our drugs for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.

The manufacturing process used to produce our drug candidates is complex and novel and it has not yet been validated for clinical and commercial production. As a result of these complexities, the cost to manufacture our drug candidates is higher than traditional small molecule chemical compounds and the manufacturing process is less reliable and is more difficult to reproduce. Furthermore, our cGMP manufacturing process development and scale-up is at an early stage. The actual cost to manufacture and process our drug candidates could be greater than we expect and could materially and adversely affect the commercial viability of our drug candidates.

Our manufacturing process may be susceptible to manufacturing issues associated with interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, and variability in drug characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, lot failures, product defects, product recalls, product liability claims and other supply disruptions. If microbial, viral or other contaminations are discovered in our drug candidates or in the manufacturing facilities in which our drug candidates are made, production at such manufacturing facilities may be interrupted for an extended period of time to investigate and remedy the contamination. Further, as drug candidates are developed through preclinical to late-stage clinical trials toward approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our drug candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.

Neither we, nor any third-party contract manufacturer, have yet commenced manufacturing of our drug candidate on a meaningful level. We will need to optimize our manufacturing process for our drug candidates, and doing so is a difficult and uncertain task, and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency, and timely availability of reagents and/or raw materials. We ultimately may not be successful in transferring our production system from our contract manufacturer to any manufacturing facilities we establish ourselves, or our contract manufacturer may not have the necessary capabilities to complete the implementation and development process. If we are unable to adequately validate or scale-up the manufacturing process for our drug candidates with our current manufacturer, we will need to transfer to another manufacturer and complete the manufacturing validation process, which can be lengthy. If we are able to adequately validate and scale-up the manufacturing process for our drug candidates with a contract manufacturer, we will still need to negotiate with such contract manufacturer an agreement for commercial supply and it is not certain we will be able to come to agreement on terms acceptable to us. As a result, we may ultimately be unable to reduce the cost of goods for our drug candidates to levels that will allow for an attractive return on investment if and when those drug candidates are commercialized.

 

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The manufacturing process for any drugs that we may develop is subject to the FDA and other foreign regulatory bodies approval process, and we will need to contract with manufacturers who can meet all applicable FDA and other foreign regulatory bodies requirements on an ongoing basis. If we or our CMOs are unable to reliably produce drugs to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize such drugs. Even if we obtain regulatory approval for any of our drug candidates, either we or our CMOs may not be able to manufacture the approved drug to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the drug, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our drug candidates, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and growth prospects. Our future success depends on our ability to manufacture our drugs on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements, and an inability to do so could have a material adverse effect on our business, financial condition, and results of operations. In addition, we could incur higher manufacturing costs if manufacturing processes or standards change, and we could need to replace, modify, design, or build and install equipment, all of which would require additional capital expenditures. Specifically, because our drug candidates may have a higher cost of goods than conventional therapies, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater.

We may depend on third parties for clinical and commercial supplies, including, in some instances, a single supplier.

We depend on third-party suppliers for clinical and commercial supplies, including the active ingredients which are used in our drug candidates. These supplies may not always be available to us at the standards we require or on terms acceptable to us, or at all, and we may not be able to locate alternative suppliers in a timely manner, or at all. If we are unable to obtain necessary clinical or commercial supplies, our manufacturing operations and clinical trials and the clinical trials of our collaborators may be delayed or disrupted and our business and prospects may be materially and adversely affected as a result.

We currently rely on a sole supplier, Friesland, for certain of our supplies, and we intend to continue relying on Friesland. If this sole supplier is unable to supply to us in the quantities we require, or at all, or otherwise defaults on its supply obligations to us, we may not be able to obtain alternative supplies from other suppliers on acceptable terms, in a timely manner, or at all. Additionally, Friesland and Glycosyn holds the know-how regarding the fermentation processes for the specific Glycosyn strains that produce the HiMOs that are licensed to us. In addition, Friesland and Glycosyn hold the know-how necessary to process and purify the product of fermentation, or down-stream process, to produce our purified drug candidates. Given that we currently rely on purchase orders for our supply needs, should we have to change our supplier or should Friesland decline to fill a purchase order, we would experience a time and cost disruption while attempting to locate alternate supplies and either elucidate the fermentation process for the Glycosyn strains or negotiate and enter into a technology transfer agreement with Friesland.

For example, we are currently aware of only two other suppliers with the 2’FL manufacturing capacity and know-how sufficient to meet our anticipated clinical and commercial supply needs, and, if necessary, we may not reach an agreement to purchase supplies from them under economically feasible conditions or at all.

Risks Related to the Development and Marketing Approval of Our Drug Candidates

The successful development of our drug candidates is highly uncertain.

Successful development of drug candidates is highly uncertain and is dependent on numerous factors, many of which are beyond our control. The success of our drug candidates will depend on several factors, including the following:

 

   

sufficiency of our financial and other resources to initiate and complete the necessary preclinical studies and clinical trials;

 

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successfully conducting IND-enabling studies with favorable results, submitting INDs as applicable, and the successful enrollment in clinical trials and completion of preclinical studies and clinical trials with favorable results;

 

   

clearance of INDs by the FDA or similar regulatory filings by comparable foreign regulatory authorities for the conduct of clinical trials of our drug candidates and our proposed design of future clinical trials;

 

   

demonstrating the safety and efficacy of our drug candidates to the satisfaction of applicable regulatory authorities;

 

   

receipt of regulatory and marketing approvals from applicable regulatory authorities, including new drug applications, or NDAs, from the FDA and maintaining such approvals;

 

   

making arrangements with third-party manufacturers for, or establishing, clinical and commercial manufacturing capabilities;

 

   

establishing sales, marketing and distribution capabilities and launching commercial sales of our drugs, if and when approved, whether alone or in collaboration with others;

 

   

establishing and maintaining of patent and trade secret protection or regulatory exclusivity for our drug candidates;

 

   

acceptance of any drugs we develop and their benefits and uses, if and when approved, by patients, the medical community and third-party payors;

 

   

effectively competing with other therapies;

 

   

obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors;

 

   

maintaining an acceptable safety profile of our drugs following approval; and

 

   

building and maintaining an organization of people who can successfully develop our drug candidates.

The length of time necessary to complete clinical trials and to submit an application for marketing approval of a drug candidate for a final decision by a regulatory authority may be difficult to predict for our therapeutic drug candidates, in large part because of their limited regulatory history. Given our early stage of development, it will take several years before we can demonstrate the safety and efficacy of a treatment sufficient to warrant approval for commercialization, if we can do so at all. If we are unable to develop, or obtain marketing approval for, or, if approved, successfully commercialize our drug candidates, we may not be able to generate sufficient revenue to continue our business.

In addition, if any of our drug candidates is approved for marketing, we will be subject to significant regulatory obligations regarding the submission of safety and other post-marketing information and reports and registration. If approved, our drug candidates would be subject to restrictions on our drugs’ labels and other conditions of regulatory approval that may limit our ability to market our drugs. We will also need to comply (and ensure that our third-party contractors comply) with current cGMPs and Good Clinical Practice, or GCP, as we (and our third-party contractors) will be required to comply with cGMPs for drugs used in our clinical trials for any clinical trials that we conduct post-approval with current cGMPs for drug candidates.

HMO therapies are a novel approach and negative perception of any drug candidates that we develop could adversely affect our ability to conduct our business, obtain regulatory approvals to market for such drug candidates.

While other companies are developing drug candidates that target the microbiome and address similar indications as our drug candidates, our mechanistic approach, which relies on the gut brain axis, is a relatively new and novel approach. In the United States, the European Union, or EU, and Australia, no drugs to date have been approved

 

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specifically demonstrating an impact on the gut brain axis through both the microbiome and immune system as part of their therapeutic effect. OM and microbiome therapies in general may not be successfully developed or commercialized or gain the acceptance of the public or the medical community. Our success will depend upon physicians who specialize in the treatment of diseases targeted by our drug candidates that we pursue as drugs, prescribing potential treatments that involve the use of our drug candidates in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may be available. Our access will also depend on consumer acceptance and adoption of our drugs that we commercialize. Adverse events in preclinical studies and clinical trials, including more imminently, conducting IND-enabling confirmatory toxicology studies of our drug candidates or in clinical trials of others developing similar drugs and the resulting publicity, as well as any other adverse events in the field of the microbiome, could result in a decrease in demand for any drug that we may develop. In addition, responses by the U.S., state or foreign governments to negative public perception or ethical concerns may result in new legislation or regulations that could limit our ability to develop or commercialize any drug candidates, obtain or maintain regulatory approval, market or otherwise achieve profitability. More restrictive statutory regimes, government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of our drug candidates or demand for any drugs we may develop.

Our drug candidates are based on HMO therapies, which are an unproven approach to therapeutic intervention.

All of our current drug candidates are based on HMO therapies, a novel potential class of therapeutic drug candidates, which are being developed to treat gut brain axis disorders, in part, by modulating the microbiome through key compositional and functional changes relevant to disease outcomes. We have not, nor to our knowledge has any other company, received regulatory approval for, or manufactured on a commercial scale, a therapeutic based on this approach. Our approach may not lead to the development of approvable or marketable drugs, and we may not be able to manufacture at commercial scale, if approved. In addition, our drug candidates may have different effectiveness rates in various indications and in different geographical areas. Finally, approaching gut brain axis disorders and the microbiome with our HiMO drug candidates are a new approach to therapeutic intervention, therefore the FDA, EMA, TGA or other regulatory authorities may require additional time to evaluate the safety and efficacy of our drugs upon filing of new drug applications for the approval of our drug candidates. This could result in a longer than expected regulatory review process, increase our expected development costs and delay or prevent commercialization of our drug candidates.

All of our drug candidates will require significant preclinical and clinical development before we can seek regulatory approval for and launch a therapeutic drug commercially.

Our business and future success depends on our ability to obtain regulatory approval of and then successfully launch and commercialize our drug candidates, including OM002. We have not yet filed an IND for our any of our drug candidates. In a pre-IND interaction with the FDA’s Division of Gastroenterology, the FDA advised us that we should undertake an IND-enabling toxicology study before proceeding with our planned Phase 2 clinical trial. If such IND-enabling toxicology studies do not confirm the published preclinical toxicology studies that we intend to rely upon for OM002, we may not be able to conduct our intended IBS-C trial in both Australia and the United States and would need to conduct additional nonclinical development work and incur additional expense and delay prior to the expansion and initiation of clinical trials in the United States, if at all. Further, our business plan assumes, that if our IND is cleared for our leading drug candidate that we will be able to commence a Phase 2 clinical trial for therapeutic applications without the need for a phase 1 clinical trial. We have previously indicated to the FDA through pre-IND interactions and responses that we intended to rely on published clinical and nonclinical data to support our planned clinical trial. The FDA has advised that subject to certain duration restrictions and the IND-enabling toxicology study detailed above, we will be able to proceed directly to Phase 2. Our assumption may prove to be incorrect, which would delay our timeline to potential commercialization of our leading drug candidate and result in additional costs and expenses. Our clinical trials may experience preliminary

 

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complications in trial execution, such as complexities surrounding regulatory clearance of our IND, the need for additional preclinical data to support our IND, trial design and establishing trial protocols, bioanalytical assay method development, dose level and regimen selection, patient recruitment and enrollment, quality and supply of clinical doses or safety issues.

All of our drug candidates are in the early stages of development and will require significant additional preclinical and clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient validated and cGMP compliant commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from drug sales. In addition, because OM002 is our most advanced drug candidate, if OM002 encounters safety, efficacy, supply or manufacturing problems, developmental delays, regulatory or commercialization issues or other problems, our development plans, including for other drug candidates, and business would be significantly harmed.

Clinical development is a lengthy, complex and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any drug candidates.

To obtain the requisite regulatory approvals to commercialize any drug candidates for therapeutic uses, we must demonstrate through extensive preclinical studies and clinical trials, including more imminently, IND-enabling confirmatory toxicology studies that our drug candidates are safe and effective in humans for their intended use. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. We may be unable to establish clinical endpoints, dose levels and regimens or bioanalytical assay methods that applicable regulatory authorities would consider clinically meaningful, and a clinical trial can fail at any stage of testing. The outcome of preclinical studies and early clinical trials, including more imminently, IND-enabling confirmatory toxicology studies, may not be predictive of the success of later preclinical studies and clinical trials, and interim results of these studies or trials do not necessarily predict final results. Differences in trial design between early-stage clinical trials and later-stage clinical trials make it difficult to extrapolate the results of earlier clinical trials to later clinical trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their drug candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their drug candidates.

Successful completion of clinical trials is a prerequisite to submitting an NDA to the FDA, a Marketing Authorisation Application to the EMA, a Marketing Authorisation Application to the TGA and similar marketing applications to comparable foreign regulatory authorities, for each drug candidate and, consequently, the ultimate approval and commercial marketing of any drug candidates. We do not know whether any of our clinical trials will begin or be completed on schedule, if at all.

We may experience delays in initiating or completing preclinical studies and clinical trials, including more imminently, IND-enabling confirmatory toxicology studies. We also may experience numerous unforeseen events during, or as a result of, any future preclinical studies or clinical trials that we could conduct that could delay or prevent our ability to receive marketing approval or commercialize our drug candidates, including:

 

   

we may be unable to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation of clinical trials or the marketing of our drugs;

 

   

regulators or institutional review boards, or IRBs, or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

   

we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective CROs the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

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clinical trials of any drug candidates may fail to show safety, purity or potency, or produce negative or inconclusive results and we may decide, or regulators may require us, to conduct preclinical studies or clinical trials or we may decide to abandon drug development programs;

 

   

the number of patients required for clinical trials of any drug candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipate;

 

   

we may need to add new or additional clinical trial sites;

 

   

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators;

 

   

the cost of preclinical studies and clinical trials of any drug candidates may be more than we anticipate or more than our available financial resources;

 

   

the supply or quality of our drug candidates or other materials necessary to conduct preclinical studies and clinical trials of our drug candidates may be insufficient or inadequate and may not achieve compliance with applicable cGMPs;

 

   

our drug candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or IRBs or ethics committees to suspend or terminate preclinical studies and clinical trials, or reports may arise from preclinical or clinical testing of our drug candidates that raise safety or efficacy concerns about our drug candidates;

 

   

preclinical studies or clinical trials of our drug candidates may produce negative or inconclusive results, which may result in our deciding, or regulators requiring us, to conduct additional clinical trials or abandon drug development programs; and

 

   

the FDA or other regulatory authorities may disagree with the design, implementation or results of our preclinical studies or clinical trials, or require us to submit additional data such as long-term toxicology studies or impose other requirements before permitting us to initiate a clinical trial.

We could also encounter delays if preclinical studies and clinical trials, including more imminently, IND-enabling confirmatory toxicology studies are suspended or terminated for any reason. A suspension or termination may be imposed 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 treatment, failure to establish or achieve clinically meaningful trial endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. 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 drug candidates. Further, the FDA or other regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after they have reviewed and commented on the design for our planned preclinical studies or clinical trials.

Further, our planned preclinical studies and clinical trials do or will contain and rely upon endpoints that require subjective assessments from trial participants and subject us to a substantial risk of “placebo effect” which is a well-known risk in clinical trials evaluating therapeutics for pain as well as IBS. While a drug candidate may show clinical activity or therapeutic benefit, a high placebo effect in a clinical trial will make it difficult to ascertain that benefit or to show a statistically significant effect of the drug candidate as compared to the control arm and may ultimately cause a clinical trial to fail.

Our drug development costs will increase if we experience delays in clinical testing or marketing approvals. We do not know whether any of our planned preclinical studies or clinical trials will begin as planned, will need to be

 

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restructured or will be completed on schedule, or at all. Significant preclinical studies or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our drug candidates and may allow our competitors to bring drugs to market before we do, potentially impairing our ability to successfully commercialize our drug candidates and harming our business and results of operations. Any delays in our planned preclinical or future clinical development programs may harm our business, financial condition and prospects significantly.

Our planned clinical trials or those of our future collaborators may reveal significant adverse events not seen in our or other’s preclinical studies or other clinical trials and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our drug candidates.

Before obtaining regulatory approvals for the commercial sale of any drugs, we must demonstrate through lengthy, complex and expensive preclinical studies and clinical trials that our drug candidates are both safe and effective for use in each target indication. Preclinical and 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 preclinical or clinical trial process. The results of preclinical studies as well as early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. In addition, initial success in clinical trials may not be indicative of results obtained when such clinical trials are completed. There is typically an extremely high rate of attrition from the failure of drug candidates proceeding through clinical trials. We believe that our drug candidates will be well tolerated by participants in our clinical trials, but we are not certain that we will be able to dose trial participants at a high enough dose that will demonstrate efficacy without unacceptable safety risk. We believe that our drug candidates have limited systemic exposure after oral administration but if the drug candidates we use in our clinical trials are absorbed by the body, participants may suffer adverse effects. There is also a concern that the microbiome will re-configure itself, leading to a limited time window of effectiveness and subsequent tolerability of our drug candidates or unanticipated short or long-term effects.

Drug candidates in later stages of clinical trials also may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the healthcare industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier clinical trials. Most drug candidates that commence clinical trials are never approved as drugs and any of our current or future clinical trials might not ultimately be successful or support further clinical development of any of our drug candidates.

If significant adverse events or other side effects are observed in any of our current or future clinical trials, we may have difficulty recruiting patients to our clinical trials, patients may drop out of our clinical trials or we may be required to significantly redesign or abandon trials or our development efforts of one or more drug candidates altogether. We, the FDA or other applicable regulatory authorities or an IRB may suspend clinical trials of a drug candidate at any time for various reasons, including a belief that patients in such trials are being exposed to unacceptable health risks or adverse side effects. 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 our drug candidates may only be uncovered with a significantly larger number of patients exposed to the drug candidate. If our drug candidates receive marketing approval and we or others identify undesirable side effects caused by such drug candidates (or any other similar drugs) after such approval, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may withdraw or limit their approval of such drug candidates;

 

   

regulatory authorities may require the addition of labeling statements, such as a “boxed” 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 may be required to change the way such drug candidates are distributed or administered, conduct additional clinical trials or change the labeling of the drug candidates;

 

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regulatory authorities may require a Risk Evaluation and Mitigation Strategy, or REMS, plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools;

 

   

we may be subject to regulatory investigations and government enforcement actions;

 

   

we may decide to remove such drug candidates from the marketplace;

 

   

we could be sued and held liable for injury caused to individuals exposed to or taking our drug candidates; and

 

   

our reputation may suffer.

We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected drug candidates and could substantially increase the costs of commercializing our drug candidates, if approved, and significantly impact our ability to successfully commercialize our drug candidates and generate revenues.

We were not involved in the early development of our lead drug candidates or in the development of third-party agents used in combination with our drug candidates; therefore, we are dependent on third parties having accurately generated, collected, interpreted and reported data from certain preclinical studies and clinical trials for our drug candidates.

We had no involvement with or control over the preclinical and clinical development of any of our lead drug candidates. We are dependent on third parties having conducted their research and development in accordance with the applicable protocols and legal, regulatory and scientific standards; having accurately reported the results of all preclinical studies and clinical trials conducted with respect to such drug candidates; and having correctly collected and interpreted the data from these trials. If these activities were not compliant, accurate or correct, the clinical development, regulatory approval or commercialization of our drug candidates will be adversely affected. Additionally, there is currently an ongoing Phase 1/2 clinical trial of our lead drug candidate, OM002, in pediatric patients for IBD, Crohn Disease and Ulcerative Colitis sponsored by Children’s Hospital Medical Center, Cincinnati under an investigator sponsored trial, or IST, in which we are not involved. As of March 15, 2022, we are not aware of any safety data having been published with respect to the third-party trial, which is scheduled for completion in March 2023. Pursuant to the Glycosyn In-License, to which we are not a party, we may be granted access or rights to use the data collected under the IST, subject to certain conditions. The patients involved in the clinical trial are high risk and taking medications which may affect the safety and efficacy results from this clinical trial. Further, any negative results of that study, whether related to OM002 or otherwise, may have an adverse effect on our ability to obtain regulatory approval and/or market and sell our drug candidates.

Positive results from early preclinical studies and clinical trials of our drug candidates, whether conducted by us or third parties, are not necessarily predictive of the results of later preclinical studies and any future clinical trials of our drug candidates. If we cannot replicate the positive results from preclinical studies of our drug candidates, whether conducted by us or third parties, in our later and future preclinical studies and clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize our drug candidates.

Any positive results from our planned preclinical studies and clinical trials of our drug candidates, whether conducted by us or third parties, may not necessarily be predictive of the results from required later preclinical studies and clinical trials. Similarly, even if we are able to complete any future preclinical studies or clinical trials of our drug candidates according to our current development timeline, the positive results from such preclinical studies and clinical trials of our drug candidates may not be replicated in subsequent preclinical studies or clinical trial results. We have not conducted our own research and have relied on independent, published research to arrive at our development thesis and plan our clinical trial protocol. As such, we have not generated any data as of the date of this prospectus.

 

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Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development and we may face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway, or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their drug candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA, EMA, TGA or comparable foreign regulatory authority approval. Furthermore, the approval policies or regulations of the FDA, EMA, TGA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval, which may lead to the FDA, EMA, TGA or comparable foreign regulatory authorities delaying, limiting or denying approval of our drug candidates.

If we encounter delays or difficulties enrolling patients in future clinical trials, our research and development efforts, business, financial condition, and results of operation could be materially adversely affected.

Successful and timely completion of clinical trials will require that we enroll a sufficient number of patient candidates. Any future clinical trials may be subject to delays for a variety of reasons, including as a result of patient enrollment taking longer than anticipated, patient withdrawal or adverse events affecting patient candidates. These types of developments could cause us to delay a trial or halt further development. Our clinical trials will compete with other clinical trials that are in the same therapeutic areas as our drug candidates, and this competition will reduce the number and types of patients available to us, as some patients who might have opted to enroll in our clinical trials may instead opt to enroll in a clinical trial being conducted by one of our competitors. Because the number of qualified-clinical investigators and clinical trials sites is limited, some of our clinical trials may be conducted at the same clinical trial sites that some of our competitors use, which could reduce the number of patients who are available for our clinical trials at such clinical trial sites. In addition, there may be limited patient pools from which to draw for clinical trials or to assure their diseases is either severe enough or not too advanced to include them in a clinical trial.

Patient enrollment depends on many factors, including:

 

   

the severity of the disease or condition under investigation;

 

   

the patient eligibility and exclusion criteria defined in the protocol;

 

   

the size and nature of the study patient population required for analysis of the primary endpoint(s) of the clinical trial;

 

   

the proximity of patients to trial sites;

 

   

the design of the clinical protocol;

 

   

the ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

   

clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;

 

   

the availability of competing clinical trials;

 

   

the efforts to facilitate timely enrollment in clinical studies or trials;

 

   

the patient referral practices of physicians;

 

   

the ability to monitor patients adequately during and after treatment;

 

   

the state of the COVID-19 pandemic and patients’ perceptions of risk in traveling to clinical sites;

 

   

the ability to obtain and maintain patient consents; and

 

   

the risk that patients enrolled in clinical trials will drop out of the clinical trials before completion.

 

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Moreover, because our drug candidates represent a departure from more commonly used methods for our targeted therapeutic areas, potential patients and their doctors may be inclined to use conventional therapies, rather than enroll patients in any future clinical study or trial. These factors may make it difficult for us to enroll enough patients to complete our clinical trials in a timely and cost-effective manner. Delays in the completion of any clinical trial of our drug candidates will increase our costs, slow down our drug candidate development and approval process and delay or potentially jeopardize our ability to commence product sales and generate revenue. In addition, some 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 product candidates.

Because we have multiple drug candidates in our clinical pipeline and are considering a variety of target indications, we may expend our limited resources to pursue a particular drug candidate and fail to capitalize on drug candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on specific drug candidates, indications and development programs. We also plan to conduct several preclinical studies and clinical trials, over the next several years, including more imminently, conducting IND-enabling confirmatory toxicology studies, which may make our decision as to which drug candidates to focus on more difficult. As a result, we may forego or delay pursuit of opportunities with other drug candidates or other indications that could have had greater commercial potential or likelihood of success. We may focus on or pursue one or more indications over other potential indications and such development efforts may not be successful, which would cause us to delay the clinical development and approval of our drug candidates. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and drug candidates for specific indications may not yield and commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular drug candidate, we may relinquish valuable rights to the product candidate through future collaborations, licenses and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such drug candidate.

Additionally, we may pursue additional in-licenses or acquisitions of development-stage assets or programs, which entails additional risk to us. Identifying, selecting and acquiring promising drug candidates requires substantial technical, financial and human resources expertise. Efforts to do so may not result in the actual acquisition or license of a particular drug candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. For example, if we are unable to identify programs that ultimately result in approved products, we may spend material amounts of our capital and other resources evaluating, acquiring and developing drugs that ultimately do not provide a return on our investment.

Interim top-line and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, once we commence conducting clinical trials, we may decide to conduct interim analyses of data from our clinical studies, publish interim top-line or preliminary 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 as patient enrollment and treatment continues and more patient data become available. Data from additional patients can have a significant impact on the overall data viewed as a whole. Adverse differences between previous preliminary or interim data and future interim or final data could significantly harm our business prospects and adversely affect our stock price. We may also announce topline data following a more comprehensive review of the data related to a particular preclinical study or clinical 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, topline or preliminary results that we report may differ from future results of the same studies, or different conclusions

 

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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, interim and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary 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 drug candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular preclinical study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine to be material or otherwise appropriate information to include in our disclosure. If the interim, top line, or preliminary 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 drug candidates may be harmed, which could harm our business, operating results, prospects or financial condition.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our drug candidates.

We face an inherent risk of product liability as a result of testing our drug candidates in clinical trials and will face an even greater risk if we commercialize any drugs. For example, we may be sued if our drug candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical trials, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the drug, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our drug candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

inability to bring a drug candidate to the market;

 

   

decreased demand for our drugs;

 

   

damage to our reputation;

 

   

withdrawal of clinical trial participants and patients and inability to enroll future participants or continue clinical trials;

 

   

initiation of investigations by regulators;

 

   

costs to defend the related litigation;

 

   

diversion of management’s time and our resources;

 

   

substantial monetary awards to clinical trial participants or patients;

 

   

drug recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

loss of revenue;

 

   

exhaustion of any available insurance and our capital resources;

 

   

the inability to commercialize any drug candidate via any regulatory pathway; and

 

   

decline in our share price.

We do not currently maintain clinical trial insurance and are currently in the process of evaluating potential providers for clinical trial insurance. We may not be able to obtain clinical trial insurance at an acceptable cost in

 

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the future, which could prevent or inhibit the ongoing development of our drugs. Since we have not yet commenced marketing of any drugs, we do not yet hold product liability insurance for commercialization of our drugs. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of drugs we develop, alone or with collaborators. If and when coverage is secured, our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

The market opportunities for our drug candidates may be limited and our estimates of the incidence and prevalence of our target patient populations may be inaccurate.

Our projections of both the number of people who have the diseases we are targeting, as well as the subset of people with these diseases in a position to receive our therapies, if approved, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, input from key opinion leaders, patient foundations or secondary market research databases, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases or regulatory approvals may include limitations for use or contraindications that decrease the addressable patient population. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for our drug candidates may be limited or may not be amenable to treatment with our drug candidates. For instance, we estimate that, based on the estimated population reported in the 2020 U.S. Census and a 5% prevalence rate, there are approximately 16.5 million patients with IBS of which approximately 33% have IBS-C in the United States. It has been estimated that only 50% of patients with IBS have been diagnosed. Even if we obtain significant market share for our drug candidates, we may never achieve profitability without obtaining regulatory approval for additional indications.

We are early in our development efforts and may not be successful in our efforts to use HMOs to build a pipeline of drug candidates and develop marketable drugs.

We are developing our initial drug candidates and additional drug candidates that we intend to use in a number of areas of health and disease, including GBA associated disorders, certain inflammatory disorders and central nervous disorders which affect the microbiome as well as other cells in the body. We may have problems applying our technologies to these areas, and our drug candidates may not demonstrate a comparable ability in treating disease as existing drug therapies for such indications. Even if we are successful in identifying additional drug candidates, they may not be suitable for clinical development as a result of our inability to manufacture more complex proprietary compounds, limited efficacy, unacceptable safety profiles or other characteristics that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance. The success of our drug candidates will depend on several factors, including the following:

 

   

initiation and completion of preclinical studies and clinical trials with positive results;

 

   

receipt of marketing approvals from applicable regulatory authorities, if necessary;

 

   

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our drug candidates;

 

   

making arrangements with third-party manufacturers for, or establishing our own, commercial manufacturing capabilities;

 

   

launching commercial sales of our drugs, if and when approved, whether alone or in collaboration with others;

 

   

entering into new collaborations throughout the development process as appropriate, from preclinical studies through to commercialization;

 

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acceptance of our drugs, if and when approved, by patients, consumers, the medical community and third-party payors;

 

   

effectively competing with other therapies;

 

   

obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors, for our drugs, if approved;

 

   

protecting our rights in our intellectual property portfolio;

 

   

operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;

 

   

maintaining a continued acceptable safety profile of the drugs following approval or commercialization; and

 

   

maintaining and growing an organization of scientists and businesspeople who can develop and commercialize our drugs and technology.

If we do not successfully develop and commercialize drug candidates, we will not be able to obtain drug revenue in future periods, which likely would result in significant harm to our financial position and adversely affect our stock price.

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

The healthcare industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical, nutritional foods and supplement companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel therapeutics or to in-license novel therapeutics that could make the drug candidates that we develop obsolete. Mergers and acquisitions in the therapeutics industry may result in even more resources being concentrated amongst our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis microbiome therapies that are more effective, safer, more easily commercialized (including through medical foods and supplements that may not be subject to same degree of regulatory scrutiny as our drug candidates) or less costly than our drug candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and drugs. We believe the key competitive factors that will affect the development and commercial success of our drug candidates are efficacy, safety, tolerability, reliability, convenience of use, price and reimbursement.

We anticipate competing with the largest healthcare companies in the world, many of which have greater financial and human resources than we currently have. In addition to these fully integrated healthcare companies, we also compete with those companies whose drugs target the same indications as our drug candidates. They include pharmaceutical companies, biotechnology companies, health and wellness companies (including manufacturers of medical foods and supplements), academic institutions and other research organizations. Any treatments developed by our competitors could be superior to our drug candidates. It is possible that these competitors will succeed in developing technologies that are more effective than our drugs or that would render our drug candidates obsolete or noncompetitive. We anticipate that we will face increased competition in the

 

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future as additional companies enter our market and scientific developments surrounding other therapies targeted at the microbiome continue to accelerate.

In addition, we have identified several companies that are targeting the microbiome, such as Synlogic, Inc., Finch Therapeutics Group, Inc., 4D Pharma PLC, Seres Therapeutics, Inc., Kaleido Biosciences Inc., and Evelo Biosciences, Inc.

Even if we obtain regulatory approval to market our drug candidates, the availability and price of our competitors’ drugs could limit the demand and the price we are able to charge for our drug candidates. We may not be able to implement our business plan if the acceptance of our drug candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our drug candidates, or if physicians switch to other new drug or biologic products or choose to reserve our drug candidates for use in limited circumstances. For additional information regarding our competition, see “Business—Competition.”

We expect to face generic, over-the-counter, or medical food competition for our drug candidates, which could adversely affect our business, financial condition, operating results and prospects.

Upon the expiration or loss of any patent protection for any of our drug candidates that are approved, or upon the “at-risk” launch, despite pending patent infringement litigation against the generic product, by a generic competitor of a generic version of any of our product candidates that are approved, which may be sold at significantly lower prices than our approved product candidates, we could lose a significant portion of sales of that product in a short period of time, which would adversely affect our business, financial condition, operating results and prospects.

In addition, we expect to face competition from over-the-counter and medical food products. In particular, our OM002 product candidate faces competition in certain indications from currently marketed oral over-the-counter products designed to treat the IBS symptoms. Additionally, we expect to face competition from currently marketed medical foods which include 2’FL in low concentrations. Even if a generic product or an over-the-counter product is less effective than our product candidates, a less effective generic or over-the-counter product may be more quickly adopted by health insurers, physicians and patients than our competing product candidates based upon cost or convenience.

Even if a drug candidate we develop as a therapeutic receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors, consumers and others in the medical or healthcare community necessary for commercial success.

If any drug candidate we develop receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, consumers and others in the medical community. If the drug candidates we develop do not achieve an adequate level of acceptance, we may not generate significant drug revenues and we may not become profitable. The degree of market acceptance of any drug candidate, if approved for commercial sale, will depend on a number of factors, including:

 

   

efficacy, safety and potential advantages compared to alternative treatments;

 

   

the labeled uses or limitations for use, including age limitations or contraindications, for our drug candidates compared to alternative treatments;

 

   

convenience and ease of administration compared to alternative treatments;

 

   

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

   

public perception of new therapies, including HMOs;

 

   

the strength of marketing and distribution support;

 

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the ability to offer our drugs, if approved, for sale at competitive prices;

 

   

the ability to obtain sufficient third-party insurance coverage and adequate reimbursement; and

 

   

the prevalence and severity of any side effects.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the laws of the FDA and other foreign regulatory bodies, provide true, complete and accurate information to the FDA and other foreign regulatory bodies, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws or report financial information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our drug candidates and begin commercializing those drugs in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs.

A variety of risks associated with testing and developing our drug candidates internationally could materially adversely affect our business.

We plan to seek regulatory approval of our drug candidates for therapeutic and other uses outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries if we obtain the necessary approvals, including:

 

   

differing regulatory requirements in foreign countries;

 

   

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

   

difficulties staffing and managing foreign operations;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

potential liability under the Foreign Corrupt Practices Act, or FCPA, or comparable foreign regulations;

 

   

challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

 

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Additionally, we intend to contract with third parties to conduct some of our clinical trials outside the United States, which will subject us to additional risks and regulations. These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

We currently have no marketing and sales organization and have no experience in marketing drugs for therapeutic uses. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not be able to generate drug revenue.

We currently have no sales, marketing or distribution capabilities and have no experience in marketing drugs for therapeutic or other uses. We intend to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other healthcare companies to recruit, hire, train and retain experienced marketing and sales personnel.

In addition to establishing internal sales, marketing and distribution capabilities, we may optimistically pursue collaborative arrangements regarding the sales and marketing of our drugs, however, we may not be able to establish or maintain such collaborative arrangements, or if we are able to do so, they may not have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from drug sales may be lower than if we had commercialized our drug candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our drug candidates.

We may not be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any drug in the United States or overseas.

The FDA, the EMA, TGA and other regulatory authorities may implement additional regulations or restrictions on the development and commercialization of drugs which act on the microbiome, which may be difficult to predict.

The FDA, EMA, TGA and regulatory authorities in other countries have each expressed interest in further regulating biotechnology products and drug candidates, such as microbiome therapeutics. Agencies at both the federal and state level in the United States, as well as the U.S. Congressional committees and other governments or governing agencies, have also expressed interest in further regulating the biotechnology industry. Such action may delay or prevent commercialization of some or all of our drug candidates. Adverse developments in clinical trials of HiMO drugs conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of any of our drug candidates. Similarly, the EMA governs the development of microbiome therapeutics as drugs in the European Union and member state regulatory bodies govern the development of microbiome therapeutics under food regulations and may issue new guidelines concerning the development and marketing authorization for microbiome therapeutics drugs and require that we comply with these new guidelines. These regulatory review agencies and committees and the new requirements or guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our drug candidates or lead to significant post-approval limitations or restrictions. As we advance our drug candidates, we will be required to consult with these regulatory agencies and comply with applicable requirements and guidelines. If we fail to do so, we may be required to delay or discontinue development of such drug candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected, delays as a result of an increased or lengthier regulatory approval process or further restrictions on the development of our drug candidates can be costly and could negatively impact our ability to complete clinical trials and commercialize our current and future drug candidates in a timely manner, if at all.

 

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Risks Related to Government Regulation

Changes in the legal and regulatory environment could limit our future business activities, increase our operating or regulatory costs, reduce demand for our drug candidates or result in litigation.

The conduct of our business, including the development, testing, production, storage, distribution, sale, display, advertising, marketing, labeling, health and safety practices, and possible regulatory classification and approval (where necessary) use of many of our drug candidates, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which our drug candidates and components thereof (such as packaging) may be manufactured or sold.

These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events. Such changes may include changes in:

 

   

food and drug laws (including FDA regulations);

 

   

laws related to drug candidate labeling;

 

   

advertising and marketing laws and practices;

 

   

laws and programs restricting the sale and advertising of certain of drug candidates;

 

   

laws and programs aimed at regulating, restricting or eliminating ingredients present in certain of our drug candidates;

 

   

changes in laws and programs that would allow for Medicare or similar programs to negotiate drug prices;

 

   

increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the actual or possible effects or side effects of ingredients in, or attributes of, certain of our drug candidates; and

 

   

state and federal consumer protection and disclosure laws.

New laws, regulations or governmental policy and their related interpretations, or changes in any of the foregoing, may alter the environment in which we do business and, therefore, may impact our operating results or increase our costs or liabilities.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, prevent new drugs and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.

The ability of the FDA to review and approve new drugs can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the FDA and other government agencies on which our operations may rely, including those 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 or 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 most recently from December 22, 2018 to January 25, 2019, the United States government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

 

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Separately, in response to the COVID-19 pandemic, the FDA postponed most inspections of manufacturing facilities and products and resumed on-site inspections of manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting business as usual or conducting inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

The results of clinical trials conducted at clinical trial sites outside the United States might not be accepted by the FDA, and data developed outside of a foreign jurisdiction similarly might not be accepted by such foreign regulatory authority.

We intend to conduct some clinical trials outside the United States. Although the FDA, EMA, TGA or comparable foreign regulatory authorities may accept data from clinical trials conducted outside the relevant jurisdiction, acceptance of these data is subject to certain conditions. For example, the FDA requires that the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles such as IRB or ethics committee approval and informed consent, the trial population must adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical trials are subject to the applicable local laws, acceptance of the data by the FDA will be dependent upon its determination that the trials were conducted consistent with all applicable U.S. laws and regulations. The FDA may not accept data from trials conducted outside of the United States as adequate support of a marketing application. Similarly, we must also ensure that any data submitted to foreign regulatory authorities adheres to their standards and requirements for clinical trials and a comparable foreign regulatory authority may not accept data from trials conducted outside of its jurisdiction.

We may rely on academic and private non-academic institutions to conduct investigator-sponsored clinical trials of our drug candidates. Any failure by the investigator-sponsor to meet its obligations with respect to the clinical development of our drug candidates may delay or impair our ability to obtain regulatory approval or commercialize for other drug candidates.

We may rely on academic and private non-academic institutions to conduct and sponsor clinical studies or trials relating to our drug candidates. We will not control the design or conduct of the investigator-sponsored trials, and it is possible that the FDA or non-U.S. regulatory authorities will not view these investigator-sponsored studies or trials as providing adequate support for future clinical trials, whether controlled by us or independent investigators, for any one or more reasons, including elements of the design or execution of the trials or safety concerns or other trial results.

Such arrangements will likely provide us certain information rights with respect to the investigator-sponsored studies or trials, including access to and the ability to use and reference the data, including for our own regulatory filings, resulting from the investigator-sponsored studies or trials. However, we would not have control over the timing and reporting of the data from investigator-sponsored trials, nor would we own the data from the investigator-sponsored studies or trials. If we are unable to confirm or replicate the results from the investigator-sponsored studies or trials or if negative results are obtained, we would likely be further delayed or prevented from advancing further clinical development of our drug candidates. Further, if investigators or institutions breach their obligations with respect to the clinical development of our drug candidates, or if the data proves to be inadequate compared to the first-hand knowledge, we might have gained had the investigator-sponsored studies or trials been sponsored and conducted by us, then our ability to design and conduct any future clinical trials ourselves may be adversely affected.

 

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Additionally, the FDA or non-U.S. regulatory authorities may disagree with the sufficiency of our right of reference to the preclinical, manufacturing or clinical data generated by these investigator-sponsored studies or trials or our interpretation of preclinical, manufacturing or clinical data from these investigator-sponsored studies or trials. If so, the FDA or other non-U.S. regulatory authorities may require us to obtain and submit additional preclinical, manufacturing or clinical data before we may initiate our planned clinical trials and/or may not accept such additional data as adequate to initiate our planned clinical trials. In addition, it could limit or prevent our ability to commercialize drug candidates for non-therapeutic uses.

Even if we obtain FDA, EMA or TGA approval for any of our drug candidates in the United States, European Union or Australia, we may never obtain approval for or commercialize any of them in any other jurisdiction, which would limit our ability to realize their full market potential.

In order to market any drugs in any particular jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy.

Approval by the FDA in the United States, the EMA in the European Union or the TGA in Australia does not ensure approval by regulatory authorities in other countries or jurisdictions. However, the failure to obtain approval in one jurisdiction may negatively impact our ability to obtain approval elsewhere. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country.

Approval processes vary among countries and can involve additional drug testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and increased costs for us and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our drugs in those countries. We do not have any drug candidates approved for sale in any jurisdiction, including in international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of any drug we develop will be unrealized.

Even if we receive regulatory approval for any drug candidates, we will be subject to ongoing regulatory compliance obligations and continued regulatory review, which may result in significant additional expense. Additionally, any of our drug 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 drug candidates.

If any of our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, distribution, advertising, promotion, sampling, record-keeping, export, import, conduct of post-marketing studies and submission of safety, efficacy and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities. In addition, we will be subject to continued compliance with cGMP and GCP requirements for any clinical trials that we conduct post-approval.

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 regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA, other marketing application, and previous responses to inspection observations. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

 

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The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. Any regulatory approvals that we receive for our drug candidates may be subject to limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. The FDA may also require a REMS program as a condition of approval of our drug candidates, which could entail requirements for long-term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves our drug candidates, we will have to comply with requirements including submissions of safety and other post-marketing information and reports and registration.

The FDA may impose consent decrees or withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with our drug candidates, 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 revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

   

restrictions on the marketing or manufacturing of our drugs, withdrawal of the drug from the market or voluntary or mandatory drug recalls;

 

   

fines, warning or untitled enforcement letters or holds on clinical trials;

 

   

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of license approvals;

 

   

drug seizure or detention or refusal to permit the import or export of our drug candidates; and

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising, and promotion of drugs that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label or other regulatory marketing pathway. The FDA and other agencies 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. The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained which would adversely affect our business, prospects and ability to achieve or sustain profitability.

The policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our drug candidates. We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the current administration may impact our business and industry. Namely, the current administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities, such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these executive actions, including any executive orders, will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If

 

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these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. In addition, 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.

Non-compliance by us or any future collaborator with regulatory requirements, including safety monitoring or pharmacovigilance requirements, can also result in significant financial penalties.

Healthcare insurance coverage and reimbursement may be limited or unavailable in certain market segments for our drug candidates, if approved, which could make it difficult for us to sell any drug candidates or therapies profitably.

The success of our drug candidates, if approved, depends on the availability of adequate coverage and reimbursement from third-party payors. In addition, because our drug candidates represent new approaches to the treatment of the diseases they target, we cannot be sure that coverage and reimbursement will be available for, or accurately estimate the potential revenue from, our drug candidates or assure that coverage and reimbursement will be available for any drug that we may develop.

Patients who are provided medical treatment for their conditions 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 commercial payors are critical to new drug acceptance.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs and treatments they will cover and the amount of reimbursement. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a drug is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

In the United States, no uniform policy of coverage and reimbursement for drugs exists among third-party payors. As a result, obtaining coverage and reimbursement approval of a drug from a government or other third-party payor is a time-consuming and costly process that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our drugs on a payor-by-payor basis, coverage and adequate reimbursement may not be obtained. Even if we obtain coverage for a given drug, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of drug candidates. Patients are unlikely to use our drug candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our drug candidates. Because our drug candidates may have a higher cost than conventional therapies, and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved drugs. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our drug candidates. Further, coverage policies and third-party reimbursement rates may change at any time. Therefore, even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

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Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved drugs and, as a result, they may not cover or provide adequate payment for our drug candidates. There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent presidential executive orders, U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. We expect to experience pricing pressures in connection with the sale of any of our drug candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, cost containment initiatives and additional legislative changes.

Healthcare legislative or regulatory reform measures may have a negative impact on our business and results of operations.

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of drug candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any drug candidates for which we obtain marketing approval.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care Education and Reconciliation Act, or collectively the ACA, was passed, which substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things: (i) established 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; (ii) expanded the entities eligible for discounts under the 340B drug pricing program; (iii) increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price, or AMP, for most branded and generic drugs, respectively, and capped the total rebate amount for innovator drugs at 100% of the AMP; (iv) expanded the eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new eligibility categories for individuals with income at or below 133% (as calculated, it constitutes 138%) of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (v) addressed 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; (vi) introduced a new Medicare Part D coverage gap discount program in which manufacturers must now agree to offer 70% 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 (increased from 50%, effective January 1, 2019, pursuant to the Bipartisan Budget Act of 2018); (vii) created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and (viii) established the Center for Medicare and Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug.

There have been judicial and Congressional challenges to certain aspects of the ACA. For example, on June 17, 2021, the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021,

 

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President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace, which began on February 15, 2021, and remained open through August 15, 2021. 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 possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how any such challenges and the healthcare reform measures of the Biden administration will impact the ACA and our business.

Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendments to the statute, including the Infrastructure Investment and Jobs Act, will remain in effect through 2031, with the exception of a temporary suspension from May 1, 2020 through December 31, 2021, unless additional Congressional action is taken. Another sequester, the PAYGO Sequester, effective with the passage of the American Rescue Plan, will add another 4% reduction in Medicare spending in 2022, unless additional Congressional action is taken. Additionally, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s AMP, for single source and innovator multiple source drugs, beginning January 1, 2024. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding, which could have an adverse effect on customers for our drug candidates, if approved, and, accordingly, our financial operations. In addition, Congress is considering additional health reform measures as part of the budget reconciliation process.

Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries, presidential executive orders, and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, on July 24, 2020 and September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that seek to implement several of the administration’s proposals. As a result, the FDA also released a final rule on September 24, 2020 providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, the U.S. Department of Health and Human Services, or HHS, finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023, in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which have also been delayed to January 1, 2023. Further, in November 2020, CMS issued an interim final rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. As a result of litigation challenging the MFN Model, on August 10, 2021, CMS published a proposed rule that seeks to rescind the MFN Model interim final rule. In July 2021, the Biden administration released an executive order, “Promoting Competition in the American Economy,” with multiple provisions aimed at prescription drugs. In response to Biden’s executive order, on September 9, 2021, HHS

 

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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. No legislation or administrative actions have been finalized to implement these principles. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical 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.

We expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our drugs. It is also possible that additional governmental action is taken to address the COVID-19 pandemic.

European Union drug marketing and reimbursement regulations may materially affect our ability to market and receive coverage for our therapeutic drugs in the European Member States.

We intend to seek approval to market our drug candidates in both the United States and in selected foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions for our drug candidates, we will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the European Union, the pricing of pharmaceutical drugs is subject to governmental control and other market regulations which could put pressure on the pricing and usage of our drug candidates. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a drug candidate. In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for our drug candidates and may be affected by existing and future healthcare reform measures. Much like the Anti-Kickback Statute prohibition in the United States, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is also prohibited in the European Union. The provision of benefits or advantages to physicians is governed by the national anti-bribery laws of EU Member States, such as the UK Bribery Act 2010. Infringement of these laws could result in substantial fines and imprisonment.

Payments made to physicians in certain EU Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes or professional codes of conduct, applicable in the EU Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.

In addition, in most foreign countries, including the European Economic Area, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its Member States to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. Reference pricing used by various EU Member States and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. In some countries, we may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of any of our drug candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Any country that has price controls or reimbursement limitations

 

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for pharmaceutical drugs may not allow favorable reimbursement and pricing arrangements for any of our drugs. Historically, drugs launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly lower. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If pricing is set at unsatisfactory levels or if reimbursement of our drugs is unavailable or limited in scope or amount, our revenues from sales by us or our strategic partners and the potential profitability of any of our drug candidates in those countries would be negatively affected.

Laws and regulations governing any international operations we may have in the future may preclude us from developing, manufacturing and selling certain drugs outside of the United States and require us to develop and implement costly compliance programs.

If we expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate. The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations.

Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain drugs and technical data relating to those drugs. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain drugs and drug candidates outside of the United States, which could limit our growth potential and increase our development costs.

The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

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, and/or publicity and could negatively affect our operating results and business.

We and any potential collaborators may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), 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 current or future collaborators. 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 federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health

 

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Information Technology for Economic and Clinical Health Act of 2009, HITECH. Depending on the facts and circumstances, we could be subject to significant penalties if violate HIPAA.

Additionally, new privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. For example, the California Consumer Privacy Act, or CCPA, which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability 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 certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA has been amended several times, and it is possible that further amendments will be enacted, but even in its current form it remains unclear how various provisions of the CCPA will be interpreted and enforced. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects, and could restrict the way products and services involving data are offered, all of which may harm our business, financial condition and results of operations. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework that may also apply to health-related and other personal information obtained outside of the United States, including but not limited to the European Union.

Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation, breach reporting requirements and/or adverse publicity and could negatively affect our operating results and business. Moreover, clinical trial subjects about whom we or our potential collaborators 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 data protection laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We can face serious consequences for violations.

U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations, including the FCPA (collectively, Trade Laws), prohibit, among other things, companies and their employees, agents, CROs, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We also expect our non-U.S. activities to increase over time. We expect to rely on third parties for preclinical studies and clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other marketing approvals. We can be held liable for the corrupt or other illegal activities of our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities.

 

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Our relationships with customers, healthcare providers, including physicians and third-party payors are subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Healthcare providers, including physicians, and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any drug candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors subject us to various federal and state fraud and abuse laws and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute, the federal civil and criminal false claims laws and the law commonly referred to as the Physician Payments Sunshine Act and regulations promulgated under such laws. These laws will impact, among other things, our clinical research, proposed sales, marketing and educational programs, and other interactions with healthcare professionals. In addition, we may be subject to patient privacy laws by both the federal government and the states in which we conduct or may conduct our business. The laws that will affect our operations include, but are not limited to:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, individuals or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind in return for, or to induce, either the referral of an individual, or the purchase, lease, order or arrangement for any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. A person does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation;

 

   

the federal civil and criminal false claims laws, including, without limitation, the federal False Claims Act, which can be enforced by private citizens through civil whistleblower or qui tam actions, and civil monetary penalty laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from the federal government, including Medicare, Medicaid and other government payors, that are false or fraudulent or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or to avoid, decrease or conceal an obligation to pay money to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. federal government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free drugs to customers with the expectation that the customers would bill federal programs for the drug. Companies also have been prosecuted for causing false claims to be submitted because of the companies’ marketing of drugs for unapproved, and thus non-reimbursable, uses. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statutes constitutes a false or fraudulent claim for the purposes of the federal False Claims Act;

 

   

HIPAA, which created additional federal criminal statutes which prohibit, among other things, a person or entity from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent 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 statues or specific intent to violate it in order to have committed a violation;

 

   

HITECH, and their respective implementing regulations, impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business

 

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associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security, and transmission of such individually identifiable health information;

 

   

the federal transparency laws, including the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, medical devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program, with specific exceptions, to report annually to CMS, information related to: (i) payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and (ii) ownership and investment interests held by physicians and their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives; and

 

   

analogous state and foreign laws and regulations; state laws that require manufacturers to report information relate to payment and other transfers of value to physicians and other healthcare providers, marketing expenditures or drug pricing; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or that otherwise restrict payments that may be made to healthcare providers; and state and local laws that require the registration of pharmaceutical sales representatives.

Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations 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 of these laws or any other governmental regulations that may apply to us, we may be subject to significant penalties, including, without limitation, civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in federal and state funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, diminished profits and future earnings, reputational harm and the curtailment or restructuring of our operations, any of which could harm our business.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent protection for any drug candidates we develop, our competitors could develop and commercialize drugs or technology similar or identical to ours, and our ability to successfully commercialize any drug candidates we may develop, and our technology may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our drug candidates and other technologies we may develop. We seek to protect

 

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our proprietary position by filing patent applications in the United States and abroad relating to our drug candidates, as well as other technologies that are important to our business. Given that the development of our technology and drug candidates is at an early stage, our intellectual property portfolio with respect to certain aspects of our technology and drug candidates is also at an early stage. We have filed or intend to file patent applications on these aspects of our technology and our drug candidates; however, any such patent applications may not issue as granted patents. Furthermore, in some cases, we have only filed provisional patent applications on certain aspects of our technology and drug candidates and each of these provisional patent applications is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Any failure to file a non-provisional patent application or other foreign patent application under the Paris Convention, including a PCT application, within this timeline could cause us to lose the ability to obtain patent protection in one or all jurisdictions for the inventions disclosed in the associated provisional patent applications. All PCT applications must be filed in desired national jurisdictions prior to that country’s national phase deadline. Most countries require that these applications be filed at least 30 months from the original provisional patent application filing date to maintain continuity of priority to that date. Any failure to meet the national phase filing requirements and deadlines for each jurisdiction may cause us to lose the ability to obtain patent protection in such jurisdiction.

Any such patent applications may not issue as granted patents, and even if they do issue, such patent claims may be insufficient to prevent third parties, such as our competitors, from utilizing our technology. Any failure to obtain or maintain patent protection with respect to our drug candidates could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Each of our OM drug candidates is intended to be a prescription-only form of a naturally occurring HMO. Patent protection for naturally occurring compounds, such as our OM drug candidates, may be limited to method of use, therefore, our OM drug candidates may be developed by competitors as drug treatments for indications outside the scope of our patented methods. Further, certain HMOs are marketed by other companies as non-prescription dietary supplements. As a result, our OM drug candidates may face non-prescription competition and consumer substitution.

The patent positions of our OM drug candidates, including the scope and extent of patent protection, are complex and uncertain. Our OM drug candidates are synthetic biology-manufactured HiMOs. We anticipate that the products we develop in the future will continue to include or be based on HMOs or other naturally occurring compounds. Patent protection for naturally occurring compounds may be difficult to obtain, defend and enforce. While we intend to seek patent protection, where appropriate, directed to, among other things, composition-of-matter for specific formulations which we may develop, their methods of use, and methods of manufacture, we do not expect to obtain composition of matter protection on HMOs per se. Composition of matter patents for biological and pharmaceutical drugs are generally considered to be the strongest form of intellectual property protection for those types of drugs, as such patents provide protection without regard to any method of use. As of the date of this prospectus, we have not been able to obtain issued claims covering compositions of matter relating to our drug candidates, and instead rely on filing patent applications with claims covering a method of use and/or method of manufacture. Method of use patents protect, inter alia, the use of a drug for the specified method of treating specific therapeutic indications.

This type of method patent does not prevent a competitor from making and marketing a drug that is identical to our drug for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their drugs for our targeted indications, physicians may prescribe these drugs “off-label” for those uses that are covered by our method of use patents. Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Further, although each of our OM drug candidates is intended to be a prescription-only form of an HMO, HMOs are marketed by others as non-prescription dietary supplements. Even if we can obtain marketing approval of our

 

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OMs, we cannot be sure physicians or patients will view the pharmaceutical grade purity and clinically-demonstrated efficacy and safety profiles of our OM drug candidates as having a superior therapeutic profile to unproven and loosely regulated HMO dietary supplements.

In addition, although current regulations of the FDA and the Federal Trade Commission, or FTC, forbid certain claims regarding the medical efficacy of a non-prescription product, there is no guarantee that FDA or FTC will enforce its regulations against third-parties marketing non-prescription products that compete with our products. These certain forbidden claims include claims that a medical food or supplement is for the treatment of a disease or condition which does not fall within the FDA-permitted general health claims or indicating that a product is “clinically proven” without substantial placebo-controlled data.

These factors may enable prescription drugs and non-prescription dietary supplements to compete with our drug candidates to a certain degree. Although we have taken steps to address these competitive issues, and plan to continue to do so vigorously, we may not be successful in such efforts.

If any of our owned patent applications do not issue as patents in any jurisdiction, we may not be able to compete effectively.

Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our owned patents. As of March 15, 2022, our intellectual property portfolio consisted of three U.S. patents, an EPO patent, a Canadian patent, six PCT applications, 16 non-provisional applications pending worldwide, and one pending U.S. provisional application. With respect to owned intellectual property, patent applications we are currently pursuing may not issue as patents in any particular jurisdiction and the claims of any issued patents may not provide sufficient protection from competitors or other third parties.

The patent prosecution process is expensive, time-consuming, and complex, and 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 may fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, publications of discoveries in the 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, or in some cases not at all. Therefore, we may not be the first to make the inventions claimed in any of our owned or pending patent applications, and we may not be the first to file for patent protection of such inventions.

If the scope of any patent protection we obtain is not sufficiently broad, or if we lose any of our patent protection, our ability to prevent our competitors from commercializing similar or identical technology and drug candidates would be adversely affected.

The patent position of healthcare companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our owned pending and future patent applications may not result in patents being issued which protect our drug candidates or other technologies or which effectively prevent others from commercializing competitive technologies and drug candidates.

 

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No consistent policy regarding the scope of claims allowable in patents in the biotechnology field has emerged in the United States. The patent situation outside of the United States is even more uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions and enforce our intellectual property rights, and more generally could affect the value of our intellectual property. In particular, our ability to stop third parties from making, using, selling, offering to sell, or importing drugs that infringe our intellectual property will depend in part on our success in obtaining and enforcing patent claims that cover our technology, inventions and improvements. With respect to company-owned intellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our drugs and the methods used to manufacture those drugs. Moreover, even our issued patents do not guarantee us the right to practice our technology in relation to the commercialization of our drugs. The area of patent and other intellectual property rights in biotechnology is an evolving one with many risks and uncertainties, and third parties may have blocking patents that could be used to prevent us from commercializing our patented drug candidates and practicing our proprietary technology. Our issued patent and those that may issue in the future may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related drugs or limit the length of the term of patent protection that we may have for our drug candidates. In addition, the rights granted under any issued patents may not provide us with protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. For these reasons, we may have competition for our drug candidates. Moreover, because of the extensive time required for development, testing and regulatory review of a potential drug, it is possible that, before any particular drug candidate can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications we own issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. Any patents that we own may be challenged, narrowed, circumvented, or invalidated by third parties. Consequently, we do not know whether our drug candidates or other technologies will be protectable or remain protected by valid and enforceable patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or drugs in a non-infringing manner which could materially adversely affect our business, financial condition, results of operations and prospects.

The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and patents that we own may be challenged in the courts or patent offices in the United States and abroad. We may be subject to a third-party pre-issuance submission of prior art to the United States Patent and Trademark Office, or USPTO, or to foreign patent authorities or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or interference proceedings or other similar proceedings challenging our owned patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, our owned patent rights, allow third parties to commercialize our drug candidates or other technologies and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. Moreover, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge our priority of invention or other features of patentability with respect to our owned patents and patent applications. Such challenges may result in loss of patent rights, loss of exclusivity, or in patent claims being narrowed, invalidated, or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or limit the duration of the patent protection of our drug candidates and other technologies. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us.

 

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In addition, given the amount of time required for the development, testing, and regulatory review of new drug candidates, patents protecting such drug candidates might expire before or shortly after such drug candidates are commercialized. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing drugs similar or identical to ours.

We may in the future co-own patent rights relating to future drug candidates with third parties. We may need the cooperation of any such co-owners of our patent rights in order to enforce such patent rights 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, financial conditions, results of operations, and prospects.

Our rights to develop and commercialize our drug candidates may be subject, in part, to the terms and conditions of future licenses granted to us by others.

We are heavily reliant upon licenses to certain patent rights and proprietary technology from third parties that are important or necessary to the development of our drug candidates. Additionally, patent rights that we in-license in the future may be subject to a reservation of rights by one or more third parties. As a result, any such third parties may have certain rights to such intellectual property.

Our agreements with Glycosyn and UC San Diego and other agreements we enter into in the future may not provide exclusive rights to use certain intellectual property and technology retained by the collaborator in all relevant fields of use and in all territories in which we may wish to develop or commercialize our technology and drugs in the future. For example, we have a limited scope license under our license and supply agreement with Glycosyn, or Glycosyn License Agreement for our lead program OM002, limited to only the therapeutic treatment of inflammatory and autoimmune disorders, including COVID-19, RA, juvenile idiopathic arthritis, IBS, AD, alopecia areata and pain. As a result, we may not be able to prevent competitors or other third parties from developing and commercializing competitive drugs that utilize technology retained by such collaborators to the extent such drugs are not also covered by our intellectual property. Additionally, Glycosyn has acquired certain of their therapeutic patent rights through an exclusive, sublicensable, worldwide in-license, the Glycosyn In-License, from the patent owners, Cincinnati Children’s Hospital Medical Center, or Cincinnati Children’s, and the other licensors thereunder. We have entered into an acknowledgement letter with Cincinnati Children’s on behalf of itself and the other licensors under the Glycosyn In-License, or the Acknowledgment Letter, pursuant to which Cincinnati Children’s consented to the terms of the Glycosyn License Agreement and confirmed that the Glycosyn License Agreement is a valid sublicense of rights granted to Glycosyn under the Glycosyn In-License.

In addition, subject to the terms of any such license agreements, we may not have the right to control the preparation, filing, prosecution and maintenance, and we may not have the right to control the enforcement, and defense of patents and patent applications retained by the collaborator and provided to us under a limited license. Our in-licensed patent applications (and any patents issuing therefrom) that are controlled by our licensors may not be prepared, filed, prosecuted, maintained, enforced, and defended in a manner consistent with the best interests of our business. If our licensors fail to prosecute, maintain, enforce, and defend such patents rights, or lose rights to those patent applications (or any patents issuing therefrom), the rights we have licensed may be reduced or eliminated, our right to develop and commercialize any of our drug candidates that are the subjects of such licensed rights could be adversely affected, and we may not be able to prevent competitors from making, using and selling competing products. Moreover, such activities by our potential future licensors may not be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. In addition, even where we may have the right to control patent prosecution of patents and patent applications that we may license to and from third parties, we may still be adversely affected or prejudiced by actions or inactions of our potential future licensees, licensors and their counsel that took place prior to the date of assumption of control over patent prosecution.

 

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We may not be able to protect our intellectual property and proprietary rights throughout the world.

Filing, prosecuting and defending patents on our drug candidates and other technologies in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of 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 drugs made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own drugs and, further, may export otherwise infringing drugs to territories where we have patent protection but enforcement is not as strong as that in the United States. These drugs may compete with our drugs, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology drugs, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our 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 license.

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 such patent. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by government patent agencies, and our 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 and 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 owned patents and applications. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment, and other similar provisions during the patent application process. In some cases, an inadvertent lapse 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 a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical drugs or technology, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our future patents.

Our ability to obtain patents is highly uncertain because, to date, some legal principles remain unresolved, and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the

 

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United States. Furthermore, the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific, and factual issues. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act included a number of significant changes to U.S. patent law. These included provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has developed new and untested regulations and procedures to govern the full implementation 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 in March 2013. The Leahy-Smith Act has also introduced procedures making it easier for third parties to challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act contained new statutory provisions that require the USPTO to issue new regulations for their implementation, and it may take the courts years to interpret the provisions of the new statute. It is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our future patents. Further, the United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have owned or licensed or that we might obtain in the future. An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition.

Similarly, changes in patent laws and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we may obtain in the future. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. For example, if the issuance in a given country of a patent covering an invention is not followed by the issuance in other countries of patents covering the same invention, or if any judicial interpretation of the validity, enforceability or scope of the claims or the written description or enablement, in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection.

Issued patents covering our drug candidates, and any patents that may issue covering our other technologies, have and may in the future be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or internationally.

The EPO patent (EP2451462), which protects our leading drug candidate (2’FL) for use in treating IBD and IBS, has been challenged via the EPO’s post-grant opposition procedure. This EPO patent was revoked by a decision issued November 28, 2019 from the EPO, during opposition proceedings. Opposition proceedings are the first instance of the EPO’s system for challenging the validity of a patent after grant. EPO appeal proceedings were initiated on December 31, 2019 with the aim of overturning the revocation of this patent. The first instance decision to revoke the patent is suspended pending the outcome of the appeal. The Technical Board of Appeal who will hear the appeal has the power to allow the granted claims, allow amended claims, remit the case back to

 

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first instance for substantive review or to confirm the revocation decision. The oral proceedings for the appeal have been scheduled for 12th July 2022, and during those proceedings a decision is likely to be handed down by the Technical Board of Appeal (although this date could be rescheduled). Before the oral proceedings, the Technical Board of Appeal may issue a public non-binding preliminary opinion in connection with the validity of EP2451462. A divisional application has been filed (European patent application No.: 17181077.3) which remains in examination. This decision is currently under appeal and we might not be successful in obtaining a decision which reinstates this patent right in the European Union. Even though we have one or more divisional patent applications pending claiming priority to this opposed patent, there is no guarantee we will be able to successfully obtain claims which would be meaningful to protect our OM002 product for the treatment of IBS in the European Union. If we have no patent protection in the European Union to cover OM002 for the treatment of IBS, we will have to rely upon the data exclusivity of ten years afforded to marketing authorization holders to prevent generic forms of OM002 from entering the market.

In addition to the above-described challenge, if we or any of our third-party licensees initiated legal proceedings against a third party to enforce a patent covering our drug candidates or other technologies, the defendant could counterclaim that such patent is invalid or unenforceable. For example, we believe that some of our in-licensed patents respecting our OM002 drug candidate are currently being infringed by one or more third-parties through their use of a formulation of 2’FL as a supplement or medical food wherein such product includes health claims related to ameliorating signs and symptoms of IBS. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. 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. Third parties may raise claims challenging the validity or enforceability of our owned patents before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to our patents in such a way that they no longer cover our drug candidates or other technologies. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, there may be invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our drug candidates or other technologies. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects.

Patent terms may be inadequate to protect our competitive position on our drugs for an adequate amount of time, and if we do not obtain protection under the Hatch-Waxman Amendments and similar non-U.S. legislation for extending the term of patents covering each of our drug candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any drug candidates we may develop, one or more of our owned U.S. patents or issuing from our U.S patent applications may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension, or PTE, of up to five years as compensation for patent term lost during the FDA regulatory review process. A PTE cannot extend the remaining term of a patent beyond a total of 14 years from the date of drug approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. Similar patent term restoration provisions to compensate for commercialization delay caused by regulatory review are also available in certain foreign jurisdictions, such as in Europe under a Supplementary Patent Certificate. If we encounter delays in our development efforts, including our preclinical studies or clinical trials, the period of time during which we could market our current and any future drug candidates under patent protection would be reduced. Additionally, we may not receive an extension if we fail to apply within the applicable deadlines, fail to apply prior to expiration of relevant patents or

 

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otherwise fail to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain PTE or restoration, or the term of any such extension is less than what we request, the period during which we will have the right to exclusively market our drug will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced.

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an interest in our patent rights, trade secrets, or other intellectual property as an inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. For example, we may have inventorship disputes 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 drug candidates or other technologies or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other claims challenging inventorship and/or our ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we 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, valuable intellectual property. Such an outcome could have a material adverse effect on our business, financial condition, results of operations and prospects. 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.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for our drug candidates and other technologies, we also rely on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information and to maintain our competitive position. Trade secrets and know-how can be difficult to protect. We expect our trade secrets and know-how to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions.

We currently, and may in the future continue to, rely on third parties to assist us in developing and manufacturing our drug candidates. Accordingly, we must, at times, share know-how and trade secrets with them. We may in the future also enter into research and development collaborations with third parties that may require us to share know-how and trade secrets under the terms of our research and development partnerships or similar agreements. We seek to protect our know-how, trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements, and including in our vendor and service agreements terms protecting our confidential information, know-how and trade secrets, with parties who have access to such information, such as our employees, scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants as well as train our employees not to bring or use proprietary information or technology from former employers to us or in their work, and we remind former employees when they leave their employment of their confidentiality obligations. However, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. We also seek to preserve the integrity and confidentiality of our data and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems.

Despite our efforts, any of the aforementioned parties may breach the agreements and disclose our proprietary information, including our trade secrets, or there may be lapses or failures in our physical and electronic security

 

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systems which lead to our proprietary information being disclosed, and we may not be able to obtain adequate remedies in the event of any such breaches. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of our scientific advisors, employees, contractors and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets as a result. Moreover, if confidential information that is licensed or disclosed to us by our partners, collaborators, or others is inadvertently disclosed or subject to a breach or violation, we may be exposed to liability to the owner of that confidential information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and adversely harmed.

We may not be successful in obtaining, through acquisitions, in-licenses or otherwise, necessary rights to our drug candidates or other technologies.

We currently have rights to certain intellectual property, through licenses from third parties, to develop our drug candidates. Some healthcare companies and academic institutions are competing with us in the field of microbiome therapies and may have patents and have filed and are likely filing patent applications potentially relevant to our business. In order to avoid infringing these third-party patents, we may find it necessary or prudent to obtain licenses to such patents from such third-party intellectual property holders. We may also require licenses from third parties for certain technologies that we may evaluate for use with our current or future drug candidates. However, we may be unable to secure such licenses or otherwise acquire or in-license any compositions, methods of use, processes, or other intellectual property rights from third parties that we identify as necessary for our current or future drug candidates at a reasonable cost or on reasonable terms, if at all. The licensing or acquisition of third-party intellectual property rights is a competitive area, and several more established companies may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. These 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.

In the event that we try to obtain rights to required third-party intellectual property rights, and are ultimately unsuccessful, we may be required to expend significant time and resources to redesign our technology, drug candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If we are unable to do so, we may be unable to develop or commercialize the affected drug candidates, which could harm our business, financial condition, results of operations, and prospects significantly.

Where we obtain licenses from or collaborate with third parties, we may not have the right to control the preparation, filing, and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties, or such activities, if controlled by us, may require the input of such third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business, or in compliance with applicable laws and regulations, which may affect the validity and enforceability of such patents or any patents that may issue from such application. Moreover, if we do obtain necessary licenses, we will likely have obligations under those licenses, including making royalty and milestone payments, and any failure to satisfy those obligations could give our licensor the right to terminate the license. Termination of a necessary license, or expiration of licensed patents or patent applications, could have a material adverse impact on our business. Our business would suffer if any such licenses terminate, if the

 

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licensors fail to abide by the terms of the license, if the licensors fail to enforce licensed patents against infringing third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. Furthermore, if any licenses terminate, or if the underlying patents fail to provide the intended exclusivity, competitors or other third parties may gain the freedom to seek regulatory approval of, and to market, drugs identical or similar to ours. Moreover, our 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 or otherwise violating the licensor’s rights. In addition, while we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future drugs, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in drugs that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize drugs, we may be unable to achieve or maintain profitability.

We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

We employ individuals who were previously employed at other healthcare companies. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, 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 our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our future patents. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. We may not be successful in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

In addition, 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 executing such an agreement 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.

Third-party claims of intellectual property infringement, misappropriation or other violation against us or our collaborators may prevent or delay the development and commercialization of our drug candidates and other technologies.

The field of developing therapeutics that target the microbiome is competitive and dynamic. Due to the focused research and development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscape is in flux, and it may remain uncertain in the future. As such, there may be significant intellectual property related litigation and proceedings relating to our owned, and other third-party owned, intellectual property and proprietary rights in the future.

Our commercial success depends in part on our and our collaborators’ ability to avoid infringing, misappropriating and otherwise violating the patents and other intellectual property rights of third parties. There is a substantial amount of complex litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference, derivation and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. As discussed above, recently, due to changes in U.S. law

 

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referred to as patent reform, new procedures including inter partes review and post-grant review have been implemented. As stated above, this reform adds uncertainty to the possibility of challenge to our patents in the future.

Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist relating to glycan technologies and in the fields in which we are developing our drug candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our drug candidates and other technologies may give rise to claims of infringement of the patent rights of others. We cannot assure you that our drug candidates and other technologies that we have developed, are developing or may develop in the future will not infringe existing or future patents owned by third parties. We may not be aware of patents that have already been issued and that a third party, for example, a competitor in the fields in which we are developing our drug candidates and other technologies, might assert are infringed by our current or future drug candidates or other technologies, including claims to compositions, formulations, methods of manufacture or methods of use or treatment that cover our drug candidates or other technologies. It is also possible that patents owned by third parties of which we are aware, but which we do not believe are relevant to our drug candidates or other technologies, could be found to be infringed by our drug candidates, or other technologies. In addition, because patent applications can take many years for a patent to issue, there may be currently pending patent applications that may later result in issued patents that our drug candidates or other technologies may infringe. We cannot provide any assurances that third-party patents do not exist which might be enforced against our current technology, including our manufacturing methods, drug candidates, or future methods or drugs resulting in either an injunction prohibiting our manufacture or future sales, or, with respect to our future sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties, which could be significant.

Third parties may have patents or obtain patents in the future and claim that the manufacture, use or sale of our drug candidates or other technologies infringes upon these patents. In the event that any third party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, a court of competent jurisdiction could hold that such patents are valid, enforceable and infringed by our drug candidates or other technologies. In this case, the holders of such patents may be able to block our ability to commercialize the applicable drug candidate or technology unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same intellectual property. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, we may be unable to commercialize our drug candidates or other technologies, or such commercialization efforts may be significantly delayed, which could in turn significantly harm our business.

Defense of infringement claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may be enjoined from further developing or commercializing our infringing drug candidates or other technologies. In addition, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties and/or redesign our infringing drug candidates or technologies, which may be impossible or require substantial time and monetary expenditure. In that event, we would be unable to further develop and commercialize our drug candidates or other technologies, which could harm our business significantly.

Engaging in litigation to defend against third parties alleging that we have infringed, misappropriated or otherwise violated their patents or other intellectual property rights is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation or

 

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administrative proceedings more effectively than we can because of greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings against us could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We are involved in, and may in the future become involved in, lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time-consuming, and unsuccessful.

Competitors may infringe our issued patents or any patents issued as a result of our pending or future patent applications. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party in such infringement proceeding from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent.

The EPO patent (EP2451462), which protects 2’FL for use in treating IBD and IBS, has been challenged via the EPO’s post-grant opposition procedure by two opponents, Nutricia NV and a European law firm. This EPO patent was revoked by a decision issued November 28, 2019 from the EPO, during opposition proceedings. Opposition proceedings are the first instance of the EPO’s system for challenging the validity of a patent after grant. EPO appeal proceedings were initiated on December 31, 2019 with the aim of overturning the revocation of this patent. The first instance decision to revoke the patent is suspended pending the outcome of the appeal. The Technical Board of Appeal who will hear the appeal has the power to allow the granted claims, allow amended claims, remit the case back to first instance for substantive review or to confirm the revocation decision. The oral proceedings for the appeal have been scheduled for July 12, 2022, and during those proceedings a decision is likely to be handed down by the Technical Board of Appeal (although this date could be rearranged). Before the oral proceedings, the Technical Board of Appeal may issue a public non-binding preliminary opinion in connection with the validity of EP2451462. A divisional application has been filed (European patent application No.: 17181077.3) which remains in examination.

If we initiate legal proceedings against a third party to enforce a patent covering one of our drug candidates, the defendant could counterclaim that the patent covering our product or drug candidate is invalid and/or unenforceable. In patent litigation in the United States, counterclaims alleging invalidity and/or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings, nullity proceedings or litigation or invalidation trials or invalidation proceedings). Such proceedings could result in revocation of or amendment to our patents in such a way that they no longer cover our drug candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity of our patents, for example, there may be invalidating prior art of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our drug candidates. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could have a material adverse impact on our business.

 

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Interference or derivation proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions or inventorship (and possibly also ownership) of inventions with respect to our patent applications or resulting patents, or patent applications or resulting patents of third parties. An unfavorable outcome could require us to cease using the related technology or force us to take a license under the patent rights of the prevailing party, if available. Furthermore, our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

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.

Our current and future registered or unregistered trademarks or trade names may be unable to be obtained, challenged, infringed, circumvented or 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, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors or other third parties 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, then we may not be able to compete effectively and our business may be adversely affected. We may license our trademarks and trade names to third parties, such as distributor. 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 tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names. Our efforts to enforce or protect our proprietary rights related to trademarks, trade names, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.

Moreover, any name we have proposed to use with our drug candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed drug names, including an evaluation of potential for confusion with other drug names. If the FDA (or an equivalent administrative body in a foreign jurisdiction) objects to any of our proposed proprietary drug names, it may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties, and be acceptable to the FDA. Similar requirements exist in the European Union. Furthermore, in many countries, owning and maintaining a trademark registration may not provide an adequate defense against a subsequent infringement claim asserted by the owner of a senior trademark. At times, competitors or other third parties 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 registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

 

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Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

   

others may be able to make products that are similar to our drug candidates or utilize similar technology but that are not covered by the claims of the patents that we may own;

 

   

we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we own now or in the future;

 

   

we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned intellectual property rights;

 

   

it is possible that our current or future pending owned patent applications will not lead to issued patents;

 

   

issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;

 

   

our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

   

we may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may harm our business; and

 

   

we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects.

We have limited foreign intellectual property rights and may not be able to protect our intellectual property rights throughout the world.

We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents on drug 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 foreign countries do not protect intellectual property rights to the same extent as federal and state 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 jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as that in the United States. These products may compete with our drugs in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to

 

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biopharmaceutical products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products against third parties in violation of our proprietary rights generally. The initiation of proceedings by third parties to challenge the scope or validity of our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Risks Related to Our Reliance on Third Parties

We are highly dependent on our relationship with Glycosyn as a licensor of our main drug candidates, the rights to which Glycosyn itself has acquired via an exclusive, sublicensable, worldwide in-license from the patent owners, Cincinnati Children’s and the other licensors thereunder and for enabling manufacturing technology related to the synthesis of OM drug candidates.

In 2020, we entered into the Glycosyn License Agreement, pursuant to which we were granted an exclusive, sublicensable, worldwide license under Glycosyn’s licensed intellectual property rights to use, sell, have sold, offer for sale, import and otherwise manufacture, obtain pricing and reimbursement approvals, market, promote, distribute, import or sell 2’FL, 3’SL and/or 6’SL therapeutic products for the therapeutic treatment of inflammatory and autoimmune disorders, including COVID-19, RA, juvenile idiopathic arthritis, IBD, IBS, AD, alopecia areata and pain. Additionally, Glycosyn also agreed to enable a contact manufacturer we select with manufacturing and analytical technology, including intellectual property rights and know-how for the manufacture of our OM drug candidates. Glycosyn has acquired certain of the therapeutic patent rights through the Glycosyn In-License from the patent owners, Cincinnati Children’s and the other licensors thereunder. We entered into the Acknowledgment Letter pursuant to which Cincinnati Children’s consented to the terms of the Glycosyn License Agreement and confirmed that the Glycosyn License Agreement is a valid sublicense of rights granted to Glycosyn under the Glycosyn In-License.

Although the Glycosyn License Agreement requires Glycosyn to obtain our prior written approval for any amendment, modification or termination of the Glycosyn In-License and imposes other covenants on Glycosyn, if Glycosyn fails to comply with its obligations under the in-license, it may lose its intellectual property rights upon termination of the in-license. Our rights under the Glycosyn License Agreement will terminate if Glycosyn loses its rights under the in-license. Pursuant to the Acknowledgement Letter, if the Glycosyn In-License is terminated for any reason and we are not in material breach of the Glycosyn License Agreement, the patent owners will negotiate in good faith and enter into a license agreement with us as promptly as reasonably possible following the termination of the Glycosyn In-License that grants us a direct exclusive, worldwide, royalty-bearing license consistent in scope with the license granted to us under the Glycosyn License Agreement and that otherwise, to the greatest extent possible, puts us in the same position as we were prior to the Glycosyn In-License being terminated. We may not be able to negotiate such a license on terms acceptable to us or the patent owners in a timely manner or at all. Any such failure to negotiate a license on acceptable terms could materially and adversely affect our business, financial condition and operations.

In consideration for licenses and other rights granted under the Glycosyn License Agreement, we issued a 2020 Note in the principal amount of $325,000, which will automatically convert into 420,944 shares of our common stock in connection with the closing of this offering, based on an assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the closing occurs on the Assumed Closing Date. In addition, we are obligated to pay Glycosyn royalties in the low- to mid-single-digit percentages of net sales of the licensed products, which vary on a product-to-product basis and which increase to high-single digit and low double-digit percentages of net sales of the licensed products if

 

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such sales are made by sublicensees. Further, we are obligated to pay Glycosyn milestone payments up to approximately $1.0 million in the aggregate upon the first occurrence of certain regulatory, intellectual property and development milestones. Additionally, we are obligated to pay a minimum annual royalty in the mid-five figures commencing in the second calendar quarter following the first commercial sale of a licensed product by us, an affiliate or a sublicensee. If we fail to timely make any necessary royalty or milestone payments, Glycosyn may terminate the Glycosyn License Agreement for material breach.

Under the Glycosyn License Agreement, we are obligated to use commercially reasonable efforts to carry out the development, regulatory, manufacturing work necessary to develop and commercialize the licensed products. Further, pursuant to such development plan, we are obligated to use commercially reasonable efforts to achieve certain specified development milestones by specified dates. If we fail to use commercially reasonable efforts to timely achieve specified development milestones or commercialize the licensed products within a reasonable time frame, provided that in certain circumstances such termination will not be effective until we, along with Glycosyn, have discussed and sought to resolve the matter pursuant to a cure plan, Glycosyn may terminate the Glycosyn License Agreement with notice.

We are highly dependent on our relationship with The Regents of the University of California, through its San Diego campus, The University of California San Diego, or UC San Diego, as a licensor of our OM001 drug candidate.

In October 2018, we entered into a license agreement with UC San Diego, which was amended in October 2019, November 2020 and February 2022, or the UC San Diego License Agreement, pursuant to which we were granted an exclusive, sublicensable, worldwide license under certain of UC San Diego’s intellectual property rights to make, use, sell, offer for sale and import licensed products in the field of therapeutic products considered drugs pursuant to federal regulation or comprises a formulation, prodrug or derivative of 3’SL or 6’SL that would be considered a drug pursuant to federal regulation, excluding a product considered medical food pursuant to federal regulation. The foregoing license is subject to UC San Diego’s retained rights: (i) to use the inventions, technology and patent rights for educational and research purposes, (ii) to publish or otherwise disseminate any information about the inventions, technology and patent rights at any time, and (iii) to allow other nonprofit institutions to use, publish, or otherwise disseminate any information about inventions, technology and patent rights for education and research purposes.

We are obligated to reimburse UC San Diego for future patent costs and pay UC San Diego an annual license maintenance fee that increases overtime and is capped in the low five figures until the first commercial sale of a licensed product. We are also obligated to pay UC San Diego royalties in a low single-digit percentage of: (i) net sales of the licensed products or the Company terminates the agreement with 90 days’ written notice, and (ii) sales of licensed products that utilize technology, but not patent rights, in each case, sold by us or any sublicensee or affiliate. We are also obligated to pay UC San Diego a sublicense fee for any non-royalty consideration we receive for any sublicense. Under the amended UC San Diego License Agreement, we are obligated to pay UC San Diego milestone payments up to an additional $2.4 million in the aggregate upon the first occurrence of certain regulatory, development and sales milestones. If we fail to timely make any necessary royalty or milestone payments, UC San Diego may terminate the UC San Diego License for material breach.

We may assign the UC San Diego License only with the written consent of UC San Diego, subject to certain conditions. In the event of such assignment, we are obligated to pay UC San Diego an assignment fee based on the total acquisition price. If UC San Diego does not provide its written consent, we may be unable to pursue certain collaborations or strategic agreements.

Under the UC San Diego License Agreement, we are obligated to use commercially reasonable efforts to diligently develop, manufacture, and sell licensed products. Further, pursuant to a due diligence milestone plan, we are obligated to use commercially reasonable efforts to achieve specified development milestones by specified dates. If we fail to use commercially reasonable efforts to timely achieve specified development

 

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milestones or commercialize the licensed products within a reasonable time frame, UC San Diego has the right to terminate the UC San Diego License Agreement with notice, subject to certain conditions. UC San Diego also has the right to terminate the UC San Diego License Agreement if we, directly or indirectly, challenge the validity, enforceability, or scope of the licensed patent rights, subject to certain conditions. We have the right to terminate the UC San Diego License Agreement for convenience upon notice to UC San Diego, but such termination shall not terminate or rescind any of our payment obligations prior to the termination of the UC San Diego License Agreement.

We will rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval of or commercialize any potential drug candidates.

We will depend upon third parties, including independent investigators, to conduct our clinical trials under agreements with universities, medicinal institutions, CROs, strategic partners and others. We expect to have to negotiate budgets and contracts with CROs and trial sites, which may result in delays to our development timelines and increased costs.

We will rely heavily on third parties over the course of our clinical trials, and, as a result, will have limited control over the clinical investigators and limited visibility into their day-to-day activities, including with respect to their compliance with the approved clinical protocol. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and other foreign regulatory bodies for drug candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical investigators and trial sites. If we or any of these third parties fail to comply with applicable GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to suspend or terminate these trials or perform additional preclinical studies or clinical trials before approving our marketing applications. Upon inspection, such regulatory authorities may determine that any of our clinical trials comply with the GCP requirements. In addition, our clinical trials must be conducted with a drug candidate produced under cGMP requirements and may require a large number of 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 or commercialization process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

Any third parties conducting our future clinical trials will not be our employees and, except for remedies that may be available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize our drug candidates. As a result, our financial results and the commercial prospects for our drug candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.

If any of our relationships with these third-party CROs or others terminate, we may not be able to enter into arrangements with alternative CROs or other third parties or to do so on commercially reasonable terms.

 

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Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO begins work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, we may encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

We currently rely on a sole supplier, Friesland, for certain of our supplies, and we intend to continue relying on Friesland.

We currently rely on a sole supplier, Friesland, for certain of our supplies, and we intend to continue relying on Friesland. If this sole supplier is unable to supply to us in the quantities we require, or at all, or otherwise defaults on its supply obligations to us, we may not be able to obtain alternative supplies from other suppliers on acceptable terms, in a timely manner, or at all. We have not yet caused any drug candidates to be manufactured or processed on a commercial scale and may not be able to do so for any of our drug candidates. We may have to enter into new supply agreements with Friesland or other third-party suppliers in order to manufacture our drug candidates on a commercial scale, and we may be unable to do some on economically feasible terms, if at all.

Currently, we rely solely on a purchase order basis with Friesland, which purchase orders are subject to the parties’ mutual agreement, combined with customary terms and conditions and are not party to any long-term contracts containing purchase obligations. The ability and willingness of Friesland to supply and provide services to us may be affected by competing orders placed by other clients and the demands of those clients. If we experience significant increases in demand, or need to replace Friesland, additional supply and manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements.

We expect to rely on third parties to manufacture our preclinical supply of drug candidates, and we intend to rely on third parties to produce and process our drugs, if approved.

The facilities used to manufacture our drug candidates must be approved by the FDA or other foreign regulatory agencies pursuant to inspections that will be conducted after we submit a marketing application to the FDA or other foreign regulatory agencies. Additionally, any facilities used for the manufacture of drug candidates commercialized for non-therapeutic uses will be subject to inspection by the FDA and other foreign regulatory bodies. We do not currently control all aspects of the manufacturing process of, and are currently largely dependent on, our contract manufacturing partners for compliance with regulatory requirements, known as cGMP requirements, for manufacture of our drug candidates. If and when our manufacturing facility becomes operational, we will be responsible for compliance with cGMP requirements. If we or our contract manufacturers cannot successfully manufacture in conformance with our specifications and the strict regulatory requirements of the FDA or other regulatory authorities, we and they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities with respect to the manufacture of our drug candidates. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our drug candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our drug candidates, if approved.

Third-party relationships are important to our business. If we are unable to maintain our collaborations, enter into new relationships or if these relationships are not successful, our business could be adversely affected.

We have limited capabilities for drug development and do not yet have any capability for sales, marketing or distribution. Accordingly, we enter into relationships with other companies to provide us with important

 

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technologies, and we may receive additional technologies and funding under these and other collaborations in the future. Relationships we enter into, may pose a number of risks, including the following:

 

   

third parties have, and future third-party collaborators may have, significant discretion in determining the efforts and resources that they will apply;

 

   

current and future third parties may not perform their obligations as expected;

 

   

current and future third parties may not pursue development and commercialization of any drug candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the third parties’ strategic focus or available funding, or external factors, such as a strategic transaction that may divert resources or create competing priorities;

 

   

third parties may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial or abandon a drug candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for clinical testing;

 

   

current and future third parties could independently develop, or develop with third parties, products that compete directly or indirectly with our products and drug candidates if the third parties believe that the competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

   

drug candidates discovered in collaboration with us may be viewed by our current or future third parties as competitive with their own drug candidates or products, which may cause such third parties to cease to devote resources to the commercialization of our drug candidates;

 

   

current and future third parties may fail to comply with applicable regulatory requirements regarding the development, manufacture, distribution or marketing of a drug candidate or product;

 

   

current and future third parties with marketing and distribution rights to one or more of our drug candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such drug or drugs;

 

   

disagreements with current or future third parties, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or terminations of the research, development or commercialization of drug candidates, might lead to additional responsibilities for us with respect to drug candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

   

current and future third parties may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;

 

   

current and future third parties may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;

 

   

if a current or future third parties of ours is involved in a business combination, the collaborator might deemphasize or terminate the development or commercialization of any drug candidate licensed to it by us; and

 

   

current and future relationships may be terminated by the collaborator, and, if terminated, we could be required to raise additional capital to pursue further development or commercialization of the applicable drug candidates.

If our relationships do not result in the successful discovery, development and commercialization of drugs or if one of our third parties terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our

 

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development of our technology and drug candidates could be delayed and we may need additional resources to develop drug candidates and our technology. All of the risks relating to drug development, regulatory approval and commercialization described in this prospectus also apply to the activities of our therapeutic collaborators.

Additionally, if any of our current or future third parties terminates their agreement with us, we may find it more difficult to attract new collaborators and our perception in the business and financial communities could be adversely affected.

Relationships are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to reach agreements with suitable third parties on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a drug candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms, or at all. If we fail to enter into relationships or do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our drug candidates, bring them to market and generate revenue from sales of drugs or continue to develop our technology, and our business may be materially and adversely affected.

Risks Related to Our Common Stock and This Offering

We do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and, as a result, it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no public market for shares of our common stock. Although we are applying to list our common stock on the Nasdaq Capital Market, or Nasdaq, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in shares of our common stock is not active. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

The price of our stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

   

the commencement, enrollment or results of any planned and future preclinical studies and clinical trials of our drug candidates we may conduct, or changes in the development status of our drug candidates;

 

   

any delay in our regulatory filings for our drug candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings;

 

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adverse results from or delays in preclinical studies and clinical trials of our drug candidates, including as a result of clinical holds, safety events, enrollment difficulties, or study protocol amendments;

 

   

our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

 

   

adverse regulatory decisions, including failure to receive regulatory approval of our drug to market for our drug candidates;

 

   

adverse developments concerning our manufacturers;

 

   

our inability to obtain adequate product supply for any approved drug or inability to do so at acceptable prices;

 

   

our inability to establish collaborations, if needed;

 

   

our failure to commercialize our drug candidates;

 

   

additions or departures of key scientific or management personnel;

 

   

unanticipated serious safety concerns related to the use of our drug candidates;

 

   

introduction of new drugs by our competitors;

 

   

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

   

our ability to effectively manage our growth;

 

   

the size and growth of our initial target markets;

 

   

actual or anticipated variations in quarterly operating results;

 

   

our cash position;

 

   

our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

   

publication of research reports about us or our industry, or microbiome therapies in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

changes in the market valuations of similar companies;

 

   

overall performance of the equity markets;

 

   

sales of our common stock by us or our stockholders, including the Selling Stockholders, in the future;

 

   

sales of our common stock by certain stockholders pursuant to, and following the termination of a leak-out agreement, lock-up agreement or any similar agreement restricting our securityholders’ ability to sell our common stock;

 

   

trading volume of our common stock;

 

   

adoption of new accounting standards;

 

   

ineffectiveness of our internal controls;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

changes in the structure of healthcare payments systems;

 

   

an event of default under the Bridge Notes and any foreclosure action that may result;

 

   

the obligation to repay all principal outstanding under the Bridge Notes and the interest (including pay-in-kind interest) accrued thereon if not converted into shares of our common stock;

 

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issuance of additional shares of our common stock to comply with the full ratchet antidilution rights contained in our outstanding warrants;

 

   

failure to raise additional funds on acceptable terms, or at all;

 

   

loss or termination of any rights under the Glycosyn License Agreement, Glycosyn In-License or the Acknowledgment Letter;

 

   

general political and economic conditions; and

 

   

other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the market for healthcare companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating results or financial condition.

We have recently issued senior secured convertible promissory notes and warrants that are convertible into and exercisable for our common stock and could cause substantial dilution to investors and a decline in our stock price.

From the end of August 2021 to April 2022, we entered into a securities purchase agreement, as amended, with various investors, pursuant to which we issued to each investor a Bridge Note and a Bridge Warrant. We issued and sold Bridge Notes with an aggregate principal amount of approximately $7.6 million. The Bridge Notes accrue interest annually at a rate of 12% per annum provided that if this offering is not closed on or before June 3, 2022, interest will accrue at a rate of 15% per annum until this offering has closed. The maturity date of the Bridge Notes is December 31, 2023. If we default under the Bridge Notes, the principal outstanding and accrued interest thereon (including pay-in-kind interest, if any) will increase by 20% and interest will accrue at a rate of 15% per annum until all outstanding payment obligations under the applicable Bridge Note are repaid or converted in full. If we enter into a merger or consolidation, effect any sale or other disposition of all or substantially all of our assets, or 50% or more of the ownership of our common stock is acquired, or a Fundamental Transaction, the holders have the right to receive shares of common stock of the successor or acquiring corporation or of us if we are the surviving corporation. In the event such transactions is for at least $10 million which is not a public offering, the holder may, in its sole discretion, choose to have the Bridge Note repaid at 120% of the principal amount due, plus accrued interest. Pursuant to the Bridge Warrants, holders may exercise their Bridge Warrants for shares of common stock up to 50% of the number of shares of common stock issuable upon conversion of the Bridge Notes, assuming full conversion of all Bridge Notes in connection with the closing of this offering, at an exercise price equal to 81.25% of the initial public offering price of a share of our common stock. The Bridge Notes and Bridge Warrants are currently convertible into or exercisable for 3,098,225 shares of our common stock, assuming full conversion of the principal under the Bridge Notes and accrued interest thereon (including pay-in-kind interest, if any) in connection with the closing, at conversion and exercise prices that are 35% and 18.75% less than the offering price in this initial public offering. Furthermore, if this offering is not closed on or before June 3, 2022, the Bridge Warrants will automatically become exercisable for up to 75% of the number of shares of common stock issuable upon conversion of the Bridge Notes, assuming full conversion of all Bridge Notes in connection with the closing of this offering, at an exercise price equal to 81.25% of the initial public offering price of a share of our common stock. The Bridge Warrants also contain full ratchet anti-dilution rights subject to customary exceptions, including but not limited to, shares issued in connection with the conversion or exercise of convertible securities issued prior to the date of issuance of the Bridge Warrants, issuances of shares pursuant to approved equity plans, in connection with transactions or

 

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licenses, and to vendors and suppliers. Notwithstanding the full ratchet antidilution, in no event shall the exercise price of the Bridge Warrants be less than $1.70 per share. If a Fundamental Transaction occurs, then, upon exercise of a Bridge Warrant, the holder shall have the right to receive, for each share of common stock that would have been issuable upon such exercise, at the option of the holder, the number of shares of common stock of the successor or acquiring corporation or of us, if we are the surviving corporation, and any additional consideration receivable as a result of the Fundamental Transaction. Alternatively, in the event of a Fundamental Transaction, we or any successor entity shall, at the holder’s option, be required to purchase the Bridge Warrant from the holder by paying an amount of cash equal to the fair value of the Bridge Warrant on the date of the consummation of such Fundamental Transaction. The Bridge Warrants provide the holder a right to participate up to the holders pro rata ownership in any future issuance of our securities for so long as the Bridge Warrant is outstanding. If the holders of the Bridge Notes and Bridge Warrants decide to exercise their conversion and exercise rights in full, you may experience substantial dilution and a decline in the value of your common stock, which could result in you suffering a loss. Any prepayment of the outstanding amounts owed under the Bridge Notes would be subject to a prepayment penalty equal to 1.2 times the amount to be prepaid. Additionally, if any holder of a Bridge Note elects not to convert all or a portion of the principal and accrued interest thereon (including pay-in-kind interest, if any) in connection with the closing of this offering or any time thereafter on or prior to the maturity date of the Bridge Notes, we will be obligated to repay the remaining portion of the outstanding principal and interest accrued thereon.

In connection with the issuance and sale of the Bridge Notes, we issued the Placement Agent Warrant to Representative. The Placement Agent Warrant is exercisable for 154,911 shares of our common stock, which represents 5% of the shares of common stock (i) issuable upon conversion of the Bridge Notes (assuming full conversion in connection with the closing of this offering), and (ii) the number of shares exercisable under the Bridge Warrants, at an exercise price of 125% of the initial public offering price. The shares of common stock exercisable under the Placement Agent Warrant are registered in the registration statement of which this prospectus is a part. The Placement Agent Warrant provides for full ratchet anti-dilution protection, a $1.70 minimum exercise price, and will be exercisable through August 31, 2026, commencing 180 days after the closing of this offering.

Additionally, in April 2022, we entered into a common stock issuance agreement with SOSV, or the ACE Termination and Issuance Agreement, to convert and terminate the ACE we issued to SOSV in September 2019. Pursuant to the terms of the ACE Termination and Issuance Agreement, we issued SOSV 763,102 shares of common stock and the SOSV Warrant in exchange for SOSV agreeing to terminate the ACE. The SOSV Warrant contains the same terms as those contained in the Bridge Warrants, except the SOSV Warrant expressly sets that it is exercisable for 381,551 shares of common stock, which will automatically increase to 572,327 shares of common stock if this offering is not closed on or before June 3, 2022. The SOSV Warrant in combination with the Placement Agent Warrant, Bridge Notes and Bridge Warrants, if converted or exercised, as applicable, could result in substantial dilution to you. Based on our operating plans, we may need to raise additional capital, which could result in additional dilution to you, or we may have to use our available capital, which may delay or prevent our achievement of our business objectives, or cause a decline in our stock price.

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

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, future debt or other financing arrangements may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited in the foreseeable future to the appreciation of the market price (if any) of their stock.

 

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Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Immediately following the closing of this offering, our executive officers, directors and their affiliates and 5% or greater stockholders will beneficially hold, in the aggregate, approximately 47% of our outstanding voting stock (assuming no exercise of the underwriters’ option to purchase additional shares and no sale of the Selling Stockholders Shares by the Selling Stockholders). Therefore, even after this offering, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval, which may not be consistent with the priorities of our other stockholders. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that stockholders may feel are otherwise in their best interests.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the net tangible book value of your shares.

The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock after this offering. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the pro forma as adjusted net tangible book value per share after this offering. As a result, investors purchasing common stock in this offering will incur immediate dilution of $4.03 per share, based on the assumed initial public offering price of $6.00 per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the initial public offering price.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less when they purchased their shares than the price offered to the public in this offering. To the extent outstanding stock options or warrants are exercised, new stock options or warrants are issued, or we issue additional shares of common stock or securities exercisable or convertible for shares of our common stock in the future, there will be further dilution to new investors. As a result of the dilution to investors purchasing common stock in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation.

We are an emerging growth company and a smaller reporting company, and the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements that are applicable to other public companies that are not emerging growth companies, including being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our 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. We may take advantage of these exemptions until the last day of the fiscal year ending after the fifth anniversary of this offering or until we are no longer an emerging growth company, whichever is earlier. We will cease to be an emerging growth company prior to the end of such five-year period if certain earlier events occur, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues equal or exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period prior to such time. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company, and we may elect to take advantage of other reduced reporting

 

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requirements in future filings. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our share price.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

If and when the Selling Stockholders, the Representative with respect to the shares issuable upon exercise of the Representative’s Warrant, and our other existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up, leak-out and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. The number of shares of our common stock to be outstanding after this offering is based on 3,403,812 shares of common stock outstanding as of December 31, 2021, excluding 639,789 shares of restricted common stock which are subject to a right of repurchase by us as of December 31, 2021 and after giving effect to: (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of convertible promissory notes, or the Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock, and assuming the occurrence of the conversion on the Assumed Closing Date, (ii) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), assuming the occurrence of the conversion on the Assumed Closing Date, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering (this assumption is based on (a) irrevocable elections from the holders of Bridge Notes of $0.3 million of aggregate principal outstanding who have irrevocably elected to convert in connection with this offering and (b) irrevocable elections from the holders of Bridge Notes of $7.3 million of aggregate principal outstanding who have irrevocably elected to not convert in connection with this offering), (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock, (iv) the issuance of 791,102 shares of our common stock in March and April 2022, and (v) 135,333 shares to be issued to Alchemy based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) pursuant to the terms of the Alchemy Consulting Agreement.

 

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Pursuant to the Bridge Warrants, holders may exercise their Bridge Warrants for shares of common stock up to 50% of the number of shares of common stock issuable upon conversion of the Bridge Notes (assuming full conversion of the Bridge Notes at the closing of this offering) at an exercise price equal to 81.25% of the initial public offering price of our common stock. Additionally, the SOSV Warrant may be exercised for 381,551 shares of common stock and 572,327 shares of common stock if we have not consummated a liquidity event, including this offering, by June 3, 2022, at an exercise price equal to 81.25% of the initial public offering price of our common stock. Assuming full conversion of the Bridge Notes and exercise of the Bridge Warrants and SOSV Warrant at the closing of this offering, in aggregate such instruments are convertible into and exercisable for 3,479,776 shares of our common stock at conversion and exercise prices that are 35% and 18.75% less than the offering price in this initial public offering. If any portion of the outstanding debt under the Bridge Notes is converted after the closing of this offering, the holder may receive a greater number of shares because (i) interest will continue to accrue on the outstanding principal under the Bridge Notes, and (ii) the Bridge Notes, following the closing of this offering, are convertible at a price per share equal to the lower of (1) 65% of the initial public offering price of our common stock, or (2) the greater of (A) 65% of the closing price per share of our common stock as reported by Nasdaq on the trading day immediately prior to the holder’s election to convert the Bridge Note, in part or in full, or (B) $1.105. We also issued or will issue the Placement Agent Warrant and Representative’s Warrant to Representative, each of which is exercisable at a price per share equal to 125% of the offering price per share in this offering. The shares of common stock sold in this offering by us and the shares sold upon exercise of the underwriters’ option to purchase additional shares from us will be freely tradable without restriction in the public market immediately following this offering. The shares: (i) issuable upon conversion of the Bridge Notes, (ii) issuable upon exercise of the Bridge Warrants, SOSV Warrant, Placement Agent Warrant, and/or Representative’s Warrant, will also (subject in certain circumstance to lock up or other restrictions), be freely tradable without restriction in the public market immediately following this offering except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sale of these securities could have a material adverse effect on the trading price of our common stock. See “Selling Stockholders”.

The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, subject to earlier release of all or a portion of the shares subject to such agreements by Representative in its sole discretion. After the lock-up agreements expire, based upon the number of shares of common stock, on an as-converted basis, outstanding as of December 31, 2021, up to an additional 4,345,007 shares of common stock will be eligible for sale in the public market. Approximately 81% of these additional shares are held by directors, executive officers and other affiliates and will be subject to certain limitations of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

The leak-out agreements pertaining to this offering will expire December 31, 2023, subject to earlier release of all or a portion of the shares subject to such agreement by Representative in its sole discretion. After the leak-out agreements expire, based upon the number of shares of common stock, on an as-converted basis, outstanding as of December 31, 2021, up to an additional 135,333 shares of common stock will be eligible for sale in the public market. None of these additional shares are held by directors, executive officers or other affiliates.

In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our existing equity compensation plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Additionally, the number of shares of our common stock reserved for issuance under our 2022 Plan will automatically increase on January 1, 2023 and each January 1st thereafter by 5% of the number of shares of common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by our compensation committee. On the date of each annual meeting of our stockholders following the closing of this offering, each continuing non-employee director will receive an option to purchase shares of our common stock under the 2022 Plan representing 0.05% of our common stock on the date of grant and at a per share exercise price equal to the per share fair market value of the underlying common stock on the date of grant. The shares subject to this option

 

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will vest upon the earlier of the one year anniversary of the grant date or immediately prior to the next annual meeting. Unless our board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution.

After this offering, other than the Selling Stockholders and Spartan Capital Securities, LLC (with respect to the Representative’s Warrant and Placement Warrant) who hold our common stock or securities convertible or exercisable for our common stock and that are being registered in the registration statement of which this prospectus is a part, no holders of our common stock or any securities convertible into or exercisable for our common stock have the right to have their shares registered under the Securities Act. Should any such shares be registered under the Securities Act, such registration would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sale of securities by such securityholders, the Selling Stockholders or Spartan Capital Securities, LLC, could have a material adverse effect on the trading price of our common stock.

We have broad discretion in the use of our existing cash and the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of our existing cash and the net proceeds from this offering, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether such proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of our existing cash and the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our existing cash and the net proceeds from this offering in ways that ultimately increase the value of your investment. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. From time to time, we may enter into license or collaboration agreements with other companies that include development funding and significant upfront and milestone payments and/or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding and the achievement of development and clinical milestones under current and any potential future license and collaboration agreements and sales of our drugs, if approved. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next.

In addition, we measure compensation cost for stock-based awards made to employees, directors and non-employee consultants based on the fair value of the award on either the grant date or service completion date, and we recognize the cost as an expense over the recipient’s service period. Because the variables that we use as a basis for valuing stock-based awards change over time, including our underlying stock price and stock price volatility, the magnitude of the expense that we must recognize may vary significantly.

Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict. The cumulative effect of such factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the

 

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expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue and/or earnings guidance we may provide.

Anti-takeover provisions under our organizational documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation, which will be filed immediately following the closing of this offering, and our amended and restated bylaws, which will be adopted immediately prior to the closing of this offering, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

   

a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

   

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

   

a requirement that special meetings of stockholders be called only by the chairman of our board of directors, our chief executive officer, our president, or by a majority of the total number of authorized directors;

 

   

a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

   

a requirement of approval of not less than two-thirds of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our certificate of incorporation; and

 

   

the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, or DGCL, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer, or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

If we engage in future acquisitions or strategic partnerships, this may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.

We may evaluate various acquisition opportunities and strategic partnerships, including licensing or acquiring complementary drugs, intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:

 

   

increased operating expenses and cash requirements;

 

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the assumption of additional indebtedness or contingent liabilities;

 

   

the issuance of our equity securities;

 

   

assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;

 

   

the diversion of our management’s attention from our existing drug programs and initiatives in pursuing such a strategic merger or acquisition;

 

   

retention of key employees, the loss of key personnel and uncertainties in our ability to maintain key business relationships;

 

   

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or drug candidates and marketing approvals; and

 

   

our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities, and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees or the underwriters.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a breach of fiduciary duty;

 

   

any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and

 

   

any action asserting a claim against us that is governed by the internal-affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid and several state trial courts have enforced such provisions and required that suits asserting Securities Act claims be filed in federal court, there is no guarantee that courts of appeal will affirm the enforceability of such provisions and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive forum provision in our

 

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amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with litigating Securities Act claims in state court, or both state and federal court, which could seriously harm our business, financial condition, results of operations, and prospects. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

General Risk Factors

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Exchange Act, which will require, among other things, that we file with the SEC annual, quarterly, and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and the Nasdaq Stock Market LLC to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, there are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt rules and regulations in these areas such as “say on pay” and proxy access. Emerging growth companies and smaller reporting companies are exempted from certain of these requirements, but we may be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have an adverse effect on our business, financial condition, results of operations and prospects. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our drug candidates or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, investors may lose confidence in our financial reporting and the trading price of our common stock may decline.

After the closing of this offering, we will be subject to the reporting requirements of the Exchange Act, or the Sarbanes-Oxley Act, and the rules and regulations of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.

Commencing five years after the closing of this offering, we will be required to comply with auditor attestation requirements, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial

 

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additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to test our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our consolidated financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biopharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our securities.

If we fail to satisfy the continued listing requirements of Nasdaq such as the corporate governance requirements or the minimum share price requirement, Nasdaq may take steps to delist our securities. Such a delisting would likely have a negative effect on the price of the securities and would impair your ability to sell or purchase the securities when you wish to do so. In the event of a delisting, any action taken by us to restore compliance with listing requirements may not allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our securities from dropping below the Nasdaq minimum share price requirement or prevent future non-compliance with Nasdaq’s listing requirements. Additionally, if our securities are not listed on, or become delisted from Nasdaq for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. As a newly public company, we have only limited research coverage by Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock or trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations, financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, factors and assumptions described in “Risk Factors” and elsewhere in this prospectus, regarding, among other things:

 

   

the success, cost and timing of our drug development activities, including preclinical studies and clinical trials;

 

   

our expectations about the timing of achieving regulatory approval and the cost of our development programs;

 

   

sales of our common stock by us or our stockholders, including the Selling Stockholders, which may result in increased volatility in our stock price;

 

   

our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our drug candidates;

 

   

the impact of the COVID-19 pandemic on our operations;

 

   

the commercialization of our drug candidates, if approved;

 

   

our plans to research, develop and commercialize our drug candidates;

 

   

our ability to obtain, maintain, expand, protect and enforce our intellectual property rights;

 

   

our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of third parties;

 

   

our ability to attract collaborators with development, regulatory and commercialization expertise;

 

   

future agreements with third parties in connection with the commercialization of our drug candidates;

 

   

the size and growth potential of the markets for our drug candidates, and our ability to serve those markets;

 

   

our ability to avoid an event of default under the Bridge Notes and any foreclosure action that may result;

 

   

our obligation to repay all principal outstanding under the Bridge Notes and the interest (including pay-in-kind interest) accrued thereon if not converted into shares of our common stock;

 

   

the loss or termination of any rights under the Glycosyn License Agreement, Glycosyn In-License or the Acknowledgment Letter;

 

   

the rate and degree of market acceptance of our drug candidates;

 

   

regulatory developments in the United States and foreign countries;

 

   

our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

 

   

the success of competing drugs, therapies or other products that are or may become available;

 

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our ability to attract and retain key scientific or management personnel;

 

   

our ability to maintain proper and effective internal controls;

 

   

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

   

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act and as a smaller reporting company under the federal securities laws; and

 

   

our use of the net proceeds from this offering.

These risks are not exhaustive. Other sections of this prospectus may include additional factors that could harm our business and financial performance. New risk factors may emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains estimates, projections and other information concerning our industry and our business, including estimated market size, projected growth rates and the incidence of certain medical conditions. Unless otherwise expressly stated, we obtained this industry, business, market, medical and other information from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which this information is derived. In that regard, when we refer to one or more sources of this type of information in any paragraph, you should assume that other information of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

This industry, business, market, medical and other information involves a number of assumptions and limitations. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. Although we are responsible for all of the disclosures contained in this prospectus and we believe the market position, market opportunity, market size and medical information included in this prospectus is reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $20.3 million (or approximately $23.7 million if the underwriters’ option to purchase additional shares from us is exercised in full) from the sale of the shares of common stock offered by us in this offering, based on the assumed initial public offering price of $6.0 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We will not receive any of the proceeds from the sale of our common stock by the Selling Stockholders or the Representative with respect to the common stock issuable upon exercise of the Placement Agent Warrant and Representative’s Warrant. However, upon any exercise of the Bridge Warrants, SOSV Warrant, the Representative’s Warrant or Placement Agent Warrant, we will receive cash proceeds per share equal to the exercise price of the Bridge Warrants, SOSV Warrant, Representative’s Warrant and Placement Agent’s Warrant, respectively. The Bridge Warrants and SOSV Warrant have a per share exercise price equal to 81.25% of the initial offering price ($4.88 per share based on the assumed initial offering price of $6.00 (the midpoint of the price range set forth on the cover page of this prospectus)). If all 1,414,290 shares of common stock exercisable under Bridge Warrants and SOSV Warrant are exercised, the aggregate gross proceeds from the Bridge Warrant and SOSV Warrant exercise price would be approximately $6.9 million. The Representative’s Warrant and Placement Agent Warrant have a per share exercise price equal to 125% of the initial offering price ($7.50 per share based on the assumed initial offering price of $6.00 (the midpoint of the price range set forth on the cover page of this prospectus)). If all 363,244 shares of common stock exercisable under the Representative’s Warrant and Placement Agent Warrant are exercised, the aggregate gross proceeds from the Representative’s Warrant and Placement Agent Warrant exercise price would be approximately $2.7 million. We will not receive any proceeds from the sale of common stock issued upon exercise of the Bridge Warrant, SOSV Warrant, Placement Agent Warrant or Representative’s Warrant.

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by approximately $3.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $5.5 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate potential future access to the public equity markets. We anticipate that we will use the net proceeds of this offering, along with our existing cash, as follows:

 

   

approximately $10.0 million to advance the development of OM002, including initiating our planned Phase 2 clinical trial in patients with IBS-C in Australia and expanding this clinical trial under an IND in the United States upon completion of our below-referenced confirmatory, IND-enabling toxicology study;

 

   

approximately $1.0 million to complete our planned confirmatory, IND-enabling toxicology study to support our IND filing for OM002; and

 

   

the remainder for clinical development of our drug candidates and other research and development activities, working capital and other general corporate purposes, including the additional costs associated with being a public company.

We may also use a portion of the net proceeds from this offering to in-license, acquire, or invest in complementary businesses, technologies, products or assets. However, we have no current plans, commitments or obligations to do so.

 

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We believe, based on our current operating plan, that the net proceeds from this offering and our existing cash will be sufficient to fund our currently planned operations for at least the next 20 months; provided that there can be no assurance in that regard; and provided further that for each $1.1 million of principal and interest under the Bridge Notes that does not convert into shares of our common stock in connection with the closing of this offering and has to be repaid, the number of months for which the net proceeds from this offering and our existing cash will be sufficient to fund our currently planned operations will be reduced by one month. In addition, if any or all of the Bridge Notes are not converted into shares of our common stock in connection with the closing of this offering and have to be repaid, we may be required to raise additional capital to pay off these Bridge Notes when they come due.

Following the closing of this offering, the 4,166,667 shares issued and sold in this offering by us will represent 37% of our outstanding shares of common stock immediately following the closing of this offering, assuming (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on May 13, 2022, or the Assumed Closing Date, (ii) (a) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any), or the Converting Obligation, into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), assuming the occurrence of the conversion on the Assumed Closing Date, and (b) $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any), or the Outstanding Obligation, continuing to remain outstanding following the closing of this offering, (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and (iv) 135,333 shares to be issued to Alchemy based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), pursuant to the terms of the Alchemy Consulting Agreement.

We have based the assumptions set forth in (ii)(a) on the receipt of irrevocable elections from the holders of the Converting Obligation who have irrevocably elected to convert the Converting Obligation in connection with this offering, and we have based the assumptions set forth in (ii)(b) on the receipt of irrevocable elections from the holders of the Outstanding Obligation who have irrevocably elected to not convert the Outstanding Obligation in connection with this offering.

If, after giving effect to items (i) through (iv) above, the Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant are exercised in full, 13,067,633 shares will be issued and outstanding and the shares sold in this offering will represent 32% of our outstanding shares of common stock. Each Holder of the Bridge Note representing a portion of the Outstanding Obligation may elect to convert any portion of such Outstanding Obligation at any time following the closing of this offering until December 31, 2023. The minimum number of shares issuable upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023, is 2,429,727 shares of common stock.

A $1.00 decrease in the trading price used to calculate the conversion price relative to the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) would result in the issuance of 2,915,674 shares upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023. We will be required to issue 8,575,520 shares of common stock if the Outstanding Obligation, is converted on December 31, 2023 at the minimum conversion price of $1.105 per share, or the Floor Price. Any conversion of all or a portion of the Outstanding Obligation prior to December 31, 2023 may affect this analysis as the amount of accrued but unpaid interest will decrease, but, in no event will the number of shares issued upon conversion of the Outstanding Obligation,

 

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exceed 8,575,520 shares of common stock, assuming full conversion of the Outstanding Obligation as of December 31, 2023 at the Floor Price and assuming we are not in breach of the Bridge Note.

A $1.00 decrease in the assumed initial public offering price below the midpoint of the price range set forth on the cover page of this prospectus would result in net proceeds of approximately $16.5 million (or approximately $19.3 million if the underwriters’ option to purchase additional shares from us is exercised in full) from the sale of the shares of common stock offered by us in this offering after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Immediately following the closing of this offering, the 4,166,667 shares issued and sold by us in this offering will represent 36% of our outstanding shares of common stock (based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus), assuming (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,778,180 shares of our common stock assuming the occurrence of the conversion on the Assumed Closing Date based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus, (ii) (a) the conversion of the Converting Obligation into an aggregate of 80,988 shares of our common stock, based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus, assuming the occurrence of the conversion on the Assumed Closing Date, and (b) Outstanding Obligation continuing to remain outstanding following the closing of this offering, (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 188,170 shares of our common stock, based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus, and (iv) 182,000 shares to be issued to Alchemy (based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus) pursuant to the terms of the Alchemy Consulting Agreement.

If, after giving effect to items (i) through (iv) above and based on an assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus, the Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant are exercised in full, 13,605,984 shares will be issued and outstanding, and the shares sold in this offering will represent 31% of our outstanding shares of common stock immediately following the closing of this offering. The minimum number of shares issuable upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023, is 2,915,674 shares of common stock based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus.

A $1.00 decrease in the trading price used to calculate the conversion price relative to the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus would result in the issuance of 3,644,594 shares upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023. We will be required to issue 8,575,520 shares of common stock if the Outstanding Obligation, is converted on December 31, 2023 at the Floor Price based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus. Any conversion of all or a portion of the Outstanding Obligation prior to December 31, 2023 may affect this analysis as the amount of accrued but unpaid interest will decrease, but, in no event will the number of shares issued upon conversion of the Outstanding Obligation, exceed 8,575,520 shares of common stock, based on the assumed initial public offering price of $1.00 below the midpoint of the price range set forth on the cover page of this prospectus and assuming full conversion of the Outstanding Obligation as of December 31, 2023 at the Floor Price and we are not in breach of the Bridge Note.

A $1.00 increase in the assumed initial public offering price above the midpoint of the price range set forth on the cover page of this prospectus would result in net proceeds of approximately $24.1 million (or approximately $28.1 million if the underwriters’ option to purchase additional shares from us is exercised in full) from the sale of the shares of common stock offered by us in this offering after deducting the underwriting discounts and

 

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commissions and estimated offering expenses payable by us. Immediately following the closing of this offering, the 4,166,667 shares issued and sold by us in this offering will represent 38% of our outstanding shares of common stock (based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus), assuming (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the 2020 Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,419,394 shares of our common stock assuming the occurrence of the conversion on the Assumed Closing Date based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus, (ii) (a) the conversion of the Converting Obligation into an aggregate of 57,848 shares of our common stock, based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus, assuming the occurrence of the conversion on the Assumed Closing Date, and (b) the Outstanding Obligation continuing to remain outstanding following the closing of this offering, (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 134,405 shares of our common stock, based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus, and (iv) 102,000 shares to be issued to Alchemy (based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus) pursuant to the terms of the Alchemy Consulting Agreement.

If, after giving effect to items (i) through (iv) above and based on an assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus, the Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant are exercised in full, 12,683,095 shares will be issued and outstanding, and the shares sold in this offering will represent 33% of our outstanding shares of common stock immediately following the closing of this offering. The minimum number of shares issuable upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023, is 2,082,622 shares of common stock based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus.

A $1.00 decrease in the trading price used to calculate the conversion price relative to the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus would result in the issuance of 2,429,727 shares upon conversion of the Outstanding Obligation, assuming full conversion of the Outstanding Obligation as of December 31, 2023. We will be required to issue 8,575,520 shares of common stock if the Outstanding Obligation is converted on December 31, 2023 at the Floor Price based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus. Any conversion of all or a portion of the Outstanding Obligation prior to December 31, 2023 may affect this analysis as the amount of accrued but unpaid interest will decrease, but, in no event will the number of shares issued upon conversion of the Outstanding Obligation, exceed 8,575,520 shares of common stock, based on the assumed initial public offering price of $1.00 above the midpoint of the price range set forth on the cover page of this prospectus and assuming full conversion of the Outstanding Obligation as of December 31, 2023 at the Floor Price and we are not in breach of the Bridge Note.

We expect that the net proceeds from this offering, together with our existing cash, will allow us to (i) advance the development of OM002, including initiating our planned Phase 2 clinical trial in patients with IBS-C in Australia and expanding this clinical trial under an IND in the United States upon completion of our below-referenced confirmatory, IND-enabling toxicology study, (ii) complete our IND-enabling toxicology study, and (iii) continue to meet our general working capital obligations. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the proceeds to be received upon the closing of this offering or the actual amounts that we will spend on the uses set forth above. The net proceeds from this offering, together with our cash, will not be sufficient for us to fund all three of our drug candidates through regulatory approval, and we will need to raise additional capital to complete the development and commercialization of all three of our drug candidates.

The amounts and timing of our actual expenditures will depend on numerous factors, including the time and cost necessary to conduct our planned clinical trials, the results of our planned clinical trials and other factors

 

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described in the section entitled “Risk Factors” in this prospectus, as well as the amount of cash used in our operations and any unforeseen cash needs. Therefore, our actual expenditures may differ materially from the estimates described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds.

We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds to us from the offering that are not used as described above in short-term, investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant, and subject to the restrictions contained in any future financing instruments.

 

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CAPITALIZATION

The following table sets forth our cash and our capitalization as of December 31, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect: (i) the conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on the Assumed Closing Date, (ii) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), assuming the occurrence of the conversion on the Assumed Closing Date, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering, (iii) the conversion of approximately $0.6 million outstanding under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), (iv) 791,102 shares of common stock issued subsequent to December 31, 2021, (v) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect immediately following the closing of this offering, and (vi) 135,333 shares to be issued to Alchemy based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), pursuant to the terms of the Alchemy Consulting Agreement; and

 

   

on a pro forma as adjusted basis to give further effect to our issuance and sale of 4,166,667 shares of common stock in this offering at the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma and pro forma as adjusted information below is illustrative only, and our cash and capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our consolidated financial statements and the related notes included in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of December 31, 2021  
     Actual     Pro Forma     Pro Forma
as Adjusted(1)
 
           (unaudited)  
  

(in thousands, except per share

data and par value data)

 

Cash

   $ 2,774       2,774       23,367  

Convertible notes payable, net of discount, including current portion

   $ 5,410       4,509       4,509  

Financing derivatives liabilities

   $ 4,618       1,931       1,931  

Future equity liabilities

   $ 4,145       —         —    

Warrant liabilities

   $ 2,156       3,640       3,640  

Stockholders’ (deficit) equity:

      

Preferred stock, $0.0001 par value; no shares authorized, issued, and outstanding, actual, and 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

      

Common stock, $0.0001 par value; 35,000,000 shares authorized, 3,403,812 shares issued and outstanding, which excludes 639,789 shares of restricted common stock subject to a right of repurchase, actual; 200,000,000 shares authorized, 7,123,432 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 11,290,099 shares issued and outstanding, pro forma as adjusted

     1       2       2  

Additional paid-in capital

     344       6,605       26,890  

Accumulated deficit

     (14,349     (14,349     (14,349

Total stockholders’ (deficit) equity

     (14,004     (7,742     12,543  

Total capitalization

   $ 2,325       2,388       22,623  

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $3.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares offered by us at the assumed initial public offering price would increase (decrease) each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $5.5 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares in the table above is based on 4,194,914 shares of common stock outstanding as of December 31, 2021, after giving effect to the issuance of 791,102 shares of our common stock in March and April 2022, and excludes:

 

   

182,175 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2021, at an exercise price of $0.40 per share;

 

   

639,789 shares of unvested restricted common stock as of December 31, 2021;

 

   

905,400 shares of our common stock issuable upon the exercise of stock options to be granted to certain of our nonemployee directors, employees and nonemployee service providers under our 2022 Plan, contingent and effective upon the effectiveness of the registration statement of which this

 

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prospectus forms a part, with an exercise price that is equal to the price per share at which our common stock is first sold to the public in this offering;

 

 

   

1,094,600 shares of our common stock reserved for future issuance under the 2022 Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our 2022 Plan, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

   

200,000 shares of common stock reserved for future issuance under our ESPP, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

As of December 31, 2021, we had a historical net tangible book value (deficit) of $(14.8) million, or $(3.66) per share of common stock. Our historical net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding, including 639,789 shares of restricted common stock which are subject to a right of repurchase by us, as of December 31, 2021.

After giving effect to the: (i) conversion of approximately $1.4 million of aggregate principal amount, plus accrued interest thereon, of the Notes, which will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on the Assumed Closing Date, (ii) the conversion of approximately $0.3 million of aggregate principal amount outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) into an aggregate of 67,489 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), assuming the occurrence of the conversion on the Assumed Closing Date, and $7.3 million of aggregate principal outstanding under the Bridge Notes, plus accrued interest thereon (including pay-in-kind interest, if any) continuing to remain outstanding following the closing of this offering, (iii) the conversion of approximately $0.6 million, the aggregate amount purchased under the SAFEs, which will automatically convert upon the closing of this offering into an aggregate of 156,808 shares of our common stock based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and (iv) 135,333 shares to be issued to Alchemy based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), pursuant to the terms of the Alchemy Consulting Agreement, our pro forma net tangible book value as of December 31, 2021 was $(8.5) million, or $(1.10) per share.

After giving further effect to the issuance and sale of 4,166,667 shares of common stock that we are offering at the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2021 would have been $23.6 million, or approximately $1.97 per share. This amount represents an immediate increase in pro forma net tangible book value of $3.07 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $4.03 per share to new investors participating in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $ 6.00  

Historical net tangible book value (deficit) per share as of December 31, 2021

   $ (3.66   

Pro forma increase in historical net tangible book value per share as of December 31, 2021

   $ 2.56     

Pro forma net tangible book value per share as of December 31, 2021

   $ (1.10   

Increase in pro forma net tangible book value per share attributable to investors participating in this offering

   $ 3.07     

Pro forma as adjusted net tangible book value per share after this offering

      $ 1.97  

Dilution per share to new investors participating in this offering

      $ 4.03  

 

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Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $0.32, and dilution in pro forma net tangible book value per share to new investors by approximately $0,68, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

An increase of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by approximately $0.28 and decrease the dilution to investors participating in this offering by approximately $0.28 per share, assuming that the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by approximately $0.32 and increase the dilution to investors participating in this offering by approximately $0.32 per share, assuming that the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value after the offering would be $2.22 per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $0.00 per share and the dilution per share to new investors purchasing common stock in this offering would be $3.78 per share based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discounts and commission and estimated offering expenses payable by us.

The foregoing tables and calculations exclude:

 

   

182,175 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2021, at an exercise price of $0.40 per share;

 

   

639,789 shares of unvested restricted common stock as of December 31, 2021;

 

   

905,400 shares of our common stock issuable upon the exercise of stock options to be granted to certain of our nonemployee directors, employees and nonemployee service providers under our 2022 Plan, contingent and effective upon the effectiveness of the registration statement of which this prospectus forms a part, with an exercise price that is equal to the price per share at which our common stock is first sold to the public in this offering;

 

   

1,094,600 shares of our common stock reserved for future issuance under the 2022 Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our 2022 Plan, which will become effective upon the execution and delivery of the underwriting agreement for this offering; and

 

   

200,000 shares of common stock reserved for future issuance under the ESPP, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under our ESPP, which will become effective upon the execution and delivery of the underwriting agreement for this offering.

To the extent the Bridge Warrants, SOSV Warrant, Representative’s Warrant or Placement Agent Warrant are exercised, there will be further dilution to investors participating in this offering. For a discussion of the potential dilutive impact of our outstanding convertible securities and warrants, including the Bridge Notes, Bridge Warrants, SOSV Warrant, Placement Agent Warrant and Representative’s Warrant, see “Use of Proceeds.”

 

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We may choose to raise additional capital through the sale of equity or convertible debt securities due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering. Further, to the extent that any outstanding options are exercised, or new options or other equity awards issued under our equity incentive plans, you will experience further dilution.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans, strategies for our business and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”

Overview

We are a preclinical-stage therapeutics company leveraging synthetic biology-manufactured HiMO molecules as new medicines to treat large patient populations underserved by current treatment options. In the first half of 2023, we plan to initiate a Phase 2 clinical trial under an approved protocol in Australia to test our lead drug candidate in over 400 patients with IBS-C, which is estimated to affect approximately five million patients in the United States alone. On this basis, we anticipate disclosing top-line data from this study in the first half of 2024. Our initial drug candidates are based on HMOs which modulate both the bacteria in the gut, or the gut microbiome, and human cells. We believe HMOs exert beneficial effects through multiple mechanisms of action. In particular, HMOs beneficially shift the composition of the gut microbiome, increase the microbiome’s production of beneficial metabolites, and directly modulate the immune system. HMOs are the third most abundant solid component of human milk after fats and lactose, and over 200 distinct HMOs have been identified by the scientific community to date. Because HMOs have been selected and conserved over millions of years of mammalian evolution, with all human beings exposed before birth and during early life development, we believe HiMO drugs can have a favorable toxicity and tolerability profile in the therapeutic context. Our pipeline currently consists of drug candidates we call OMs, based on some of the most abundant and well-characterized HMOs, including OM001, OM002, and OM003, each of which we believe has the potential to treat the GBA disorders and certain inflammatory disorders. We selected these drug candidates based on preclinical, clinical and toxicology third-party published data indicating the potential for disease-modifying HMO bioactivity combined with a low risk of dose-limiting toxicity.

The following chart summarizes our current drug pipeline:

 

 

LOGO

 

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Since our inception in 2018, our operations have focused on identifying and developing potential drug candidates, organizing and staffing the company, business planning, establishing our intellectual property portfolio, raising capital, and providing general and administrative support for these operations. We do not have any drug candidates approved for sale and have not generated any revenue. We have funded our operations primarily through the issuance of the Notes and SAFEs. Since inception, we have raised an aggregate of approximately $9.5 million of gross proceeds from these issuances.

We believe, based on our current operating plan, that the net proceeds from this offering and our existing cash will be sufficient to fund our currently planned operations for at least the next 20 months, although there can be no assurance in that regard. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We have incurred significant operating losses since our inception in 2018 and expect to continue to incur significant and increasing operating losses for the foreseeable future. We do not have any products approved for sale, we have not generated any revenue from the sale of products, and our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our drug candidates. Our net losses were $2.0 million and $12.0 million for the years ended December 31, 2020 and 2021, respectively. As of December 31, 2021, we had an accumulated deficit of $14.3 million.

As a result of these conditions, management has concluded that substantial doubt about our ability to continue as a going concern exists as conditions and events, considered in the aggregate, indicate that it is probable that we will be unable to meet our obligations as they become due within one year after the date that the financial statements are issued. The financial information throughout this prospectus and the consolidated financial statements included elsewhere in this prospectus have been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these consolidated financial statements do not include any adjustments that may result from an unfavorable outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plans and secure sources of financing and ultimately attain profitable operations.

We anticipate that our expenses will increase substantially for the foreseeable future, particularly if and as we continue to invest in our research and development activities, including conducting preclinical studies, submit INDs and conduct clinical trials for our current and future drug candidates, seek marketing approvals for any drug candidates that successfully complete clinical trials, expand our product pipeline, hire additional personnel and invest in and grow our business, obtain, expand, maintain, enforce and protect our intellectual property portfolio, seek regulatory approvals for our drug candidates, establish a sales, marketing and distribution infrastructure and establish manufacturing capabilities, whether alone or with third parties, to commercialize drug candidates for which we may obtain regulatory approval, if any, begin to commercialize any approved products, and experience any delays or encounter any issues with any of the above, including but not limited to failed studies, negative or mixed clinical trial results, safety issues or other regulatory challenges, the risk of which in each case may be exacerbated by the ongoing COVID-19 pandemic. In addition, following the closing of this offering, we expect to incur additional expenses associated with operating as a public company, including those related to audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance premiums and investor and public relations costs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on a variety of factors. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from drug sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of

 

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one or more of our drug candidates. Insufficient liquidity may also require us to relinquish rights to drug candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from drug sales, we may not become profitable.

We rely, and expect to continue to rely, on third parties for the manufacture of our drug candidates for preclinical studies and clinical trials, as well as for commercial manufacture if our drug candidates obtain marketing approval. We also rely, and expect to continue to rely, on third parties to manufacture, package, label, store, and distribute our drug candidates, if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment, and personnel while also enabling us to focus our expertise and resources on the development of our drug candidates.

The global COVID-19 pandemic continues to rapidly evolve. We continue to evaluate the impact COVID-19 has had on the global supply chain, which has adversely affected the development timeline for OM001, and may continue to have an adverse effect on our ability to effectively conduct our business operations as planned, and we may not be able to avoid part or all of any further impact from the spread of COVID-19 or its consequences. The COVID-19 pandemic outbreak has the potential to continue to cause a disruption in our supply chain and may adversely impact economic conditions in North America, Europe and elsewhere. As a result of supply chain disruptions, we may experience delays in initiating or conducting any planned or future clinical trials if product material is delayed. Additionally, toxicology studies may be delayed as a result of supply chain disruptions as third-party CROs experience potential backlogs in slotting. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. The ultimate impact of the COVID-19 pandemic or a similar health pandemic or epidemic is highly uncertain and will depend on future developments. We do not yet know the full extent of potential delays or impacts on our business, our planned or future clinical trials, healthcare systems or the global economy as a whole, but these delays could have a material impact on our operations.

License Agreements

Below is a summary of the key terms for our license agreements. For a more detailed description of these agreements, see the sections of this prospectus entitled “Business—License Agreements” and Note 10 to our consolidated financial statements included elsewhere in this prospectus.

License and Supply Agreement with Glycosyn

In July 2020, we entered into the Glycosyn License Agreement with Glycosyn, which was amended in January 2021, pursuant to which Glycosyn granted to us an exclusive, sublicensable, worldwide license under Glycosyn’s intellectual property rights to use, sell, have sold, offer for sale, import and otherwise manufacture, obtain pricing and reimbursement approvals, market, promote, distribute, import or sell 2’FL, 3’SL and/or 6’SL therapeutic products for the therapeutic treatment of inflammatory and autoimmune disorders, including COVID-19, RA, juvenile idiopathic arthritis, IBD, IBS, AD, alopecia areata and pain. Pursuant to the Glycosyn License Agreement, Glycosyn also agreed to enable a contract manufacturer we select with manufacturing and analytical technology, including intellectual property rights and know-how for the manufacture of our OM drug candidates.

 

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In consideration for licenses and other rights granted under the Glycosyn License Agreement, we issued a 2020 Note in the principal amount of $325,000, which will automatically convert into 420,944 shares of our common stock in connection with the closing of this offering, based on an assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the closing occurs on the Assumed Closing Date. In addition, we are obligated to pay Glycosyn royalties in the low- to mid-single-digit percentages of net sales of the licensed products, which vary on a product-to-product basis and which increase to high-single digit and low double digit percentages of net sales of the licensed products if such sales are made by sublicensees. If we create a combination product using 3’SL, 6’SL and/or 2’FL, we are obligated to pay Glycosyn a royalty calculated based on the weighted-average of the respective royalties for of 3’SL, 6’SL and/or 2’FL based on their proportion in the combination product. Further, we are obligated to pay Glycosyn milestone payments up to approximately $1.0 million in the aggregate upon the first occurrence of certain regulatory, intellectual property and development milestones. Additionally, we are obligated to pay a minimum annual royalty in the mid-five figures commencing in the second calendar quarter following the first commercial sale of a licensed product by us, an affiliate or a sublicensee.

License Agreement with University of California San Diego

In October 2018, we entered into the UC San Diego License Agreement with UC San Diego, which was amended in October 2019, November 2020 and February 2022 pursuant to which UC San Diego granted us an exclusive, sublicensable, worldwide license under certain of UC San Diego’s intellectual property rights to make, use, sell, offer for sale and import licensed products in the field of therapeutic products considered drugs pursuant to federal regulation or comprises a formulation, prodrug or derivative of 3’SL or 6’SL that would be considered a drug pursuant to federal regulation, excluding a product considered medical food pursuant to federal regulation. The foregoing license is subject to UC San Diego’s retained rights: (i) to use the inventions, technology and patent rights for educational and research purposes, (ii) to publish or otherwise disseminate any information about the inventions, technology and patent rights at any time, and (iii) to allow other nonprofit institutions to use, publish, or otherwise disseminate any information about inventions, technology and patent rights for education and research purposes. In consideration for the license granted under the UC San Diego License Agreement, we paid UC San Diego an upfront license fee of $10,000, together with past patent costs of approximately $2,300, and in connection with the second and third amendments to the UC San Diego License Agreement the Company paid UC San Diego an amendment fee of $3,000 and $20,000, respectively. The Company can terminate the agreement for convenience with 90 days’ written notice. For as long as the agreement remains in effect, we are obligated to reimburse UC San Diego for future patent costs and pay UC San Diego an annual license maintenance fee that increases overtime and is capped in the low five figures until the first commercial sale of a licensed product. We are also obligated to pay UC San Diego royalties in a low single-digit percentage of: (i) net sales of the licensed products, and (ii) sales of licensed products that utilize technology, but not patent rights, in each case, sold by us or any sublicensee or affiliate. We are also obligated to pay UC San Diego a low double-digit percentage sublicense fee for any non-royalty consideration we receive for any sublicense. Under the amended UC San Diego License Agreement, we are obligated to pay UC San Diego milestone payments up to an additional $2.4 million in the aggregate upon the first occurrence of certain regulatory, development and sales milestones. As of December 31, 2021, we have paid additional patent costs of approximately $28,000. No royalties, sublicense fees or milestone payments have been paid to UC San Diego.

Arpeggio Research and Development Collaboration Agreement

In December 2020, we entered into a Research and Development Collaboration Agreement, or the Arpeggio Agreement, with Arpeggio Biosciences, Inc., or Arpeggio, to design, conduct and interpret mechanistic research on certain MOs using Arpeggio’s sequencing and analysis technology to determine therapeutic uses for such MOs for clinical development by us. Pursuant to the Arpeggio Agreement, the parties granted each other a non-exclusive, non-royalty bearing, non-commercial research license, solely to perform each party’s obligations under a defined research plan. Arpeggio granted us a perpetual, worldwide, sublicensable license to use the collaboration data for all purposes related to the research, development or commercialization of products. Under

 

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the Arpeggio Agreement, Arpeggio will not use any of its licensed technology to research, develop or commercialize, for itself, or on behalf of any third party, any MO during the term of the Arpeggio Agreement. Pursuant to the Arpeggio Agreement, we will not use any third party to conduct such mechanistic research for any MO for ourselves, or on behalf of any third party.

Under the Arpeggio Agreement, Arpeggio is responsible for costs associated with the studies which are delineated in a research plan agreed by the Parties. We are responsible for all costs related to the research, development and commercialization of MOs for the therapeutic uses discovered under the research plan as well as all costs outside the scope of such plan. Further, we are responsible for leading all development and commercialization strategy and activities related to the use of the MO therapeutic products.

Upon the execution of studies conducted by Arpeggio, we are obliged to make upfront payments of approximately $15,000 for the first three MOs and are obligated to make an additional $15,000 payment upon notice from Arpeggio that it has initiated performance under the research plan. If the mutually agreed upon budget for a given MO exceeds $10,000, we will be responsible for the overage upon commencing the applicable study. We are further required to make aggregate milestone payments up to $1.2 million, based upon achievement of certain development and regulatory milestones. We will also pay royalties on an MO therapeutic product-by-MO therapeutic product basis of a low single digit percentage on net sales of MO therapeutic products made by us, our affiliates or sublicensees. For each additional MO added to the research plan, we are required to pay an upfront payment of $10,000. As of December 31, 2021, we have paid Arpeggio approximately $46,000 associated with studies under the Arpeggio Agreement. No royalties or milestone payments have been paid to Arpeggio.

Although we have conducted studies under an in initial research plan with Arpeggio, we are not currently advancing any development programs that are subject to the Arpeggio Agreement and the associated royalty and milestone payments.

The Arpeggio Agreement will terminate upon the expiration of all existing or anticipated payment obligations with respect to the last product in all countries. The Parties have the right to terminate the Arpeggio Agreement with notice in the event of an uncured material breach or for insolvency or bankruptcy.

Components of Results of Operations

Operating Expenses

We classify operating expenses into two main categories: (i) research and development expenses, and (ii) general and administrative expenses.

Research and Development

Our research and development expenses consist of direct and indirect expenses incurred in connection with our research activities and development programs.

These expenses include:

 

   

direct expenses, consisting of:

 

   

external research and development expenses incurred under our license agreements, expenses resulting from payments to CROs, investigative sites, consultants to conduct our planned preclinical studies;

 

   

other expenses associated with contract manufacturing, labeling, packaging and distribution of clinical trial supplies; and

 

   

fees paid for consulting services related to our drug development and regulatory efforts.

 

   

indirect expenses, consisting of personnel, including expenses for salaries, bonuses, benefits, stock-based compensation, and allocation of certain management expenses.

 

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To date, most of these expenses have been incurred to advance our drug candidates. We expect that significant additional spending will be required to progress our drug candidates through clinical development and regulatory approval. These expenses will primarily consist of expenses for the administration of clinical trials as well as manufacturing costs for clinical material supply.

We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid expenses and other current assets or accrued liabilities and other current liabilities.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, our drug candidates or any of our future drug candidates. We expect our research and development expenses to increase significantly in the foreseeable future as we continue to invest in research and development activities related to developing our drug candidates, as our drug candidates continue to advance into later stages of development, as we conduct clinical trials of our drug candidates, as we seek regulatory approvals for our drug candidates, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, the successful development of our drug candidates is highly uncertain, and we may never succeed in achieving regulatory approval for our drug candidates.

General and Administrative

General and administrative expenses consist primarily of management fees and other related costs, including payroll and stock-based compensation, for personnel in our executive and administrative functions; professional fees for legal, accounting, auditing, tax and consulting services, and travel expenses. We expense general and administrative costs as incurred.

We expect that our general and administrative expenses will increase in the near-term as we continue to build a team to support our administrative, accounting and finance, communications, legal and business development efforts. Following this offering, we expect to incur increased expenses associated with being a public company, including those related to audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance premiums and investor and public relations costs.

Other Expense

Change in fair value of financing derivatives

The conversion discount upon a qualified financing and mandatory redemption upon a change of control features of the Bridge Notes are bifurcated as embedded derivatives and recorded at fair value. The conversion discount upon a liquidity event, redemption upon a fundamental transaction, redemption upon an event of default, and interest rate reset upon an event of default or maturity date extension features of the Bridge Notes are bifurcated as embedded derivatives and recorded at fair value. Changes in the fair value of these derivatives are recognized as a component of other expense. Changes in the assumptions used to derive these fair values are updated at each reporting period and at settlement.

Change in fair value of future equity liabilities

The SAFEs are financial instruments requiring liability classification and are carried at fair value. Changes in the fair value of the SAFEs are recognized as a component of other expense. The Accelerator Contract for Equity by and between the Company and SOSV IV LLC entered into in September 2019, or the ACE, is a financial instrument requiring liability classification and is carried at fair value. Changes in the fair value of the ACE are recognized as a component of other expense.

 

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Change in fair value of warrant liabilities

Outstanding warrants issued to investors and placement agent are classified as liabilities and recorded at fair value. Changes in the fair value of these warrants are recognized as a component of other expense. The assumptions used to derive these fair values are updated at each reporting period.

Interest expense

Interest expense relates to non-cash interest incurred in relation to outstanding convertible notes, as well as amortization of the original issuance discount for all convertible notes using the effective interest method.

Gain on extinguishment of convertible notes payable

Gain on extinguishment of convertible notes payable relates to the settlement of existing convertible notes that were modified to extend the maturity date. The carrying value of the convertible notes and related derivative liabilities are compared to the fair value of the newly issued debt instruments, with the difference recognized as a gain on extinguishment.

Gain on extinguishment of future equity liability

Gain on extinguishment of future equity liability relates to the conversion of the 2021 SAFEs into Bridge Notes and related Bridge Warrants. The 2021 SAFEs are carried at fair value immediately prior to conversion, and the difference between the fair value of the 2021 SAFEs and Bridge Notes is recognized as a gain on extinguishment.

Income taxes

We account for income taxes under the asset and liability method pursuant to Accounting Standards Codification 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent we believe that these assets are more likely than not to be realized in the future. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

We provide reserves for potential payments of taxes to various tax authorities related to uncertain tax positions. Amounts recognized are based on a determination of whether a tax benefit previously taken on filed tax returns or a position expected to be taken on future tax returns is more likely than not sustaining a challenge from the local tax authorities. The tax benefit recognized is equal to the largest amount that is more than 50% likely to be sustained. Interest and penalties associated with uncertain tax positions are recorded as a component of income tax expense.

 

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Results of Operations

Comparison of the Years Ended December 31, 2020 and 2021

The following table summarizes our results of operations for the years ended December 31, 2020 and 2021 (in thousands):

 

     2020      2021  

Operating expenses

     

Research and development

   $ 539      $ 746  

General and administrative

     663        2,819  
  

 

 

    

 

 

 

Total operating expenses

     1,202        3,565  
  

 

 

    

 

 

 

Loss from operations

     (1,202      (3,565

Other expense:

     

Interest expense

     (289      (1,410

Change in fair value of financing derivatives

     (46      (3,502

Change in fair value of future equity liabilities

     (457      (2,768

Change in fair value of warrant liabilities

     —          (830

Gain on extinguishment of convertible notes payable

     —          98  

Gain on extinguishment of future equity liabilities

     —          24  
  

 

 

    

 

 

 

Total other expense

     (792      (8,388
  

 

 

    

 

 

 

Net loss before income taxes

     (1,994      (11,953

Provision for income taxes

     —          —    
  

 

 

    

 

 

 

Net loss and comprehensive loss

   $ (1,994      (11,953
  

 

 

    

 

 

 

Research and Development

The following table summarizes our research and development expenses for the years ended December 31, 2020 and 2021 (in thousands):

 

     2020      2021      Increase/
(Decrease)
 

License fees

   $  328      $ 13      $ (315

Pre-clinical development

     55        167        112  

Professional and consulting fees

     153        275        122  

Employee compensation

     3        291        288  
  

 

 

    

 

 

    

 

 

 
   $ 539      $ 746      $ 207  
  

 

 

    

 

 

    

 

 

 

Research and development expenses were $0.5 million for the year ended December 31, 2020 and $0.7 million for the year ended December 31, 2021. The $0.2 million increase was primarily driven by us beginning substantive operations during the current year. Employee compensation costs, which include payroll-related expenses and stock-based compensation expense, increased year-over-year as we had no employees in 2020 and began expanding our research staff during 2021. The decrease in license fees relates to the Glycosyn license purchased in 2020, which does not have recurring license costs, and the fact that no additional licenses were purchased in the current year. The increases in pre-clinical development and professional and consulting fees relate to us expanding our research efforts in 2021.

General and Administrative

General and administrative expenses were $0.7 million for the year ended December 31, 2020 and $2.8 million for the year ended December 31, 2021, an increase of $2.1 million from the prior year. The increase in general

 

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and administrative expenses was primarily driven by a $1.4 million increase to professional and consulting fees and a $0.7 million increase in employee compensation costs. The increases relate to our expanded operations in 2021 through the hiring of administrative employees and accounting and legal expenses incurred.

Other Expense

Other expenses were $0.8 million for the year ended December 31, 2020 and $8.4 million for the year ended December 31, 2021, an increase of $7.6 million from the prior year. The increase is primarily due to the $5.8 million increase in change in fair value of our outstanding financing derivatives and future equity liabilities as well as a $0.8 million increase in fair value of outstanding warrant liabilities, offset by a $0.1 million gain on extinguishment of 2020 Notes that were modified during 2021 and future equity liabilities converted into Bridge Notes. An additional increase of $1.1 million is driven by increased interest expense related to outstanding convertible notes.

Liquidity and Capital Resources

Liquidity

Since our inception, we have not generated any revenue from drug sales and have incurred significant operating losses and negative cash flows from operations. We anticipate that we will continue to incur net losses for the foreseeable future. As of December 31, 2021, we had an accumulated deficit of $14.3 million. As of December 31, 2021, we had cash of $2.8 million. Based on our current operating plan, we believe that the net proceeds from this offering, together with our existing cash, will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next two months.

We have funded our operations primarily through the issuance of the 2019 SAFEs, ACE, 2020 Notes, 2020 SAFEs, 2021 SAFEs, and Bridge Notes. Since inception, we have raised an aggregate of approximately $9.5 million of gross proceeds from these issuances.

2019 SAFEs

In September 2019, we entered into the 2019 SAFEs, for an aggregate principal amount of approximately $0.1 million with Mr. Martinez, our Chief Executive Officer and a member of our board of directors, Mr. Ferrone, our President, Chief Operating Officer and a member of our board of directors, and a co-founder and former Vice President of our company. In January 2022, the 2019 SAFEs were amended to require that they automatically convert upon an initial public offering. The 2019 SAFEs will automatically convert upon the closing of this offering into an aggregate of 45,698 shares of our common stock, based on an assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus).

ACE Liability

We entered into the ACE with SOSV for an aggregate principal amount of approximately $0.3 million. In April 2022, we entered into the ACE Termination and Issuance Agreement, pursuant to which we issued 763,102 shares of common stock and the SOSV Warrant to terminate the ACE and all rights thereunder. The terms of the warrant are consistent with the terms of the Warrants issued to the holders of the Bridge Notes. Under the SOSV Warrant, the holder has the right to purchase up to 381,551 shares of common stock and 572,327 shares of common stock if we have not consummated a liquidity event by June 3, 2022.

2020 Convertible Notes

From February 2020 to July 2020, we entered into a convertible note purchase agreement with new and existing investors under which we issued and sold to investors convertible promissory notes in the aggregate principal

 

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amount of approximately $1.4 million, or the 2020 Notes, through multiple closings. The 2020 Notes accrue interest at a rate of 7% per annum. The 2020 Notes were amended in February 2021 and February 2022 to extend the maturity date to August 20, 2022, and in April 2022 to clarify the definition of “fully-diluted number of shares”, which is used in the calculation of the conversion price. The 2020 Notes will automatically convert upon the closing of this offering into an aggregate of 2,568,888 shares of our common stock, based on an assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), and assuming the occurrence of the conversion on the Assumed Closing Date.

2020 SAFEs

In October and December 2020, we entered into the 2020 SAFEs with investors in the aggregate amount of $0.5 million. In January 2022, the 2020 SAFEs were amended to state that if the Liquidity Event is an IPO, the purchase amount will automatically convert into shares of common stock at the conversion ratio defined by the agreement. The 2020 SAFEs will automatically convert upon the closing of this offering into an aggregate of 111,110 shares of our common stock, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus).

2021 SAFEs

In June and July 2021, we entered into the 2021 SAFEs with investors in the aggregate amount of $250,000, including a SAFE with SOSV in the amount of $100,000. The holders of the 2021 SAFEs elected to convert each of their respective 2021 SAFEs into a Bridge Note (described below) and related Bridge Warrant, resulting in a gain on extinguishment of $24,000.

Bridge Financing

From August 2021 to September 2021, we entered into a securities purchase agreement with various investors, pursuant to which we issued to each investor a Bridge Note and a Bridge Warrant. We issued and sold Bridge Notes with an aggregate principal amount of approximately $5.2 million. The Bridge Notes accrue interest annually at a rate of 12% per annum. In March 2022, we amended and restated the Bridge Warrants and the Bridge Notes and issued additional Bridge Notes and Bridge Warrants with an aggregate principal amount of approximately $2.2 million. Pursuant to the Bridge Warrants, holders may exercise their Bridge Warrants for shares of common stock up to 50% of the number of shares of common stock issuable upon the conversion of the Bridge Notes, assuming full conversion of the Bridge Notes as of the closing of this offering, at an exercise price equal to 81.25% of the initial public offering price of our common stock.

In addition to the Bridge Warrants, we issued a warrant to the placement agent of the Bridge Notes, or Placement Agent Warrant. The Placement Agent Warrant may be exercised for shares of common stock up to 5% of the number of shares of common stock (i) issuable upon conversion of the Bridge Notes in connection with this offering (assuming full conversion of the Bridge Notes as of the closing of this offering), and (ii) exercisable under the Bridge Warrants. The Placement Agent Warrant has an exercise price equal to 125% of our common stock offered hereby.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our research and development programs. In addition, upon closing of this offering, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend on many factors, including:

 

   

the regulatory approval pathway for our drug candidates, including whether regulatory authorities will require us to conduct Phase 1 clinical trials for our drug candidates, and the resulting clinical development plans for our drug candidates;

 

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the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our drug candidates and any need to conduct additional such studies as may be required by a regulator;

 

   

the willingness of the FDA, the EMA, the TGA or comparable foreign regulatory authorities to accept our clinical trials, as well as data from our planned and ongoing preclinical studies and clinical trials and other work, as the basis for review and approval of our drug candidates;

 

   

the outcome, timing and cost of meeting regulatory requirements established by the FDA, the EMA, the TGA and other comparable foreign regulatory authorities;

 

   

the number and characteristics of drug candidates that we develop or may in-license;

 

   

the costs of acquiring, licensing, or investing in businesses, drug candidates, and technologies;

 

   

the effect of changes in regulation or policy relating to the development and commercialization of our drug candidates by the FDA, the EMA, the TGA and other comparable foreign regulatory authorities;

 

   

the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements, or cGMPs, and a supply chain for the development and manufacture of our drug candidates in sufficient quantities;

 

   

our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense, and enforcement of any patents or other intellectual property rights;

 

   

our need and ability to retain key management and hire scientific, technical, business, and medical personnel;

 

   

the effect of competing products and drug candidates and other market developments;

 

   

our need to implement additional internal systems and infrastructure, including financial and reporting systems;

 

   

the costs associated with operating as a public company;

 

   

the costs associated with securing and establishing commercialization;

 

   

the timing, receipt, and amount of sales from our potential drugs, if approved;

 

   

the economic and other terms, timing of and success of any collaboration, licensing or other arrangements which we may enter in the future; and

 

   

costs associated with any delays or issues with any of the above, including the risk of each of which may be exacerbated by the ongoing COVID-19 pandemic.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any drug candidates or generate revenue from the sale of any drug candidate for which we may obtain marketing approval. In addition, our drug candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for at least several years, if ever. As a result, we will need substantial additional financing to support our continuing operations and further the development of and commercialize our drug candidates.

Until such time, if ever, as we can generate substantial revenues, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the

 

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terms of these securities may include liquidation or other preferences that may adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures, or declaring dividends. If we raise additional funds through collaborations, strategic alliances, or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce, or terminate our research programs, or license the rights to develop and market drug candidates that we would otherwise prefer to develop ourselves.

Cash Flows

The following table provides information regarding our cash flows for the years ended December 31, 2020 and 2021 (in thousands):

 

     2020      2021      Increase/
(Decrease)
 

Net cash used in operating activities

   $ (874    $ (3,042    $ (2,168

Cash used in investing activities

     —          —          —    

Net cash (used in)/provided by financing activities

     1,574        4,996        3,422  
  

 

 

    

 

 

    

 

 

 

Net increase in cash

   $ 700      $ 1,954      $ 1,254  
  

 

 

    

 

 

    

 

 

 

Operating Activities

During the year ended December 31, 2020, we used $0.9 million of cash in operations, primarily driven by professional and consulting fees in connection with our research and development activities and general administrative support.

During the year ended December 31, 2021, we used $3.0 million of cash in operations, primarily driven by increased compensation costs, professional fees, and consulting fees in connection with our research and development activities and general and administrative expenses related to our efforts in becoming a public company.

Investing Activities

During the years ended December 31, 2020 and 2021, we had no investing activities.

Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was $1.6 million, consisting of $1.1 million of proceeds from issuance of the 2020 Notes and $0.5 million from the issuance of the 2020 SAFEs.

During the year ended December 31, 2021, net cash provided by financing activities was $5.0 million, consisting of $4.9 million from the issuance of the Bridge Notes, net of issuance costs of $0.2 million, $0.3 million of proceeds from the issuance of the 2021 SAFEs, and $0.1 million of proceeds from the exercise of common stock options. These cash inflows were offset by $0.3 million paid for offering costs that have been capitalized and deferred in anticipation of this offering.

Critical Accounting Policies and Significant Judgement and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates

 

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that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reported periods. We based our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates considering changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in our estimates.

While our accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this prospectus, we believe the following accounting policies used in the preparation of the consolidated financial statements require the most significant judgments and estimates. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of our other significant accounting policies.

Stock-Based Compensation

We measure all stock-based awards granted to employees, nonemployees, and directors based on the fair value on the date of the grant. For awards with both performance and service conditions, we recognize expense based on the fair value of the performance awards over the estimated service period to the extent the achievement of the related performance criteria is estimated to be probable. At each reporting date, we evaluate whether any performance conditions related to a performance-based award have changed. The effect of any change in performance conditions would be recognized as a cumulative catch-up adjustment in the period such change occurs, and any remaining unrecognized compensation expense would be recognized over the remaining requisite service period. Our policy is to account for forfeitures when they occur. To date, none of the criteria underlying awards determined to have performance criteria have been considered probable; as such, no compensation expense has been recognized for performance-based awards as of December 31, 2021.

We classify stock-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs and service payments are classified.

For restricted stock awards, we estimate the grant-date fair value using the difference between the purchase price per share and the fair value of common stock. For awards with service conditions only, we use the straight-line method to recognize compensation cost over each award’s requisite service period, which is generally the vesting period. For awards with both performance and service conditions, we recognize expense based on the fair value of the performance awards over the estimated service period to the extent the achievement of the related performance criteria is estimated to be probable. At each reporting date, we evaluate whether any performance conditions related to a performance-based award have changed. The effect of any change in performance conditions is recognized as a cumulative catch-up adjustment in the period such change occurs, and any remaining unrecognized compensation expense would be recognized using the accelerated attribution method over the remaining requisite service period.

The fair value of each stock option grant is estimated on the date of grant using the Black- Scholes option-pricing model. Prior to this offering, we were a private company and lack company-specific historical and implied volatility information. Therefore, we estimated our expected stock volatility based on the historical volatility of a publicly traded set of peer companies. The expected term of our stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. For any awards that are not “plain-vanilla” options, we estimate the expected term based on our best estimate at the date of grant. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero because we have never paid cash dividends our common stock and do not expect to pay any cash dividends in the foreseeable future.

 

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In determining the exercise prices for options granted, we have considered the estimated fair value of the underlying common stock as of the measurement date. Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date.

Determination of the Fair Value of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Historically, these independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately- Held-Company Equity Securities Issued as Compensation, or the Practice Aid. The Practice Aid identifies various available methods for allocating the enterprise value across classes of series of capital stock in determining the fair value of our common stock at each valuation date.

We determined the current value method, or CVM, was the most appropriate method for determining the fair value of our common stock based on our stage of development and other relevant factors. Under the CVM, the enterprise value is calculated based on an assumed forced asset sale at a future date and the corresponding allocation of proceeds based on the rights and preferences of each class of equity.

Beginning in August 2021, we determined the fair value of common stock by utilizing the probability-weighted expected return method, or PWERM, determined by a third-party valuation expert. The PWERM is a scenario-based methodology that estimates the fair value of common stock based upon an analysis of our future values, assuming we consummate an IPO or an alternative financing or we liquidate. The future value of common stock under each scenario is discounted back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an estimate of the value for common stock. A discount for lack of marketability is then applied to estimate the fair value of the common stock at the valuation date.

In addition to considering the results of these independent third party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:

 

   

our stage of development and commercialization and our business strategy;

 

   

the progress of our research and development drug candidates, including the status of planned preclinical studies for our drug candidates;

 

   

our business conditions and projections;

 

   

our financial position, including cash on hand, and our historical and forecasted performance and operating results;

 

   

the lack of an active public market for our common stock;

 

   

the analysis of initial public offerings and the market performance of similar companies in the biopharmaceutical industry;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company in light of prevailing market conditions;

 

   

the hiring of key personnel and the experience of management;

 

   

trends and developments in the biopharmaceutical industry; and

 

   

external market conditions affecting the biopharmaceutical industry.

 

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Following the closing of this offering, our board of directors will determine the fair market value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.

As of December 31, 2021, the unrecognized stock-based compensation expense related to employee stock options was $0.2 million and is expected to be recognized as expense over a weighted-average period of approximately years. The intrinsic value of all outstanding stock options as of December 31, 2021 was approximately $0.6 million, based on the assumed initial public offering price of $6.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), all related to exercisable options.

Financing Derivatives

We issued the 2020 Notes with multiple investors at various closing dates. The 2020 Notes contain a conversion discount upon a qualified financing feature that is bifurcated as an embedded derivative and accounted for separately at fair value. The 2020 Notes also contain a mandatory redemption upon a change of control feature that is bifurcated as an embedded derivative and accounted for separately at fair value. We issued Bridge Notes that contain a conversion discount upon a liquidity event that is bifurcated as an embedded derivative and accounted for separately at fair value. The Bridge Notes also contain an optional redemption feature upon a fundamental transaction, an optional prepayment feature and an interest reset upon an event of default or maturity date extension feature. These features are bifurcated as embedded derivatives and accounted for separately at fair value. We recorded the fair value of the embedded derivatives on the date of issuance and subsequently remeasured the derivatives to fair value at each reporting date. The fair value of the financing derivatives is determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Changes in the fair value of these derivatives are recognized as a component of other expense in the consolidated statements of operations and comprehensive loss. We used a with and without bond model to determine the fair value of the financing. derivatives, which requires us to estimate the timing and probability of each of the various settlement provisions within the outstanding convertible notes such as an equity financing, change of control, liquidation, or payoff at maturity. These estimates are subject to uncertainty as significant differences between our estimates and the ultimate settlement method of these derivatives could materially impact our financial condition or results of operations.

Future Equity Liabilities

SAFE Liabilities

We classify SAFEs as liabilities on the consolidated balance sheets as the SAFEs may require cash settlement and the SAFEs have preference to common stockholders in the case of a dissolution or liquidity event. We recorded the SAFEs at fair value on the date of issuance and subsequently remeasured the liabilities to fair value at each reporting date. The fair value of the SAFEs is determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Changes in the fair value of the SAFEs were recognized as a component of other expense in the consolidated statements of operations and comprehensive loss. We used a probability weighted expected return method to determine the fair value of our SAFE liabilities, which requires us to estimate the timing and probability of each of the various settlement provisions within the outstanding SAFEs such as an equity financing, liquidity event, or dissolution. These estimates are subject to uncertainty as significant differences between our estimates and the ultimate settlement method of the SAFEs could materially impact our financial condition or results of operations.

ACE Liability

We entered into an agreement with SOSV to provide funding under an ACE. We recorded the ACE at fair value on the date of issuance and subsequently remeasured the liability to fair value at each reporting date. The ACE contains a provision whereby the investor is entitled to acquire more favorable terms or benefit from more

 

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favorable terms under financing instruments we may issue. Upon the issuance of the 2020 SAFEs, the discount percentage of the conversion price was updated to 75%. Upon the issuance of the convertible notes in February 2020, the ACE began accruing interest at a rate of 7% and acquired the right to a 300% premium upon redemption due to a change of control. Upon the issuance of the Bridge Notes, the ACE obtained the more favorable discount percentage to the conversion price of 65%, began accruing interest at 12% per year, and acquired warrant rights to purchase up to 50% of the number of shares of common stock issuable upon the full conversion of the ACE, and 75% in an event of default or extension of the Bridge Notes. These additional rights are included in the measurement of fair value of the ACE when they are acquired.

The fair value of the ACE is determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value was estimated based on results of third-party valuations using a probability-weighted present value model. In determining the fair value of the liability, estimates and assumptions impacting fair value included the estimated future value of our business, discount rates, and estimated timing of future equity events as well as any rights of the holders from specific contractual features in relation to the more favorable nation feature. We determined that the valuations represented fair value of the liabilities at issuance and each reporting date. We used a Monte Carlo Simulation model to determine the fair value of the ACE liability, which requires us to estimate the timing and probability of each of the various settlement provisions within the outstanding ACE such as an equity financing, liquidity event, or dissolution. These estimates are subject to uncertainty as significant differences between our estimates and the ultimate settlement method of the ACE could materially impact our financial condition or results of operations.

Warrants

Concurrently with the issuance of the Bridge Notes, we issued warrants to each investor and in April 2022 the Placement Agent Warrant to Representative. The fair value of the warrants is determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Changes in the fair value of the warrants are recognized as a component of other expense in the consolidated statement of operations and comprehensive loss. We used a Monte Carlo Simulation model to determine the fair value of the warrant liabilities, which requires us to estimate the timing to exercise, equity volatility and risk-free rate. These estimates are subject to uncertainty as significant differences between our estimates and the ultimate settlement of the warrants could materially impact our financial condition or results of operations.

Concentrations

We are dependent on third-party CROs, contract development and manufacturing organizations, and contract manufacturing organizations to supply certain intellectual property and services for research activities in its drug candidates. In particular, we rely and expect to continue to rely on a small number of these organizations to supply us with our requirements for key raw materials related to these programs. These drug candidates could be adversely affected by a significant interruption in the supply of key raw materials.

Contractual Obligations and Commitments

Pursuant to the Glycosyn License Agreement, UC San Diego License Agreement and Arpeggio Agreement, we are obligated to make certain milestone and royalty payments. These payment obligations are contingent upon future events, such as our generating drug sales. We are currently unable to estimate the timing or likelihood of generating future product sales. See the subsection entitled “License Agreements” above.

In addition, we enter into contracts in the normal course of business with CROs, clinical supply manufacturers and with vendors for preclinical studies and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and generally provide for termination after a notice period, and, therefore, are not considered long-term contractual obligations. Payments due upon cancellation consist only of payments for services provided and expenses incurred up to the date of cancellation.

 

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Recent Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements included elsewhere in this prospectus.

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company” under the JOBS Act, and as such, we can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and therefore we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

We will cease to be an emerging growth company prior to the end of such five-year period if certain earlier events occur, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period. In particular, in this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company, and we may elect to take advantage of other reduced reporting requirements in future filings.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

 

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BUSINESS

Overview

We are a preclinical-stage therapeutics company leveraging synthetic biology-manufactured HiMO molecules as new medicines to treat large patient populations underserved by current treatment options. In the first half of 2023, we plan to initiate a Phase 2 clinical trial under an approved protocol in Australia to test our lead drug candidate in over 400 patients with the constipation dominant form of irritable bowel syndrome, or IBS-C, which is estimated to affect approximately five million patients in the United States alone. On this basis, we anticipate disclosing top-line data from this study in the first half of 2024. Our initial drug candidates are based on bioactive oligosaccharides naturally produced in human milk, called human milk oligosaccharides, or HMOs, which modulate both the bacteria in the gut, or the gut microbiome, and human cells. We believe HMOs exert beneficial effects through multiple mechanisms of action. In particular, HMOs beneficially shift the composition of the gut microbiome, increase the microbiome’s production of beneficial metabolites, and directly modulate the immune system. HMOs are the third most abundant solid component of human milk after fats and lactose, and over 200 distinct HMOs have been identified by the scientific community to date. Because HMOs have been selected and conserved over millions of years of mammalian evolution, with all human beings exposed before birth and during early life development, we believe HiMO drugs can have a favorable toxicity and tolerability profile in the therapeutic context. Our pipeline currently consists of drug candidates we call Oligosaccharide Medicines, or OMs, based on some of the most abundant and well-characterized HMOs, including OM001 (HiMO 3’sialyllactose), or 3’SL, OM002 (HiMO 2’-fucosyllactose), or 2’FL, and OM003 (HiMO 6’-sialyllactose), or 6’SL, each of which we believe has the potential to treat gut-brain axis disorders, or GBA, and certain inflammatory disorders. We selected these drug candidates based on published third-party clinical, preclinical and toxicology data indicating the potential for disease-modifying HMO bioactivity combined with a low risk of dose-limiting toxicity.

Our OMs are produced via synthetic biology and are identical in chemical structure to their equivalent HMOs. Therefore, we believe our OMs will reproduce the multiple beneficial effects observed with HMOs and have the potential to affect multiple pathways implicated in GBA disorders and certain inflammatory disorders. These disorders are complex and often implicate multiple pathways involving the central nervous system, or CNS, and the enteric nervous system controlling the gut, or ENS, as well as other organ systems including the immune, endocrine and autonomic systems. We initially intend to target GBA disorders and certain inflammatory disorders, such as irritable bowel syndrome, or IBS, inflammatory bowel disease, or IBD, rheumatoid arthritis, or RA, oligoarticular juvenile idiopathic arthritis, or oJIA, atopic dermatitis, or AD, and autism spectrum disorder, or ASD. We plan to prioritize the development of our drug candidates for disorders where available treatment options are inadequately serving patients due to safety or tolerability issues, where regulators have indicated that medical foods and supplements cannot be legally marketed for disease or symptom treatment, and where we have the potential to redefine the standard of care. We continuously evaluate expansion opportunities for our pipeline including new indications and new HiMO drug candidates.

We believe HiMO-based medicines are a novel treatment approach to diseases which are being more frequently classified as GBA disorders by the scientific and medical communities because they operate via diverse mechanisms affecting gut somatic cells, the microbiome and the human immune system. To our knowledge, there have been no therapeutic compounds to date that have been approved to treat GBA through this multifaceted mechanistic approach.

In addition to our plans to initiate our first clinical trial in Australia, in accordance with the feedback we received during a pre-investigational new drug, or IND, interaction with the U.S. Food and Drug Administration, or the FDA, Division of Gastroenterology, we plan to undertake a confirmatory, IND-enabling toxicology study, to be commenced following the closing of this offering, prior to expanding this clinical trial under an IND from the FDA in the United States. The FDA provided us guidance related to the third-party published toxicology studies, suggesting that we must conduct our own confirmatory toxicology studies under Good Laboratory Practices, or GLP, to include in our IND, which indicates that they consider HiMOs as new molecular entities, or NMEs, when being developed as therapeutics. Subsequently, we plan to evaluate OM002 for the treatment of the

 

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diarrhea predominant form of IBS, or IBS-D. We believe the clinical, preclinical and toxicology third-party published data on 2’FL, which reports both preclinical and exploratory clinical data in infants, healthy volunteers and IBS patients, support our therapeutic rationale for the clinical development of OM002 as a potential new medicine for the treatment of both IBS-C and IBS-D. To date, there has been no reported toxicities in human and animal studies of 2’FL. We believe OM002 has the potential to be the first drug, if approved, to treat both IBS-C and IBS-D, which, based on the estimated adult population reported in the 2020 U.S. Census and an approximately 5.0% prevalence rate among adults, is estimated to affect over 10 million patients in the United States, alone.

The following chart summarizes our current drug pipeline:

 

 

LOGO

Unlike other glycans in development, our OM drug candidates are based on HMOs that all humans have been exposed to in utero and, if breastfed, through mother’s milk. Through natural selection, these compounds have survived the evolutionary process so that they are available for the infant to help populate a healthy gut microbiome, and determine tolerance for the developing immune system. As such they are resistant to degradation by stomach acid and digestive enzymes found in the upper GI tract, and thus are not utilized for nutrition or energy by the human body. OM molecules, while synthetic, are identical to their HMO counterpart and share the same characteristics and, therefore, are already optimized and bioavailable in the colon. In summary, the key characteristics of our drug candidates are described below:

 

   

Optimized by Nature—HMOs have been conserved through millions of years of mammalian evolution to benefit human health through their prebiotic effects that shift the microbiome, modulate the immune system, and maintain the health of cells in the body. As a result, we believe that our HiMO OM drug candidates will not need further optimization using medicinal chemistry.

 

   

Orally Bioavailable—HMOs are highly water soluble and resistant to gastric acid, digestive enzymes degradation in the proximal gastrointestinal tract, or GI, and therefore, reach the colon intact where they can exert local effects with a small amount absorbed into circulation. As a result, we believe our OM drug candidates will be suitable for convenient oral administration.

 

   

Diverse Effects—Over 200 distinct, structurally similar, HMOs have been identified by the scientific community to date. Individual HMOs have not only been observed to have multiple mechanisms of action, but they have also been observed to have distinct mechanisms of action from each other. HMOs may also operate synergistically when present together. Therefore, in contrast with predominant drug development practices, where potential drug candidates are screened and developed based on the modulation of a single therapeutic target, we believe development of HiMO drug candidates enables a

 

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diverse pipeline of addressable diseases, both within a single HiMO drug candidate and across multiple HiMO drug candidates. Further, while our initial focus is on the development of individual HiMO drug candidates, we believe there is an opportunity to explore the development of next-generation combination HiMOs to leverage mechanistic synergies between individual HiMOs.

We believe HiMOs exert beneficial effects through multiple mechanisms of action. In particular, HiMOs beneficially shift the composition of the gut microbiome, increase the microbiome’s production of beneficial metabolites, and directly modulate the immune system.

Our drug candidates are identical to HMOs that are naturally found in human milk, maternal circulation from the first trimester of pregnancy, fetal circulation in utero as well as surrounding the fetus in the amniotic fluid, and ingested by infants who continue breastfeeding. As a result, we believe the likelihood of on and/or off target toxicity is low and is supported by published toxicology data which has shown no toxicity, even at high doses. Since we believe there is a reduced risk that our drug candidates will fail due to nonclinical toxicity prior to reaching the clinic, and no optimization of our drug candidates are required, we are anticipating a more predictable preclinical development cost and timeline. Clinically, the low probability of toxicity may ultimately broaden the eligible patient population to include the full spectrum of severity of various GBA and certain inflammatory disorders, and particularly, the pediatric population where the risk-benefit ratio may not be as favorable for drugs with significant side effects or toxicities.

We prioritize our drug candidates for multi-indication potential via their mechanisms to modulate the gut microbiome, promote healing and/or health of the body’s own cells, and have local as well as systemic anti- inflammatory effects. These features have been implicated and are believed to be common drivers for numerous diseases, which we believe enables us to develop each drug for multiple indications.

We hold an exclusive, sublicensable, worldwide license to our main drug candidates, OM001, OM002 and OM003, for the therapeutic treatment of inflammatory and autoimmune disorders, including COVID-19, RA, JIA, IBD, IBS, AD, alopecia areata and pain, under our license and supply agreement, or the Glycosyn License Agreement, with Glycosyn, LLC, or Glycosyn, a small biotechnology company developing synthetic biology to produce oligosaccharide molecules equivalent to those found naturally in human milk. Certain of these therapeutic rights Glycosyn itself has acquired via an exclusive, sublicensable, worldwide in-license from the patent owners, Cincinnati Children’s Hospital Medical Center, or Cincinnati Children’s, and the other licensors thereunder. We also hold an exclusive, sublicensable, worldwide license to OM001 and OM003 as therapeutic products for the treatment of inflammatory or autoimmune disorders, including RA, juvenile arthritis, alopecia areata and AD, among many others, as well as atherosclerosis or hyperlipidemia, from the patent owner, The Regents of the University of California, through its San Diego campus, The University of California San Diego, or UC San Diego.

Pursuant to the Glycosyn License Agreement, Glycosyn has agreed to enable a contract manufacturer we select with manufacturing and analytical technology, including intellectual property rights and know-how for the manufacture of our OM drug candidates. We currently intend to rely on Royal FrieslandCampina N.V., a Dutch multinational dairy cooperative based in Amersfoort, Netherlands, and its subsidiaries, or, collectively, Friesland, to supply food grade 2’FL produced under Glycosyn’s and Friesland’s patents and know-how for our initial clinical trial of OM002. Friesland and Glycosyn hold the know-how regarding the fermentation processes for the specific Glycosyn strains that produce the HiMOs that are licensed to us. In addition, Friesland and Glycosyn hold the know-how necessary to process and purify the product of fermentation, or down-stream process, to produce our purified drug candidates. In light of existing production capacity by Friesland using Glycosyn’s synthetic biology, we believe our pipeline of drug candidates are capable of being manufactured reproducibly and at large scale and that this scalable synthetic biology platform can be readily applied to other potential HiMO drug candidates.

Our OM drug candidates are protected by a patent portfolio consisting of a combination of issued and allowed patents and pending patent applications that are owned by us or licensed to us from third parties. Our portfolio covers therapeutic and human health supporting methods of use encompassing certain HMOs and/or

 

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combinations thereof. As of March 15, 2022, our intellectual property portfolio, consisted of three U.S. patents, a European Patent Office, or EPO, patent, a Canadian patent, six Patent Cooperation Treaty, or PCT applications, 16 non-provisional applications pending worldwide, and one pending U.S. provisional applications.

Overview of GBA and Certain Inflammatory Disorders

The GBA is a complex bi-directional communication between the CNS (brain) and the ENS controlling the gut, also known as the little brain. These complex interactions involve the cognitive and emotional centers of the brain as well as other organ systems including the immune, endocrine and autonomic systems. The pathogenic role of the gut microbiome in GBA disorders and certain inflammatory disorders are gaining much attention in the therapeutic arena, as there are approximately 1014 microorganisms in the gut, roughly 10 times more than cells in the entire human body. These organisms are highly biologically active and interact locally with intestinal cells and ENS, as well as directly with CNS through neuroendocrine and metabolic pathways. In clinical practice, a disruption of the gut microbiota (dysbiosis) and the presence of a leaky gut have been associated with a number of disorders, such as autism, Parkinson’s disease, and anxiety-depressive behaviors, functional gastrointestinal disorders such as IBS, and those previously considered solely autoimmune disorders such as IBD and AD. Expanding understanding of causal pathways from dysbiosis to disease informs novel targets and approaches to treat GBA disorders and certain inflammatory disorders.

Since most GBA disorders and certain inflammatory disorders are complex and involve multiple pathways, our company was built on the belief that human-identical drug candidates, like our drug candidates, have properties that could provide potentially transformational benefits to patients. Because OMs have multiple mechanisms of action on the gut microbes and direct effects on the body’s cells, we believe our drug candidates could offer a more complete therapeutic solution to tradition drug options that have a single target or pathway. As a result, we believe OMs have potential to represent a new class of drugs with differentiated therapeutic potential for numerous disorders which are not well-treated by approved and investigational drugs that approach disease intervention from a single target or linear pathway.

Our Strategy

We are driven by our mission to revolutionize the treatment of GBA disorders and certain inflammatory disorders by developing drugs based on the differentiated profile of HMOs. Key elements of our strategies are to:

 

   

Prioritize advancing drug candidates based on a combination of market-need insights and available clinical and nonclinical data. We believe we are well-positioned to advance and expand our product pipeline quickly, and prioritize drug candidates that have the most supportive published data available. Our drug candidates are already optimized through evolution, with no further modification in chemistry needed, and for the reasons noted earlier, we believe there is a lower risk for toxicity. This could give us an advantage in both speed and cost as compared to traditional drug development from the discovery stage to the commencement of a Phase 2 clinical trial where toxicities, safety, and tolerability issues are the primary reasons for program failure in drug development. We plan to continue to identify new drug candidates and targets and new indications to expand out pipeline.

 

   

Develop institutional expertise around HMOs. We are leveraging our differentiated drug development approach, knowledge and expertise to lead efforts to expand and translate the scientific understanding of HMOs and their impact on human health. Therefore, we believe we are well positioned to advance our understanding about HMOs and to use that knowledge in pursuit of our mission. We believe we have the ability to establish relationships with key opinion leaders as a result of our management team’s industry experience and engagement in the field and the favorable profiles and promise of HMOs as drug candidates. Further, we believe our drug development capabilities and differentiated approach, along with the expertise of our senior management, medical and scientific advisors, will further help us establish our leadership position to advance the previously untapped therapeutic potential of these compounds and will be significantly more cost efficient than traditional drug development from the discovery stage to the commencement of a clinical trial.

 

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Further strengthen and expand our intellectual property portfolio. We believe we have a robust intellectual property portfolio to support our pipeline programs. As of March 15, 2022, our patent portfolio, both in-licensed and wholly-owned, comprised of three U.S. patents, one EPO patent, six PCT applications, and 16 non-provisional applications pending worldwide, including method of use patents. We also rely on partnerships, regulatory frameworks, trademarks, trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position. We are continually expanding our intellectual property portfolio to protect our biological findings from our exploration of HMO transcriptomic effects in the context of inflammation as well as our deepening understanding of GBA and certain inflammatory disorders.

 

   

Retain commercialization optionality to maximize the value of our pipeline. We plan to retain commercialization optionality to maximize the economic value we receive around certain drug candidates or in disease areas where we can advance independently. We intend to retain significant economic and commercial rights to our drug candidates in key geographic areas that are core to our long-term strategy.

 

   

Explore strategic collaborations to expand our pipeline of drug candidates with additional human bioactive compounds. We plan to explore collaborations to expand our pipeline of drug candidates to other naturally occurring bioactive compounds that meet our criteria of having the potential to redefine the standard of care in diseases where available treatment options are inadequately serving patients due to safety or tolerability issues.

Our Team and Investors

We are led by an experienced management team with an unwavering commitment to developing OMs to treat diseases and improve human health. Our management team is comprised of Alexander Martinez, co-founder, Chairman and Chief Executive Officer, Jason Ferrone, co-founder, Chief Operating Officer and President, and Emil Chuang, M.B., B.S. (Syd) FRACP, our Chief Medical Officer. Mr. Martinez’s over 16 years of healthcare experience spans health policy, corporate law, government affairs, corporate development, competitive intelligence, investor relations and commercial launch, with most of his biopharmaceutical experience at Ionis Pharmaceuticals, Inc., or Ionis, and Akcea Therapeutics, Inc. Mr. Ferrone has been in drug discovery and development for more than 20 years, leading the Ionis patent group for nearly a decade. Also, while at Ionis, Mr. Ferrone served as a clinical lead for a program from the research phase to Phase 2 as well as leading regulatory affairs for the organization. Dr. Chuang is a pediatric gastroenterologist who graduated medical school from the University of Sydney and has completed specialty training in three disciplines, including pediatrics, pediatric gastroenterology, and nutrition. He began his academic career at Duke University and then the University of Pennsylvania, followed by over 20 years of industry experience including Centocor Biotech, Inc. (now known as Janssen Biotech, Inc.) Nestle Health Science S.A., Takeda Pharmaceutical Company, Ltd., and Progenity, Inc.

Our institutional investors include SOSV IV, LLC, or SOSV, CRCM Opportunity Fund III, L.P., and Washington Research Foundation Capital. We are an alumnus of SOSV’s IndieBio Venture Accelerator program.

Our Drug Candidates

The advantages of human milk over formula milk have been known since the 1960s, but it was not until two decades ago that the clinical benefits observed for human milk were largely attributed to HMOs, and only in the last decade that nutrition companies began studying and fortifying infant formula with HMOs. Clinical benefits observed in infants include a reduction in respiratory and gastrointestinal infections, allergies, and inflammation. HMOs are nutrients and serve as an energy source for the beneficial intestinal bacteria while at the same time preventing the growth of harmful bacteria. Additional benefits include the modulation of the intestinal epithelial cell response and the development of the immune system. These benefits do not appear to be limited to infant and juvenile pre-clinical models. For these reasons, the potential benefits of HMOs in treating adult diseases have gained interest in recent years.

 

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We believe the FDA will consider each of our current HiMO drug candidates as a new molecular entity, small molecule, based on their molecular weight and chemical class. As such, we plan to develop our drug candidates and submit for marketing authorization via NDAs as opposed to biologic license applications.

About Our Lead Candidate: OM002

OM002 is a synthetic biology-produced HiMO 2’FL. HMOs are the most abundant non-caloric solid component of human milk, of which over 200 distinct HMOs have been identified to date. The single most abundant HMO is 2’FL, which constitutes nearly 30% of the total HMO proportion in human milk.

Published, Independent Studies Support Exploration of 2’FL in GBA and Certain Inflammatory Disorders

2’FL has been shown to have direct effects on the microbiome composition, direct anti-inflammatory effects as well as supporting intestinal epithelial health and epithelial barrier integrity. In terms of the effect on the microbiome, 2’FL has a trifold effect, namely prebiotic effects leading to the selective proliferation of beneficial bacteria, inhibition of pathogenic, or disease-causing bacteria, and finally, increase short-chain fatty acid production which is important to maintain the health of the colon cell lining. This suggests that 2’FL has the potential to treat the underlying causes for conditions such as IBS, rather than treating just the major symptoms as in the currently approved therapy.

2’FL Appears to Promote Microbial Homeostasis, Reversing or Improving Dysbiosis

There is a growing body of evidence that dysbiosis, or disruption of the normal bacterial composition, in the colon is a key driver of a number of conditions, including many GBA and certain inflammatory disorders. The ability to reverse or improve this dysbiosis may be beneficial to treating these disorders.

This body of evidence suggests the potential of 2’FL to reverse or improve dysbiosis has been validated in vivo in experimental models. For example, using a murine, or rodent model of intestinal adaptation, Mezoff et al, studied the effects of 2’FL following intestinal resection to assess the adaptive response after intestinal resection. The results showed that after 56 days, treated animals had greater weight gain and intestinal crypt depth. In other words, 2’FL supported the growth of the intestinal cells leading to better weight gain. Additionally, 2’FL increased small bowel luminal content microbial alpha diversity following resection. A greater alpha diversity signifies a great richness in the number of species and desirable. Finally, transcriptional analysis of the intestine revealed enriched ontologies and pathways related to antimicrobial peptides, metabolism, and energy processing, suggesting a healthier ecosystem for the bacteria. The conclusion from the study was that 2’FL supplementation following ileocecal resection increases weight gain, energy availability through microbial community modulation, and histological changes consistent with improved adaptation.

Bifidobacterium are one of the major genera of bacteria that make up the gastrointestinal tract microbiota in mammals. In a disease state, there is often a relative depletion of these bacteria. The mechanism for the bifidogenic effects, or increase the proliferation of bifidogenic bacteria, of 2’FL occurs through the presence of specific glycosidases, which are enzymes to break down HMOs and utilize them as nutrients, in these bacteria to utilize 2’FL as a source of energy. This contrasts with most pathogenic, or disease causing, Enterobacteriaceae that do not have these enzymes and thus, their growth is inhibited. Moreover, HMOs such as 2’FL also have a carbohydrate structure and they can act as soluble receptor decoys to prevent pathogens from infecting the host.

These animal findings have since been confirmed in several human studies:

 

   

In a study of adult healthy volunteers given 2’FL to doses up to 20g per day for two weeks, Elison et al showed an increase in relative abundance of bifidobacteria, and a reduction in relative abundance of two phyla, firmicutes and proteobacteria, were observed.

 

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Ryan et al gave 12 adults with a diverse history of gastrointestinal disorders (including IBS and IBD) a pre-biotic mixture containing four grams of 2’FL for six weeks. At the end of the study, there was a 19-fold increase in Bifidobacterium spp, and a 17-fold increase in the species Bifidobacterium longum. These shifts in the microbiome were associated with improved symptoms. At the same time, potentially harmful bacteria were eliminated in seven of eight subjects at the end of treatment. Short-chain fatty acids, or SCFA, which serve to maintain health of intestinal cells were also increased.

 

   

Finally, Iribarren et al treated IBS patients with two doses of a 4:1 mix of 2’FL and Lacto-N-neotetraose, a neutral HMO, (2’FL/LNnT) and compared it against placebo. The results showed 63% of patients in the higher dose group (10g) had a greater than 50% increase in the stool bifidobacteria abundance, versus 26% in the placebo group.

2’FL Appears to Modulate Inflammation

Inflammation is adaptive, or a normal healthy function, of the immune system, when it responds to the threat represented by pathogens or tissue damage and once the threat is eliminated or cleared from the body, the inflammation resolves. However, when inflammation is unresolved, it becomes maladaptive, causing abnormal biological effects and damage to healthy tissues. Unresolved or maladaptive inflammation is a central component of many of the GBA and certain inflammatory disorders we are exploring to treat with our OMs. We believe OM002’s ability to treat GBA and certain inflammatory disorders and reduce local inflammation is an important attribute.

 

   

2’FL reduces inflammation caused by cow’s milk in infants. Cow’s milk has been shown to cause low-grade inflammation in infants and occasionally result in an allergic response. In an infant study, Geohring, et al showed that by supplementing infants being fed with a cow milk-based formula with 2’FL, the plasma inflammatory cytokines, including interleukin or IL receptor antagonist, or IL-1ra, IL-1a, IL-1b, IL-6, and tumor necrosis factor a, or TNF-a, were reduced to levels similar to infants who were fed with human milk.

 

   

2’FL reduces intestinal inflammation and shows benefit in a colitis model. IL-10 is an immunoregulatory cytokine that plays a central role in regulating intestinal inflammation in humans and mice. Mice deficient that are deficient IL-10 receptor develop spontaneous colitis early in life and are one of the most widely used animal models for studying the pathogenesis of human IBD. Grabinger et al studied the potential of several HMOs in alleviating intestinal inflammation in a mice (IL10 -/-) model of colitis. The results showed that 2’FL increased Ruminococcus gnavus, a bacteria belonging to the clostridia family and is responsible for decreasing activation of immune cells. This was associated with a significant decrease in the severity of colitis as displayed by reduced inflammatory marker expression, histological and diarrhea scores, increased epithelial integrity, and less pronounced colon shortening.

 

   

2’FL can prevent intestinal inflammation caused by harmful bacteria. Gram-negative pathogenic bacteria such as E. coli are a major cause of enteric infection and activate mucosal inflammation through lipopolysaccharide, or LPS. He et al studied the effects of 2’FL on susceptible mice infected with toxigenic E. coli. The results showed that 2’FL was able to directly inhibit the inflammation and attenuated LPS-dependent induction of IL-8 of inflammation, through the modulation CD14 expression in human enterocytes.

 

   

2’FL protects the intestinal lining against damage from cancer drug. In a mice model, Zhao, et al. studied 2’FL and its ability to prevent mucositis by protecting small intestinal epithelial cells against apoptosis, or cell death, stimulated by 5-fluorouracil, or 5-FU, a potent drug to treat cancer. The study showed that treatment with 2’FL provided protection of the intestinal epithelial cells against apoptosis and prevented 5-FU-induced intestinal mucositis.

 

   

2’FL reduces allergic response to food allergens in mice. In an allergic mouse model, Li et al showed that 2’FL reduced ß²-lactoglobulin, a milk allergen–induced serum-specific immunoglobulin E, or IgE, secretion and mast cell degranulation, while reducing the inflammatory cytokines, TNF-α±, IL -4, and

 

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IL-6 production and promoting the miR-146a expression, which is shown to be an anti-allergen. This suggests that 2’Fl can regulate intestinal immunity and may reduce allergic response to certain foods and potentially other antigens.

In summary, multiple third-party studies in different animal models and in infants have shown the beneficial effects of 2’FL in reducing inflammation and/or reduce damage to the intestinal mucosa.

2’FL Appears to Improve Gut Barrier Function

Maintaining the integrity of the intestinal barrier is essential to prevent inflammation caused by bacteria and/or antigens, or toxins / other foreign substance from entering the body where it can induce inflammation. The ability to protect this integrity and prevent a “leaky gut” is important in the prevention of a number of inflammatory and allergic disorders.

 

   

2’FL promotes the production of beneficial bacteria and increases the production of proteins that help maintain the gut barrier. In a Simulator of the Human Intestinal Microbial Ecosystem model to assess the impact of HMOs on adult gut microbiota and gut barrier function, Suligoj et al confirmed the bifidogenic effects of 2’FL noted earlier and in doing so, it was accompanied by an increase in SCFA, and in particular butyrate, an important source of nutrient for the colonic epithelial cells. At the same time, there was a significant reduction in paracellular permeability and an increase in claudin-8 and claudin-5 gene expression, a measure of tight junction proteins that promote gut barrier integrity.

 

   

2’FL reduces the leakiness of the intestinal barrier. In another model of gut barrier function, Lee et al assessed the effects of 2’FL supplementation in a high-fat fed mouse model. The results showed that mice supplemented with 2’FL had significantly reduced intestinal permeability and increased expression of IL-22, a cytokine known for its protective role in the intestine. In addition, 2’FL supplementation improved the metabolic profiles, lipid metabolism and signaling in the vagal afferent pathway, the pathway that is the direct connection between the gut and the brain.

2’FL Toxicity and Tolerability Profile

Independently generated nonclinical data, both in vitro and in vivo, support our belief that 2’FL will have a favorable toxicity and tolerability profile in the therapeutic context. The potential toxicity of 2’FL was evaluated in repeat-dose studies in rats and pigs, including juveniles, and in genotoxicity studies.

Toxicological studies with 2’FL have demonstrated that it is well tolerated when administered and consumed by rats at dietary fortification levels of up to 10%, or 7.7 g/kg/day, for 90 days and was well tolerated by neonatal pigs at dietary fortification levels of up to 2.0 g/l/day (291.74 mg/kg/day in male piglets and 298.99 mg/kg/day in female piglets for 21 days). In separate 90-day toxicological studies, no observed adverse effect level, or NOAEL, commonly defined as the highest experimental point that is without adverse effect, of 5,000 mg/kg body weight/day for both male and female rats was established for 2’FL administered by oral gavage and at an oral dietary level of 10%.

2’FL was also tested in genotoxicity studies to determine its mutagenic and clastogenic potential, indications of carcinogenicity potential. The studies included a bacterial reverse mutation assay, in vitro rat micronucleus assay, and in vivo micronucleus assay. In each of these tests, 2’FL yielded non-mutagenic and non-clastogenic responses.

Furthermore, clinical trials have been conducted in pediatric populations to evaluate the safety of 2’FL as a nutritional supplement. Trials in which approximately 400 total infants were exposed to 2’FL with a duration of exposure up to six months reported that 2’FL is well tolerated, with no significant adverse effects noted. Due to its demonstrated low toxicity profile, 2’FL has received a generally recognized as safe, or GRAS, designation under FDA regulations for the inclusion in infant and toddler nutritional products in the United States and

 

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Therapeutic Goods Administration, or TGA, approval as a food supplement in Australia. The infant nutrition commercial experience indicates that its use in these infant and toddler nutritional products is regarded as well tolerated.

Moreover, trials in which over 400 total adult subjects were administered 2’FL at a maximum dose of 20 g/day and a maximum exposure of 12 weeks indicated that 2’FL was well tolerated, with no significant adverse effects reported among healthy adults. We are not aware of any trials reporting dose limiting toxicities or trial discontinuations attributed to 2’FL.

Considering the GRAS designation and TGA approval, as well as the results of nonclinical and clinical studies, both in terms of tolerability and positive benefits associated with 2’FL, we intend to evaluate the safety and efficacy of OM002 in the treatment of IBS and believe there is low risk of new toxicology findings in our confirmatory, IND-enabling toxicology studies or our planned initial Phase 2 clinical trial, in which we plan to administer dosages below those administered in the above studies.

About IBS

IBS is a prototypic GBA disorder. As of 2016, the prevalence of IBS is approximately 5% of the U.S. population. IBS is a chronic functional gastrointestinal disorder characterized by abdominal pain and discomfort associated with altered bowel habits. Patients often experience additional symptoms such as bloating, sensation of incomplete evacuation, and straining. The symptoms of IBS adversely affect a person’s health-related quality of life, or QOL. To illustrate, on average, respondents to an international survey of IBS patients published in the Journal of Clinical Gastroenterology in 2009 indicated they would be willing to give up 15.1 years of their remaining life (or about 25% of their remaining life) to receive a treatment that would make them symptom free. The symptoms of IBS not only adversely affect a person’s health-related QOL, but also place a significant financial burden on society because of reduced work productivity and a significant increase (over approximately 50%) in the use of health-related resources. IBS comprises three distinct subtypes, which are categorized based on predominant bowel symptoms (i.e., constipation, diarrhea, or mixed).

There are emerging data to suggest that intestinal epithelial barrier dysfunction is a common element of many GBA disorders such as IBS. A leaky gut may allow translocation of foreign antigens from the gut lumen and this, in turn, lead to the initiation and progression of immune activation.

Published, Independent Studies Support Rationale of Treating IBS with 2’FL

We believe the preclinical findings described above support 2’FL as a potential ideal drug candidate for IBS. Further, the therapeutic potential benefit in adult disease is supported by a recent publication by Palsson et al. This study was conducted at 17 sites in the United States and recruited 317 subjects with IBS based on the Rome IV criteria, which requires patients to recurrent abdominal pain on average at least one day per week during the previous three months that is associated with two or more of the following: pain related to defecation (may be increased or unchanged by defecation), associated with a change in stool frequency, and/or associated with a change in stool form or appearance. In addition, IBS patients who have constipation must also have two or more of the following: fewer than three spontaneous bowel movements per week, straining for more than 25% of defecation attempts, and/or lumpy or hard stools for at least 25% of defecation attempts. This was an open-label study with eligible subjects given five grams of HMOs for a duration of 12 weeks. This is a mixture containing four grams of 2’FL and one gram of LNnT (lacto-N-neotetrose, a neutral HMO). All subtypes of IBS were included in the study. An overall improvement in the overall IBS Symptom Severity Score and health-related QOL score were observed. A similar magnitude of improvement was seen across IBS subtypes. Specifically, there was a shift towards a normal stool consistency irrespective of the IBS subtype. In terms of pain, a reduction in pain, both on the intensity scale and number of days with pain was noted, with benefits observed from as early as four weeks of treatment and benefits sustained for the duration of the treatment period. The limitations of the study were that it was an open-label study, and the FDA approval endpoints were not used. Nonetheless, we believe the magnitude of change observed and reported in this exploratory study supports investigation in a properly powered and designed studies testing therapeutic effects of OM002 in the distinct subtypes of IBS.

 

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IBS-C Market Overview

IBS-C accounts for approximately one-third of all IBS cases and occurs more commonly in women than men. As of December 2021, there are approximately five to six million people with IBS-C in the United States based on the Rome IV diagnostic criteria. Pharmacotherapy for the treatment of IBS-C is limited, and all the approved medications in the United States are designed to treat the predominant symptoms and not the underlying causes of IBS. These include linaclotide (Linzess) and lubiprostone (Amitiza). Linaclotide works by increasing fluid secretion in the small intestine by activating the guanylate cyclase 2C receptor in the small intestine. In clinical trials, diarrhea (20% vs 3% placebo) and abdominal pain (7% vs 5%) were the most commonly observed side effects and this may limit both use and adherence. In nonclinical studies in neonatal mice, administration of a single, clinically relevant adult oral dose of linaclotide caused deaths due to dehydration. As a result, there is a black box warning and is contraindicated in children under two years of age, and the safety and effectiveness in patients less than 18 years of age have not been established. Pediatric IBS is a common condition, particularly in adolescents with an estimated prevalence of approximately 12% in this age group but because of the lack of supporting clinical data and the black box warning, these drugs approved for use in adults are not suitable for use in the pediatric population. Due to the safety concerns and the frequency of diarrhea as a side effect of treatment, there remains a significant unmet medical need for therapeutics that can be used for a broader population without the side effect burden. Lubiprostone activates the chloride channel in the apical region of the epithelial surface of the small intestine to increase fluid secretion in the small intestine to help with the passage of stool. It is approved for use in adult women with IBS-C and adult patients who have chronic idiopathic constipation, or CIC. Efficacy has not been demonstrated for the pediatric population and is contraindicated for use in children under six years of age.

Planned Clinical Trial for IBS-C

In the first half of 2023, we plan to initiate a Phase 2 clinical trial under an approved protocol in Australia to test OM002 in over 400 patients with IBS-C, which is estimated to affect approximately five million patients in the United States alone. We have also had a pre-IND meeting with the FDA, and, after taking into consideration FDA comments, are planning to undertake a confirmatory, IND-enabling toxicology study, to be commenced following the closing of this offering to support our anticipated IND filing in the first half of 2023. As an NME, the FDA requested a toxicology plan that supports our duration of dosing in the Phase 2 clinical trial. The current plan is to conduct the initial Phase 2 IBS-C clinical trial in Australia and, following completion of our anticipated IND-enabling toxicology study, in the United States. In this upcoming clinical trial, we plan to enroll approximately 400 patients with IBS-C based on the Rome IV IBS criteria. The Rome Foundation which created the criteria is an independent not for profit organization that provides support for activities designed to create scientific data and educational information to assist in the diagnosis and treatment of Disorders of Gut Brain Interactions. Patient eligibility will be confirmed during a two-week run-in period. They will then be randomized into one of two doses of 2’FL or placebo and treated for 12 weeks. The primary comparison will be a clinical response based on the FDA recommended criteria for response based on the 2012 IBS guideline and is also consistent with the European Medicines Agency, or EMA, guidelines, namely, patients who meet the following weekly response criteria in at least six of the 12 weeks of treatment: improvement from baseline in the weekly average of daily worst abdominal pain by 30% and increase from baseline of ≥ one complete spontaneous bowel movement, or complete SBM, per week. In addition, we will be collecting data for other key IBS assessments including the IBS-symptom severity score, and IBS-QOL questionnaire. With over 130 subjects per study arm, the clinical trial will be powered at 80% to demonstrate a p=0.05 difference between the active treatment group versus placebo. We anticipate disclosing top-line data from this study in the first half of 2024.

Statistical Significance

In the description of the preclinical studies and clinical trials discussed throughout this prospectus, n represents the number of animal subjects or patients in a particular group and p or p-values represent the probability that random chance caused the result (e.g., a p-value of 0.001 means that there is a 0.1% probability that the difference between the placebo group and the treatment group is purely due to random chance). A p-value of less than or equal to 0.05 is a commonly used criterion for statistical significance, and may be supportive of a finding of efficacy by regulatory authorities.

 

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Potential Development for Other Related Constipation Indications

The data generated by our initial IBS-C clinical trial will inform future clinical trials, if any, in other related constipation indications as our IBS-C clinical trial we will be measuring safety and efficacy endpoints clinically relevant to these other indications.

Chronic Idiopathic Constipation

Chronic idiopathic constipation, or CIC, is a common disorder and affects approximately 9% of the general population in the United States as of 2016. CIC shares many of the characteristics of IBS-C and patients must have two or more of the following features to be diagnosed with CIC: straining during more than 25% of defecations, lumpy or hard stools (Bristol Stool Form Scale 1-2) more than 25% of defecations, sensation of incomplete evacuation more than 25% of defecations, sensation of anorectal obstruction/blockage more than 25% of defecations, require manual maneuvers to facilitate more than 25% of defecations (e.g., digital evacuation, support of the pelvic floor), and/or fewer than three SBM per week. Unlike IBS-C, pain is not typically a feature of CIC.

As in IBS-C pharmacotherapy is limited, and all the approved medications in the United States are designed to treat the symptoms and not the condition. These include linaclotide (Linzess) and lubiprostone (Amitiza).

About IBS-D

IBS-D is another subtype of IBS, but in this case, the predominant symptoms are frequent bowel movements, loose stools, and feelings of urgency. Other common symptoms may include abdominal pain, gas, and bloating. IBS-D is sometimes confused with small intestinal bacterial overgrowth and bile salt diarrhea. Non-drug management for IBS-D is similar to that of IBS-C with supportive treatment as the mainstay of therapy. As with the symptom polarization effect of drug treatment for IBS-C, the side effects of treatment for IBS-D can be serious and patients on treatment may be hospitalized for severe constipation or worse, and the side-effects may be worse than the original IBS-D symptoms. Alosetron (Lotronex) is designed to relax the colon and slow the movement of waste through the lower bowel. Due to the potential for rare but potentially life-threatening side effects, it can be prescribed only by doctors enrolled in a special Risk Evaluation and Mitigation Strategy, or REMS, program, is intended for severe cases of diarrhea-predominant IBS in women who have not responded to other treatments. Eluxadoline (Viberzi) can ease diarrhea by reducing muscle contractions and fluid secretion in the intestine and increasing muscle tone in the rectum. Side effects can include nausea, abdominal pain, and mild constipation. Eluxadoline has also been associated with pancreatitis, which can be serious. Rifaximin (Xifaxin) is a nonabsorbable antibacterial drug that was originally developed for travelers’ diarrhea. It has since been developed for the treatment of IBS-D. As a non-selective antibacterial agent, it reduces the bacterial load in the colon which in turn may reduce the gas production by the colonic bacteria. Treatment is for 14 days and is not designed for chronic use because of the concerns for the development of bacterial antibiotic resistance and Clostridioides difficile infection. Most patients relapse after several months and retreatment is permitted. With the increasing awareness of the importance of the gut microbiome in promoting homeostasis, a non-selective reduction in colonic bacteria may not be the ideal treatment strategy for IBS-D.

Due to the significant limitations of the approved medications for IBS outlined above, their use in clinical practice is limited and the management of IBS is left largely to naturopathic health care providers practicing complementary and alternative medicine. This is not surprising considering none of the drugs approved for IBS today are first-line therapy because of their poor side effect profile. Moreover, the approved drugs today are only treating the symptoms of constipation or diarrhea, and the most common side effect of these drugs is the other end of the spectrum, that is, patients with constipation may develop diarrhea as a side effect and vice versa. With increased awareness of the importance of the gut microbiome in GBA and certain inflammatory disorders, the development of drugs that positively influence the gut microbiome is critical. For new drugs to become a viable first-line therapy, a favorable safety profile, and is suitable for use in the pediatric IBS population is essential.

 

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Future Clinical Trial for IBS-D

The Palsson study demonstrated an efficacy signal not only in IBS-C, but also IBS-D. Therefore, we are in the planning stages of a Phase 2 clinical trial in IBS-D patients and plan to initiate the trial after the start of the IBS-C trial. In this clinical trial, we plan to recruit IBS-D patients based on Rome IV criteria. Unlike the IBS-C clinical trial, this will be a 12-week dose-finding clinical trial. We believe patients with IBS-D may benefit from dose titration, and therefore, we are planning a dose titration clinical trial to explore a dosing paradigm for these patients. Since this is a dose-finding clinical trial, it will not be powered to demonstrate a statistically significant difference in the primary endpoint. However, we will incorporate secondary and exploratory endpoints to aid in the identification and evaluation of positive treatment effects.

OM001 (3’SL)

As discussed above, human milk contains three major HMO types: neutral, neutral N-containing, and acid. 3’SL is an acid type HMO and represents a form of HMO bound to sialic acid, or sialylated HMO, and similar to 2’FL is also found naturally in human milk in significant quantities. In human milk, approximately 73% of sialic acid, or SA, is bound to HMOs and 3% is present in free form.

The immunomodulatory effects of HMOs in early life have been of interest to researchers for decades. HMOs can bind to cell surface receptors expressed on epithelial cells and cells of the immune system and thus modulate neonatal immunity in the infant’s gut, and possibly also sites throughout the body. In recent years, 3’SL has been identified as the primary, directly anti-inflammatory HMO in preclinical studies.

Modulation of the GBA and Certain Inflammatory Diseases and Microbiome

3’SL is important in normal brain development, learning and memory

In addition to benefits common to most HMOs in infants, namely support resistance to pathogens, gut maturation, and immune function, the sialylated HMO represent an important source of SA, and together are important in brain development and function for cognitive development. Preclinical studies have demonstrated strong gut-brain interactions, and the putative role of 3’SL in normal brain development. The gut microbiota can be altered by stress. In a study in mice, it was shown the mice supplemented with 3’SL resulted in diminished stress effects on gut microbiota. In addition, the stress did not induce anxiety-like behavior in mice given 3’SL. Similarly, 3’SL has been shown to improve learning and memory in rats and pigs. The association between brain development, and the influence of 3’SL on the gut microbiota is not limited to preclinical models. In a human observational study in infants, it was shown that infants who received human milk that contained higher levels of 3’SL were associated with better cognition, particularly language functions.

As noted above, patients with ASDs often have gastrointestinal dysfunction as a comorbidity. Abnormal gut-brain signaling has been implicated in ASD, which has been mainly associated with altered microbiota composition and proinflammatory processes. In one study, children with ASD were found to have low levels of salivary SA compared with controls. Within the group with ASD, the SA level was associated with stereotypes and hyperactivity/noncompliance but not ASD severity.

Modulation of Inflammation

3’SL reduces inflammation and promotes healing in animal models of arthritis

 

   

In addition to brain development and cognition, 3’SL has been studied extensively in preclinical models of arthritis. In a collagen-inducted arthritis, or CIA, mouse model, intervention with 500 mg/kg of oral 3’SL given every other day produced statistically significant reductions in synovitis and pannus formation, suppressed cartilage destruction, reduced chemokines, pro-inflammatory cytokines, matrix metalloproteinases, and osteoclastogenesis. The markers are suggested of reduced in inflammation and destruction of the joints and promotion of healing. The improvements in biomarkers, clinical endpoints

 

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and histology in the 3’SL treated mice were similar to those improvements observed in mice treated with 1 mg/kg methotrexate every other day. Prophylactic or preventive dosing of 3’SL in the same CIA mouse model, at oral dosages of both 100 mg/kg and 500 mg/kg every other day showed dose-dependent improvements in these same biomarkers, clinical endpoints and histology.

 

   

In the collagen antibody-induced arthritis, or CAIA, mouse model, approximately 2,000 mg/kg/day (90 mg three times per day) oral doses caused significant reductions in clinical scores of disease and pro-inflammatory cytokines. In human Jurkat T cells and THP-1 monocytes in vitro incubated with LPS, 3’SL caused significant reductions in IL-1b, IL-6 and TNF-a in a dose-dependent manner. This confirms the results in the previous study and confirmed the potential for 3’SL to modulate joint damage.

3’SL inhibits or reduces the inflammation in an animal model of AD

 

   

In a preclinical study, Kang et al, demonstrated in a mouse model of AD, 3’SL directly induced transforming growth factor-b or TGF-b-mediated Treg differentiation regulatory in AD mouse models to prevent inflammation. It also inhibited immunoglobulin-E or IgE, Interleukin or IL, IL-1b, IL-6, and tumor necrosis factor or TNF-a secretion and markedly downregulated AD-related cytokines including IL-4, IL-5, IL-6, IL-13, IL-17, IFN-g, TNF-a, and Tslp through regulation of NF-kB pathway. These finding are consistent with the potential for 3’SL to be beneficial in atopic or allergic conditions such as eczema or AD.

Modulation of Cardiometabolic Risk

It has been shown that exercise in maternal mice increases 3’SL in maternal milk and when the milk is given to 3’SL knock-out mice results in an improvement in metabolic health and cardiac function in offspring during adulthood. This infers the therapeutic potential for 3’SL for obesity, type 2 diabetes, and cardiovascular disease.

3’SL Nonclinical Toxicology Data

A number of independent, third-party published nonclinical studies have shown that 3’SL is, when administered orally, well-tolerated, across multiple species in juvenile and adult animals at dosages up to and including 5,000 mg/kg/day for 90 days of administration. These data supported a successful application for GRAS certification for the inclusion of 3’SL in infant formula and other food products intended for the general population as a food additive (GRAS Notice No. GRN 000766). Although the GRAS applicant relied upon scientific procedures (through independent, third-party published literature) to certify 3’SL as GRAS; it is noteworthy that human infants are chronically exposed to 3’SL in human milk (GRAS Notice No. GRN 000766). The level of systemic absorption of 3’SL in rodents and humans are different, where about 50% of an oral dose in mice is excreted intact in urine and total HMOs found in human infant urine is about 10% of the estimated daily intake of HMOs.

3’SL Exploratory Clinical Safety and Tolerability Data

3’SL has been studied in three clinical studies in adults with H. pylori infection with doses up to 20 g per day and for a duration of 4 weeks of treatment. In the first study by Opekun et al (2003), six subjects with confirmed H. pylori infection but were otherwise healthy received 7.6g of 3’SL for two days. No adverse events were reported for these subjects. In a second study by Parente et al (2009) 65 dyspeptic patients with H. pylori infection documented by histology and 13C-Urea Breath Test were randomized to receive two different dosages of 3’SL (10 g or 20 g/day) in three daily administrations before meals or placebo for four weeks. No serious adverse events were observed during therapy in any of the study groups. Moreover, no significant differences were found between the placebo and the aggregated treatment groups in terms of overall adverse events. Finally, Gurung et al (2018), conducted a randomized placebo-controlled study to assess the safety of 3’SL in patients who were positive for H. pylori infection. Forty-eight subjects were randomized to receive either 12g of 3’SL or

 

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placebo for four weeks. From the safety perspective, no changes in clinical chemistry tests, hematology tests, or urinalyses were observed post-treatment. Observed adverse events included nausea, loose stools, diarrhea, abdominal pain, and epigastric pain. All were classified as mild with no moderate or severe AEs reported. There were no significant differences in adverse events between the treated and placebo groups.

Based on the above findings, and the anti-inflammatory properties of 3’SL, we are prioritizing the development to GBA and certain inflammatory disorders where inflammation is a central feature of the disease pathophysiology.

Oligoarticular Juvenile Idiopathic Arthritis

oJIA is the most common subtype of juvenile idiopathic arthritis, or JIA, among patients of European descent, making up about 40-50% of children with JIA from independent, third-party published cohorts of patients as of August 2021. Polyarticular JIA, or pJIA, is the second most common subtype of JIA where the primary differentiation from oJIA is the number of joints affected within first six months of onset. For oJIA, the number of joints affected is four or less, whereas in polyarticular JIA, which is typically more severe than oJIA, the patients present with five or more affected joints. In both types of JIAs, the knee is the most commonly affected joint although both large and small joints are commonly involved. Approximately 50% of patients presenting with oligoarticular JIA will develop arthritis in additional joints over time. There are no currently approved biologic disease-modifying anti-rheumatic drugs, or bDMARDs for oJIA. The current treatment paradigm involves a stepwise treatment, escalating from NSAIDs to disease-modifying treatments. Methotrexate and a majority of NSAIDs are not specifically approved for oJIA but are approved for polyarticular JIA which includes oJIA patients that have additional joints affected over time. Methotrexate is used commonly as the next step after NSAIDs in both forms, but for oJIA no biologic DMARDs are approved, whereas for pJIA a number of such drugs are approved for moderately and severely active disease: abatacept, etanercept, adalimumab (TNF-a mAb), and tocilizumab (IL-6 mAb). Despite NSAID and DMARD treatment, a significant fraction of patients fails to achieve disease control. Additionally, the currently available treatments have considerable toxicities such as gastrointestinal bleeding risks and hepatotoxicity for NSAIDs, several severe toxicities associated with methotrexate, and risk of infections in the case of bDMARDs. The risk of infections and the development of lymphomas are constant concerns of chronic immunosuppression, particularly in children. Therefore, there remains a considerable unmet medical need for effective treatment with a more benign safety profile.

In light of the pre-clinical observations for 3’SL in models of RA, we intend to explore development of OM001 for this indication in the future.

ASD, Behavior and Cognition

ASD is a developmental disability that can cause significant social, communication and behavioral challenges. In 2020, the U.S. Centers for Disease Control and Prevention reported that approximately 1 in 54 children in the United States is diagnosed with a form of ASD. People with ASD may communicate, interact, behave, and learn in ways that are different from most other people. The learning, thinking, and problem-solving abilities of people with ASD can range from gifted to severely challenged. Some people with ASD need a lot of help in their daily lives; others need less. ASD can sometimes be detected at 18 months or younger. By age two, a diagnosis by an experienced professional can be considered very reliable. However, many children do not receive a final diagnosis until much older. Currently, the etiology of ASD is unknown, but there may be many different factors that make a child more likely to have an ASD, including environmental, biological, and genetic factors. There is currently no known cure for ASD. However, research shows that early intervention treatment services can improve a child’s development. Apart from the challenges of cognitive deficits in some patients with ASD, behavioral issues such as wander or bolt from safety, self-injurious behaviors, headbanging, arm biting, and skin scratching are major issues faced by the caregiver.

In light of the pre-clinical observations for 3’SL in models of cognition and anxiety, we intend to explore development of OM001 for ASD in the future.

 

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Atopic Dermatitis

AD is the most common type of eczema, affecting more than 9.6 million children and about 16.5 million adults in the United States as of December 2021. Like other immune mediated conditions, the prevalence of childhood AD has steadily increased from 8% to ~12% in decades to 2017. It is a chronic condition that can come and go for years or throughout life and can overlap with other types of eczema. Atopic dermatitis typically begins in childhood, usually in the first six months of a baby’s life. Even though it’s a common form of eczema, it’s also severe and long-lasting.AD typically waxes and wanes over time. In some children, symptoms may improve over time, while other children will continue to have AD flares into adulthood. Treatment for mild AD usually consists of general supportive care, but for more severe cases, topical corticosteroids and non-steroidals may be required. Occasionally, biologics may be required for severe cases.

In light of the pre-clinical observations for 3’SL in models of AD, we intend to explore development of OM001 for AD in the future.

OM001 Clinical Development Plan

We are in the planning stage of clinical development to explore the pharmacokinetics of 3’SL in a multiple dose-escalation study to confirm a safe and potentially effective dose range in patients with an inflammatory disease. We anticipate that this will be followed by longer-term dosing in a Phase 2 clinical trial in the potential indications we have identified as development paths for OM001.

OM003 (6’SL)

OM003 is another HMO with a sialyllactose backbone and as such shares similar characteristics with 3’SL. Like 3’SL, it is found naturally in human milk, but in greater quantities. While the effects of 2’FL is largely through interactions at and adjacent to the intestinal epithelium, sialyllatose such as 6’SL and 3’SL may cross the blood brain barrier and have direct action in the central nervous system. Based on the available data, our initial target indication for OM003 is visceral pain that is of GI origin. Visceral pain occurs when pain receptors in the pelvis, abdomen, chest, or intestines are activated. It is often vague, generally poorly localized, and characterized by hypersensitivity to a stimulus such as organ distension. It often feels like a deep squeeze, pressure, or aching. Consistent with disorders of the GBA, it has been suggested that in concert with chronic visceral pain, there is high comorbidity with stress-related psychiatric disorders including anxiety and depression. Evidence suggests that long-term stress facilitates pain perception and sensitizes pain pathways, leading to a feed-forward cycle promoting chronic visceral pain disorders such as IBS.

In addition to visceral pain, we believe OM003 has potential for ASD and inflammatory conditions in the GI tract and we believe these indications may be developed as monotherapy or in combination with another OM products.

Preclinical Data:

 

   

Tarr et. al. has shown that in the mouse model of stress 6’SL as well as 3’SL ameliorates the stress response without affecting the composition of the gut microbiota, suggesting it has a direct effect on the neuronal cells.