ITEM 1A:
RISK FACTORS
An investment
in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with
all of the other information included in this Quarterly Report before making an investment decision. Our future operating results
may vary substantially from anticipated results due to a number of risks and uncertainties, many of which are beyond our control.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware
of, or that we currently believe are not material, may also become important factors that affect us. The following discussion
highlights some of these risks and uncertainties and the possible impact of these risks on future results of operations. If any
of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected.
In that case, the market value of our stock could decline substantially and you could lose part or all of your investment.
RISKS RELATED
TO OUR BUSINESS
Our products
and product candidates may not achieve or maintain widespread market acceptance.
We may not
achieve or maintain widespread market acceptance of our products or product candidates among physicians, patients or healthcare
providers. Our products are highly susceptible to physician and patient preference and market acceptance. We have a limited history
of promoting our cosmeceutical products. Significant marketing efforts to date have been focused primarily on dermatologists and
plastic surgeons.
We believe
that market acceptance of our products will depend on many factors including:
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The perceived advantages of our products over competing products;
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The effectiveness of our sales and marketing efforts;
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The convenience and ease of administration of our products;
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The safety and efficacy of our products and the prevalence and severity of any possible adverse side effects;
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The availability and success of alternative treatments;
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Our product pricing and cost effectiveness;
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Publicity concerning our products, product candidates or competitive products;
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Whether or not patients routinely use our products and purchase additional product, and
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Our ability to respond to changes in physician, aestheticians and patient preferences for the treatment of dermatological conditions and the improvement of the appearance of skin.
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If our
products fail to achieve or maintain market acceptance or if new products or technologies are introduced by others that are more
favorably received than our products, are more cost effective or that otherwise render our products obsolete, we may experience
a decline in the demand for our products.
If we are unable
to market and sell our products successfully, our business, financial condition, results of operation and future growth would
suffer. Our ability to compete depends upon the success of our business development activities and our ability, and the ability
of our collaborators, to innovate, develop and commercialize new products and product enhancements, as well as to identify new
markets for our products
Our business
strategy requires us to develop or acquire new and innovative applications of our products, identify new markets for our existing
products, and develop or acquire new technology. We are currently developing products for the treatment of burns and exploring
several delivery technologies to improve our existing products. However, our development efforts may not lead to new commercial
products. To successfully expand our product offerings, we must:
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Develop or acquire new products that either add to
or significantly improve our current product lines;
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Convince our target customers that any new cosmeceutical
products or line extensions would be an attractive revenue-generating addition to their practices;
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Protect our products with defensible intellectual property;
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Satisfy and maintain all regulatory requirements for
commercialization.
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The process
of developing product candidates involves a high degree of risk and may take several years. Product candidates we may acquire
or license in the future that appear promising in the early phases of development may fail to reach the market for several reasons,
including:
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Pharmaceutical product candidates may fail to receive
regulatory approvals required to bring the products to market;
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Manufacturing costs or other factors may make our pharmaceutical
and cosmeceutical product candidates uneconomical;
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The proprietary rights of others and their competing
products and technologies may prevent our product candidates from being commercialized;
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Success of pharmaceutical product candidates in nonclinical
and early clinical studies does not ensure that later stage clinical trials will be successful;
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The length of time necessary to complete clinical trials
and to submit an application for marketing approval of pharmaceutical product candidates for a final decision by a regulatory
authority varies significantly and may be difficult to predict; and
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Developing pharmaceutical and cosmeceutical product
candidates is very expensive and will have a significant impact on our operating expenses.
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We may
be unable to continue to develop new products, enhancements to our existing products and other technologies in the near term,
if at all, in part because new products or enhancements to our existing products must meet regulatory standards and receive requisite
regulatory approvals.
Our failure
to introduce new products or enhancements to our existing products for any one of these reasons could adversely affect our expected
growth rate and adversely affect our overall business and financial results.
Our marketed
products and our products under development could be rendered obsolete by technological or medical advances
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The development
of medical advances to treat the conditions that our products are designed to address may render our marketed products and our
products under development obsolete or uneconomical. The enhancement to the appearance of skin, the regeneration of hair growth
and the treatment of burns, acne or other skin disorders are the subjects of active research and development by many potential
competitors, including major pharmaceutical companies, specialized biotechnology firms, universities and other research institutions,
as well as other major cosmeceutical companies which develop wrinkle reduction or age defying skin and hair care products. While
we intend to expand our technological capabilities to remain competitive, research and development by others may render our technology
or products obsolete or noncompetitive or result in treatments superior to any therapy we develop.
Technological
advances affecting costs of production also could adversely affect our ability to sell products. Our products could become more
expensive to produce, or not competitive, which would decrease our revenues and adversely affect our results of operations and
financial condition.
During
2015, the majority of our revenues were derived from two wholesale distributors. The loss of the distributors could have a material
negative effect on our financial condition.
During the
year ended December 31, 2015, we derived 31.1% and 15.7% of our sales from two wholesale distributors. These two distributors
purchase products from us on a purchase order basis on negotiated terms of payment. The distributors are under no obligation to
continue to purchase our products. The loss of either of the distributors, a material reduction in their purchases or the cancellation
of product orders or unexpected returns of unsold products could decrease our revenues and impede our future growth prospects.
We do not have long-term purchase commitments with our distributors. We are actively seeking to expand our products’ distribution
channels in order to reduce the impact the loss of any one distributor would have on our Company, however we can give no assurance
that we will be successful in doing so.
If we
breach any of our key license or supply agreements, we could lose exclusivity rights or the agreements could be terminated
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We have an
international licensing agreement with kiWW for all cosmetic products for a term of eight years. These rights are important to
our business, and any breach of the related agreements could result in a termination of the respective rights, which, in turn,
would prevent us from marketing the affected products or developing the affected product candidates. Our agreements with kiWW
require milestone and royalty payments, minimum revenue requirements or minimum annual royalty payments and other obligations.
If we have insufficient demand for these products or otherwise fail to meet the minimum purchase requirements or any of the other
requirements set forth in these agreements, we could lose the exclusive nature of our right to market products under the kiWW
brand. Additionally, we are overdue in payments owed to kiWW. Should we not be able to cure this breach of our payment obligations
under the agreement within a mutually agreeable timeframe, we face the possibility that the agreement could be terminated.
If we fail
to comply with any of the requirements under our key license and supply agreements, we may lose exclusive rights under these agreements
or they may be terminated in their entirety. Because at the time of this report, we remain overdue in payments owing to many of
the counterparties to these agreements, there is a risk that such loss or termination is enhanced at present. In that event, others
could obtain rights to sell products that compete directly with our products and our revenues and market share would correspondingly
decrease. The loss of any rights under any of our license and supply agreements would adversely affect our ability to sell our
products and adversely affect our revenues and results of operations
We rely on
third parties to perform many necessary commercial services for our products, including services related to the distribution,
storage, transportation and regulatory monitoring of our products. We rely on third parties to perform a variety of functions
related to the sale and distribution of our cosmeceutical products. These services include distribution, logistics management,
inventory storage and transportation, invoicing and collections, the key aspects of which are out of our direct control. If any
third-party service provider fails to comply with applicable laws and regulations, fails to meet expected deadlines or otherwise
does not carry out its contractual duties to us, our ability to deliver products to meet commercial demand would be significantly
impaired. In addition, we may retain one or more third parties to perform various regulatory monitoring services for our products,
including adverse event reporting, safety database management and other product maintenance services. If the quality or accuracy
of the data maintained by these regulatory service providers is insufficient, our ability to continue to market our approved products
could be jeopardized or we could be subject to regulatory sanctions.
If our
competitors develop and market products faster than we do or if the products of our competitors are considered more desirable
than our products, revenues of our existing or new products may be adversely affected
.
The dermatology
market in particular, is highly competitive and includes a number of established, large and mid-sized pharmaceutical and cosmeceutical
companies, as well as smaller emerging companies and specialty pharmaceutical and cosmeceutical companies, whose activities are
focused on our target markets and areas of expertise. We face and will continue to face, competition for our products and in the
commercialization, development, licensing and discovery of our product candidates. This could negatively impact our ability to
achieve significant market acceptance of our products and product candidates. Furthermore, new developments including the development
of other drug technologies, delivery methods and improved formulations, occur in the pharmaceutical industry at a rapid pace.
These developments may render our currently marketed products and product candidates or technologies obsolete or noncompetitive.
Compared to
us, many of our competitors and potential competitors have substantially greater:
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Capital resources;
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Research and development resources, including personnel and technology;
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Regulatory experience;
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Favorable brand name awareness;
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Clinical trial experience; and
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Manufacturing, distribution and sales and marketing experience.
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As a result
of these factors, our competitors may obtain regulatory approval of their products more rapidly than us. Our competitors may obtain
patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates
or technologies. Our competitors may also develop pharmaceutical and cosmeceutical products that are more effective and less costly
than ours and may also be more successful than us in manufacturing and marketing their products.
Other
competitors may invest significant amounts in achieving production economies of scale
.
It is possible
that our competitors may be able to reduce their cost of production so that they can aggressively price their products and secure
a greater market share. Our competitors may also be able to attract and retain qualified personnel and to secure capital resources.
Any of these events could adversely affect our ability to compete and our results of operations could suffer.
If we
are unable to attract and retain key personnel, our business will suffer.
Our success
depends on our continued ability to attract, retain and motivate highly qualified management, business development, sales and
marketing, manufacturing, product development and other personnel. We may not be able to recruit and retain qualified personnel
(particularly for senior sales and marketing and research and development positions) in the future due to intense competition
for personnel among businesses like ours. The failure to do so could have a significant negative impact on our future product
revenues and business results. Our success depends on a number of key management and technical personnel, including Ali Kharazmi,
our President and Chief Executive Officer, Saeed Kharazmi, our Chairman of the Board, Acting Chief Financial Officer, and Sanjay
Dhar, Ph.D, our Director of Research and Development. We are not aware of any present intention of these persons or any of our
other executive officers to leave our company. In addition, we do not have “key person” insurance policies on any
of our executive officers that would compensate us for the loss of their services. If we lose the services of one or more of these
individuals, replacement could be difficult and may take an extended period of time and could impede significantly the achievement
of our business objectives. This may have a material adverse effect on our results of operations and financial condition.
Our products
and product candidates may cause undesirable side effects that could limit their use
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Skin irritation
is a reported side effect of cosmeceutical products. Although these side effects generally are not severe, they may limit the
use of our products, particularly if physicians or patients perceive the risks to outweigh the benefits or the side effects of
competitive products to be less significant. If more severe side effects associated with any of our cosmeceutical products were
to be reported or observed, we could be required to suspend our marketing of the products, conduct additional safety tests and
potentially cease the sale of the products. In addition, we face the potential for product liability claims from any patients
who experience side effects, whether or not any action is taken by a regulatory authority.
Undesirable
side effects caused by our product candidates could interrupt, delay or halt our development programs, including clinical trials,
and could result in the denial of any required regulatory approval by the FDA or other regulatory authorities.
We may
face liability and indemnity claims that could result in unexpected costs and damage to our reputation.
Our business
exposes us to potential liability risks that arise from the testing, manufacture and sale of our cosmeceutical products. Plaintiffs
in the past have received substantial damage awards against pharmaceutical companies based upon claims for injuries allegedly
caused by the use of their products. Although we currently maintain product liability insurance, there is no guarantee that any
claims brought against us would be within our existing or future insurance policy coverage or limits. Any judgment against us
that is in excess of our policy limits would have to be paid from our cash reserves, which would reduce our capital resources.
Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets.
Also, it may be necessary for us to recall products that do not meet approved specifications, which would result in adverse publicity,
potentially significant costs in connection with the recall and a loss of revenues. Any product liability claim or series of claims
brought against us could harm our business significantly, particularly if a claim resulted in adverse publicity or damage awards
outside or in excess of our insurance policy limits.
Failure
to adequately comply with information security policies or to safeguard against breaches of such policies could adversely affect
our operations and could damage our business, reputation, financial position and results of operations
.
In the process
of making sales using consumer credit cards as a method of payment, we may handle and transfer such information as part of our
business. These activities are subject to laws and regulations, as well as industry standards, in the United States and other
jurisdictions in which our products and services are available. These requirements, which often differ materially and sometimes
conflict among the many jurisdictions in which we operate, are designed to protect the privacy of consumers’ personal information
and to prevent that information from being inappropriately used or disclosed. We maintain and review technical and operational
safeguards designed to protect this information and generally require others with whom we work to do so as well. However, despite
those safeguards, it is possible that hackers, employees acting contrary to our policies, third-party agents or others could improperly
access relevant systems or improperly obtain or disclose data about our consumers, or that we may be determined not to be in compliance
with applicable legal requirements and industry standards for data security, such as the Payment Card Industry guidelines. A breach
or purported breach of relevant security policies that compromises consumer data or determination of non-compliance with applicable
legal requirements or industry standards for data security could expose us to regulatory enforcement actions, card association
or other monetary fines or sanctions, or contractual liabilities, limit our ability to provide our products and services, subject
us to legal action and related costs and damage our business reputation, financial position, and results of operations.
Changes
in economic conditions could materially affect our ability to maintain or increase sales.
The cosmeceutical
industry depends on consumer discretionary spending. The United States in general or the specific markets in which we operate
may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence,
high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced
access to credit or other economic factors that may affect consumers discretionary spending. Economic conditions may remain volatile
and may continue to depress consumer confidence and discretionary spending for the near term. Negative economic conditions might
cause consumers to make changes to their discretionary spending behavior, including spending currently made on our cosmeceutical
line of products. If such sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales
and this could materially adversely affect our business, financial condition or results of operations.
Our business
is subject to intense competition and we may be unable to compete effectively against entrenched companies with larger resources
and established channels of distribution.
Competition
from other cosmeceutical businesses could impact sales and seriously harm our business, financial condition and results of operations.
We strive to provide direct and indirect benefits to our distributors that are superior to, or competitive with, other cosmeceutical
companies. If we are unable to provide our distributors with adequate benefits, or if any significant number of our distributors
are not successful, we may be unable to maintain or renew our contractual relationships with distributors, causing our business,
financial condition and results of operations to suffer.
The cosmeceutical
industry in which we operate is highly competitive and increased competition could reduce our sales and profitability
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We compete
in different markets within the cosmeceutical industry on the basis of the uniqueness of our product offerings, the quality of
our products, customer service, price and distribution. Our markets are highly competitive. Our competitors vary in
size and many may have greater financial and marketing resources than we do. If we cannot maintain quality and pricing that
are comparable or superior to our competitors, we may not be able to grow our revenues and operating profits and we may lose market
share. Competitive conditions could result in our experiencing reduced revenues, gross margins and operating results and
could cause an investor in our Company to lose a substantial amount or all of its investment in our Company.
The loss
of suppliers or shortages in ingredients could harm our business.
We acquire
ingredients and products from third-party suppliers and manufacturers. A loss of any of these suppliers and any difficulties in
finding or transitioning to alternative suppliers could harm our business. In addition, we obtain some of our products from sole
suppliers that own or control the product formulations, ingredients, or other intellectual property rights associated with such
products. In the event we are unable to renew these contracts, we may need to discontinue some products or develop substitute
products, which could harm our revenue. In addition, if we experience supply shortages or regulatory impediments with respect
to the raw materials and ingredients we use in our products, we may need to seek alternative supplies or suppliers and may experience
difficulties in finding ingredients that are comparable in quality and price. Some of our products incorporate products that may
have limited supplies. If demand exceeds forecasts, we may have difficulties in obtaining additional supplies to meet the excess
demand. If we are unable to successfully respond to such issues, our business could be harmed.
FINANCIAL
RISKS
Our financial
statements have been prepared assuming that our Company will continue as a going concern and we will need to obtain additional
funding if we are to continue operations.
The factors
described elsewhere herein raise substantial doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from this uncertainty. To date we have incurred significant cash losses that
have materially impaired our liquidity and working capital. Additionally, during the last ninety days as we have sought to procure
additional financing but were unsuccessful. We have been under severe liquidity restraints such that our CEO was required to personally
guarantee borrowings may by our Company from our bank. This has resulted in the substantial increase in balances outstanding and
owing to our suppliers that has put our relationships with them in jeopardy. We continue to attempt to procure the needed funding
to maintain our operations. Should we be successful, we will need to quickly reverse the historical trend of our operations through
generating significantly higher levels of revenue (at or about historical margins) and reducing our operating expenses. If we
cannot generate the revenues and gross margin (while reducing operating expenses) at levels required to achieve profitability
or obtain sufficient additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations.
Should that happen, an investor could suffer the loss of a significant portion or all of his investment in our Company.
We have
a limited operating history and investors will have no ability to gauge market acceptance for our products or the ability of management
to execute on our business plan.
We are an early-stage
company with a limited operating history and limited revenues derived from our operations. Our operations to date have been primarily
focused on our formation, the hiring of our management team, acquiring, licensing and developing our technology and products,
building and expanding our sales force, marketing department and investor relations and commencing the commercial launch of our
products.
It is difficult
to predict future performance and our ability to maintain operations is dependent upon a number of factors over which we have
limited control. As a result, it is difficult to predict our quarterly financial results and they are likely to fluctuate significantly.
We are a relatively new company with a limited operating history and our sales prospects are uncertain. We also have relatively
limited experience selling our products. Accordingly, we cannot predict with any certainty the timing or level of sales of our
products in the future. If our quarterly sales or operating results fall below the expectations of investors or securities analysts,
the price of our common stock could decline substantially. In addition to the other factors discussed under these “Risk
Factors,” specific factors that may cause fluctuations in our operating results include:
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Demand and pricing for our products, including any
change in wholesaler purchasing patterns for our products;
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Physician and patient acceptance of our products;
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Timing of new product offerings, acquisitions, licenses
or other significant events by us, our partners or our competitors;
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Regulatory approvals and legislative changes affecting
our cosmeceutical products;
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Any interruption in the manufacturing or distribution
of our products, including events affecting our third-party suppliers and any failure to comply with manufacturing specifications;
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Changes in treatment practices of physicians or other
providers that currently recommend our products;
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Significant product returns and rebates;
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Implementation of new or revised accounting or tax
rules or policies; and
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The effect of competing technological and market developments.
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Because
we have a limited operating history, we are subject to all of the risks and uncertainties of a new business.
We only initiated
the rollout of the NuGene Line in 2013. We are subject to all of the risks and uncertainties normally associated with an early
stage business, including potential manufacturing issues, difficulties establishing our marketing and distribution operations,
lack of name recognition, lack of adequate capital, difficulties hiring and retaining qualified employees and difficulties in
complying with all applicable federal, state and local regulatory and administrative requirements. As an early stage company,
we expect to incur operating losses until (if ever) we successfully release and market a line of products that will generate enough
revenues and gross margin to become profitable or thereafter maintain profitability. There is no assurance that we will be able
to validate and market products that will generate enough revenues for us to become profitable or thereafter maintain profitability.
As a result, our Company cannot predict when, if ever, it might achieve profitability and cannot be certain that it will be able
to sustain profitability, if achieved. Our lack of an operating history may make it difficult for you to evaluate our business
prospects in connection with an investment in our securities.
We have
had operating losses since the Merger and we expect to continue to incur net losses for the near term.
As of June
30, 2016, we had an accumulated deficit of approximately $9.0 million and we have reported a net loss of approximately $2.6 million
for the six months ended June 30, 2016. Our working capital deficit as of June 30, 2016 amounted to approximately $2 million
and was not adequate to sustain our operations. Unless our sales revenues increase significantly, we anticipate that we will continue
to incur net losses in the near term and we may not be able to sustain operations at current levels.
We need
to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all,
and which materially may dilute your investment
.
To attain profitability,
we must increase our revenues and manage our product, operating and administrative expenses, as to which each of which we can
give no assurance. Because we have been to date unable to generate sufficient revenues to pay our expenses and our existing sources
of cash and cash flows are otherwise insufficient to fund our activities, we currently must raise additional funds to continue
our operations and to manage our current short-term debt load. Further, recent efforts to raise additional capital have been unsuccessful.
We do not have any arrangements in place for additional funds and no assurance can be given that those funds will become available
on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders
may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of
our existing stockholders. If we are unsuccessful in obtaining additional funds on commercially reasonable terms or at all, and
thereafter in achieving profitability, we may be required to curtail significantly or cease our operations, which could result
in the loss of all of your investment in our stock.
Should
we be able to obtain additional financing and thereafter be successful in growing our revenues according to our operating plans,
we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance
.
The ability
to manage and operate our business as we execute our growth strategy will require further substantial capital and effective planning.
Additionally, we have not been able to maintain adequate levels of capital to fund existing operations. Significant rapid growth
on top of our current operations could greatly strain our internal resources, leading to a much lower quality of customer service,
reporting problems and delays in meeting important deadlines resulting in substantial loss of market share and other problems
that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel,
management systems, infrastructure, liquidity and other resources. If we do not manage our growth effectively, our operations
could be adversely affected, resulting in slower, no or negative growth, critical shortages of cash and a failure to achieve or
sustain profitability.
We will
not pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors
to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit
or if our business is sold at a price that enables investors to recognize a profit
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We currently
intend to retain future earnings (if any) to support the development and expansion of our business and will not pay cash dividends
for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking
into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans
and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our
common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in
connection with a sale of their shares or a sale of our business. The trading market for our shares has been volatile and holders
of our securities (which are highly speculative) may experience fluctuations and losses.
Significant
differences between actual and estimated demand for our products could adversely affect us.
If we overestimate
demand, we may be required to write off inventories and increase our reserves for product returns or liabilities to customers
in future periods. If we underestimate demand, we may not have sufficient inventory of products to ship to our customers. Our
cosmeceutical products have expiration dates that generally range from 24 to 36 months from the date of manufacture. Judgment
is required in estimating these reserves. The actual amounts could be materially different from our estimates, and differences
will need to be accounted for in the period in which they become known. If we determine that the actual amounts exceed our reserve
amounts, we will record a charge to earnings to approximate the difference. A material reduction in earnings resulting from a
charge could have a material adverse effect on our net income, results of operations and financial condition.
We currently
need to raise additional funds to continue our operations and still pursue our growth strategy and if we are unable to raise that
capital, we will need to curtail or even to cease operations.
Our current
cash and cash equivalents are insufficient to fund our operations through the end of our
third
quarter in
2016. We need to raise additional funds to finance our operations and to fund product development programs,
sales and marketing initiatives for our current products. Factors affecting our product development expenses include, but are
not limited to:
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The number of our products in early-stage development;
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Our licensing or other partnership activities, including
the timing and amount of related development funding, licensee fees or milestone payments;
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The number and outcome of clinical trials conducted
by us and/or our collaborators; and
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Our future levels of revenue.
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We hope to
satisfy our future cash needs through private equity offerings, debt financings or collaboration, licensing and other similar
arrangements. Additional funding may not be available to us on acceptable terms, or at all, and without that funding we may not
be able to continue operations. To the extent that we raise additional capital by issuing equity securities, our stockholders’
ownership will be diluted and possibly substantially.
If we
raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially
valuable rights to our current products, potential products or proprietary technologies, or grant licenses on terms that are not
favorable to us
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If adequate
funds are not available, our ability to achieve profitability or to respond to competitive pressures would be significantly limited
and we may be required to delay, significantly curtail or eliminate the sales of one or more of our current products and/or the
development of one or more of our potential products.
CORPORATE
AND OTHER RISKS
Our executive
officers, directors and principal stockholders beneficially own or control a substantial portion of our outstanding common stock,
which may limit the ability of our stockholders, whether acting alone or together, to propose or direct the management on the
overall direction of our Company
.
Additionally,
this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in
an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common
stock is beneficially owned and controlled by a group of insiders, including our officers and directors. Accordingly, our principal
stockholders together with our directors, Chief Executive Officer and insider shareholders would have the power to control the
election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares
of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our
Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring
approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control
may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge
with a third party or enter into different transactions that require stockholder approval. These provisions could also limit the
price that investors might be willing to pay in the future for shares of our common stock.
Our Chief
Executive Officer and our Chief Financial Officer have limited experience in these roles in a public company.
To serve in
the roles of officer and/or director for a public company, an individual needs to be aware of responsibilities in addition to
those shouldered by the leader of a private company. Among such additional responsibilities, a senior executive officer
must be able to communicate fairly and effectively with the stakeholders of a public company, be aware of the controls required
to be maintained by a public company and act in accordance with the legal requirements incumbent upon such senior executives and
directors. Neither of our officers (who serve as our only directors), have such experience, the absence of which could increase
our exposure to untimely compliance with applicable regulation that could result in possible added liability and cost to the material
detriment of our operations and financial interests. Our CFO is a medical doctor by training and has assumed the title and
responsibility of a chief financial officer but has not had any prior experience in the traditional services to be rendered but
has rather relied on staff and consultants in his acting in this capacity.
We do
not have an Audit Committee and we have no independent persons serving on our Board of Directors
.
As of the date
of this Annual Report, we do not have an independent Audit Committee. An Audit Committee qualitatively enhances a company’s
internal controls over financial reporting. Among its functions, independent Audit Committees review the financial reporting,
internal controls safeguarding Company assets, interact with auditors, may oversee material financial decisions and provide a
sounding board for individuals who believe that there are irregularities in a Company’s accounting policies and procedures.
Our Board of Directors consists of our CEO and our CFO and no other persons currently serve on our board. With our lack
of an independent Audit Committee and other outside board members at this time, we run a greater risk that a significant error
or irregularity could occur that could be materially damaging to our shareholders.
Issuances
of our Series A Preferred Stock or other authorized shares of preferred stock may make it more difficult for a third party to
effect a change-of-control.
Our articles
of incorporation authorize the Board of Directors to issue up to 25,000,000 shares of "blank check" preferred stock.
The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by
the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and
liquidation, conversion rights, redemption rights and sinking fund provisions. In connection with the Merger, we issued
(in addition to common stock) 1,917,720 shares of Series A Preferred Stock to NuGene's two founders. The Series A Preferred Stock
is initially convertible into common stock at a ratio of one to one, has the right to elect a majority of the board of directors
and has in connection with any other vote of shareholders three votes for every vote available to the common stock. These outstanding
shares of Series A Preferred Stock diminish and any future issuances of other series of preferred stock could further diminish
the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, the Series
A Preferred Stock could be used to restrict our ability to merge with, or sell assets to, a third party. The Series A Preferred
Stock specifically, and the ability of the Board of Directors generally, to issue preferred stock make it more difficult, and
could delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent
our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect
the market price of our common stock. The summary description of the Series A Preferred Stock contained in this Annual Report
is qualified in its entirety by reference to the Certificate of Designations filed with Secretary of State of Nevada on December
24, 2014 and included in our Current Report on Form 8-K filed with the SEC on January 6, 2015.
We have
incurred significantly increased costs as a result of being a public company.
In reviewing
the past operations of NuGene and future prospects, investors should recognize that we have incurred and will continue to incur
significant legal, accounting and other expenses that NuGene did not incur as a private company, particularly if we are no longer
characterized as an "emerging growth company" as defined under the Jumpstart Our Business Startups Act of 2012 (the
"JOBS Act"). In addition, new and changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated
and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act"),
and the JOBS Act, have created uncertainty for public companies and increased costs and time that boards of directors and management
must devote to complying with these rules and regulations. The Sarbanes-Oxley Act and related rules of the U.S. Securities and
Exchange Commission, or SEC, and the Nasdaq markets regulate corporate governance practices of public companies. Compliance with
these rules and regulations has and will continue to increase our legal and financial compliance costs and lead to a diversion
of management time and attention from revenue generating activities. For example, we may be required to adopt new internal controls
and disclosure controls and procedures as well as incurring additional expenses associated with our SEC reporting requirements.
For as
long as we remain an "emerging growth company" as defined in the JOBS Act, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not "emerging growth companies."
These exceptions
provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions
from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved and an extended transition period for complying with new or revised accounting standards. We
may take advantage of these reporting exemptions until we are no longer an "emerging growth company." We may remain
an "emerging growth company" for up to five years. To the extent we use exemptions from various reporting requirements
under the JOBS Act, we may be unable to realize our anticipated cost savings from those exemptions.
Pursuant to
the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are characterized as
an "emerging growth company." Section 404 of the Sarbanes-Oxley Act requires annual management assessments
of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with
the SEC as a public company, and generally requires in the same report a report by our independent registered public accounting
firm on the effectiveness of our internal control over financial reporting. However, under the JOBS Act, our independent registered
public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant
to Section 404 of the Sarbanes-Oxley Act until we are no longer an "emerging growth company."
CAPITAL MARKET RISKS
The recent
public market for our shares has been and may continue to be volatile. This volatility may affect the ability of our investors
to sell their shares as well as the price at which they sell their shares.
The market
price for our shares may be significantly affected by factors such as variations in the volume of trading activity, quarterly
and yearly operating results, general trends in the markets we serve, press releases announcing developments and changes in state
or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price
and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad
market fluctuations may adversely affect the market price of our common stock.
The application
of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely
affect the market price of our common stock and increase your transaction costs to sell those shares
.
As long as
the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the
“penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The
“penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to
persons other than established customers and accredited investors (generally those with assets, excluding principal residence,
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they
apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than
established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser
and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of
limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing
the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general
and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock,
regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market
for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market
for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure
sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent
investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
We may
not be able to attract the attention of brokerage firms, which could have a material adverse impact on the market value of our
common stock.
Security analysts
of brokerage firms are unlikely to provide coverage of our common stock since there is no incentive to brokerage firms to recommend
the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop or be
maintained for our common stock. It will also likely make it more difficult to attract new investors at times when we require
additional capital.
Future
sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price.
There is a
risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price,
if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales
could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
Risks Related
to Regulatory Matters
While
we believe that that our principal cosmeceutical products and product candidates do not require FDA approval as new drugs, the
FDA could disagree and we may be required to conduct clinical trials to establish efficacy and safety or cease to market these
product
s.
Our cosmeceutical
products are marketed without FDA approval on the basis that they are generally recognized as safe and effective for their intended
use and thus do not require new drug approval. The FDA has not challenged this position. The FDA may at any time disagree with
our position for a variety of reasons, including new information about the particular product or its active ingredients, how the
product is promoted, if another company obtains FDA approval for a prescription drug with the same active ingredient, or based
on a change of FDA regulatory policy. This could require us to seek new drug approval for these products to remain on the market
or to withdraw a product until required clinical trials are performed and new drug approval is obtained.
If the active
ingredients of the products are finally determined by the FDA not to be generally recognized as safe and effective for OTC use,
the FDA may seek to apply those findings to prescription products as well, leading to potential objections to the continued marketing
of the products or a demand that marketing continue only on the basis of a new drug approval. Either of these outcomes could affect
the way our products are marketed or our ability to market them at all. Further, the FDA could decide that growth factors derived
from human adipose stem cells do not come within this policy and thus must seek new drug approval to remain on the market or must
be withdrawn until approval is obtained.
Our pharmaceutical
products under development may not be approved by the FDA or foreign regulatory authorities, and any failure or delay associated
with our product development and clinical trials or obtaining regulatory approval of these products would increase our product
development costs and time to market. We face substantial risks of failure inherent in developing pharmaceutical products. The
pharmaceutical industry is subject to stringent regulation by many different agencies at the federal, state and international
levels. Our pharmaceutical products must satisfy rigorous standards of safety and efficacy before the FDA approves them, and before
any foreign regulatory authorities approve them for commercial use in any countries outside the U.S. where we decide to market
them. Even if a regulatory filing is accepted, the FDA or foreign regulatory authorities may request additional information from
us, including data from additional clinical trials, and, ultimately, may not grant marketing approval for some of our products
or may grant approval only under conditions that are less commercially attractive than anticipated. To the extent that these products
do not perform successfully in our planned pivotal clinical trials, we may need to develop alternative candidates. Product development
is generally a long, expensive and uncertain process. Successful development of our new pharmaceutical product formulations, including
our burn cream will depend on many factors, including:
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Our ability to select key components, establish a stable
formulation and optimize characteristics;
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Our ability to develop a formulation that demonstrates
our intended safety and efficacy profile; and
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Our ability to transfer from an early-stage company
to commercial-scale operations and the costs associated with commercial manufacturing.
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If we are unable
to develop suitable clinical formulations of our pharmaceutical products or are significantly delayed in doing so, our ability
to commercialize these products will be adversely affected. Once we have manufactured a formulation that we believe is suitable
for pivotal clinical testing, we will need to complete our clinical testing, and failure can occur at any stage of testing. These
clinical tests must comply with FDA and other applicable regulations. We may suffer significant setbacks in advanced clinical
trials, even after showing promising results in earlier trials. The results of later clinical trials may not replicate the results
of prior clinical trials. Based on results at any stage of clinical trials, we may decide to discontinue development of a product
candidate. We, or the FDA, may suspend clinical trials at any time if the patients participating in the trials are exposed to
unacceptable health risks or if the FDA finds deficiencies in our applications to conduct the clinical trials or in the conduct
of our trials. Moreover, not all products in clinical testing will receive timely, or any, regulatory approval. Even if clinical
trials are completed as planned, their results may not support our assumptions or our product claims. The clinical process may
fail to demonstrate that our products are safe for humans or effective for intended uses. In addition, these failures could cause
us to abandon a product entirely. If we fail to take any current or future product from the development stage to market, we will
have incurred significant expenses without the possibility of generating revenues, and our business will be adversely affected.
We will
be subject to ongoing regulatory review of products currently under development that may be marketed in the future.
Any pharmaceutical
products under development will be subject to extensive regulation. These regulations will impact many aspects of our operations,
including the manufacture, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related
to the products. The FDA also may require post-marketing testing and surveillance to monitor the effects of approved products
or place conditions on any approvals that could restrict the commercial applications of these products. In addition, the subsequent
discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the
product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure of products, injunctions against their distribution, disgorgement
of money, operating restrictions and criminal prosecution.
In addition
to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to
restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes
and false claims statutes. Violations of the federal anti-kickback statute are punishable by imprisonment, criminal fines, civil
monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions under the federal
anti-kickback statute, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to
induce prescribing, purchasing, arranging for or recommending prescription or purchase may be subject to scrutiny if they do not
qualify for a statutory exemption or safe harbor. Federal false claims laws prohibit any person from knowingly making, or causing
to be made, a false claim to the federal government, or knowingly making, or causing to be made a false statement to have a false
claim paid. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims
laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless
of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s
products from reimbursement under government programs, criminal fines and imprisonment.
In addition,
as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians.
This practice is overseen by the FDA and other governmental authorities under regulations that include, in particular, requirements
concerning record keeping and control procedures. Any failure to comply with these regulations may result in significant criminal
and civil penalties as well as damage to our credibility in the marketplace. Because of the breadth of these laws and the narrowness
of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these
laws, which could have a material adverse effect on our business, financial condition and results of operations.
The regulatory
status of our cosmeceutical products could change, and we may be required to conduct clinical trials to establish efficacy and
safety or cease to market these products
.
The Federal
Food, Drug, and Cosmetic Act does not recognize “cosmeceuticals” as a category of products. We use the term “cosmeceuticals”
as a marketing term to describe our non-prescription, cosmetic products. The FDA does not have a premarket approval system for
cosmetic products outside of new color additive, and we believe we are permitted to market our cosmeceutical products and have
them manufactured without submitting safety or efficacy data to the FDA. However, the FDA may in the future determine to regulate
what we term as cosmeceuticals or the ingredients included in our cosmeceuticals as drugs or biologics, rather than cosmetics.
If any of our products are deemed to be drugs or biologics, rather than cosmetics, we would be required to conduct clinical trials
to demonstrate the safety and efficacy of our cosmeceutical products in order to continue to market and sell them. In such event,
we may not have sufficient resources to conduct any required clinical trials and we may not be able to establish sufficient efficacy
or safety data to resume the sale of our cosmeceutical products. Any inquiries by the FDA or any foreign regulatory authorities
into the regulatory status of our cosmeceutical products and any related interruption in the marketing and sale of our cosmeceutical
products could severely damage our brands and image in the marketplace, including our relationships with physicians and their
patients.
If our
manufacturers do not comply with U.S. and federal regulations, our supply of product could be disrupted or terminated
.
Our manufacturers
must comply with U.S. regulations and corresponding foreign standards, including the FDA’s current Good Manufacturing Practice
regulations for drug manufacturing and processing, or cGMPs, applicable to the manufacturing processes related to ingredients
sold to us for use in our products, and their facilities must be inspected and approved by the FDA and other regulatory agencies
as part of their business. We will have limited control over the FDA compliance of our third-party manufacturers. If any of our
manufacturers fail to meet or are found to be non-compliant with the cGMPs or any other FDA requirements or similar regulatory
requirements outside of the U.S., obtaining the required regulatory approvals, including from the FDA, to use alternative suppliers
may be a lengthy and uncertain process. A lengthy interruption in the manufacturing of one or more of our products as a result
of non-compliance could adversely affect our product inventories and supply of products available for sale which could reduce
our sales, margins and market share, as well as harm our overall business and financial results. Additionally, the Federal Drug
and Cosmetic Act (“FDCA”) may hold labelers/specification developers (brands selling a product) criminally and civilly
liable for the violations, acts, and omission of their manufacturers.
Under the FDCA,
cosmetics (which we refer to as cosmeceuticals) are defined as articles applied to the human body to cleanse, beautify or alter
the appearance. The manufacturing of cosmetics is subject to the misbranding and adulteration sections of the FDCA applicable
to cosmetics. Cosmetics are not subject to premarket approval by the FDA but the product and ingredients must be tested to assure
safety. If the product or ingredients are not tested for safety, a specific warning is required. The FDA monitors compliance of
cosmetic products through random inspections of cosmetic manufacturers and distributors. The FDA utilizes an “intended use”
doctrine to determine whether a product is a drug or cosmetic by the labeling claims made for the product. If a cosmetic product
is intended for a disease condition or to affect the structure or any function of the human body, the FDA will regulate the product
as a drug rather than as a cosmetic. The product will then be subject to all drug requirements under the FDCA. The labeling of
cosmetic products is subject to the requirements of the FDCA, the Fair Packaging and Labeling Act and other FDA regulations.
We have only
limited experience in regulatory affairs, which may affect our ability or the time we require to obtain necessary regulatory approvals.
We have only limited experience in regulatory affairs, including the preparation and filing of applications to gain the regulatory
approvals necessary for pharmaceutical product candidates. Moreover, some of the products that are likely to result from our product
development, licensing and acquisition programs may be based on new technologies that have not been extensively tested in humans.
As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals for any products
that we develop, license or acquire.
If we
move forward with production of an FDA regulated product, then our operations could be harmed if we are found not to be in compliance
with Good Manufacturing Practices.
In the United
States, FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements require us and our vendors to
maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls
and record keeping. The ingredient identification requirement, which requires us to confirm the levels, identity and potency
of ingredients listed on our product labels within a narrow range, is particularly burdensome and difficult for us with respect
to products that contain many different ingredients. We are also required to report serious adverse events associated with consumer
use of our products. Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are
not in compliance with these regulations or public reporting of adverse events harms our reputation for quality and safety. A
finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling
certain products. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing
certain of our products as we work with our vendors to assure they are qualified and in compliance.
RISKS RELATED
TO OUR INTELLECTUAL PROPERTY
If we
are unable to obtain and maintain protection for our intellectual property, the value of our technology and products may be adversely
affected, which would materially affect our business
.
Patents
.
Our commercial success will continue to depend in part on the patent rights we plan to obtain related to future products we may
market. Our success also depends on our and our licensors’, collaborators’, and suppliers’ ability to maintain
these patent rights against third-party challenges to their validity, scope or enforceability of these patent rights.
Our patent
position (and those of our licensors, collaborators and suppliers) is subject to the same uncertainty as other pharmaceutical
and consumer product companies. Our patents and patent applications (as well as those of our licensors, collaborators and suppliers)
may not protect our technologies and products because, among other things, our pending applications may not result in issued patents;
we may develop additional proprietary technologies that are not patentable; patents issued to us may not provide a basis for future
commercially viable products; and patents issued to us may not provide us with any competitive advantage, or may be challenged,
circumvented, invalidated or rendered unenforceable by third parties. For example, the USPTO or the courts may deny, narrow or
invalidate patent claims, particularly those that concern biotechnology and pharmaceutical inventions. Inventors or third parties
of whom we are unaware, may challenge the ownership of patents and applications we own, license or benefit from through supply
agreements with our collaborators and suppliers. We, our licensors, collaborators and suppliers may not be successful in securing
or maintaining proprietary or patent protection for our products, and protection that is secured may be challenged and possibly
lost.
Our competitors
may develop products similar to ours using methods and technologies that are beyond the scope of our intellectual property rights.
Composition
of matter patents on active pharmaceutical ingredients may provide protection for competing products without regard to formulation
or other type of limitation.
Our primary
patent protection strategy consists of obtaining patents for the formulation and methods of manufacturing our products and product
candidates when appropriate, in addition to our pending composition patent claims. Our competitors or other third parties, including
generic drug companies, may challenge the scope, validity or enforceability of our patent claims. As a result, these patents may
be narrowed in scope, invalidated or deemed unenforceable and may fail to provide us with any market exclusivity or competitive
advantage even after significant investment in efforts to obtain and maintain a meaningful competitive patent position. Additionally,
rights we issue to U.S. and foreign patents that we own or license will be limited to the terms of the patents in the respective
countries where the patents issued.
We also may
not be able to protect our intellectual property rights against third-party infringement, which may be difficult to detect, especially
for infringement of patent claims for methods of manufacturing. If we become involved in any dispute regarding our intellectual
property rights, regardless of whether we prevail, we could be required to engage in costly, distracting and time-consuming litigation
that could harm our business. As a result of general uncertainties in the patent prosecution process, we cannot be sure that any
additional patents will ever be issued. Issued patents generally require the payment of maintenance or similar fees. Failure to
make these payments could result in the unenforceability of patents not maintained.
Trade Secrets
and Proprietary Know-how
. We, our licensors, collaborators and suppliers also rely upon trade secrets, proprietary know-how
and other technological innovation, particularly when patent protection is not appropriate or available. However trade secrets
are difficult to protect, and we have limited control over the protection of trade secrets used by our licensors, collaborators
and suppliers. Although we attempt to protect our trade secrets by requiring our employees, consultants, advisors and current
and prospective business partners to enter into confidentiality agreements prohibiting them from disclosing or taking our proprietary
information and technology, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how.
If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. Further,
third parties that are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others may
independently develop similar or equivalent trade secrets or know-how. If our confidential or proprietary information is divulged
to third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully
penetrate our target markets could be severely compromised.
Trademarks
.
Our trademarks will continue to be important to our success and competitive position. We have received U.S. trademark registration
for our corporate name, NuGene
®
, and own or have rights to use our product
and component names. We also have license regarding the use of Kathy Ireland
®
who acts as our brand ambassador. We also will need to pursue trademark registration for any new trademarks that we select. We
may not be able to secure any of our trademark registrations with the PTO or comparable foreign authorities. If we do not adequately
protect our rights in our various trademarks from infringement (and we are involved in two separate ongoing disputes with respect
to trademarks), any goodwill that has been developed in those marks would be lost or impaired. We could also be forced to cease
using any of our trademarks that are found to infringe upon or otherwise violate the trademark or service mark rights of another
company, and, as a result, we could lose all the goodwill that has been developed in those marks and could be liable for damages
caused by any infringement or violation.
Our ability
to market our products may become subject to the intellectual property rights of third parties, and we may have to engage in costly
litigation to enforce or defend challenges to our intellectual property by third parties, which may harm our results of operations,
financial condition and cash flow.
Our commercial
success will continue to depend in part on our ability, as well as the ability of our collaborators and suppliers, to make, use
and sell our products without infringing the patents or proprietary rights of third parties. Our competitors, many of which have
substantially greater resources than we have and have made significant investments in competing technologies or products, may
seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use and sell products either
in the U.S. or international markets. We may not be aware of all of the patents and other intellectual property rights of others
potentially adverse to our interests that may be owned by third parties.
Our third-party
suppliers may also be notified of alleged infringement, and potentially be sued for infringement of patents or other proprietary
rights. We may have limited control or involvement over the defense of these claims, and these third parties could be subject
to injunctions and temporary or permanent exclusionary orders in the U.S. or in the countries in which they are based. Because
of the uncertainty inherent in any patent or other litigation involving proprietary rights, we (or our licensors, collaborators
or suppliers) may not be successful in defending claims of intellectual property infringement by third parties. This could likely
have a material adverse effect on our results of operations. Regardless of the outcome of any litigation, defending the litigation
may be expensive, time-consuming and distracting to management.
If we or our
third-party licensors and suppliers are unsuccessful in any challenge to our rights to market and sell our products, we may (among
other things) be required to:
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pay actual damages, royalties, lost profits and/or
increased damages and the third party’s attorneys’ fees, which may be substantial;
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cease the development, manufacture, use and/or sale
of products that use the intellectual property in question through a court-imposed sanction called an injunction;
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expend significant resources to modify or redesign
our products, manufacturing processes or other technology so that it does not infringe others’ intellectual property
rights or to develop or acquire non-infringing technology (which may not be possible); or
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obtain licenses to the disputed rights that could require
us to pay substantial upfront fees and future royalty payments and may not be available to us on acceptable terms, if at all,
or to cease marketing the challenged products.
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Ultimately,
we could be prevented from selling a product, commercializing a product candidate, or otherwise forced to cease some aspect of
our business operations as a result of any intellectual property litigation. Even if we (or our collaborators and suppliers) are
successful in defending an infringement claim, the expense, time delay, and burden on management of litigation and negative publicity
could have a material adverse effect on our business.
We may
be subject to claims that we, or our employees, have inadvertently or otherwise used or disclosed alleged trade secrets or other
proprietary information of our employees' former employers.
We employ individuals
who were previously employed at other personal care product or nutritional supplement companies, including our competitors or
potential competitors. To the extent that our employees are involved in research areas that are similar to those in which they
were involved with their former employers, we may be subject to claims that such employees have inadvertently or otherwise used
or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to
defend against such claims.