Adynxx, Inc.
100 Pine Street, Suite 500
San Francisco, CA 94111
(415) 512-7740
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Rick Orr
President and Chief Executive Officer
Adynxx, Inc.
100 Pine Street, Suite 500
San Francisco, CA 94111
(415) 512-7740
(Name, address, including zip code, and telephone number, including
area code, of agent for service)

Copies to:

Laura A. Berezin
John T. McKenna
Cooley LLP
3175 Hanover Street
Palo Alto, CA 94304
(650) 843-5000

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, please 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. ☐

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.

The information in this preliminary prospectus is not complete and may be changed. We may not 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 we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Dated July 25, 2019

PRELIMINARY PROSPECTUS

             Shares of Common Stock

Pre-Funded Warrants to Purchase Shares of Common Stock

Adynxx, Inc. is offering     shares of common stock. We are also offering to certain purchasers whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if any such purchaser so chooses, pre-funded warrants, in lieu of shares of common stock that would otherwise result in such purchaser's beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock. Each pre-funded warrant is exercisable for one share of our common stock. The purchase price of each pre-funded warrant is equal to the price at which a share of common stock is sold to the public in this offering, minus $0.01, and the exercise price of each pre-funded warrant will be $0.01 per share. The pre-funded warrants are immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. For each pre-funded warrant that we sell, the number of shares of common stock we are offering will be reduced on a one-for-one basis. This offering also relates to the shares of common stock issuable upon exercise of the pre-funded warrants sold in this offering. The shares of common stock and pre-funded warrants can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance. Our common stock is presently quoted on The OTCQB Market tier of the OTC Markets Group, Inc., or OTCQB, under the symbol “ADYX.” On July 24, 2019, the last reported sale price of our common stock was $2.88 per share. The prices quoted on the OTCQB may not be indicative of the market price of our common stock on a national securities exchange. There is no established public trading market for the pre-funded warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the pre-funded warrants on any national securities exchange or other nationally recognized trading system.

The public offering price will be determined through negotiation between us and the underwriter in the offering and may be at a discount to the current market price. Therefore, the recent market price used throughout this prospectus may not be indicative of the offering price. See “Underwriting” beginning on page 121 of this prospectus for more information.

We have applied to list our common stock on              under the symbol “ADYX.”

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 8 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

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We have agreed to reimburse the underwriter for certain expenses in connection with this offering. See “Underwriting.”

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We have granted the underwriter the right to purchase up to      additional shares of our common stock at the public offering price, less underwriting discounts and commissions. The underwriter can exercise this right at any time within 30 days from the date of this prospectus. If the underwriter exercises its option to purchase additional shares in full, the total underwriting discounts and commissions payable by us will be $     and the total proceeds to us from this offering, before expenses, will be $    , excluding the proceeds, if any, from the exercise of the pre-funded warrants.

Delivery of the shares of common stock is expected to be made on or about          , 2019. We have granted the underwriter an option to purchase up to an additional     shares of common stock for a period of 30 days.

           , 2019

CERTAIN DEFINED TERMS

As used in this prospectus, unless the context otherwise requires, references to:

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“Adynxx” or “Private Adynxx” refer to Adynxx, Inc. prior to the consummation of the Merger;

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“Alliqua” refers to Alliqua BioMedical, Inc. and, unless otherwise stated or the context otherwise requires, its consolidated subsidiaries prior to the consummation of the Merger;

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“Merger” refers to the business combination between Adynxx, Inc. and Alliqua BioMedical, Inc., consummated on May 3, 2019, pursuant to which (i) Embark Merger Sub, Inc., a then wholly-owned subsidiary of Alliqua BioMedical, Inc., merged with and into Adynxx, Inc., with Adynxx, Inc. surviving as a wholly-owned subsidiary of Alliqua BioMedical, Inc., (ii) Alliqua BioMedical, Inc. issued shares of its common stock to stockholders of Adynxx, Inc. at an exchange rate of 0.0359 shares of common stock in exchange for each share of Adynxx, Inc. common stock outstanding immediately prior to the Merger (which exchange rate reflects the Reverse Stock Split). Immediately after the Merger, the former Private Adynxx stockholders, warrantholders and optionholders owned approximately 86% of the fully-diluted common stock of the combined company, and the Alliqua stockholders and optionholders, whose shares of Alliqua common stock remained outstanding after the Merger, owned approximately 14% of the fully-diluted common stock of the combined company, and (iii) Alliqua BioMedical, Inc. was renamed “Adynxx, Inc.”;

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“Reverse Stock Split” refers to a 1-for-6 reverse stock split of the issued and outstanding capital stock of Alliqua BioMedical, Inc. effected on May 3, 2019 immediately prior to the Merger; and

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“we,” “us,” “our,” the “Company” and similar references refer: (i) prior to the consummation of the Merger, to Adynxx, Inc., and (ii) following the consummation of the Merger, to Adynxx, Inc. (formerly Alliqua BioMedical, Inc.) and, unless otherwise stated or the context otherwise requires, all of its subsidiaries.

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We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future and our expenses will increase substantially if and as we:

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continue the clinical development of our product candidates;

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advance our programs into larger, more expensive clinical trials;

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initiate additional nonclinical, clinical, or other studies for our product candidates;

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identify and develop potential commercial opportunities, such as reduction in postoperative pain for patients scoring ≥16 on the Pain Catastrophizing Scale, or PCS, for the brivoligide product candidate;

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seek regulatory and marketing approvals and reimbursement for our product candidates;

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continue manufacturing our product candidates and plan for scale-up of outsourced manufacturing capabilities as we commence additional clinical trials for our product candidates;

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establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

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seek to identify, assess, acquire, and/or develop other product candidates;

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make milestone, royalty or other payments under third party license agreements;

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seek to maintain, protect, and expand our intellectual property portfolio;

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seek to attract and retain skilled personnel;

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create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and

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experience any delays or encounter issues with the development and potential for regulatory approval of our clinical candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies, or supportive studies necessary to support marketing approval.

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Further, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

We have never generated any revenue from product sales and may never be profitable.

We have no products approved for commercialization and have never generated any revenue from product sales. Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize one or more of our product candidates. We do not anticipate generating revenue from product sales for the foreseeable future. Our ability to generate future revenue from product sales depends heavily on our success in many areas, including but not limited to:

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completing research and development of our product candidates;

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obtaining regulatory and marketing approvals for our product candidates;

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manufacturing product candidates and establishing and maintaining supply and manufacturing relationships with third parties that meet regulatory requirements and our supply needs in sufficient quantities to meet market demand for our product candidates, if approved;

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marketing, launching and commercializing product candidates for which we obtain regulatory and marketing approval, either directly or with a collaborator or distributor;

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gaining market acceptance of our product candidates as treatment options;

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addressing any competing products;

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protecting and enforcing our intellectual property rights, including patents, trade secrets, and know-how;

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negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter;

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obtaining reimbursement or pricing for our product candidates that supports profitability; and

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attracting, hiring, and retaining qualified personnel.

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Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. We will have to develop or acquire commercial-scale manufacturing capabilities in order to continue development and potential commercialization of our product candidates. Additionally, if we are not able to generate revenue from the sale of any approved products, we may never become profitable.

Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness.

As of March 31, 2019, our total current and long-term liabilities balance was $12.6 million, of which $4.3 million was secured indebtedness, collateral for which includes, but is not limited to, a negative lien against our intellectual property rights. Our ability to make scheduled payments of the principal, to pay interest on, to refinance the secured loan agreement with Oxford Finance, or the Loan Agreement, or Notes or to make cash payments in connection with any conversion of the Notes depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control and ability to raise additional capital. We may not be able to raise sufficient capital or generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives if they are available to us based on the terms of the instruments and agreements governing the indebtedness, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. If we default under the Loan Agreement, Oxford Finance will have the ability to exercise its rights as collateral agent to take possession and dispose of the collateral securing the indebtedness under the Loan Agreement, which collateral includes all of our property, including our intellectual property. Our business, financial condition and results of operations could be substantially harmed as a result of any such foreclosure.

Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which would intensify the risks discussed above.

Despite our current indebtedness levels, and the restrictions we are under based on the terms of the Loan Agreement from incurring additional senior indebtedness, we may be able to incur substantial additional indebtedness in the future, subject to any restrictions contained in our then-existing debt instruments, some of which may be secured indebtedness, however the terms of such indebtedness may not be commercially attractive, if available.

We face risks related to a government funded award. If NIDA/NIH were to eliminate, reduce or delay funding from this award, this would have a significant negative impact on the brivoligide program.

Funding of the brivoligide program is substantially dependent upon a NIDA/NIH award for the costs related to the planned Phase 2 and Phase 3 mastectomy model studies. If NIDA/NIH were to eliminate, reduce or delay the funding for this award or disallow some of our incurred costs, we would have to obtain additional funding for continued development or regulatory registration for brivoligide or significantly delay, reduce or stop the development effort. In contracting with NIDA/NIH, we are subject to various U.S. government contract requirements which may limit reimbursement or if we are found to be in violation could result in contract termination. If the U.S. government terminates our award for its convenience, or if we default by failing to perform in accordance with the award schedule and terms, significant negative impact on our cash flows and operations could result.

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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights.

To the extent that we raise additional capital through the sale of equity, debt or other securities convertible into equity, your ownership interest will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available at all, would likely involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, making additional product acquisitions, or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates or future revenue streams or grant licenses on terms that are not favorable to us. We cannot assure you that we will be able to obtain additional funding if and when necessary to fund our entire portfolio of product candidates to meet our projected plans. If we are unable to obtain funding on a timely basis, we may be required to delay or discontinue one or more of our development programs or the commercialization of any product candidates or be unable to expand our operations or otherwise capitalize on potential business opportunities, which could materially affect our business, financial condition, and results of operations.

Risks Related to the Development of Our Product Candidates

We are heavily dependent on the success of our lead product candidate, brivoligide, which is in the early stages of clinical development, and our other product candidates, which are in pre-clinical development. We cannot give any assurance that we will generate data sufficient to receive regulatory approval, which will be required before any of our product candidates can be commercialized.

To date, we have invested substantially all of our efforts and financial resources to identify and develop our portfolio of product candidates. Our future success is dependent on our ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. We currently generate no revenue from sales of any drugs, and we may never be able to develop or commercialize a product candidate.

Our product candidate brivoligide, which is currently in Phase 2 of clinical development, is being developed for the reduction of postoperative pain in patients scoring ≥16 on the PCS. We have not prospectively demonstrated a statistically significant clinical benefit in this patient population for the primary endpoint in any clinical trial and may not be able to do so. Furthermore, the U.S. Food and Drug Administration, or the FDA, has not previously granted an indication for the reduction of postoperative pain in patients scoring ≥16 on the PCS. Additionally, in order to obtain an indication for the reduction of postoperative pain without restriction by type of surgical procedure, we intend to study brivoligide in pivotal trials in one orthopedic and one soft-tissue model of postoperative pain. We have studied brivoligide to date in TKA, an orthopedic model of postoperative pain, and intend to study brivoligide in mastectomy with immediate tissue expander or implant placement, or mastectomy, as a soft-tissue model of postoperative pain. Failure to demonstrate efficacy in both an orthopedic and soft-tissue model of postoperative pain may limit the likelihood of FDA approval for brivoligide for postoperative pain, may limit approval to a subset of surgical procedures, and may limit the addressable patient population and related commercial opportunity. Further, we may not be able to replicate or develop additional data to satisfy regulatory requirements for approval. Our other product candidate, AYX2, has not yet been evaluated in clinical trials and may fail to show the desired safety and efficacy during clinical development. There can be no assurance that the data that we develop for our product candidates in their planned indications will be sufficient to obtain regulatory approval.

Our current product candidates are for the treatment of pain. The evaluation of pain therapeutics often relies upon patient-reported outcomes of pain, such as the Numerical Rating Scale, or NRS, as clinical trial endpoints. While these endpoints are well-validated and accepted by the FDA and comparable foreign authorities for evaluation of efficacy of product candidates for the treatment of pain, there may be increased variability associated with these patient-reported outcomes as compared to objective measures used in evaluation of efficacy for product candidates treating other disease states. If these patient-reported endpoints are associated with increased variability in future studies, the data generated may not be sufficient to obtain regulatory approval.

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In addition, none of our product candidates have advanced into a pivotal study for their proposed indications and it may be years before such studies are initiated and completed, if at all. We are not permitted to market or promote any of our product candidates before they receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates. We cannot be certain that any of our product candidates will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.

Our research and development is focused on discovering and developing novel drugs based on transcription factor decoys, and the approach we are taking to discover and develop drugs is not proven and may never lead to marketable products.

The discovery and development of drugs based on transcription factor decoys is an emerging field, and the scientific discoveries that form the basis for our efforts to discover and develop product candidates are relatively new. The scientific evidence to support the feasibility of developing differentiated product candidates based on these discoveries is both preliminary and limited, and has not led to products which have obtained regulatory approval by the FDA or comparable foreign authorities. Therefore, we do not know if our approach will be successful. Failure by any transcription factor decoy, including those currently being developed by us, would adversely impact this platform technology.

In addition, our product candidates are all based on a single platform technology. If we were required to discontinue development of brivoligide because the related trials are unsuccessful or do not demonstrate sufficiently positive results to continue development of brivoligide, development of our other product candidates may be harmed. Moreover, if we decide to leverage any success with brivoligide to develop our other product candidates reliant on our platform technology, we may not be successful in such efforts. In any such event, our business will be adversely impacted.

Our research and development is focused on discovering and developing non-opioid therapies to treat pain. We are not developing our product candidates to address opioid dependence, and any potential impact these therapies may have on opioid usage is speculative and may never be supported by clinical data.

Our product candidates are being developed for the treatment of pain. There can be no assurance that any of these product candidates will have any impact on potential opioid usage in patients who use our product candidates, if approved. There remains significant uncertainty regarding the assessment of opioid-sparing outcomes in clinical trials of product candidates addressing pain as well as the clinical relevance of any such results. Further, there is no clear guidance from regulators on the design or endpoints of clinical trials intended to evaluate pain and related opioid usage and what clinical data, if any, would be necessary to support potential claims of reduced opioid usage or opioid-sparing effects. As a result of this uncertainty, we cannot assess, and can provide no assurance of, the potential impact, if any, that our product candidates may have on opioid usage for pain or as analgesic therapy. In addition, we have not evaluated, and do not intend to evaluate, the potential effect of our product candidates on opioid dependence.

We have yet to present the current clinical data to the relevant regulatory authorities to give an opinion on the clinical development pathway for brivoligide.

We plan to present the clinical and non-clinical data sets for brivoligide to the FDA and relevant foreign regulatory authorities after completion of the planned Phase 2 studies at an End of Phase 2 meeting or receipt of scientific advice from the EMA, as applicable. Until the results of these meetings are known and documented, there can no assurance as to what requirements may be imposed for filing a New Drug Application, or NDA, or Marketing Approval in the EMA for brivoligide. We are currently relying on opinions from experts and regulatory precedents to design our development program. It is possible that the official position of the applicable regulatory authorities will be substantially different from the advice we have received. Any such difference could increase both the time and cost required to obtain the necessary regulatory approvals for brivoligide, which may in turn limit or prohibit its further development, resulting in a material harm to our business, financial condition, results of operations and prospects.

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Even if we successfully complete the necessary preclinical studies and clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate and the regulatory approval may be for a more narrow indication than we seek.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following the commencement of clinical trials, and depends upon numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an application. We have not obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Applications for our product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

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the FDA or comparable foreign regulatory authorities may disagree with the design, size or implementation of our clinical trials;

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the FDA or comparable foreign regulatory authorities may disagree with the use of and definition of one orthopedic and one soft-tissue surgical model of postoperative pain as appropriate for approval for general postoperative pain;

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the FDA does not currently have published guidance on the requirements for a general postoperative pain indication and may publish guidance that is not in alignment with our current clinical development plans, which may cause us to alter development plans, thereby increasing the costs and time required to complete clinical development of brivoligide;

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the FDA or comparable foreign regulatory authorities may disagree with the use of the PCS as a tool for patient selection for treatment with brivoligide;

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the population studied in our clinical trials may not be sufficiently broad or representative to assure safety in the full population for which we seek approval;

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the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from our preclinical studies or clinical trials;

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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or foreign jurisdictions;

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the FDA or comparable foreign regulatory authorities may find failures in our manufacturing processes, validation procedures and specifications, or facilities of the third-party manufacturers with which we contract for clinical and commercial supplies that may delay or limit our ability to obtain regulatory approval for our product candidates; and

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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our NDA or other applicable regulatory submissions insufficient for approval.

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The lengthy and uncertain regulatory approval process, as well as the unpredictability of the results of clinical trials, may result in our failing to obtain regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations, and prospects. Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the relevant regulatory authorities may not complete their review processes in a timely manner, may issue a complete response letter, or ultimately, may not approve our product candidates. In addition, we may experience delays or rejections if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or

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may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of data obtained from preclinical and clinical testing could delay, limit or prevent the receipt of marketing approval for a product candidate.

Drug development involves a lengthy and expensive process with an uncertain outcome, and results of preclinical studies and earlier clinical trials may not be predictive of future results.

Clinical testing is expensive and generally takes many years to complete, and the outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of larger, later-stage clinical trials. Product candidates that have shown promising results in early-stage clinical trials may still suffer significant setbacks in subsequent clinical trials. Our clinical trials to date have been conducted on a small number of patients in limited numbers of clinical sites. We will have to conduct larger studies in our proposed indications to verify the results obtained to date and to support any regulatory submissions for further clinical development. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles despite promising results in earlier, smaller clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses. We do not know whether any Phase 2, Phase 3, or other clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety with respect to the proposed indication for use sufficient to obtain regulatory approval to receive regulatory approval or market our product candidates.

We may find it difficult to enroll patients in our clinical trials given the limited number of patients scoring ≥16 on the PCS who are undergoing the procedures we intend to use as our models of postoperative pain for testing of brivoligide. We may also find it difficult to enroll patients in surgical models that are performed under general anesthesia due to the intrathecal route of administration of brivoligide. Difficulty in enrolling patients could delay or prevent the completion of clinical trials of our product candidates.

Identifying and qualifying patients to participate in clinical trials of our product candidates is essential to their success. The timing of our clinical trials depends in part on the rate at which we can recruit patients to participate in clinical trials of our product candidates, and we may experience delays in completion of our clinical trials if we encounter difficulties in enrollment.

In future clinical trials of brivoligide, we will be evaluating brivoligide using surgical models including but not limited to TKA and mastectomy. While we have successfully completed enrollment in three Phase 2 studies of postoperative pain following TKA to date within projected timelines, we may not be able to do so successfully in the future. We have never conducted a study using the mastectomy model of postoperative pain, and may not meet projected enrollment timelines. Some competitors have ongoing clinical trials for product candidates that use the same surgical models as our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in competitors’ clinical trials.

The eligibility criteria of our planned clinical trials may further limit the availability of suitable clinical trial participants as we expect to require that patients have specific measurable characteristics or meet certain criteria to assure that they are appropriate for inclusion in our clinical trials. In future clinical trials of brivoligide, we will be evaluating brivoligide in patients scoring ≥16 on the PCS. Approximately one-third of individuals score ≥16 on the PCS, however if this rate is not reflected in patient populations at the clinical trial sites, we may have fewer patients eligible for enrollment than expected. In addition, we may not be able to identify, recruit, and enroll a sufficient number of patients to complete our clinical trials in a timely fashion because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical trials, the willingness of patients to receive an intrathecal injection if undergoing a surgical procedure typically performed under general anesthesia, and the willingness of physicians to participate in our planned clinical trials. If patients are unwilling to participate in our clinical trials for any reason, the timeline for conducting studies and obtaining regulatory approval of our product candidates may be delayed.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates could be harmed, and our ability to generate product revenue from any of these product candidates could be delayed or prevented. In addition,

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any delays in completing our clinical trials would likely increase overall costs, impair product candidate development and jeopardize our ability to obtain regulatory approval relative to our current plans. Any of these occurrences may harm our business, financial condition, and prospects significantly.

Clinical trials are costly, time consuming and inherently risky, and we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Clinical development is expensive, time consuming and involves significant risk. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of development. Events that may prevent successful or timely completion of clinical development include but are not limited to:

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inability to generate satisfactory preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials;

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delays in reaching agreement on acceptable terms with contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;

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delays in obtaining required Institutional Review Board, or IRB, approval at each clinical trial site;

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refusal to permit the conduct of a clinical trial by regulatory authorities, after review of an IND, or equivalent foreign application or amendment;

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delays in recruiting qualified patients in our clinical trials;

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failure by clinical sites or our CROs or other third parties to adhere to clinical trial requirements;

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failure to perform in accordance with the FDA’s Good Clinical Practice requirements, or GCP, or applicable foreign regulatory guidelines;

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high patient drop-out rate in our clinical trials;

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occurrence of adverse events, or AEs, associated with our product candidates;

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changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;

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the cost of clinical trials of our product candidates;

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negative or inconclusive results from our clinical trials which may result in our deciding, or regulators requiring us, to conduct additional clinical trials or abandon development programs in other ongoing or planned indications for a product candidate; and

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delays in reaching agreement on acceptable terms with third party manufacturers and the time for manufacture of sufficient quantities of our product candidates for use in clinical trials.

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Any inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us or impair our ability to generate revenue. Clinical trial delays could also shorten any periods during which our products have patent protection and may allow competitors to develop and bring products to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or terminate clinical trials, delay regulatory approval by the FDA or comparable foreign regulatory authorities or, even if approved, result in restrictive labelling of our products. We will continue to evaluate our product candidates in additional clinical trials, and there is no guarantee that severe side effects will not be identified.

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Brivoligide targets Early Growth Response 1, or EGR1, a transcription factor that has a role in memory consolidation within the hippocampus. There is a potential risk of transient alteration in memory function with brivoligide if sufficient material is distributed to the brain. This risk has been evaluated in preclinical studies and in the clinical trials conducted to date, but has not been observed; however, studies using the mastectomy model will involve movement of the brivoligide injection to the upper regions of the spinal canal which may involve increased risk of brain exposure and possible transient cognitive or memory dysfunction.

Brivoligide is intended to prevent or reduce exacerbated pain following surgery and not to mask, numb or otherwise alter a patient’s normal response to pain. However, we have not conducted studies on or otherwise evaluated any masking effect of brivoligide on a patient’s pain response function. If patients, physicians or other healthcare providers consider brivoligide to alter patients’ normal pain response in a manner that would be considered detrimental to recovery, that would be considered an undesirable side effect and would harm our ability to develop brivoligide and future market acceptance of brivoligide.

Additionally, even if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, potentially significant negative consequences could result, including but not limited to:

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withdrawal of regulatory approvals of such products;

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requirements by regulatory authorities to place additional warnings on the label of such products;

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requirement by regulatory authorities to create a REMS plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers, and/or other elements to assure safe use;

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potential lawsuits, which may result in us being held liable for harm caused to patients; and

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reputational harm.

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Any of these events could prevent us from achieving or maintaining market acceptance of a product candidate, even if approved, and could significantly harm our business, results of operations, and prospects.

We may not be successful in any efforts to identify, license, discover, develop, or commercialize additional product candidates.

Although a substantial amount of our effort will focus on the continued clinical testing, potential approval, and commercialization of our existing product candidates, the success of our business is also expected to depend in part upon our ability to identify, license, discover, develop, or commercialize additional product candidates. Research programs to identify new product candidates require substantial technical, financial, and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. Our research programs or licensing efforts may fail to yield additional product candidates for clinical development and commercialization for a number of reasons, including but not limited to the following:

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our research or business development methodology or search criteria and process may be unsuccessful in identifying potential product candidates;

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our collaboration with twoXAR, which relies upon artificial intelligence technology to generate potential product opportunities, may not generate viable product candidates;

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we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;

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our product candidates may not succeed in preclinical or clinical testing;

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our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval;

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competitors may develop alternatives that render our product candidates obsolete or less attractive;

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product candidates we develop may be covered by third parties’ patents or other exclusive rights;

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the market for a product candidate may change during our development program so that such a product may become unreasonable to continue to develop;

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a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

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a product candidate may not be accepted as safe and effective by patients, the medical community, or third-party payors.

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If any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify, license, discover, develop, or commercialize additional product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations.

We may not be successful in meeting our diligence obligations under our existing collaboration with twoXAR or under future license agreements necessary to maintain and continue to use product candidate licenses in effect. In addition, if required in order to commercialize our product candidates, we may be unsuccessful in obtaining or maintaining necessary rights to our product candidates through acquisitions and in-licenses.

We may seek to obtain rights to intellectual property, through licenses from third parties and under patents that we do not own, to develop and commercialize additional product candidates, such as our collaboration with twoXAR. Because our programs may require the collaboration with or use of proprietary rights held by third parties, the growth of our business may depend in part on our ability to maintain in effect these collaborations and proprietary rights. For example, we have certain specified diligence obligations under our collaboration with twoXAR. We may not be able to achieve the required diligence milestones in a timely manner, which may result in a right of termination by twoXAR, and we may be unable to successfully negotiate an extension or waiver of those termination rights. Any termination of the collaboration with twoXAR or future license agreements with third parties with respect to our product candidates would be expected to negatively impact our business prospects.

We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our product candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash 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. Even if we are able to license or acquire third-party intellectual property rights that are necessary for our product candidates, there can be no assurance that they will be available on favorable terms.

We collaborate with U.S. and foreign academic institutions to identify product candidates, accelerate our research and conduct development. Typically, these institutions have provided us with an option to negotiate an exclusive license to any of the institution’s rights in the patents or other intellectual property resulting from the collaboration. Regardless of such option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue a program of interest to us.

If we are unable to successfully obtain and maintain rights to required third-party intellectual property, we may have to abandon development of that product candidate or pay additional amounts to the third party, and our business and financial condition could suffer.

Even if we obtain regulatory approval for a product candidate, we will remain subject to ongoing regulatory requirements.

If our product candidates are approved, they will be subject to ongoing regulatory requirements with respect to manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy and other post-approval information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

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Manufacturers and manufacturers’ facilities are required to continuously comply with FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP, regulations and corresponding foreign regulatory manufacturing requirements. 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 or marketing authorization application, or MAA.

Any regulatory approvals that we receive for our product candidates may be subject to limitations on the approved indicated uses for which the product candidate 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 product candidate. We will be required to report certain adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. If our original marketing approval for a product candidate was obtained through an accelerated approval pathway, we could be required to conduct a successful post-marketing clinical study in order to confirm the clinical benefit for our products. An unsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval.

If a regulatory agency discovers previously unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, the regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

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issue warning letters;

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impose civil or criminal penalties;

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suspend or withdraw regulatory approval;

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suspend any of our ongoing clinical trials;

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refuse to approve pending applications or supplements to approved applications submitted by us;

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impose restrictions on our operations, including closing our contract manufacturers’ facilities; or

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require a product recall.

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Any government investigation of alleged violations of law would be expected to require us to expend significant time and resources in response and could generate adverse publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to develop and commercialize our products and our value and operating results would be adversely affected.

We rely on third parties to conduct our clinical trials, and perform other clinical development-related services, such as drug shipping, blinding and randomization, data collection, and biostatistical analysis. If these third parties do not successfully perform and comply with regulatory requirements, we may not be able to successfully complete clinical development, obtain regulatory approval or commercialize our product candidates and our business could be substantially harmed.

We have relied upon and plan to continue to rely upon third-party CROs to conduct, monitor and manage our ongoing clinical program. We rely on these parties for execution of clinical trials and we manage and control only certain aspects of their activities. We remain responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs and other vendors are required to comply with all applicable laws, regulations and guidelines, including those required by the FDA and comparable foreign regulatory authorities for all of our product candidates in clinical development. If we or any of our CROs or vendors fail to comply with applicable laws, regulations and guidelines, the results generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before

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approving our marketing applications. We cannot guarantee that our CROs and other vendors will meet these requirements, or that upon inspection by any regulatory authority, such regulatory authority will determine that activities conducted by our third-party vendors in support of any of our clinical trials comply with applicable requirements. Failure to comply with these laws, regulations and guidelines may require us to repeat clinical trials, which would be costly and delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs in a timely manner or do so on commercially reasonable terms. In addition, our CROs may not prioritize our clinical trials relative to those of other customers and any turnover in personnel or delays in the allocation of CRO employees by the CRO may negatively affect our clinical trials. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, our clinical trials may be delayed or terminated and we may not be able to meet our current plans with respect to our product candidates. CRO contracts may also involve higher costs than anticipated, which could negatively affect our financial condition and operations.

We rely and expect to continue to rely on third parties to manufacture our clinical product supplies, and if approved, we intend to rely on third parties to produce and process our product candidates. Our commercialization of any of our product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain approval of government regulators, fail to provide us with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.

We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our clinical supplies for use in the conduct of our clinical trials, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We currently rely on outside vendors to manufacture clinical supplies of our product candidates and plan to continue relying on third parties to manufacture our product candidates on a commercial scale, if approved. We plan to rely on third-party manufacturers and their responsibilities will include purchasing from third-party suppliers the materials necessary to produce our product candidates for our clinical trials and regulatory approval. There are expected to be a limited number of suppliers for the materials that we expect to use to manufacture our product candidates, and we may not be able to identify alternative suppliers to prevent a possible disruption of the manufacture our product candidates for our clinical trials, and, if approved, ultimately for commercial sale. Although we generally do not expect to begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the study, any significant delay or discontinuity in the supply of a product candidate, or the active ingredient or other material components in the manufacture of the product candidate could delay completion of our clinical trials and result in potential delay in regulatory approval of our product candidates, which would harm our business and results of operations.

With respect to our brivoligide product candidate, we rely on Nitto-Denko Avecia, Inc., or Avecia, for drug substance manufacturing, and have worked to date with Pyramid Laboratories, Inc., or Pyramid, and CordenPharma GmbH, or Corden, to supply our drug product materials for clinical trials. We do not have long-term supply agreements or commitments from those parties to supply our materials. Moreover, even if we had a longer-term supply arrangement, we may be precluded from entering into a back-up or alternative supplier arrangement which may increase the risk for further development, regulatory approval, or commercialization of our product candidates. We have not established clinical trial material supply agreements for AYX2 and may not be able to do so.

Certain components used in the manufacture of brivoligide are sourced from a single vendor.

Brivoligide is an oligonucleotide, and there are currently a limited number of oligonucleotide manufacturers with commercial sale capabilities globally. We currently use Avecia as a single supplier for the brivoligide drug substance and we do not have a long-term supply agreement or commitment from Avecia to supply our drug substance. If Avecia is unable or unwilling to meet our current or future needs for our drug substance on acceptable terms, or at all, we may be unable to locate alternative suppliers or manufacturers. While we intend to develop secondary sources for manufacturing of our drug candidates in the future, we may not be able to do so on commercially reasonable terms or at all. Any interruption in the supply of a key material could significantly delay our research and development process or increase our

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expenses for development and commercialization of our product candidates. Any interruption in supply of our product candidates from Avecia could result in delay of our clinical trials or interrupt our commercial supply, which would harm our business and results of operations.

We face intense competition from other companies developing products for the reduction of postoperative pain.

Brivoligide faces significant competition. If we are able to successfully develop brivoligide for the reduction of postoperative pain, it would compete with EXPAREL (bupivacaine liposome injectable suspension, marketed by Pacira Pharmaceuticals, Inc.), HTX-011 (bupivacaine and meloxicam, in development by Heron Therapeutics, NDA submitted to the FDA in 2018, Complete Response Letter received from the FDA on April 30, 2019), Ofirmev (intravenous acetaminophen, marketed by Mallinckrodt Pharmaceuticals), branded and generic oral opioid pain therapeutics, branded and generic oral nonsteroidal anti-inflammatory drugs, or NSAIDs, and potentially other products in development for the reduction of postoperative pain that reach the market.

Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do, and have significantly greater experience in the discovery and development of product candidates, as well as in obtaining regulatory approvals of those product candidates in the United States and in foreign countries. Many of our current and potential future competitors also have significantly more experience commercializing drugs that have been approved for marketing. Mergers and acquisitions in the pharmaceutical and biotechnology industries could result in even more resources being concentrated among a smaller number of our competitors. Competition may reduce the number and types of patients available to us to participate in clinical trials, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors.

Small or early-stage companies and research institutions may also prove to be significant competitors, particularly through collaborative arrangements with large and established pharmaceutical companies. We will also face competition from these parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, and acquiring or in-licensing technologies and products complementary to our programs or potentially advantageous to our business. If any of our competitors succeed in obtaining approval from the FDA or other regulatory authorities for their products sooner than we do or for products that are more effective or less costly than our products, our commercial opportunity could be significantly reduced. Major technological changes can happen quickly in the biotechnology and pharmaceutical industries, and the development of new mechanisms of action, technologically improved or different products or drug delivery technologies may make our product candidates or platform technologies obsolete or noncompetitive.

We currently have no marketing and sales experience or capabilities. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.

We have no experience selling and marketing our product candidates and we currently have no marketing or sales organization. To successfully commercialize any products that may result from our development programs, we will need to invest in and develop these capabilities, either on our own or with others, which would be expensive, difficult and time consuming. Any failure or delay in the timely development of our internal commercialization capabilities could adversely impact the potential for success of our products.

Further, given our lack of prior experience in marketing and selling pharmaceutical products, we may rely on future collaborators to commercialize our products. If collaborators do not commit sufficient resources to commercialize our future products and we are unable to develop the necessary marketing and sales capabilities on our own, we will be unable to generate sufficient product revenue to sustain or grow our business. We may be competing with companies that currently have extensive and well-funded marketing and sales operations, in particular in the markets our product candidates are intended to address. Without appropriate capabilities, whether directly or through third-party collaborators, we may be unable to compete successfully against these more established companies.

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The commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, and others in the medical community.

In addition to extensive internal efforts, the successful commercialization of brivoligide will require many third parties, over whom we have no control, to choose to utilize brivoligide. These third parties include physicians and hospital pharmacy and therapeutics committees, or P&T committees.

In addition, there is significant uncertainty related to the insurance coverage and reimbursement for newly approved products. In the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for products such as our and what reimbursement codes our products may receive.

Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to limit or reduce healthcare costs may result in restrictions on coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for our products.

Physicians must prescribe brivoligide for our commercialization to be successful. Because administration of brivoligide will be intended for patients scoring ≥16 on the PCS, and will require administration of the one-page PCS evaluation tool prior to surgery, physicians may not accept brivoligide as a viable addition to their patient treatment pathway.

If brivoligide does not achieve broad market acceptance, the revenues that are generated from our sales will be limited.

Risks Related to our Business Operations

Our future success depends in part on our ability to retain our President and Chief Executive Officer, Chief Medical Officer, and Chief Scientific Officer, and to attract, retain, and motivate other qualified personnel.

We are highly dependent upon the efforts of our senior management, including Rick Orr, our President and Chief Executive Officer, Donald C. Manning, our Chief Medical Officer, and Julien Mamet, our founder and Chief Scientific Officer. The loss of the services provided by these individuals may adversely impact the achievement of our objectives. These individuals could leave our employment at any time, as they are “at will” employees. The loss of the services of these individuals and other members of our senior management could delay or prevent the achievement of research, development, marketing, or product commercialization objectives. We do not maintain any “key-man” insurance policies on any of the key employees nor do we intend to obtain such insurance coverage. Recruiting and retaining other qualified employees, consultants, and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of highly qualified personnel in our industry, which is likely to continue. As a result, competition for personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. In addition, failure to succeed in development and commercialization of our product candidates may make it more challenging to recruit and retain qualified personnel. The inability to recruit and retain qualified personnel, or the loss of the services of key members of senior management could impede the progress of our research, development, and commercialization objectives.

We will need to expand our organization and we may experience difficulties in managing this growth, which could disrupt our operations.

As of June 30, 2019, we had six full-time employees. As our development and commercialization plans and strategies develop, we expect to need additional managerial, operational, sales, marketing, financial, legal, and other resources. Our management may need to divert a disproportionate amount of their attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may

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result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

Our business and operations would suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-security.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, research data, our proprietary business information and that of our suppliers, technical information about our products, clinical trial plans and employee records. Similarly, our third-party providers possess certain of our sensitive data and confidential information. The secure maintenance of this information is critical to our operations and business strategy. Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, ransomware, cyber fraud, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, encrypted, lost or stolen. Any such access, inappropriate disclosure of confidential or proprietary information or other loss of information, including our data being breached at third-party providers, could result in legal claims or proceedings, liability or financial loss under laws that protect the privacy of personal information, disruption of our operations or our product development programs and damage to our reputation, which could adversely affect our business. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

We may acquire businesses or products, or form strategic alliances, in the future, and may not realize the benefits of such acquisitions.

We may acquire additional businesses or products, form strategic alliances, or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing, and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot provide any assurance that, following any such acquisition, we will achieve the synergies expected in order to justify the transaction, which could result in a material adverse effect on our business and prospects.

Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict and may have a significant adverse effect on our business and results of operations.

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 product candidates, restrict or regulate postapproval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. Among policy makers and payors in the United States there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access and the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

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The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the Affordable Care Act, substantially changed the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act, among other things: (1) introduced a new average manufacturer price definition for drugs and biologics that are inhaled, infused, instilled, implanted or injected and not generally dispensed through retail community pharmacies; (2) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and expanded rebate liability from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; (3) established a branded prescription drug fee that pharmaceutical manufacturers of branded prescription drugs must pay to the federal government; (4) expanded the list of covered entities eligible to participate in the 340B drug pricing program by adding new entities to the program; (5) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts (which through subsequent legislative amendments, was increased to 70% from 50% starting in 2019) off negotiated prices of applicable branded 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; (6) extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; (7) expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals, including individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (8) created a licensure framework for follow-on biologic products; and (9) established a Center for Medicare and Medicaid Innovation at the Centers for Medicare and Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. For example, the Tax Cuts and Jobs Act of 2017, or TCJA, was enacted, which includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the TCJA, the remaining provisions of the Affordable Care Act are invalid as well. While the Trump administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business.

Other legislative changes have been proposed and adopted since the Affordable Care Act 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 and subsequent laws, which began in 2013 and will remain in effect through 2027, unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. New laws may result in additional reductions in Medicare and other healthcare funding, which may materially adversely affect customer demand and affordability for our products and, accordingly, the results of our financial operations. Also, there has been heightened governmental scrutiny recently over the manner in which pharmaceutical companies set prices for their marketed products, which have resulted in several Congressional inquiries and proposed federal legislation, as well as state efforts, designed to, among other things, bring more transparency to product 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 drug products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for

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generic drugs for low-income patients. Further, the Trump administration released a “Blueprint,” or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measures and, at the same, is immediately implementing others under its existing authority. While some proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Most recently, the Trump administration released a “Blueprint,” or plan, to reduce the cost of drugs. The Trump administration’s Blueprint contains certain measures that the U.S. Department of Health and Human Services is already working to implement. At the state level, individual states in the United States are increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded 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, once marketing approval is obtained.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begins commercializing those products in the United States, our operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

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federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

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HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of individually identifiable health information;

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the federal physician sunshine requirements under the Health Care Reform Laws requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, 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 otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

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Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

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

Our research and development activities and our third-party manufacturers’ and suppliers’ activities may involve the controlled storage, use, and disposal of hazardous materials, including the components of our product candidates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of hazardous materials. In some cases, hazardous materials and various wastes resulting from their use may be stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by us and our third-party manufacturers for handling and disposing of hazardous materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters is located in the San Francisco Bay Area which has in the past experienced severe earthquakes and other natural disasters. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations or those of our collaborators, and have a material adverse effect on our business, results of operations, financial condition, and prospects. If a natural disaster, terrorist attack, power outage, or other event occurred that prevented us from using or damaged critical

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elements of our business and operations (such as the manufacturing facilities of our third-party contract manufacturers) our business may be disrupted for a substantial period of time. We have limited or no disaster recovery and business continuity plans in place currently and our business would be impaired in the event of a serious disaster or similar event. We may incur substantial expenses to develop and implement any disaster recovery and business continuity plans, which could have a material adverse effect on our business.

The terms of our Loan Agreement with Oxford place restrictions on our operating and financial flexibility.

The Loan Agreement subjects us and our subsidiaries to various affirmative and restrictive covenants, including a covenant against the occurrence of a “change in control,” financial reporting obligations, and certain limitations on the incurrence of indebtedness, liens (including a negative pledge on intellectual property and other assets), investments, distributions (including dividends), collateral, transactions with affiliates or mergers or acquisitions. Compliance with these covenants may limit our flexibility in operating our business and our ability to take actions that might be advantageous to us and our shareholders.

Additionally, we may be required to repay the entire amount of outstanding indebtedness under the Loan Agreement in cash if we fail to stay in compliance with our covenants or suffer some other event of default under the Loan Agreement. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In that case, we may be required to delay, limit, reduce or terminate our clinical development efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Oxford could also exercise its rights as collateral agent to take possession and dispose of the collateral securing the loan for its benefit, which collateral includes all of our property, including our intellectual property. Our business, financial condition and results of operations could be substantially harmed as a result of any of these events.

Substantially all of our assets are subject to a first-priority lien in favor of Oxford under the Loan Agreement. The foreclosure on such assets or exercise of other remedies available to Oxford under the Loan Agreement could substantially harm our business operations and financial condition.

Substantially all of our assets are subject to a first-priority lien in favor of Oxford under the Loan Agreement. There can be no assurance that we will remain in compliance with our obligations under the Loan Agreement, including making required payments and complying with affirmative and negative covenants. In the event of foreclosure or exercise of other remedies by Oxford under such agreement on the assets pledged to Oxford, our business operations and financial condition will be substantially harmed.

Risks Related to our Intellectual Property

We intend to rely on exclusivity from patent rights for our product candidates and any future product candidates. If we are unable to obtain or maintain exclusivity, we may not be able to compete effectively in our markets.

We have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our product candidates that are important to our business. This process can be expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain in flux. We own the rights to issued patents and to patent applications that cover our product candidates and their application. The patent applications that we own may fail to result in issued patents with claims that cover our product candidates in the United States or in other foreign countries. Further, third parties may challenge the validity of our issued patents, their enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Furthermore, even if they are unchallenged, our

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patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing intellectual property around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

We have filed several patent applications covering various aspects of our product candidates. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for the successful commercialization of any product candidates that we may develop. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced.

We may not have sufficient patent term protections for our products to effectively protect our business.

Patents have a limited term. In the United States, the statutory expiration of a patent is generally 20 years after it is filed. Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, our products may be open to competition from generic medications. In addition, upon issuance in the United States any patent term can be adjusted based on certain delays caused by the applicant(s) or the United States Patent and Trademark Office, or USPTO. For example, a patent term can be reduced based on certain delays caused by the patent applicant during patent prosecution. Further, it is possible for a third party to challenge the validity of our issued patents via litigation and/or post-grant administrative proceedings at the USPTO, which if successful, could invalidate the issued patents and lead to earlier market entry and competition by others.

Patent term extensions under the Hatch-Waxman Act in the United States and under supplementary protection certificates in Europe may be available to extend the patent or data, regulatory exclusivity terms associated with the products. With respect to our product candidates brivoligide and AYX2, a portion of the potential commercial opportunity will likely rely on patent term extensions, and we cannot provide any assurances that any such patent term extensions will be obtained and, if so, for how long. As a result, we may not be able to maintain exclusivity for our products for an extended period, which would negatively impact our business and results of operations. If we do not have sufficient patent terms or regulatory exclusivity to protect our products, our business and results of operations will be adversely affected.

Patent laws and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.

Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of their protection. The laws of foreign countries may not protect our patent rights to the same extent as the laws of the United States. 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. We therefore cannot be certain that we were the first to make the invention claimed in our owned and licensed patents or pending applications, or that we were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications are prosecuted and may also affect patent litigation. The applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. In general, 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 issued patents, all of which could have a material adverse effect on our business and financial condition.

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If we are unable to maintain effective proprietary rights for our product candidates or any future product candidates, we may not be able to compete effectively in our markets.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.

Although we require all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements can be duly enforced or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.

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

Our commercial success depends in part on avoiding infringement of the patents and proprietary rights of third parties. There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexamination proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our product candidates. We have conducted freedom to operate analyses with respect to only certain of our product candidates, and have not requested independent formal written opinions, and therefore we do not know whether there are any third-party patents that would impair our ability to commercialize these product candidates. We also cannot guarantee that any of our analyses are exhaustive, nor can we be sure that we have identified each and every patent and pending application in the United States and abroad that is relevant or necessary to the commercialization of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our product candidates may infringe.

In addition, third parties may obtain patents in the future and claim that the use of our technologies infringes upon their patents. If any third-party patents were held by a court of competent jurisdiction to cover aspects of our product candidate’s formulations, manufacturing process, methods of use, or of any molecules formed during their manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire or are finally determined to be invalid or unenforceable. Such a license may not be available on commercially reasonable terms, or at all.

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Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

Intellectual property may be discovered in the future through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit our exclusive rights, and limit our ability to contract with non-U.S. manufacturers.

We have received a grant award from NIDA/NIH for the development of brivoligide in the mastectomy model of postoperative pain. Intellectual property may be generated through the use of this U.S. government funding and would therefore be subject to certain federal regulations. As a result, the U.S. government may in the future have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or the Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right, under certain limited circumstances, to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government or fails to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.

Our product candidates may be subject to generic competition.

Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an abbreviated new drug application, or ANDA, seeking approval of a generic copy of an approved innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under section 505(b)(2) that references the FDA’s finding of safety and effectiveness of a previously approved drug. A 505(b)(2) NDA product may be for a new or improved version of the original innovator product. Innovative small molecule drugs may be eligible for certain periods of regulatory exclusivity (e.g., five years for new chemical entities, three years for changes to an approved drug requiring a new clinical trial, seven years for orphan drugs), which preclude FDA approval (or in some circumstances, FDA filing and review of) an ANDA or 505(b)(2) NDA relying on the FDA’s finding of safety and effectiveness for the innovative drug. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the final drug product, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic applicant that seeks to market its product before expiration of the patents must include in the ANDA or 505(b)(2) what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues to protect its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.

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If there are patents listed for our product candidates in the Orange Book, ANDAs and 505(b)(2) NDAs with respect to those product candidates would be required to include a certification as to each listed patent indicating whether the ANDA applicant does or does not intend to challenge the patent. We cannot predict whether any patents issuing from our pending patent applications will be eligible for listing in the Orange Book, how any generic competitor would address such patents, whether we would sue on any such patents, or the outcome of any such suit.

We may not be successful in securing or maintaining proprietary patent protection for products and technologies we develop or licenses. Moreover, if any patents that are granted and listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, the affected product could more immediately face generic competition and our sales would likely decline materially. Should sales decline, we may have to write off a portion or all of the intangible assets associated with the affected product and our results of operations and cash flows could be materially and adversely affected.

All of our assets are subject to a first-priority lien in favor of Oxford under a security agreement entered into in connection with the Loan Agreement with Oxford, and the Loan Agreement contains a negative pledge on all of our intellectual property. The foreclosure on such assets or exercise of other remedies available to Oxford under the Loan Agreement could materially adversely affect our business operations and future prospects.

All of the assets (including intellectual property) owned by us are subject to a first-priority lien in favor of Oxford under a security agreement entered into in connection with the Loan Agreement with Oxford. There can be no assurance that we will remain in compliance with our obligations under the Loan Agreement. In the event of foreclosure or exercise of other remedies by Oxford under such agreement on the assets (including such intellectual property) pledged to Oxford, our ability to use and develop our product candidates as well as our business operations and future prospects will be materially adversely affected. In addition, the Loan Agreement contains a negative pledge on all of our intellectual property rights.

Although we are not currently involved in any significant litigation, we may be involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming, and unsuccessful.

Competitors may infringe our patents or the patents of our potential licensors. Although we are not currently involved in any litigation, if we were to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are a commonplace. Grounds for a validity challenge of a patent could be an alleged failure to meet any of several statutory requirements for patentability, 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. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome of such interference proceeding could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. 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. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidates to market.

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.

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We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we have written agreements and make every effort to ensure that our employees, consultants, and independent contractors do not use the proprietary information or intellectual property rights of others in their work for us, and we are not currently subject to any claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties, we may in the future be subject to such claims. 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, which could adversely impact our business. 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.

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

Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop our own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products 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 products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, 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 Corporate Governance

Our bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of a fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; any action asserting a claim against us that is governed by the internal affairs doctrine; or, to the maximum extent permitted by law, any other claim or dispute. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our bylaws described in the preceding sentence. If a court were to find the choice of forum provisions contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a significant impact on our business, financial condition and results of operations.

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This exclusive forum provision will not apply to claims which are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, or for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction. For instance, the provision would not apply to actions arising under federal securities laws, including suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, jurisdiction over which is exclusively vested by statute in the U.S. federal courts. As a result, this 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, employees or agents, which may discourage such lawsuits against us and such persons.

Some provisions of our charter document and Delaware law may have antitakeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by the our stockholders to replace or remove our management.

Provisions in our certificate of incorporation and bylaws as well as provisions of the DGCL, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

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allowing the authorized number of our directors to be changed only by resolution of the board of directors;

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authorizing the issuance of   “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

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eliminating the ability of stockholders to call a special meeting of stockholders; and

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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove management by making it more difficult for stockholders to replace members of our board of directors, which will be responsible for appointing the members of our management. In addition, we will be subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by the board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Risks Related to this Offering and Ownership of our Common Stock and Pre-Funded Warrants

Private Adynxx has a material weakness in its internal control over financial reporting. If this material weakness persists or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report its financial results could be adversely affected.

Prior to the closing of the Merger, Adynxx was a private company and had limited accounting and financial reporting personnel and other resources with which to address its internal control over financial reporting. In connection with the audit of Private Adynxx’s financial statements for the year ended December 31, 2018 and preparation of interim financial statements for the first quarter of 2019, Private Adynxx and its independent registered public accounting firm identified a material weakness in Private Adynxx’s internal controls over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis.

The material weakness related to Private Adynxx’s inability to prepare accurate financial statements, resulting from a lack of adequate accounting personnel to timely and appropriately account for and disclose the impact of complex, non-routine transactions in accordance with GAAP, including the recording of convertible note and related disclosures. In response to the material weakness, Adynxx is currently working to remediate the material weakness by retaining third-party consultants to help enhance its internal controls over financial reporting. There can be no assurance that these efforts will remediate the

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material weakness or avoid future weaknesses or deficiencies. Any failure to remediate the material weakness and any future weaknesses or deficiencies or any failure to implement required new or improved controls or difficulties encountered in their implementation could cause Adynxx to fail to meet its reporting obligations or result in material misstatements in its financial statements. Following the closing of this offering, Adynxx’s management will be required to assess the effectiveness of its disclosure controls and procedures and internal control over financial reporting. If Adynxx is unable to remediate its material weakness, Adynxx’s management may not be able to conclude that its disclosure controls and procedures or internal control over financial reporting are effective, which could result in investors losing confidence in its reported financial information and may lead to a decline in the stock price. Failure to comply with Section 404 of Sarbanes-Oxley could potentially subject Adynxx to sanctions or investigations by the SEC, the Financial Industry Regulatory Authority or other regulatory authorities, as well as increasing the risk of liability arising from litigation based on securities law.

If we fail to comply with the continued listing requirements of         following this offering, our common stock may be delisted and the price of our common stock and our ability to access the capital markets would be harmed.

In June 2019, Nasdaq delisted our common stock due to our noncompliance with Nasdaq’s minimum stockholders’ equity requirement and minimum round lot shareholder requirement. Our common stock is presently quoted on the OTCQB. While we intend to list our common stock for trading on        in connection with this offering, there can be no assurance that we will be able to comply with the continued listing requirements of         following this offering or otherwise maintain our listing on       , including maintenance of required minimum stockholders’ equity amounts. If we fail to comply with such listing requirements and cannot regain compliance in a manner satisfactory to       , our common stock would be delisted and potentially quoted on the OTC markets, and the price and liquidity of our common stock and our ability to access the capital markets could be significantly harmed.

Our stock price may be volatile and may decline regardless of our operating performance.

Our stock price has been and is likely to continue to be volatile. The trading prices of the securities of companies in our industry have been highly volatile. As a result of this volatility, investors may not be able to sell their common stock at or above their purchase price. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

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adverse regulatory decisions;

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any delay in our regulatory filings for our product 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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the commencement, enrollment or results of any future clinical trials we may conduct, or changes in the development status of our product candidates;

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adverse results from, delays in or termination of clinical trials;

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

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lower than expected market acceptance of our product candidates following approval for commercialization;

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changes in financial estimates by us or by any securities analysts who might cover our stock;

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conditions or trends in our industry;

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changes in the market valuations of similar companies;

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stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the pharmaceutical industry;

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publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

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announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

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announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

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investors’ general perception of our company and our business;

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recruitment or departure of key personnel;

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overall performance of the equity markets;

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limited trading volume of our common stock;

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

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significant lawsuits, including patent or stockholder litigation;

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proposed changes to healthcare laws in the United States or foreign jurisdictions, or speculation regarding such changes;

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failure to satisfy continued listing standards for       ;

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failure to comply with covenants and obligations under our debt instruments and agreements;

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general political and economic conditions; and

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

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry. Stock prices of such companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management, and harm our business.

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Based upon our common stock outstanding as of March 31, 2019, after giving effect to the closing of the Merger, our executive officers, directors and current beneficial owners of 5% or more of our common stock, in the aggregate, beneficially own approximately 86.3% of our outstanding common stock. These stockholders, acting together, are able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with the interests of other stockholders.

We will incur costs and demands upon our management as a result of complying with the laws and regulations affecting public companies in the United States, which may harm our business.

As a public company listed in the United States, we will incur significant additional legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and        may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from regular business activities to compliance activities. If, notwithstanding our efforts, we fail to comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

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Failure to comply with these rules might also make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

The sale or availability for sale of a substantial number of shares of our common stock after expiration of the lock-up period could adversely affect the market price of our shares.

Sales of a significant number of shares of our common stock, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

As of June 30, 2019, 5,807,877 shares of our common stock were outstanding. In connection with this offering, subject to certain exceptions, we and all of our directors and officers have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the consent of              for a period of 90 days after the date of this prospectus. When the applicable lock-up periods expire, subject to applicable securities laws, we and our directors and executive officers will be able to sell shares in the public market.

Additionally, sales of our common stock by our officers or directors, even when done during an open trading window under our policies with respect to insider sales may adversely impact the trading price of our common stock. Although we do not expect that the relatively small volume of such sales will itself significantly impact the trading price of our common stock, the market could react negatively to the announcement of such sales, which could in turn affect the trading price of our common stock.

Shares of our common stock are thinly traded and may continue to be thinly traded in the future.

Although a trading market for our common stock exists, the trading volume has not been significant, due in part to a substantial number of our outstanding shares being subject to contractual lock-up and other legal restrictions. There can be no assurance that an active trading market for our common stock will develop or, if developed, be sustained in the future, even following the lapse or expiration of such lock-up or other legal restrictions. As a result of the thin trading market or “float” for our stock, the market price for our common stock may fluctuate significantly more than the stock market as a whole. Without a large float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In the absence of an active public trading market, an investor may be unable to liquidate his or her investment in our common stock. Trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger. We cannot predict the prices at which our common stock will trade in the future.

In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, because our securities are currently quoted on the OTC Markets, the liquidity and price of our securities may be substantially more limited than if we were quoted or listed on        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 reports about our business, or if they downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We are not currently covered by any securities or industry analysts. If no analysts elect to cover us in the future, or if one or more of the analysts who may cover us in the future downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. Further, we do not have any control over these analysts. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

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Management will have broad discretion as to the use of the net proceeds from this offering, and we may not use these proceeds effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our products and cause the price of our common stock to decline.

If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

The assumed public offering price of our common stock is substantially higher than the as adjusted net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our as adjusted net tangible book value per share after this offering. Based on an assumed public offering price of  $     per share, the closing price of our common stock as reported by OTCQB on           , 2019, you will experience immediate dilution of  $     per share, representing the difference between our as adjusted net tangible book value per share after this offering and the assumed public offering price. In addition, to the extent outstanding stock options are exercised, there will be further dilution to investors in this offering. In addition, if the underwriter exercises its option to purchase additional shares in full, or if we issued additional equity securities, you will experience additional dilution. See “Dilution” for a more detailed description of the dilution to investors in the offering.

The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all other stockholders.

Our certificate of incorporation authorizes us to issue up to 95,000,000 shares of common stock and up to 1,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

There is no public market for the pre-funded warrants being offered in this offering.

There is no established public trading market for the pre-funded warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants on any securities exchange or nationally recognized trading system, including the        . Without an active market, the liquidity of the pre-funded warrants will be limited.

Holders of our pre-funded warrants will have no rights as a common stockholder until they acquire our common stock.

Until you acquire shares of our common stock upon exercise of your pre-funded warrants, you will have no rights with respect to shares of our common stock issuable upon exercise of your pre-funded warrants. Upon exercise of your pre-funded warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

The pre-funded warrants are speculative in nature.

The pre-funded warrants offered hereby do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price. Specifically, commencing on the date of issuance, holders of the pre-funded warrants may acquire the common stock issuable upon exercise of such warrants at an exercise price of  $0.01 per share of common stock. Moreover, following this offering, the market value of

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the pre-funded warrants is uncertain and there can be no assurance that the market value of the pre-funded warrants will equal or exceed their public offering price. There can be no assurance that the market price of the common stock will ever equal or exceed the exercise price of the pre-funded warrants, and consequently, whether it will ever be profitable for holders of the pre-funded warrants to exercise the pre-funded warrants.

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.

Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

If we fail to remain current in our reporting requirements, we could lose certain privileges on the OTCQB which would impact the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

As a company traded on the OTCQB, we must be current with our filings pursuant to Section 13 or 15(d) of the Exchange Act in order to maintain price quotation privileges on the OTCQB. If we fail to remain current in our reporting requirements, the market liquidity of our securities could be harmed by impacting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their securities in the secondary market.

Our ability to use net operating losses to offset future taxable income may be subject to limitation.

Our net operating loss, or NOL, carryforwards could expire unused and be unavailable to offset future income tax liabilities because of their limited duration or because of restrictions under U.S. tax law. Our NOLs generated in tax years ending on or prior to December 31, 2017 are only permitted to be carried forward for 20 years under applicable U.S. tax law. Under the tax act informally known as the 2017 Tax Cuts and Jobs Act, our federal NOLs generated in tax years ending after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the 2017 Tax Cuts and Jobs Act. As of December 31, 2018, we had federal net operating loss carry forwards of approximately $33.5 million. The net operating loss of $28.7 million, carried forward from tax years ended before January 1, 2018, will begin to expire in 2033. Net operating losses incurred after December 31, 2017, which currently amounts to $4.8 million, may be carried

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forward indefinitely and will not expire. As of January 1, 2019, we had federal and California research and development tax credit carry forwards of approximately $1.8 million and $0.7 million, respectively. The federal research and development tax credit carry forwards will begin to expire in 2031 and the California research and development tax credit carry forwards are available indefinitely until utilized.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or, the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating losses and net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. It is possible that we have in the past undergone, and in the future may undergo, an ownership change, which could result in additional limitations on our use of net operating loss carryforwards and certain other tax attributes. This could have a material adverse effect on cash flow and results of operations.

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inability to carry out our business plans;

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our planned uses of the proceeds of this offering;

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our ability to become and remain listed on        or another national securities exchange following this offering;

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our ability to service our indebtedness and interest thereon when it becomes due;

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our dependence on funding from government sources;

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our ability to maintain collaborations and enter into new collaborations; and

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the other factors discussed under the heading “Risk Factors” in this prospectus.

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These forward-looking statements are based on information available as of the date of this prospectus, and current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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

You should not place undue reliance on these forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements.

You should read this prospectus 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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INDUSTRY AND MARKET 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, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information included in this prospectus. Although we are responsible for all of the disclosure 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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The number of shares of common stock that will be outstanding after this offering is based on 5,807,877 shares of common stock outstanding as of March 31, 2019, and excludes:

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690,057 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $2.76 per share under the Adynxx, Inc. 2010 Equity Incentive Plan;

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278 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $362.77 per share under the HepaLife Technologies, Inc. 2001 Incentive Stock Option Plan;

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3,255 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $584.34 per share under the Alliqua, Inc. 2011 Long-Term Incentive Plan;

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23,387 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $73.32 per share under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan;

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24,726 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $347.93 per share not granted pursuant to a written equity incentive plan;

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3,332 shares of common stock issuable from time to time after this offering upon the settlement of restricted stock awards, or RSAs, outstanding as of March 31, 2019 under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan;

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57,897 shares of common stock issuable upon the exercise of outstanding warrants as of March 31, 2019, with a weighted-average exercise price of  $97.66 per share;

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9,188 shares of common stock reserved for future issuance under the Alliqua, Inc. 2011 Long-Term Incentive Plan; and

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72,436 shares of common stock reserved for future issuance under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan.

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278 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $362.77 per share under the HepaLife Technologies, Inc. 2001 Incentive Stock Option Plan;

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3,255 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $584.34 per share under the Alliqua, Inc. 2011 Long-Term Incentive Plan;

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23,387 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $73.32 per share under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan;

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24,726 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2019, with a weighted-average exercise price of  $347.93 per share not granted pursuant to a written equity incentive plan;

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3,332 shares of common stock issuable from time to time after this offering upon the settlement of restricted stock awards, or RSAs, outstanding as of March 31, 2019 under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan;

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57,897 shares of common stock issuable upon the exercise of outstanding warrants as of March 31, 2019, with a weighted-average exercise price of  $97.66 per share;

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9,188 shares of common stock reserved for future issuance under the Alliqua, Inc. 2011 Long-Term Incentive Plan; and

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72,436 shares of common stock reserved for future issuance under the Alliqua BioMedical, Inc. 2014 Long-Term Incentive Plan.

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In addition, to the extent any outstanding options or warrants are exercised, new investors would experience further dilution.

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pipeline of products. In addition, operating as a publicly traded company involves the hiring of additional financial and other personnel, upgrading our financial information systems and incurring costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval of any of our product candidates.

Our current capital resources are insufficient to fund our planned operations for a 12-month period, and therefore, raise substantial doubt about our ability to continue as a going concern. We will continue to require substantial additional capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates.

Basis of Presentation

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research and development, such as the development of our product candidates. We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following:

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expenses incurred under agreements with consultants and clinical trial sites that conduct research and development activities on our behalf;

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laboratory and vendor expenses related to the execution of clinical trials;

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contract manufacturing expenses, primarily for the production of clinical supplies; and

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internal costs that are associated with activities performed by our research and development organization. These costs are not separately allocated by product candidate as we typically use our employee resources across various research and development activities. Unallocated internal research and development costs consist primarily of:

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personnel costs, which include salaries, benefits and stock-based compensation expense; and

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regulatory expense related to development activities.

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The largest component of our operating expenses has historically been the investment in research and development activities. However, we do not allocate internal research and development costs, such as salaries, benefits, stock-based compensation expense and indirect costs to product candidates on a program-specific basis. The following table shows our research and development expenses by program (in thousands):

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We expect research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursue regulatory approvals, which will require a significant investment in regulatory support and contract manufacturing. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher research and development expenses due to license fees and/or milestone payments.

In December 2018, we received a NIH grant to support the clinical development of our lead product candidate, brivoligide. The grant is expected to provide approximately $2.8 million in funding in 2019 that will support research and development activities for the ADYX-006 Mastectomy study. We record qualified expenses reimbursable under the NIH grant as grant reimbursements, a contra operating expense.

The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, intellectual property rights, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

General and Administrative Expenses

Our general and administrative expenses consisted of personnel-related costs, professional fees for legal, consulting, audit and tax services, overhead expenses, such as rent, equipment depreciation, insurance and utilities, and other general operating expenses not otherwise included in research and development expenses.

We expect to incur additional expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, or SEC, and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative headcount to support the growth of our business and operate as a public company.

Grant Reimbursements

We accounted for reimbursements of qualified grant related research and development expenses in accordance with the guidance provided by the Financial Accounting Standards Board, or FASB, in the Accounting Standards Update (ASU) 2018-08, “ Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made ,” or ASU 2018-08, which it adopted in January 2019. Based on this guidance, we determined that reimbursements of qualified expenses per the terms of the grant, met the definition of a ‘conditional contribution’ (versus an exchange contract) because (i) we have limited discretion in the way the funds may be spent, which creates a barrier to entitlement, and (ii) the grant contains provisions that release the awarding agency from the obligation to transfer funds that are not expended at the time the award is terminated.

We recognized the grant reimbursements as a contra operating expense in the period in which the related costs are incurred and the related services are rendered, provided that the applicable performance obligations under the government grants have been met.

Interest Income (Expense), Net

Interest income (expense), net, consists primarily of cash interest expense on the Oxford term loans, or Term Loans, and non-cash interest expense and amortization of debt issuance and debt discount costs related to the Term Loans and the debt discounts on the issuance of Notes. Debt discount is accreted to interest expense over the debt borrowing term.

Other Income

Other income consists primarily of gains and losses resulting from the revaluation of our preferred stock warrant liabilities and convertible debt derivative liabilities, both of which are revalued at the end of each reporting period and any change in fair value recorded as a component of other income or expense.

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We had preferred stock warrants related to Term Loans as well as convertible debt derivatives relating to the issuance of Notes. Both the warrants and Notes derivatives were recorded as a liability, with an offsetting amount recorded as debt discount. The preferred stock warrants were converted into warrants to purchase shares of common stock upon the closing of the Merger. We recorded adjustments to the fair value of the convertible debt derivative liability, as applicable, for the duration that they were outstanding.

Income Taxes

We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we maintained a full valuation allowance on the net deferred tax assets as of December 31, 2018 and December 31, 2017 of approximately $8.8 million and $7.5 million, respectively. We intend to maintain a full valuation allowance on the federal and state deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

As of December 31, 2018, we had federal net operating loss, or NOL, carry forwards of approximately $33.5 million. The NOL carry forwards prior to January 1, 2018 of  $28.7 million will begin to expire in 2033. The net operating loss carry forwards incurred post for the year ended December 31, 2018 of $4.8 million will not expire. As of December 31, 2018, we had federal and California research and development tax credit carry forwards of approximately $1.8 million and $0.7 million, respectively. The federal research and development tax credit carry forwards will begin to expire in 2031 and the California research and development tax credit carry forwards are available indefinitely until utilized.

Under Section 382 of the Internal Revenue Code, or the IRC, our ability to utilize NOL carry forwards or other tax attributes such as research tax credits, in any taxable year may be limited if we have experienced an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who own at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws. Generally, after a control change, a corporation cannot deduct net operating loss or credit carry forwards in excess of the Section 382 limitations. Due to these provisions, utilization of certain NOLs and research and development tax credits, for both federal and state purposes, may be subjected to annual limitations regarding their utilization against taxable income in future periods.

We recorded no income tax benefit or expense for the three months ended March 31, 2019 and 2018, and the years ended December 31, 2018 and 2017. No tax benefit was recorded through March 31, 2019 because, given our history of operating losses, we believe it is more-likely-than-not that the deferred tax asset will not be realized, and as such a full valuation allowance was provided.

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Research and Development

Research and development expenses increased by $0.6 million to $1.3 million for the three months ended March 31, 2019, from $0.7 million for the three months ended March 31, 2018. The increase was primarily due to an increase of $0.6 million in connection with start-up activities related to the Phase 2 ADYX-005 TKA and the Phase 2 ADYX-006 Mastectomy clinical trials that are expected to initiate enrollment in the fourth quarter of 2019.

General and Administrative

General and administrative expenses increased by $0.2 million to $0.9 million for the three months ended March 31, 2019, from $0.7 million for the three months ended March 31, 2018. This increase was primarily due to an increase of $0.2 million in legal and professional service costs incurred in connection with the Merger and preparation to be a public company.

Grant Reimbursements

Beginning in February 2019, we started to receive payments from a NIH grant to support the clinical development of our lead product candidate, brivoligide. In the three months ended March 31, 2019, we recorded $94,000 of grant reimbursements relating to qualified expenses incurred under the terms of the NIH grant.

Interest Income (Expense), Net

Interest income (expense), net increased by $0.1 million to $0.2 million for the three months ended March 31, 2019, from $0.1 million for the three months ended March 31, 2018. The increase was primarily attributable to an increase in interest expense resulting from accrued interest on outstanding Notes.

Other Income

Other income consists primarily of gains and losses resulting from the revaluation of our preferred stock warrant liabilities.

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Comparison of the Year Ended December 31, 2018 and 2017 (in thousands)

Research and Development

Research and development expenses decreased by $6.6 million to $2.1 million in 2018, from $8.7 million in 2017. This decrease was primarily due to a decrease of $6.4 million related to the completion of the ADYX-004 clinical trial initiated in 2017.

General and Administrative

General and administrative expenses increased by $0.7 million to $3.0 million in 2018, from $2.3 million in 2017. This increase was primarily due to an increase of $0.7 million for legal and professional fees incurred in connection with the Merger and preparation to be a public company.

Interest Expense, Net

Interest expense, net, increased by $0.5 million to $1.0 million in 2018, from $0.5 million in 2017. The increase was primarily attributable to an increase in interest paid on the Term Loans, accretion of a final charge due at maturity for the Term Loans, accrued interest on outstanding Notes, and the amortization of debt discount related to the embedded derivatives for the Notes.

Other Income (Expense), Net

Other income (expense), net increased by $0.1 million to $0.1 million in 2018 due primarily to the change in valuation of the warrant liability and embedded derivatives related to the Notes.

Liquidity and Capital Resources

Since inception through March 31, 2019, our operations have been financed primarily by the sale of equity securities, payments from strategic collaborators, borrowings under term loans and the issuance of convertible notes. As of March 31, 2019, we had $1.6 million in cash and cash equivalents and an accumulated deficit of  $39.7 million.

We expect that our research and development and general and administrative expenses will increase, and, as a result, we anticipate that we will continue to incur increasing losses in the foreseeable future. As stated above, we also expect that our current capital resources will be insufficient to fund our planned operations for a 12-month period. Therefore, we will need to raise additional capital to fund our operations, which may be through the issuance of additional equity, and potentially through the incurrence of additional debt. In addition, we may be required to raise additional capital in the future to service our indebtedness, including outstanding indebtedness that will become due and payable during fiscal year 2019, and make necessary capital expenditures. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts and our ability to refinance outstanding indebtness before the applicable maturity date. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates. In addition, if we default under the loan and security agreement, or the

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Loan Agreement, with Oxford Finance, Oxford Finance will have the ability to exercise its rights as collateral agent to take possession and dispose of the collateral securing the indebtedness under the Loan Agreement, which collateral includes all of our property, including our intellectual property.

Beginning in February 2019, we started to receive payments from a NIH grant to support the clinical development of our lead product candidate, brivoligide. While these payments will offset certain qualifying expenses incurred on this research and development program, it will not be adequate to cover other expenses expected to be incurred for research, development, general and administrative expenses.

We have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval for and commercialize any of our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development and manufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for, our product candidates. Subject to obtaining regulatory approvals of any of our product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations. Further, we expect to continue to incur additional costs associated with operating as a public company following the Merger.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through the issuance of additional equity and potentially through borrowings, and strategic alliances with partner companies. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.

Cash Flows

The following table shows a summary of our cash flows for each of the periods shown below (in thousands):

Cash Flows from Operating Activities

Cash used in operating activities for the three months ended March 31, 2019 was $1.6 million, consisting of a net loss of  $2.5 million, which was offset by non-cash charges of  $0.4 million primarily for stock-based compensation expense, accretion of the charge due upon maturity of debt, non-cash interest expense on Notes and loss on revaluation of warrant liability, and a net increase in cash resulting from changes in operating assets and liabilities of $0.5 million. The change in our net operating assets and liabilities was due primarily to cash generated from an increase in accounts payable of $0.7 million and an

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increase of  $0.2 million for accrued liabilities, both of which were due primarily to an increase in legal, accounting and other professional fees and expenses incurred in connection with the Merger and preparation to be a public company, which was offset by cash used due to an increase in prepaid expense of $0.4 million primarily related to clinical trial activity.

Cash used in operating activities for the three months ended March 31, 2018 was $2.4 million, consisting of a net loss of  $1.5 million, which was offset by non-cash charges of $0.1 million primarily for stock-based compensation expense, accretion of the charge due upon maturity of debt and amortization of debt discount and debt financing costs. In addition, $1.0 million of cash was consumed resulting from changes in operating assets and liabilities. The change in our net operating assets and liabilities was due primarily to a decrease in accounts payable of  $0.6 million related to the completion of the ADYX-004 clinical trial initiated in 2017 and a decrease of  $0.4 million due to the reduction of accrued liabilities relating to the ADYX-004 clinical trial.

Cash used in operating activities for 2018 was $6.0 million, consisting of a net loss of  $6.0 million, which was offset by non-cash charges of $0.8 million primarily for stock-based compensation expense, non-cash interest expense, and accretion of final charge due upon maturity of debt, and net cash used due to changes in operating assets and liabilities of $0.8 million. The cash used in our net operating assets and liabilities was primarily due to the decrease of  $0.6 million for the reduction of accrued liabilities relating to the completion of the ADYX-004 clinical trial initiated in 2017 and $0.2 million for the reduction of accounts payable related to clinical trial activity and professional fees related to merger activities.

Cash used in operating activities for 2017 was $10.2 million, consisting of a net loss of  $11.6 million, which was offset by non-cash charges of $0.5 million primarily for stock-based compensation expense, accretion of final charge due upon maturity of debt and amortization of debt discount and debt financing costs, and a net increase in cash resulting from a changes in operating assets and liabilities of $0.9 million. The change in our net operating assets and liabilities was due primarily to an increase in accounts payable of $0.6 million related to increased clinical trial activity and a decrease of $0.3 million in prepaid expenses primarily related to research and development activities.

Cash Flows from Investing Activities

Cash used in investing activities for all periods presented was nominal.

Cash Flows from Financing Activities

During the three months ended March 31, 2019, net cash provided by financing activities was $1.5 million consisting of proceeds from the issuance of Notes.

During the three months ended March 31, 2018, net cash provided by financing activities was $0.9 million as a result of  $1.5 million of proceeds from the issuance of Notes, offset by $0.6 million for the repayment of principal of the Term Loans.

During 2018, net cash provided by financing activities was $3.6 million consisting primarily of proceeds from the issuance of Notes of  $4.5 million, offset by $0.9 million used to repay principal of the Term Loans.

During 2017, net cash used in financing activities was $59,000 resulting primarily from $139,000 used to repay principal for the Term Loans, offset partially by $80,000 cash generated from the exercise of warrants to purchase our Series A preferred stock.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):

(1)

Reflects principal, interest payments and final balloon payment due to Oxford Finance under a loan and security agreement. Interest rate is floating and future interest payments are estimated based upon the December 2018 interest rate.

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(2)

See “— Convertible Notes” below.

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(3)

We lease our office space under a non-cancellable long-term operating lease.

​

The following table summarizes our contractual obligations as of March 31, 2019 (in thousands):

(1)

Reflects principal, interest payments and final balloon payment due to Oxford Finance under a loan security agreement. Interest rate is floating and future interest payments are estimated based upon the March 2019 interest rate.

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(2)

See “— Convertible Notes” below.

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(3)

We lease our office space under a non-cancellable long-term operating lease.

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Term Loans

In November 2015, we entered into the Loan Agreement with Oxford Finance pursuant to which Oxford Finance agreed to lend us up to $10.0 million principal amount issuable in three tranches, or the Term Loans, of which $5.0 million had been drawn as of March 31, 2019. The Term Loans will mature on November 1, 2019. The Loan Agreement has been amended several times. We have the option to prepay all, but not less than all, of the borrowed amounts, provided that we will be obligated to pay a prepayment fee. The Term Loans bear interest at a floating per annum rate equal to (i) 7.06% plus (ii) the greater of  (a) the

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30-day U.S. Dollar LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (b) 0.19%. We will be required to make a final payment of 4.25% of the funded amount, payable on the earlier of  (i) the maturity date or (ii) the prepayment of the Term Loans. Our obligations under the Loan Agreement are secured by a perfected first-priority lien on all of our assets, including our intellectual property. In connection with the Merger, Alliqua was named as an additional borrower under the Loan Agreement. As of March 31, 2019, we were in compliance with all covenants under the Loan Agreement.

In January 2019, we and Oxford Finance amended the Loan Agreement to provide for two months of interest-only payments followed by eight months of repayments. We also placed $200,000 in a segregated bank account that is subject to a blocked control agreement in favor of Oxford Finance. The funds in the segregated account will be released upon the closing of this offering. The amendment fee was $50,000. The amendment was accounted for as a debt modification.

In May 2019, we and Oxford agreed to an additional amendment to provide consent to the Merger. This consent amended certain provisions of the term loan to protect Oxford’s rights under the original Term Loan agreement. The consent allowed Alliqua to be named as an additional borrower.

In connection with the Loan Agreement, we issued warrants to purchase our preferred stock to Oxford Finance. Upon the closing of the Merger, these warrants were converted into warrants to purchase 11,829 shares of our common stock at an exercise price of  $6.34 per share. The warrants are immediately exercisable and expire ten years from the issuance date.

Other Contracts

We enter into contracts in the normal course of business with various third parties for preclinical research studies, clinical trials, testing and other general and administrative services. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

As of December 31, 2017 and 2018 and March 31, 2019 and 2018, we did not have any off-balance sheet arrangements and did not have any holdings in variable interest entities.

Summary of Significant Accounting Policies and Estimates

Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Accrued Research and Development Expenses

We record accrued expenses for estimated costs of our research and development activities conducted by external service providers. We recognize external development costs based on patient enrollment and related costs at clinical investigator sites as well as for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. This process involves reviewing contracts with service providers, identifying services that have been performed on our behalf, confirming the level of service performed are aligned with

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the contract, expected remaining period of performance and the associated cost incurred for the service when we have not been invoiced or otherwise notified of actual cost. We estimate our accrued research and development expenses as of the date of each of our balance sheets. Expenses that are paid in advance of performance are deferred as a prepaid expense and expensed as the services are provided. Our management made significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Through March 31, 2019, we have had no significant adjustments to accrued clinical trial expense.

Stock-based Compensation

We recognize compensation costs related to stock-based awards granted to employees, directors and non-employees based on the estimated fair value of the awards on the date of grant. We estimate the grant-date fair value, and the resulting stock-based compensation expense, using the Black-Scholes valuation model for stock options, the fair value of our common stock on the date of grant for restricted stock units, or RSUs.

We generally recognized the grant date fair value of the stock-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. For non-employee awards, the grant date fair value is recognized on a straight-line basis over the associated service period of the award.

We use the Black-Scholes valuation model to assist us in determining the fair value of our stock options. The Black-Scholes valuation model requires the use of following assumptions:

•

Expected volatility.    Expected volatility is estimated using comparable public companies’ volatility for similar terms.

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•

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method.

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•

Risk-free interest rate.    The risk-free interest rate used in the Black-Scholes model is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

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•

Expected dividend.    The Black-Scholes model calls for a single expected dividend yield as an input. We have never paid dividends and have no plans to pay cash dividends.

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Under the guidance of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, we accounted for forfeitures as they occurred.

We did not grant any common stock options to employees during the three months ended March 31, 2019 or the years ended December 31, 2018 and 2017. Stock-based compensation expense recorded in research and development and general and administrative expenses was $68,000 and $75,000 for the three months ended March 31, 2019 and 2018, respectively, and $293,000 and $301,000 for the years ended December 31, 2018 and 2017, respectively. As of March 31, 2019, unrecognized stock-based compensation expense related to employees totaled approximately $463,000, which is expected to be recognized over approximately 1.75 years.

Income Taxes

We account for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

In evaluating the ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including its operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an

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adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

We recognize the tax benefit from uncertain tax positions in accordance with GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s tax return.

Warrants

Freestanding warrants are classified as liabilities on our balance sheets. Warrants are subject to re-measurement at fair value at each balance sheet date, and any change in fair value is recognized as a component of other income or expense. We will continue to adjust the carrying values of freestanding warrants classified as liabilities for changes in fair value until the earlier of the exercise or expiration of the warrants.

Derivative Instruments

We evaluate our convertible debt to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Accounting Standards Codification, or ASC 815-15, “ Derivatives and Hedging: Embedded Derivatives .” The result of this accounting treatment is that the fair value of the bifurcated derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

Debt Modifications and Extinguishments

When we modify debt, we do so in accordance with ASC 470-50, “ Debt: Modifications and Extinguishments, ” which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications.” Based on the guidance relied upon and the analysis performed, if the debt modifications were considered to be substantial modifications, then they were treated as an extinguishment of the debt.

In accordance with ASC 470-50 we determined that the October 2018 modification of the March 2018 and September 2018 Notes to add an additional conversion option in the event of a reverse merger, was considered to be a “substantial modification.” As a result, we treated this modification as an “extinguishment” of those debts and recognized $11,000 of net gain from this debt extinguishment in other income. All other changes to debt provisions were not considered substantial and were treated as debt modifications.

Recently Adopted Accounting Pronouncements

Non-employee Share-Based Payment Accounting

In June 2018, FASB issued Accounting Standards Update No. 2018-07, “ Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ”

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(or ASU 2018-07). This new guidance changes the accounting for non-employee share-based payments to align with the accounting for employee stock compensation. We early adopted the guidance as of January 1, 2018 and the impact to its financial statements was not material.

Lease Accounting

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , or ASU 2016-02. ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We have elected the package of practical expedients permitted in ASC Topic 842. Accordingly, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2015) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.

As a result of the adoption of the new lease accounting guidance, we recognized on January 1, 2019 (a) a lease liability of approximately $227,000, which represents the present value of the remaining lease payments of approximately $239,000, discounted using our incremental borrowing rate of 9.41%, and (b) a right-of-use asset of approximately $227,000 which represents the lease liability of  $227,000. The most significant impact was the recognition of right-of-use, or ROU, assets and lease obligations on the balance sheet for operating leases. This standard did not have a material impact on our operating results or cash flows from operations.

Statement of Cash Flows Restricted Cash Accounting

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash. This ASU requires changes in restricted cash during the period to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If cash, cash equivalents and restricted cash are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the total in the statement of cash flows to the related captions in the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within that fiscal year, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all periods presented. We adopted the guidance on a retrospective basis as of January 1, 2017, and the beginning and ending balance of cash and cash equivalents for all periods presented in the statements of cash flows include restricted cash.

Recent Accounting Pronouncements Not Yet Effective

In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) . The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. This ASU is effective for fiscal years beginning after December 15, 2019 including interim periods within that fiscal year, with early adoption permitted. We are currently assessing whether these amendments will have a material effect on our financial statements.

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OUR BUSINESS

Overview

We are a clinical stage biopharmaceutical company focused on the development of a new class of therapeutics called transcription factor decoys and bringing to market novel, disease-modifying products to address unmet needs in the treatment of pain and inflammation. Transcription factor decoys are short strands of DNA that specifically bind to and block the activity of their target transcription factors. Transcription factors are proteins that specifically bind to the regulatory regions of one or more target genes and regulate the expression of those genes. Since the founding of Adynxx in 2007, we have leveraged our AYX platform of proprietary transcription factor decoys to identify and develop novel product candidates designed to modify the course of pain. Our resulting pipeline includes brivoligide, a Phase 2 drug candidate intended to address postoperative, or post-surgical pain in a readily-identified group of patients with a greater risk of experiencing increased pain and elevated opioid use following surgery, and AYX2, a pre-clinical candidate intended to treat chronic pain. Both programs were discovered by us and are part of our AYX platform of transcription factor decoys. We plan to continue advancing our AYX platform programs while simultaneously developing new transcription factor decoy candidates, collaborating with twoXAR, our artificial intelligence-driven drug discovery partner, and evaluating in-licensing opportunities to expand our pipeline and leverage our business development, clinical development and regulatory expertise. We are currently collaborating with twoXAR to use their artificial intelligence-driven drug discovery platform to identify endometriosis treatments.

The following table outlines the status of our development programs:

We believe that our transcription factor decoy technology can transform the treatment of pain, and going forward has the potential to be applied to additional disease states. The AYX platform drug candidates are currently focused on postoperative pain and pre-existing chronic pain. We plan to leverage our expertise in transcription factor decoy drug discovery and development to identify additional product candidates in inflammation related disease states including but not limited to organ scarring, heart disease and cancer.

We have a highly experienced management team whose members have, in the course of their prior employment, participated in bringing more than 10 product candidates through clinical development, regulatory approval and/or into commercialization, including such approved products as Zerbaxa, Teflaro, Doribax, Vibativ, Symproic, Embeda, Revlimid, Mulpleta, Osphena, Comtan, FocalinXR, Trileptal, Kapvay and Cuvposa. We plan to leverage our management team’s breadth and depth of experience in clinical and regulatory drug development as well as market development and commercialization to continue to develop existing product candidates, and to discover and develop additional product candidates in-house using the AYX platform and build our pipeline through collaboration and in-licensing activities.

Our Strategy

Our goal is to be a leader in the development and commercialization of novel therapeutics for pain and inflammation. Our focus to achieve this goal will be to utilize our experience and capabilities to:

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Advance our existing product candidates through late-stage clinical trials, generating meaningful clinical results;

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•

Work with U.S. and international regulatory authorities for expeditious, efficient development pathways toward registration of our product candidates;

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•

Prepare for commercialization of each program;

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•

Use our expertise in transcription factor decoy drug development to discover and develop additional transcription factor decoy product candidates targeting a range of inflammation-related diseases;

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•

Collaborate with twoXAR to use AI-driven drug discovery technology to identify novel drug candidates for the treatment of endometriosis;

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•

Use our industry and academic relationships and experience to source, evaluate and in-license well-characterized product candidates to continue pipeline development; and

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•

Identify potential commercial or distribution partners for our product candidates in relevant territories.

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Transcription Factor Decoy Technology

Transcription factor decoys are short strands of DNA that specifically bind to and block the activity of their target transcription factors by preventing their interaction with DNA (Figure 1). Transcription factors are proteins that specifically bind to the regulatory regions of one or more target genes and regulate the expression of those genes. Using a screening assay, we discover and develop transcription factor decoys that are designed with binding and size parameters suitable for clinical application.

Figure 1
 
Transcription Factor Decoy Mechanism of Action

Transcription Factor Decoy Mechanism of Action. (A) A transcription factor, or TF, binds to the regulatory region of the target gene on the DNA to regulate gene expression. (B) A TF decoy mimics the regulatory region of the target gene normally bound by its TF target. The mechanism of action is direct; by binding its TF target, the decoy prevents it from binding to its intended target, and thus blocks gene expression.

The AYX Platform of Transcription Factor Decoys

The AYX platform consists of a wide range of transcription factor decoys, each of which has multiple binding sites capable of targeting one or more transcription factors, and we believe that we have the technological expertise to generate additional decoys based on desired therapeutic characteristics. The current AYX drug candidates are intended to treat postoperative pain and chronic pain. We plan to leverage our expertise in transcription factor decoy drug discovery and development to identify additional product candidates to treat inflammation-related diseases, including but not limited to organ scarring, heart disease and cancer.

Our Product Candidates

Brivoligide for Postoperative Pain

Brivoligide is a transcription factor decoy specifically designed to inhibit the function of the transcription factor Early Growth Response 1, or EGR1, at the time of surgery. EGR1 is expressed in the spinal cord and dorsal root ganglia, or DRG, in response to trauma such as surgery. In normal animals, EGR1 initiates a wide

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range of gene regulation that results in increased or exacerbated pain following trauma or injury. In contrast, in animals that are unable to express EGR1, third party studies have shown that there is a reduction of pain intensity in response to trauma or injury, which may suggest that EGR1 has a role in elevated post-surgical pain. By inhibiting the function of EGR1 in people undergoing surgery, we believe brivoligide can prevent the regulation of genes that lead to an increased sensitivity to pain in some patients following surgery. We have evaluated brivoligide in four clinical trials: a Phase 1 dose-escalating safety study in healthy volunteers and three Phase 2 studies in subjects undergoing unilateral total knee arthroplasty, or TKA. A total of 264 subjects have received a single injection of brivoligide into the spinal canal, or an intrathecal injection, in doses ranging from 1.25 mg/3 mL (1.25 milligrams of brivoligide in 3 milliliters of solution) to 1,100 mg/10 mL. Brivoligide has been observed to be well-tolerated in the trials we have completed to date.

Post-hoc analyses of data generated in the three completed Phase 2 studies indicate that patients receiving a single administration of brivoligide at the time of surgery, in addition to standard of care, experienced reduced pain for weeks and shortened time to achieve mild pain, both as measured using the numerical rating scale, or NRS, when compared to patients receiving placebo and standard of care, in each case in a population of patients at greater risk of experiencing increased and prolonged pain following surgery. These differences were either not statistically significant or could not be considered significant due to the post-hoc nature of the analyses. These patients are readily indentifiable prior to surgery as patients who score high on the Pain Catastrophizing Scale, or PCS, and represent approximately one-third of the surgical population.

Postoperative Pain and Pain Catastrophizing

In addition to varying across the type of surgery, the severity and duration of postoperative pain varies across individuals. A growing body of literature indicates that the psychological construct known as pain catastrophizing is also an important factor in predicting the onset, severity, and duration of postoperative pain.

Pain catastrophizing is as an amplified, negative orientation toward pain. It is comprised of elements of rumination (continuous or repetitive thoughts, anxious preoccupation with pain, and the inability to inhibit pain-related thoughts and fears); magnification (magnification of the unpleasantness of pain situations and expectations for negative outcomes from pain); and a sense of helplessness (perceived inability to control painful situations and experiences).

Pain catastrophizing likely reflects a specific underlying physiology of pain associated with an enhanced response to painful stimuli, both in intensity and duration, as well as a relative insensitivity to pain relieving or analgesic therapies such as opioids. This physiology is associated with an enhanced and prolonged response to painful stimuli that suggests limited ability to appropriately inhibit pain signals being conveyed to the brain. Further, there is evidence that this underlying physiology can be inherited.

We estimate that of the 37 million surgical procedures performed in the United States annually, approximately 16 million of those result in a sufficient duration and severity of postoperative pain to be characterized as high unmet analgesic, or pain relieving, need procedures. Of those 16 million high-unmet analgesic need procedures, based on publications focused on the PCS, we expect that approximately one third will be conducted on patients scoring high (≥16) on the PCS, representing approximately 5.3 million patients who we believe could be candidates for brivoligide treatment. See “— The Role of the PCS in Identifying Patients Who May Benefit from Brivoligide.”

To estimate the number of surgical procedures and the number of high-unmet analgesic need procedures, we use datasets sourced from samples and databases maintained by the Healthcare Cost and Utilization Project, or HCUP. The HCUP is a family of health care databases and related software tools and products developed through a federal-state industry partnership with and sponsored by the Agency for Healthcare Research and Quality, or the AHRQ. The HCUP is based on statewide data collected by individual data organizations across the United States and provided to AHRQ through the HCUP partnership.

For inpatient procedure estimates, we used the HCUP Nationwide Inpatient Sample, or the NIS, a large publicly available all-payer inpatient care database in the United States containing data on more than seven million hospital stays. We believe that the large sample size from the NIS is ideal for developing

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national and regional estimates and enables analyses of rare conditions, uncommon treatments, and special populations. For outpatient procedure estimates we used the HCUP State Ambulatory Surgery and Services Database, or the SASD, which includes 29 states and captures two-thirds of the United States population. The SASD also includes data for ambulatory surgery and other outpatient services from hospital-owned facilities and, for some states, from non-hospital-owned facilities. There is no dataset available after 2015 for SASD, and as a result, the 2014 data are the most recent for both NIS and SASD. However, we believe that the 2014 data remain relevant for purposes of estimating the quantity of surgical procedures due to the relative year-over-year stability of prior estimates in this dataset and the fact that 2014 is the most recently available complete year of this large dataset.

Based on consultations with pain management experts, we classified individual surgical procedures to identify those that we believe result in a sufficient duration and severity of postoperative pain to be characterized as high-unmet analgesic need procedures.

Table 1: Estimated annual procedures with high-unmet analgesic need

The Role of the PCS in Identifying Patients Who May Benefit from Brivoligide

Catastrophizing is readily assessed by the PCS, a screening assessment tool that contains 13 questions covering the three components of pain catastrophizing: rumination, helplessness and magnification of pain. Each question is self-rated on a five point scale (from zero to four) and the total score ranges from zero to 52. The PCS has been extensively validated, having been established in over 100 studies. For patient selection purposes, the PCS can be segmented, with high scores predictive of more pain and lower analgesic response after surgery. Results from the literature and from the brivoligide study data suggest that a PCS of ≥16 may represent a clinically relevant threshold among TKA patients to predict positive response to brivoligide.

The importance of determining how a specific patient will respond to a specific treatment or procedure, or patient phenotyping, to predict the response to novel therapies has been recognized by the FDA. Once the PCS is completed by the patient, summation of the responses allows results to be easily available well in advance of surgery in order to determine which patients would potentially benefit from receiving brivoligide due to their underlying physiology.

Publications focused on the PCS suggest that approximately one-third of people presenting for surgery have PCS scores ≥ 16 and that these same patients experience postoperative pain that is higher in intensity and longer in duration than expected and display a relative resistance to standard analgesic therapies.

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Current Therapy for Postoperative Pain

Postoperative pain management is currently largely opioid-based and supported by adjunctive therapies and techniques such as local anesthetic nerve blocks and direct administration of local anesthetic into the surgical site, all of which only provide short-term relief. The proliferation of adjunctive and alternative therapies suggests that there are a considerable number of patients receiving inadequate pain relief, especially from movement-evoked pain, which is particularly insensitive to opioids. Persistent opioid use after surgery, even among those who are new to opioids, puts patients at increased risk of developing opioid use disorder. A non-opioid approach to postoperative pain relief specifically targeting the high PCS scoring population, a population that is relatively insensitive to standard postoperative analgesic therapies, is urgently needed. We believe there is no approved therapeutic agent that can provide weeks to months of reduction in postoperative pain and opioid utilization in patients who score high on the PCS with a single administration at the time of surgery.

Our Solution: Brivoligide for Postoperative Pain in Patients Scoring ≥16 on the PCS

We are pursuing an innovative approach to postoperative pain in people scoring ≥16 on the PCS. Our lead compound, brivoligide, is designed to be a non-opioid, non-addictive agent given a single time prior to surgery and directed at core mechanisms of increased sensitivity to pain in the high PCS scoring population. In this population, brivoligide may reduce the intensity and duration of acute pain in the postoperative period.

Pharmacology of Brivoligide

EGR1 is a transcription factor expressed in the spinal cord and dorsal root ganglia, or DRG, in response to trauma such as surgery. In normal animals, EGR1 initiates a wide range of gene regulation that results in increased or exacerbated pain following trauma or injury. In contrast, in animals that are unable to express EGR1, studies have shown that there is a reduction of pain intensity in response to trauma or injury. As described above, patients who have high scores on the PCS have an amplified, negative orientation toward pain which likely reflects a specific underlying physiology associated with an enhanced response to painful stimuli. Based on the data we have generated to date from clinical studies, we believe these patients have an altered pain response that results in the full manifestation of EGR1 activity in response to trauma such as surgery. Brivoligide is a transcription factor decoy that is specifically designed to bind to EGR1 and inhibit its activity in the spinal cord and DRG during surgery. In doing so, we believe brivoligide can reduce the severity and duration of postoperative pain in patients that score high on the PCS and would otherwise experience increased or exacerbated pain following surgery.

Brivoligide Clinical Data

Brivoligide has been evaluated in four clinical trials, all of which were sponsored and conducted by us under an Investigational New Drug application, or IND, owned by us: a Phase 1 dose-escalating safety study in healthy volunteers and three Phase 2 studies in subjects undergoing unilateral TKA. A total of 264 subjects have received a single intrathecal administration of brivoligide injection in doses ranging from 1.25 mg/3 mL to 1,100 mg/10 mL (Table 2). Brivoligide was shown to be well tolerated by patients in clinical trials conducted to date. In the Phase 1 study in healthy volunteers, the study drug (highest dose of 330mg/3mL) was well tolerated by all 25 people that received it. All of the AEs that were reported are among those expected when an injection in the spinal canal is given (for example, headache, backache, and nausea). In three subsequently completed Phase 2 clinical trials in TKA evaluating doses of brivoligide up to 1,100mg/10mL, there was no meaningful difference between the study drug and placebo groups in the rate of the complications that are typically seen in patients undergoing knee replacement surgery with spinal anesthetic and receiving analgesic medication.

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Table 2: Brivoligide Doses Administered

ADYX-001:    The first-in-human study, ADYX-001, was a Phase 1, single center, randomized, double-blind, placebo-controlled study to evaluate the safety and tolerability of ascending dose levels of a single intrathecal injection of brivoligide versus placebo in healthy adult subjects. Single doses of intrathecal brivoligide versus placebo were evaluated in five sequential ascending dose cohorts: 1.25 mg/3 mL, 5 mg/3 mL, 20 mg/3 mL, 80 mg/3 mL, and 330 mg/3 mL; six subjects were randomized 5:1 to receive brivoligide injection or placebo in each cohort (total n=30).

All 30 subjects received study drug (25 subjects received brivoligide injection and five subjects received placebo) and completed the in-house and 30-day follow-up visits. Safety assessments consisted of the collection of adverse events, or AEs, and serious adverse events, or SAEs, clinical laboratory assessments, vital signs, and physical/neurological examination. AEs that occurred or worsened after administration of the study drug were classified as treatment emergent adverse events, or TEAEs.

A total of 41 TEAEs were reported in 20 of the 30 study subjects. Most of the TEAEs were consistent with an intrathecal route of administration (backache, headache and associated nausea). All AEs were transient and resolved completely. There were no SAEs.

In addition to the safety evaluations, including physical/neurological exam, vital signs, ECG, clinical labs, and collection of other medications taken after surgery, or concomitant medications, a battery of cognitive assessments was performed to evaluate any potential effects of brivoligide on memory.

The cognitive assessments were performed at screening, baseline and after dosing at two hours, eight hours, 24 hours and on Day 3. No clinically significant changes in cognitive function from baseline were observed at any dose level.

ADYX-002:    ADYX-002 was a Phase 2 randomized, double-blind, placebo-controlled, adaptive study to evaluate the safety and efficacy of a single intrathecal preoperative administration of brivoligide injection at two dose levels compared to placebo in patients undergoing unilateral TKA.

ADYX-002 assessed the effect of brivoligide on acute and persistent (subacute) pain at rest and with movement as well as effects on opioid requirements in subjects undergoing unilateral TKA.

The study population consisted of healthy male and female subjects between 40 and 80 years of age, inclusive, who were scheduled to undergo primary unilateral TKA for painful osteoarthritis with an American Society of Anesthesiologists Physical Status Classification System of  ≤3, which system assesses fitness of patients before surgery on a scale of zero to six. Subjects randomized to the brivoligide treatment group received a single 3 mL intrathecal brivoligide injection (110 mg/3 mL or 330 mg/3 mL) just before administration of anesthesia using the same needle. Subjects participated in the study for 42 days (± 5 days).

The primary and key secondary endpoints were assessed using a standard numerical rating scale, or NRS, whereby subjects are asked to select a number between 0 and 10 that best represents their pain intensity. An NRS score of 0 represents no pain and a score of 10 represents the worst pain possible.

The following assessments were used to evaluate efficacy: NRS pain assessment at rest; NRS pain assessment before removal of intravenous patient controlled analgesic therapy, and before administration of opioid medication in hospital; a defined distance walk (5 meters inpatient, 15 meters outpatient) with NRS

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pain assessment before and after; range of motion, or ROM, with NRS pain assessments; Brief Pain Inventory, or BPI, questionnaire daily through Day 28 and at Day 42; and the collection of analgesic medication data through Day 42.

Safety profile assessments consisted of the collection of AEs and SAEs, clinical laboratory assessments, vital signs, and physical/neurological examination.

Out of 100 subjects randomized, six withdrew and 94 completed the study post dosing. After initial dosing of 30 patients randomized 1:1:1 between 3 mL placebo, 110 mg/3 mL brivoligide and 330 mg/3 mL brivoligide, the Data Monitoring Committee reviewed the data to select the appropriate dose going forward based on prespecified criteria. Following review by the Data Monitoring Committee, all remaining subjects were enrolled in the 3 mL placebo or 330 mg/3mL brivoligide groups.

Safety

Overall, 44 subjects treated with placebo, 13 subjects treated with brivoligide 110 mg/3 mL and 40 subjects treated with brivoligide 330 mg/3 mL groups reported at least one TEAE. The overall AE profile was 96% mild or moderate with no AE clearly related to brivoligide. Four SAEs in three subjects were reported in the brivoligide group and two SAEs in two subjects were reported in the placebo group. No SAEs were considered related to brivoligide. In summary, brivoligide was shown to be well tolerated in patients.

Efficacy

For pain with walking, at rest, and with joint range of motion, as well as total use of opioid medications, either during the hospital stay or following discharge, no significant difference was observed between brivoligide 330 mg/3 mL and placebo 3 mL treated groups.

Post-hoc analysis of the study data suggested higher doses in larger volumes could provide broader distribution and clinically meaningful benefit, regardless of injection site.

ADYX-003:    The second Phase 2 study, ADYX-003, was a randomized, double-blind, placebo-controlled, two-stage study to evaluate the safety and efficacy of two dose levels of brivoligide injection administered at one of two potential spinal injection sites before surgery in patients undergoing TKA. The two potential spinal injection sites are the space between lumbar vertebrae 3 and 4, or L 3/4, and the space between lumbar vertebrae 4 and 5, or L 4/5.

The total subject population was 120 subjects distributed over two dose, and two injection sites within each dose, with a brivoligide to placebo control ratio of 2:1 in each group:

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Brivoligide (660 mg in 6 mL) injected at L4/5; n= 20

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Placebo (vehicle control 6 mL) injected at L4/5; n= 10

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Brivoligide (660 mg in 6 mL) injected at L3/4; n=20

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Placebo (vehicle control 6 mL) injected at L3/4; n=10

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Brivoligide (1,100 mg in 10 mL) injected at L4/5; n=20

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Placebo (vehicle control 10 mL) injected at L4/5; n=10

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Brivoligide (1,100 mg in 10 mL) injected at L3/4; n=20

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Placebo (vehicle control 10mL) injected at L3/4; n=10

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The following assessments were used to evaluate efficacy: NRS pain assessment at rest; a defined distance walk (5 meters inpatient, 15 meters outpatient), with NRS for pain upon standing for the walk and pain during the walk; range of motion with NRS pain assessments; and collection of analgesic medication data through Day 42.

Safety assessments consisted of the collection of AEs and SAEs, clinical laboratory assessments, vital signs and physical/neurological examination.

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Safety

Overall, all subjects in the brivoligide 660 mg/6 mL and brivoligide 1,100 mg/10 mL groups, and 95% of subjects in the placebo 6 mL and placebo 10 mL groups, reported at least one TEAE. The overall AE profile was 90% mild to moderate with no AE clearly related to brivoligide. No subject withdrew in association with an AE. Ten SAEs in nine subjects were reported in the brivoligide group and three SAEs in two subjects were reported in the placebo group. No SAEs were considered related to study drug.

Efficacy

Brivoligide 660 mg/6 mL significantly reduced pain with walking (15 meters) during the Day 7 to Day 28 period (LS Mean 2.0 ± 0.2 vs. 2.9 ± 0.3, p=0.026) as illustrated in Figure 2. Neither dose of brivoligide gave statistically significant reduction of pain with walking (5 meters) during the zero to 48 hour period. This early period (0-48 hours) is consistent with the time required for the effect of EGR1-driven gene regulations to show effects on pain. NRS pain scores with brivoligide 1,100 mg/10 mL did not show statistical significance compared with placebo 10 mL for pain scores with walking.

Brivoligide 660 mg/6 mL also significantly reduced pain scores at rest during the outpatient period (Day 7 to Day 28) when compared to placebo 6 mL across injection groups (LS Mean 1.5 ± 0.2 vs. 2.4 ± 0.3, p=0.033) as illustrated in Figure 3. Brivoligide 660 mg/6 mL had no statistically significant effect on pain scores at rest during the 0-48 hour period. NRS pain scores with brivoligide 1,100 mg/10 mL, did not show statistical significance compared with placebo 10 mL for pain scores at rest.

A p-value is a statistical measure of the probability that the difference in two values could have occurred by chance. The smaller the p-value, the greater the statistical significance and confidence in the result. Typically, results are considered statistically significant if they have a p-value less than 0.05, meaning that there is less than a one-in-20 likelihood that the observed results occurred by chance.

Brivoligide 660 mg/6 mL demonstrated similar differences in pain reduction between injection sites (L3/4 vs. L4/5) when compared to the combined 6 mL placebo, suggesting brivoligide 660 mg/6 mL can be administered without limitation as to injection site.

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Opioid utilization was similar between brivoligide 660 mg/6 mL and 1,100 mg/10 mL and placebo groups during the zero to 48 hour inpatient and Day 7 to Day 28 outpatient periods. The use of opioids for postoperative pain management was collected to evaluate the potential impact, if any, differential opioid use may have on pain scores. The study was not designed to evaluate the potential for brivoligide to reduce opioid usage, and surgeons were allowed to prescribe opioids on a fixed scheduled basis without restriction. No clinically significant difference was noted for range of motion assessments in either time period.

Pain ratings in the 1,100 mg/10 mL dose group showed a reduction relative to placebo only at the earliest time points. The 1,100 mg/10 mL dose did not display any dose related safety concerns and was not superior to 660 mg/6 mL for efficacy, so 660 mg/6 mL was the dose selected for use in subsequent studies.

ADYX-004:    ADYX-004 was a multicenter, Phase 2, randomized, double-blind, placebo-controlled study to evaluate the safety and efficacy of brivoligide injection 660 mg/6 mL compared to placebo 6 mL administered intrathecally before surgery in patients undergoing TKA.

Protocol changes relative to ADYX-003 included: allowance of NSAIDs from the perioperative period and beyond; allowance of local anesthetic mixtures injected between joints; lengthened follow-up to 90 days post-surgery; use of an eDiary to collect daily pain ratings for least, average and worst pain as well as daily collection of opioid use out to 90 days; and postoperative and outpatient opioid dosing was to be on an “as needed” basis and not on a fixed schedule. In addition, ADYX-004 was designed to assure a balance in the high PCS scoring subjects by using PCS scores ≥20/<20 for randomization.

The following assessments were used to evaluate efficacy: NRS pain assessment at rest; a defined distance walk (5 meters inpatient, 15 meters outpatient), with NRS for pain during the walk; NRS pain assessment with rising from a seated position and worst, least and average pain over the last 24 hours (collected by subjects daily via eDiary); and collection of analgesic medication data through Day 90.

Safety assessments consisted of physical examination, vital signs, clinical laboratory assessments, and collection of AEs and SAEs. AEs were monitored from the time of randomization through Day 28 and SAEs were monitored from the time of consent through Day 28.

The primary efficacy endpoint was the mean NRS pain rating with walking during the 15-meter distance walk Day 7 to Day 28. The secondary efficacy endpoints included:

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Mean NRS pain rating at rest, Day 7 to Day 28;

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Total use of postoperative opioid medications 48 hours to Day 90 (analyzed for mITT and for PCS ≥20/<20);

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Total use of postoperative opioid medications 0 to 48 hours (analyzed for mITT and for PCS ≥20/<20); and

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Time to achieve an NRS pain score of  ≤3 for worst pain (analyzed for mITT and for PCS ≥20/<20).

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A total of 210 subjects were dosed with either brivoligide 660 mg/6 mL (108 subjects) or placebo (102 subjects) and 17 subjects prematurely discontinued from the study (five subjects prior to dosing and 12 subjects after dosing): nine subjects in the brivoligide treatment group (two prior to dosing) and eight subjects in the placebo group (three prior to dosing). One subject was randomized to placebo but incorrectly received brivoligide and was incorporated into the brivoligide group only for the safety analyses. A total of 198 subjects completed the study.

Safety

No subject withdrew because of an AE and no tolerability signals were identified following dosing of brivoligide 660 mg/6 mL. The overall AE profile was primarily mild to moderate with no AE clearly related to brivoligide. No subjects were discontinued from the study due to TEAEs. Five SAEs in five subjects were reported in the brivoligide group and eight SAEs in six subjects were reported in the placebo group. No SAEs were considered related to study drug except for one SAE in the placebo group that was considered possibly related.

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Efficacy

For the primary endpoint, no significant difference was observed between the brivoligide 660 mg/6 mL and placebo 6 mL treated groups. The results of the analyses of the secondary and additional endpoints in the total mITT population also did not show a clinically relevant effect of brivoligide 660 mg/6 mL vs. placebo 6 mL.

Although results of the analyses were not clinically relevant, several prespecified secondary and additional endpoints suggested efficacy of brivoligide when compared with placebo in subjects with PCS score ≥20. These endpoints included time to achieve an NRS pain score ≤3 for worst pain over the previous 24 hours and opioid use over the period of 48 hours to Day 90.

A Kaplan-Meier analysis of time to achieve an NRS pain score of  ≤3 for worst pain is presented in Table 3. A Kaplan-Meier analysis is a statistical method used to measure the fraction of patients that have a particular trait or attribute over a given period of time.

Table 3

ADYX-004 Time to NRS Pain Score ≤3 for Worst Pain — Kaplan Meier Analysis (mITT and Sub Populations)

Abbreviations: NRS = Numeric Rating Scale, PCS = Pain Catastrophizing Scale, NE = Not Estimable.
Note: An event is defined as 3 consecutive pain scores ≤3 over a 4-day period (allows for one missing eDiary entry). Time to event (days) is defined as the date of the first pain score ≤3 that starts the event — the end date of surgery. Subjects who reach Day 90 or withdraw from the study before an event are censored on the date of the last NRS score assessed or Day 90 if the last score is collected after Day 90. Subjects who do not have any eDiary pain scores for an assessment are censored on the day of surgery.

Derived worst pain is the higher score (of the reported worst/least scores) reported in the eDiary.

Total postoperative opioid utilization 48 hours to Day 90 is presented in Table 4. If an eDiary day was missing, the dosage for the opioid medications were imputed with the mean morphine equivalent from the previous two days with recordings. Indications of no opioid use for a day were counted as zero. The results of these analyses without imputation were similar.

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Abbreviations: NRS = Numeric Rating Scale, LS = Least Square, CI = Confidence Interval, PCS = Pain Catastrophizing Scale.

Note: The worst rating (score of 10) is imputed if missing due to pain.

(1)

Results are obtained from a mixed effects model with terms for treatment, actual Screening PCS and treatment by Screening PCS interaction as fixed effects.

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A Kaplan Meier analysis of time to less than 5mg of opioid per day analyzed by PCS ≥16 is presented in Figure 4. This analysis suggests that brivoligide has the potential to shorten the time required for patients to achieve little to no postoperative opioid utilization.

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In summary, we believe high scores on the preoperative PCS can be used to identify people that may benefit from brivoligide administration before surgery.

Brivoligide Development Plan and Registration Strategy

We hold an IND for brivoligide for the treatment of postoperative pain in patients scoring ≥16 on the PCS. We plan to conduct a study in subjects undergoing TKA with predictive enrichment of the study population with patients scoring ≥16 on the PCS to further explore the results obtained in the prior Phase 2 studies in TKA in the proposed target population. We also plan to conduct a Phase 2 study in subjects undergoing mastectomy who score high on the PCS. We have received a grant award from NIDA/NIH for up to $5.7 million to support the conduct of the Phase 2 mastectomy study. If successful, we plan to follow the Phase 2 studies of brivoligide with Phase 3 pivotal studies in both TKA and mastectomy. The design and size of the Phase 3 studies will be determined after completion of the respective Phase 2 studies. Based on the funding opportunity announcement under which we received the award, and on the milestones and budget outlined in our application, following completion of milestones related to the Phase 2 mastectomy study, including receipt of positive data for the Phase 2 mastectomy study and clear guidance from the FDA at an end of phase 2 meeting, we may be eligible to receive an additional award of up to $9.0 million over three years to fund a Phase 3 mastectomy study.

We propose to use a predictive enrichment strategy in which patients are chosen who are more likely to respond to the drug treatment than other patients with the condition being treated and only enroll subjects with PCS scores ≥16 in the Phase 3 studies of brivoligide. The rationale for this approach is as follows:

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Post-hoc analyses of Phase 2 studies ADYX-003 and ADYX-004 suggest that patients with PCS scores of  ≥16 are more likely to respond to brivoligide treatment, while analyses of those with PCS <16 do not show meaningful evidence of efficacy;

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The PCS is an easy to administer assessment and can be incorporated into clinical practice to identify patients who are more likely to respond to brivoligide treatment;

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Adequate data has been generated from the 180 subjects with PCS <16 (104 brivoligide vs. 76 placebo) in studies ADYX-003 and ADYX-004 to suggest that this patient population is unlikely to derive a benefit from brivoligide treatment, and continuing to enroll subjects in this patient population would be medically inappropriate; and

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We believe predictive enrichment of the Phase 3 studies will support an indication of reduction of postoperative pain in patients who score ≥16 on the PCS.

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ADYX-005 Study

ADYX-005 is a Phase 2 randomized double-blind, placebo-controlled study to evaluate the safety and efficacy of a single intrathecal preoperative administration of brivoligide injection in patients with a PCS score ≥16 undergoing TKA. We are evaluating whether to commence this Phase 2 clinical trial as early as the fourth quarter of 2019, with top-line results expected as early as the second half of 2020, subject to receipt of additional capital to fund the trial through top-line results.

The study protocol calls for approximately 122 subjects to be enrolled in the study and randomized 1:1 into two treatment groups (brivoligide injection 660 mg/6 mL and placebo 6 mL) with randomization by study center. Subjects will receive study drug just prior to administration of spinal anesthesia via the same needle.

Safety and laboratory assessments will be performed in the standard manner up to Day 28. Concomitant medications will be collected through Day 28; analgesic medications will be collected through Day 42.

Pain at rest and with walking will be recorded by study staff postoperatively at follow-up visits. Daily ratings of worst pain over the previous 24 hours will be collected via electronic diary, or eDiary, by subjects every evening from Day 1 until the Day 42 visit. Analgesic medication use will be collected via eDiary by subjects daily after discharge until the Day 42 visit. Follow-up visits will occur on Days 7, 14, 21, 28 and 42 The primary endpoint will be reduction in pain with walking from Day 7 to Day 28 as measured using the NRS.

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ADYX-006 Study

ADYX-006 is a Phase 2 randomized double-blind, placebo-controlled study to evaluate the safety and efficacy of a single intrathecal preoperative administration of brivoligide injection in patients with a PCS score ≥16 undergoing mastectomy. We plan to commence this Phase 2 clinical trial as early as the fourth quarter of 2019, with top-line results expected as early as the second half of 2020, subject to receipt of additional funds from our grant award from the National Institute of Drug Abuse, or NIDA, described under “— Our Solution: Brivoligide for Postoperative Pain in Patients Scoring ≥16 on the PCS — Brivoligide Development Plan and Registration Strategy.”

The study protocol calls for approximately 126 subjects to be enrolled in the study and randomized 1:1 into two treatment groups (brivoligide injection 660 mg/6 mL and placebo 6 mL). Safety and laboratory assessments will be performed up to Day 21. Concomitant medications will be collected through Day 21; analgesic medications will be collected through Day 21.

Data for pain at rest with general movement involving the chest and upper body, and worst pain over the last 24 hours, with deep full breath and forceful cough, will be collected by subjects via eDiary every evening from Day 1 until the Day 21 visit. NRS pain assessment upon certain movements of the arm will be collected by subjects via eDiary from Day 14 to 21 as allowed by the subject’s surgeon. Analgesic medication use will be recorded after discharge until the Day 21 visit by subjects daily via eDiary. A physical well-being questionnaire will be collected at screening and at the Day 21 follow-up visit. Follow-up visits will occur on Days 7 and 21. The primary endpoint will be mean pain rating with general movement involving the chest and upper body from Day 3 to Day 14.

AYX2 for Chronic Pain

Chronic pain, which includes types of pain such as low back pain, pain associated with pinched or compressed nerves known as radiculopathy, and pain associated with inflammation of the spinal nerve root known as radiculitis, affects as many as 25 million patients annually in the United States. Chronic pain can be caused by changes in various components of the pain pathway, including the ongoing regulation of gene activity in the spinal cord and DRG. The transcription factors driving this regulation include a family of transcription factors known as Kruppel-like Factors, or KLF, and constitute a promising class of targets that can potentially alter the course of pain with a single or short-term treatment. AYX2 is a differential inhibitor of specific members of the KLF family of transcription factors, including KLF6, KLF9 and KLF15.

Pharmacology of AYX2

Chronic pain is a dynamic state that is maintained by a number of factors, including the ongoing regulation of gene activity in the spinal cord and DRG. We identified a group of transcription factors with the potential to control these gene regulations based on their known functions. We then screened decoys designed against those factors and identified two decoys that bind to KLF6, KLF9 and KLF15 that significantly reduced chronic pain following a single administration in multiple models testing the response to painful stimuli in rats, including the spared-nerve injury, or SNI, and chronic constriction injury, or CCI, models.

Results demonstrated that a single administration of decoys binding to KLF6, KLF9, and KLF15 produced a significant and weeks-long reduction in pain sensitivity compared to controls. In the SNI model, the clinical reduction in pain sensitivity from a given decoy was correlated to its capacity to bind KLF15 and KLF9 at a specific ratio. In the CCI model, the clinical reduction in pain sensitivity from a given decoy was correlated to the combined binding capacity to KLF6 and KLF9. AYX2 was optimized to achieve both binding patterns.

We conducted a non-Good Laboratory Practice toxicology study to determine potential toxicity and tolerability of single and repeated AYX2 intrathecal injections in a study that included a total of 30 rats. Standard toxicology study data were collected, including clinical observations, clinical pathology, spinal and brain histopathology. Single and repeated AYX2 injections were well tolerated.

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AYX2 Development Path

Based on the non-clinical data generated to date, we believe AYX2 has the potential to be developed as a one-time or short-course treatment for chronic pain. We plan to conduct an IND-enabling toxicology program. Phase 1 is planned to be a single ascending dose study design, using healthy subjects. An initial Phase 2 proof-of-concept is planned in radiculopathy and radiculitis. The study is planned to be a randomized, placebo-controlled, safety and efficacy study of single administration AYX2 or placebo.

Discovery and Development of Additional Product Candidates Using the AYX Platform

The AYX platform drug candidates are currently focused on postoperative pain and pre-existing chronic pain. We plan to leverage our expertise in transcription factor decoy drug discovery and development to identify additional product candidates in inflammation related disease states including but not limited to organ scarring, heart disease and cancer.

The discovery and preclinical development of an AYX decoy may include the following steps, as appropriate and relevant depending on the target disease: (1) identifying potentially relevant transcription factor targets based on pre-established scientific knowledge in the target disease or in biological systems with similar features and/or on the direct analysis of transcription factor DNA binding motives in the promoter of relevant genes, (2) designing preliminary decoys against those potential transcription factor targets using their known, consensus DNA binding sequence and directly screening the therapeutic profile of those decoys for efficacy in non-clinical models, (3) designing AYX decoy by optimizing the sequences of the initial decoys into sequences optimal for clinical use and confirming their therapeutic profile, mechanism of action and pharmacology in non-clinical models, (4) performing IND-enabling studies to allow submitting an IND and testing the decoy in clinical trials.

twoXAR Collaboration

We believe that artificial intelligence-, or AI-based platforms, such as twoXAR’s, are helping create portfolios of drug programs more efficiently through faster, more predictive models than traditional approaches. Such technology can accelerate the entire drug development process, decrease risk and substantially reduce overall costs.

Endometriosis is an often painful disorder in which tissue similar to the lining of the uterus grows in other places outside of the uterus. We are seeking to identify product candidates with the potential to address the underlying biological drivers of endometriosis instead of masking symptoms, in order to significantly differentiate from standard of care, using twoXAR’s proprietary AI-driven platform, which has demonstrated in vivo success rates significantly greater than those of traditional approaches across therapeutic areas including diseases such as liver cancer, rheumatoid arthritis, and type 2 diabetes.

In June 2018 we entered into a collaboration agreement with twoXAR. Under our agreement, twoXAR will use its proprietary AI technology to identify a set of medical treatments with the potential to treat or prevent the recurrence of endometriosis and associated symptoms. We will select product candidate(s) from this set to test for efficacy in in vivo models of endometriosis based on predetermined criteria. Following identification of one or more candidate compounds based on those evaluated in vivo , we intend to select one or more compounds on which to conduct preclinical characterization work, IND-enabling work and clinical development. If currently approved compounds are identified, we could potentially employ the 505(b)(2) regulatory pathway to efficiently develop this indication. Under the agreement, we will use commercially reasonable efforts to develop and commercialize selected compounds, and we are subject to a number of obligations including, but not limited to, the outside dates for initiation of pre-clinical and clinical development activities and regulatory filing. Both we and twoXAR will not develop drug candidates with the same product profile as the selected compounds for the term of the agreement.

Approximately 4.4 million women suffer from endometriosis in the United States, with up to 175,000 new diagnoses projected annually by 2022. Symptoms of endometriosis include chronic pelvic pain, painful menstruation and sexual intercourse, infertility, and/or painful hypersensitivity. Over time, endometriosis may be associated with pain-related adhesions and scarring from chronic inflammation and in some cases cancer.

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Initial diagnosis of endometriosis is based on clinical presentation, with definitive diagnosis requiring laparoscopy with histologic confirmation. There is no accepted screening or preoperative diagnostic test, and because symptoms may be vague, and because diagnosis is invasive and carries a small risk of complications, diagnosis can be delayed for more than six years. Endometriosis is classified using the American Society for Reproductive Medicine, or ASRM, scoring system, with the stages as follows: minimal (stage I), mild (stage II), moderate (stage III), severe (stage IV). We believe that existing therapies are insufficient, and new disease-modifying treatments addressing the underlying disease drivers of endometriosis are sought to address the unmet need associated with the current standard of care.

First line treatment includes NSAIDs and combination oral contraceptives in the absence of contraindications. Second line treatment includes continuous combination oral contraceptives for three to six months or implantation of a levonorgestrel IUD. Third line treatment includes GnRH agonist therapy with “add-back therapy” of aromatase inhibitors in the case of resistant disease. Third line therapy can be associated with significant bone mineral loss especially in this young female population and therefore is not appropriate as first line therapy. Surgical intervention is considered definitive treatment. New disease-modifying treatments addressing the underlying pathology of endometriosis are sought to address the unmet need associated with standard of care.

twoXAR retains all intellectual property rights to its computational methods and disease models and grants us a non-exclusive license to use intellectual property rights solely for the development of our selected product candidates for the treatment of endometriosis. We own all intellectual property developed following selection of the selected product candidates, twoXAR will assign all residual right, title and interests to such intellectual property to us. Under the agreement, we control prosecution, defense and enforcement of such intellectual property rights relating to selected product candidates, and twoXAR has backup rights to prosecution, defense and enforcement with respect to such intellectual property for which we elect not to exercise such rights.

The agreement with twoXAR will remain in effect until expiration of the applicable royalty term unless terminated by us upon 60 days prior written notice to twoXAR or terminated by either party upon certain events of material breach. Upon termination, all licenses granted under the agreement will terminate.

Competition

The biopharmaceutical industry is highly competitive. We face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Given the significant unmet medical need for novel therapies to treat pain, as well as the ongoing public health crisis associated with OUD in the United States, many public and private universities and research organizations are actively engaged in the discovery, research and development of product candidates. As a result, there are and will likely continue to be extensive resources invested in the discovery and development of new products to treat these unmet medical needs. We anticipate facing intense and increasing competition as new products enter the market and advanced technologies become available.

In addition, there are numerous multinational pharmaceutical companies and large biotechnology companies currently marketing or pursuing the development of products or product candidates targeting the same indications as our product candidates. Many of our competitors, either alone or with strategic partners, have or will have substantially greater financial, technical and human resources than we do. Accordingly, our competitors may be more successful than us in developing or marketing products and technologies that are more effective, safer or less costly. Additionally, our competitors may obtain regulatory approval for their products more rapidly and may achieve more widespread market acceptance. Accelerated mergers and acquisitions activity in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These companies also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials and acquiring technologies complementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

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While brivoligide has a novel therapeutic profile, competing non-opioid products and product candidates for postoperative pain include, but are not limited to:

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EXPAREL (marketed by Pacira Pharmaceuticals, Inc.);

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Ofirmev (marketed by Mallinckrodt Pharmaceuticals);

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HTX-011 (in development by Heron Therapeutics, NDA submitted to FDA in 2018, Complete Response Letter received from FDA on April 30, 2019); and

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CA-008 (in development by Concentric Analgesics).

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Additional competitive products that comprise current analgesic standard of care include opioids and oral and topical NSAIDs. Potential competitive products or product candidates for AYX2 include opioids, oral and topical NSAIDs, oral gabapentinoids, and steroid injections.

We believe that the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, duration of effect, product labeling, cost-effectiveness, price, the level of generic competition, hospital formulary access, and the availability of reimbursement from the government and other third-parties. Our commercial opportunity could be reduced or eliminated for any of our products if our competitors have products that are approved earlier than our product candidates or are superior compared to our product candidates or if our product candidates do not result in an improvement in condition compared to those other products.

Manufacturing

We currently contract with third parties for the manufacturing of our product candidates for preclinical studies and clinical trials and intend to do so in the future. We do not own or operate manufacturing facilities for the production of clinical trial quantities of our product candidates and do not plan to build our own clinical or commercial scale manufacturing capabilities. Although we rely on contract manufacturers, we have extensive experience overseeing CMOs.

We contract drug substance for preclinical studies from several suppliers in the US. For IND-enabling and for clinical trials, we contract with the largest manufacturer of GMP oligonucleotide worldwide. Alternate GMP manufacturers exist for oligonucleotide product candidates but they do not currently have the production scale of our current supplier. Drug product manufacturing is contracted by a separate CMO.

To date, our CMOs have met the manufacturing requirements for producing our product candidates. We expect our current drug substance manufacturer to be capable of providing sufficient quantities of our product candidates to meet anticipated full-scale commercial demand. However, while preliminary feasibility assessments have been conducted with the manufacturer, we cannot be certain that full commercial scale production can be successful, cost effective, or completed on a timely basis without significant delay in the development or commercialization of our product candidates.

Brivoligide

Brivoligide drug substance for all clinical trials was manufactured by Nitto-Denko Avecia, Inc., or Avecia, and brivoligide drug product was manufactured by Pyramid Laboratories, Inc. or CordenPharma GmbH. We currently have sufficient drug substance available to conduct the currently planned ADYX-005 and ADYX-006 studies, subject to standard testing by the manufacturer to confirm the material meets manufacturing specifications; however, we will have to manufacture new drug product for these studies. We do not have long-term supply agreements or commitments from any parties to supply drug substance or drug product.

AYX2

AYX2 drug substance for preclinical studies was manufactured by Avecia, TriLink BioTechnologies, Inc., and Invitrogen Corporation. We currently plan to use the same CMOs for drug substance and drug product for AYX2 GMP manufacturing as currently used for brivoligide.

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Intellectual Property

We are dedicated to protecting our proprietary technologies that are core to our business. We seek and maintain, where available, patent protection for our product candidates including but not limited to composition of matter, method(s) of use and/or formulation. We plan to continue to expand our intellectual property portfolio by filing patent applications on new dosage or formulation forms, methods of treatment, and compositions of matter for our product candidates as appropriate. We file and prosecute patent applications in the United States and Europe, and when appropriate, additional countries, including Canada, Australia, Japan, Brazil, Russia, India or China.

Our success will depend significantly upon our ability to: (i) obtain and maintain patents and other available exclusivity protections for commercially important technology, inventions and know-how related to our business; (ii) prosecute our patent applications to issue as patents and defend and enforce our patents; (iii) maintain any licenses to use intellectual property owned by others; (iv) preserve the confidentiality of our trade secrets, and (v) operate without infringing the valid and enforceable patents and other proprietary rights of others. In addition to maintaining our existing proprietary assets, we seek to strengthen our proprietary positions when economically reasonable to do so. Our ability to augment our proprietary position relies on our: (i) know-how; (ii) ability to access technological innovations, and (iii) ability to in-license technology when appropriate.

The patent positions of pharmaceutical/biotechnology companies like us are generally uncertain and involve complex legal, scientific, and factual issues. In addition, the scope claimed in a patent application can be significantly reduced before any patent issues. After issuance of a patent application, if the issued patent is challenged, then the courts can redefine the scope of the patent, including by invalidating it or rendering it unenforceable in its entirety. Consequently, we do not know with certainty whether patents will issue in each country where it or our licensor’s file patent applications, or if those patent applications, if ever issued, will issue with claims that cover our product candidates, or, even if they do whether the patent or our relevant claims will remain enforceable upon challenge. Accordingly, we cannot predict with certainty whether the patent applications we are currently pursuing will issue as patents in a particular jurisdiction or whether the claims of any issued patents will provide sufficient proprietary protection from potential competitors to make any of our products commercially successful. Any of our patents, including already issued in-licensed patents or any patents that may issue to us or our licensors in the future could potentially be challenged, narrowed, circumvented, or invalidated by third parties.

Because newly filed patent applications in the United States Patent and Trademark Office, or the USPTO, and certain other patent offices are maintained in secrecy for a minimum of 18 months, and because publications of discoveries in the scientific or patent literature often lag far behind the actual discoveries themselves, we cannot be certain of the priority of our inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention, although patent applications filed after 2013 are given priority based on first to file in the U.S. The date of an invention is typically not publicly disclosed. Also, while we are not currently participating in any interferences or post-grant challenge proceedings, such as patent oppositions and patent litigation, that seek to invalidate the patentability of patents before or after they issue, respectively, we may have to participate in such proceedings in the future. Such proceedings could result in substantial cost, even if the eventual outcome is favorable to us.

The term of individual patents depends upon the legal term of the patents in the countries where they are issued. In most countries, the standard patent term for inventions relating to human drugs and their formulation and use is 20 years from the date of filing the first non-provisional patent or international application under the Patent Cooperation Treaty of 1970, or the PCT.

We have received a grant award from NIDA/NIH for the development of brivoligide in the mastectomy model of postoperative pain. Intellectual property may be generated through the use of this U.S. government funding and would therefore be subject to certain federal regulations. As a result, the U.S. government may in the future have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act. These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the

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U.S. government has the right, under certain limited circumstances, to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government or fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.

Patent Protection of our Product Candidates

We fully-own the patents and patent applications protecting our oligonucleotide product candidates.

Brivoligide

The patent and patent applications protecting brivoligide encompass composition of matter, method of use, formulation, dosage and target patient populations. Composition of matter and method of use for brivoligide and closely related compounds patents have issued in the United States and additional geographies. Those patents will expire in 2028 and 2029 and could be subject to extension. The brivoligide formulation patent has also issued in the United States and is under prosecution in additional geographies. It will expire in 2033 and could be subject to extension. A dosing regimen patent application is under prosecution in the United States with an expiration date, if issued, of 2037 that could be subject to extension. An International PCT patent application pertaining to the brivoligide target patient population (≥16 on the PCS) was filed in February 2019. We anticipate prosecuting this application at least in the United States, Europe, Canada, Japan, Australia, Brazil, Russia, India and China. If issued, this application would be valid until 2039 and could be subject to extension. The final list of countries to prosecute this application under will be decided at the time of National Stage Entry of the current PCT application, which occurs in August 2020.

AYX2

A patent covering AYX2 composition of matter and method of use has been issued in the U.S. and will expire in 2035 and could be subject to extension. Further, patent applications covering AYX2 composition of matter and method of use are also under prosecution in the United States, Europe, Japan, Canada, Australia, Brazil, Russia, India and China. If issued, these patents will expire in 2035 and could be subject to extension.

Patent Term

Depending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years beyond the normal expiration of the patent, limited to the approved indication (or any additional indications approved during the period of extension), as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for extension and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended and the application for the extension must

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be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Similar provisions may be available in Europe and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug. In Europe, through the European Medicines Agency, there is a period of ten years of regulatory data exclusivity from the time of approval if the centralized procedure is used, however under the centralized procedure this term would run concurrently with the period of exclusivity provided by the patent. When possible, depending upon the length of clinical trials and other factors involved in the filing of NDAs for our products, we expect to apply for PTEs for patents covering our product candidates and their methods of use both in the United States and any foreign jurisdiction where available. There is no guarantee, however, that the applicable authorities will agree to grant extensions, and if granted, what the length of those extensions will be.

Other Proprietary Rights and Processes

We also rely on trade secret protection for some of our confidential and proprietary information. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees and consultants, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and disclose our technology. If these events happen, we may not be able to meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information concerning our business, scientific, development or financial affairs that are either developed or made known to the individual during the course of the individual’s relationship with us are to be kept confidential and not disclosed to third parties except in specific circumstances. Our agreements with employees also provide that all inventions conceived by the employee in the course of employment with us or based on the employee’s use of our confidential information are our exclusive property or that we have an exclusive royalty free license to use such technology.

Government Regulations and Product Approvals

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical products such as those we are developing. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.

FDA Approval Process

All of our current product candidates are subject to regulation in the United States by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and its implementing regulations. The FDA subjects drugs to extensive pre and post market regulation. Failure to comply with the FDC Act and other federal and state statutes and regulations may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs, withdrawal of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal penalties.

FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed in the United States. The process required by the FDA before a new drug may be marketed in the United States is long, expensive, and inherently uncertain. Drug development in the United States typically involves completion of preclinical laboratory and animal tests, submission to the FDA of an IND, which must become effective before clinical testing may commence, approval by an IRB, at each clinical site before each trial may be initiated, performance of adequate and well controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought, submission to the FDA of an NDA, satisfactory completion of an FDA

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inspection of the manufacturing facility or facilities at which the product is produced, and FDA review and approval of the NDA. Developing the data to satisfy FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product, disease or indication.

Preclinical tests include laboratory evaluation of the product’s chemistry, formulation, and toxicity, as well as animal studies to characterize and assess the potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practice, or GLP, regulations. These preclinical results are submitted to the FDA as part of an IND along with other information, including information about the product’s chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical studies including reproductive toxicity and carcinogenicity may be initiated or continue after the IND is submitted.

An IND must become effective before United States clinical trials may begin. A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the IND automatically becomes effective and the clinical trial proposed in the IND may begin. If the FDA does raise any concerns or questions and places the clinical trial on a clinical hold, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, a submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development.

Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations, including GCP requirements for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials; and (ii) with protocols that detail, among other things, the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to and approved by an IRB at each study site before the study commences at that site and the IRB must monitor the clinical trial until it is completed. An IRB may also require the clinical trial at that site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements or if the drug candidate has been associated with unexpected serious harm to patients, or the IRB may impose other conditions. The study sponsor or the FDA may also suspend or discontinue a clinical trial at any time on various grounds, including a determination that the subjects are being exposed to an unacceptable health risk.

Clinical trials to support an NDA for marketing approval are typically conducted in three sequential phases, although there is leeway to overlap or combine these phases.   

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Phase 1.    The drug candidate is initially introduced into healthy human subjects or patients with the target disease or condition, and is tested to assess safety, dosage tolerance, pharmacokinetics and pharmacological activity, and, when possible, to ascertain evidence of efficacy. The drug candidate may also be tested in patients with severe or life-threatening diseases to gain an early indication of its effectiveness.

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Phase 2.    The trials are conducted using a limited patient population for the purposes of preliminarily determining the effectiveness of the drug in that particular indication, ascertaining dosage tolerance, discerning the optimal dosage, and identifying possible adverse effects and safety risks.

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Phase 3.    If a compound demonstrates evidence of efficacy and has an acceptable safety profile in the Phase 2 clinical trials, then Phase 3 clinical trials are undertaken to obtain additional information from an expanded and diverse patient population, at multiple, geographically

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dispersed clinical trial sites, in randomized controlled studies often with a double-blind design to maximize the reproducibility of the study results. Typically, a minimum of two positive Phase 3 clinical trials are submitted to support the product’s marketing application. These Phase 3 clinical trials are intended to provide sufficient data demonstrating evidence of the efficacy and safety of the drug such that the FDA can evaluate the overall benefit-risk of the drug and provide adequate information for the labeling and package insert for the drug. Trials conducted outside of the United States under similar, GCP-compliant conditions in accordance with local applicable laws may also be acceptable to FDA in support of product approval.

Sponsors of clinical trials for investigational drugs must publicly disclose certain clinical trial information, including detailed trial design. These requirements are subject to specific timelines and apply to most Phase 3 clinical trials of FDA-regulated products.

In some cases, FDA may condition approval of an NDA for a product candidate on the sponsor’s agreement to conduct additional clinical trials after NDA approval. In other cases, a sponsor may voluntarily conduct additional clinical trials post approval to gain more information about the drug. Such post approval trials are typically referred to as Phase 4 clinical trials.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if SAEs occur. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access to certain data from the study. Phase 1, Phase 2, Phase 3 and Phase 4 clinical trials may not be completed successfully within any specified period, or at all.

Concurrent with clinical trials, companies usually finalize a process for manufacturing the drug in commercial quantities in accordance with current good manufacturing practice, or cGMP, requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

After completion of the required clinical testing, an NDA is prepared and submitted to the FDA requesting approval to market the drug for one or more specified indications. FDA review and approval of the NDA is required before marketing of the product may begin in the United States. The NDA must include the results of all preclinical, clinical, and other testing, including negative or ambiguous results as well as positive findings, together with other detailed information including compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The NDA must also contain extensive manufacturing information. The FDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use. The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is subject to both a substantial application user fee and annual program user fees. The sum of these fees may total several million dollars and they are typically increased annually.

The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. Once the submission is accepted for filing, the FDA begins an in-depth review.

Under the Prescription Drug User Fee Act PDUFA, guidelines that are currently in effect, the FDA has agreed to certain performance goals in the review of NDAs. Standard NDAs are generally reviewed within ten months of filing, or twelve months from submission. Although FDA often meets its user fee performance goals, the FDA can extend these timelines if necessary, and FDA review may not occur on a timely basis. The FDA usually refers applications for novel drugs, or drugs that present difficult questions of safety or efficacy, to an advisory committee — a panel of independent experts, typically including clinicians and other scientific experts — for review, evaluation, and a recommendation as to whether the application

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should be approved and under what conditions. The FDA is not bound by the recommendation of the advisory committee, but it generally follows its recommendations. Before approving an NDA, the FDA will typically inspect one, or more, clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve an application unless it verifies that compliance with cGMP requirements is satisfactory and that the manufacturing processes and facilities are adequate to assure consistent production of the product within required specifications. The FDA will not approve a drug unless the application contains data showing substantial evidence that it is safe and effective in the indication studied.

After the FDA evaluates the NDA and conducts its inspections, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies contained in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application, including potentially significant, expensive and time-consuming requirements related to clinical trials, nonclinical studies or manufacturing. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive, and the FDA may interpret data differently than we do. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the application, the FDA will typically issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of additional information requested. FDA approval is never guaranteed. The FDA may refuse to approve an NDA if applicable regulatory criteria are not satisfied.

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. The approval for a drug may be significantly more limited than requested in the application, including limitations on the specific diseases and dosages or the indications for use, which could restrict the commercial value of the product. The FDA may also require that certain contraindications, warnings, or precautions be included in the product’s package insert, or labeling.

In addition, as a condition of approval, the FDA may require a REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guidelines, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing-including dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS or use of a companion diagnostic with a drug can materially affect the potential market and profitability of the drug. Moreover, product approval may require, as a condition of approval, substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. The FDA may also condition approval on, among other things, changes to proposed labeling or development of adequate controls and specifications.

Once granted, product approvals may be withdrawn if compliance with regulatory standards are not maintained or problems are identified following initial marketing. In addition, after approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

Advertising and Promotion

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing post-approval regulatory requirements. For instance, the FDA closely regulates the post-approval marketing, labeling, advertising and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Failure to comply with these requirements can result in adverse publicity as well as significant penalties, including the issuance of warning letters directing a company to correct any deviations from the FDA’s standards. The FDA may also impose a requirement that future advertising and promotional materials be pre-cleared by the FDA, and we may face federal and/or state civil and criminal investigations and prosecutions.

Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA

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approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

AE Reporting and cGMP Compliance

Recordkeeping, AE reporting and the submission of periodic reports are required following the FDA’s approval of an NDA. The FDA also may require post-marketing testing or Phase 4 clinical trials, REMS, or surveillance to monitor the effects of an approved drug. In addition, the FDA may place conditions on an approval that could restrict the distribution or use of the product. Furthermore, manufacture, packaging, labeling, storage and distribution procedures must continue to conform to cGMPs after approval. Manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies to assess compliance with ongoing regulatory requirements, including cGMPs. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality control to maintain compliance with cGMPs. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that it or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution or withdraw approval of the NDA for that drug. Regulatory authorities may also withdraw product approvals, request product recalls, or impose marketing restrictions through labeling changes or product removals upon discovery of previously unknown problems with a product, including AEs of unanticipated severity or frequency, or with manufacturing processes.

Other Healthcare Laws and Compliance Requirements

In the United States, our activities are potentially subject to regulation by federal, state, and local authorities in addition to the FDA. These other agencies include, without limitation, the Centers for Medicare and Medicaid Services, other divisions of the U.S. Department of Health and Human Services, the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, as well as state and local governments. Such agencies enforce a variety of laws, including without limitation, anti-kickback and false claims laws, data privacy and security laws, and physician payment transparency laws.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. 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. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated.

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Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or the ACA, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, ACA codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to or approval by the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved, and thus non-reimbursable, uses. In addition, the civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. HIPAA, created new federal criminal statutes that prohibit 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. Like the Anti-Kickback Statute, ACA broadened the reach of certain criminal healthcare fraud statutes created under HIPAA by amending the intent requirement such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs.

We may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, including the final Omnibus Rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as service providers of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from HIPAA and each other in significant ways and may not have the same effect, thus complicating compliance efforts.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. ACA imposed, among other things, new annual reporting requirements for covered manufacturers for certain payments and “transfers of value” provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of  $150,000 per year and up to an aggregate of  $1 million per year for “knowing failures.” Covered manufacturers were required to begin collecting data on August 1, 2013 and submit reports on aggregate payment data to the government for the first reporting period (August 1, 2013 — December 31, 2013) by March 31, 2014, and were required to report detailed payment data for the

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first reporting period and submit legal attestation to the completeness and accuracy of such data by June 30, 2014. Thereafter, covered manufacturers must submit reports by the 90 th day of each subsequent calendar year. In addition, certain states require implementation of commercial compliance programs and compliance with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices, and/or tracking and reporting of gifts, compensation and other remuneration or items of value provided to physicians and other healthcare professionals and entities.

If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to it, we may be subject to penalties, including potentially significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

International Regulation

In addition to regulations in the United States, a variety of foreign regulations govern clinical trials, commercial sales, and distribution of drugs. Whether or not we obtain FDA approval for a drug, we or our collaborators must obtain approval of the drug by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing of the drug in those countries. The approval process varies from country to country and the time to approve may be longer or shorter than that required for FDA approval. Further, to the extent that any of our products are sold in a foreign country, we may be subject to additional foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.

Pharmaceutical Coverage, Pricing and Reimbursement

In the United States and other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of any products for which we receive regulatory approval for commercial sale will therefore depend in part on the availability of reimbursement from third-party payors, including government health administrative authorities, managed care providers, private health insurers, and other organizations.

Generally, if we obtain FDA approval of brivoligide, before we can attempt to sell brivoligide in a hospital, brivoligide must be approved for addition to that hospital’s list of approved drugs, or formulary list, by the hospital’s P&T committee. A hospital’s P&T committee typically governs all matters pertaining to the use of medications within the institution, including the review of medication formulary data and recommendations for the appropriate use of drugs within the institution to the medical staff. The frequency of P&T committee meetings at hospitals varies considerably, and P&T committees often require additional information to aid in their decision-making process. We may experience substantial delays in obtaining formulary approvals, and hospital pharmacists may be concerned that the cost of acquiring brivoligide for use in their institutions will adversely impact their overall pharmacy budgets, which could cause pharmacists to resist efforts to add brivoligide to the formulary, or to implement restrictions on the usage of brivoligide in order to control costs.

The process for determining whether a third-party payor will provide coverage for a drug product typically is separate from the process for setting the price of a drug product or for establishing the reimbursement rate that the payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-party payor not to cover our product candidates could reduce physician utilization of our products once approved and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a third-party payor’s decision to provide coverage for a drug product does not imply that an adequate

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reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for drug products can differ significantly from payor to payor. One third-party payor’s decision to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will require us to provide scientific and clinical support for the use of our products to each payor separately and will be a time-consuming process.

The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity and reviewing the cost-effectiveness of drug products and medical services, in addition to questioning safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after FDA approval or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.

In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on coverage and reimbursement and requirements for substitution of generic products. By way of example, in the United States, ACA contains provisions that may reduce the profitability of drug products. The ACA, among other things, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of prescriptions for individuals enrolled in Medicaid managed care plans, imposed mandatory discounts for certain Medicare Part D beneficiaries and subjected manufacturers to new annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

Other legislative changes have been proposed and adopted since ACA was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not recommend and Congress did not enact legislation to reduce the deficit by at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have an adverse effect on our business, operating results or financial condition.

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Facilities

As of June 30, 2019, we conducted all of our operations, other than our outsourced operations, at office space located at 100 Pine Street, Suite 500, San Francisco, CA 94111. This office space is subleased from REC Americas, LLC, and the term of the lease is for 62 months and expires on December 31, 2019.

Employees

As of June 30, 2019, we had a total of six full-time employees in the United States, three of whom were primarily engaged in research and development activities and three of whom were engaged in general management and administration. Two of our employees have either an M.D. or a Ph.D. None of our employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced any work stoppage and consider our relations with our employees to be good.

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Donald C. Manning, M.D., Ph.D. has served as our Chief Medical Officer since May 2019. From January 2012 to May 2019, Dr. Manning served as Chief Medical Officer of Adynxx. Prior to joining Adynxx, Dr. Manning served as Chief Medical Officer at Shionogi Inc., the U.S. subsidiary of Shionogi & Co., Ltd., a global pharmaceutical company, from July 2009 to May 2011 and as Executive Vice President of Clinical Development, Medical Affairs and Pharmacovigilance from March 2010 to May 2011. Prior to Shionogi, Dr. Manning served as Vice President of Medical Affairs at King Pharmaceuticals Inc., from January 2009 to June 2009, and as Vice President of Clinical Research and Development at Alpharma Inc., a global specialty pharmaceutical company, from August 2008 to January 2009. Alpharma was acquired by King Pharmaceuticals in January 2009. Prior to Alpharma, Dr. Manning served as Vice President and Therapeutic Area Head for Neurosciences at Celgene Corporation, a biotechnology company that develops and commercializes medicines for cancer and inflammatory disorders, from October 2006 to August 2008 and as Executive Director from April 2003 to October 2006. Dr. Manning received a B.S. from McGill University and an M.D. and Ph.D. from Johns Hopkins School of Medicine.

Non-Employee Directors

Dennis Podlesak has served as a member of our board of directors since May 2019 and has served as a member of the board of directors of Adynxx since 2010. Since 2007, Mr. Podlesak has served as a Partner of Domain Associates LLC, a private venture capital management firm focused on life sciences. While at Domain, Mr. Podlesak has been the founder and the Chief Executive Officer of a number of companies, including Calixa Therapeutics, Inc., a privately held biopharmaceutical company which was acquired by Cubist Pharmaceuticals, Inc. in December 2009. Mr. Podlesak was also the Executive Chairman of Corthera, Inc., a biopharmaceutical company, which was acquired by Novartis AG in January 2010. Mr. Podlesak currently serves as the chairperson of the board of directors of Syndax Pharmaceuticals, Inc., a clinical stage biopharmaceutical company. Mr. Podlesak received a B.A. from Western Illinois University and an M.B.A. from Pepperdine University. He completed post-graduate studies at The Wharton School, University of Pennsylvania.

Mr. Podlesak was selected to serve on the Adynxx board of directors because of his experience as the Chief Executive Officer and Chairman of other successful companies in the biotechnology industry, his over 20 years of strategic, operational and commercial experience in the pharmaceutical industry, and his service as a director of other publicly traded and privately held life science companies.

Eckard Weber, M.D. has served as a member of our board of directors since May 2019 and has served as a member of the board of directors of Adynxx since 2010. Dr. Weber has served as a partner with Domain Associates, LLC, a private venture capital management firm focused on life sciences, since 2001. Dr. Weber has been the founding Chief Executive Officer of multiple Domain Associates portfolio companies including Acea Pharmaceuticals, Ascenta Therapeutics, Calixa Therapeutics, Cytovia and NovaCardia, each a biopharmaceutical company. Dr. Weber received his German undergraduate degree from Kolping Kolleg in Germany and an M.D. from the University of Ulm Medical School in Germany. Dr. Weber received his postdoctoral training in neuroscience at Stanford University Medical School.

Dr. Weber was selected to serve on the Adynxx board of directors because of his extensive experience in the life sciences industry as an entrepreneur, chief executive officer and venture capitalist, as well as his training as a physician.

Stan Abel has served as a member of our board of directors since May 2019 and has served as a member of the board of directors of Adynxx since 2008. Since 2010, Mr. Abel has served as the President and Chief Executive Officer of SiteOne Therapeutics Inc., a pain company focused on developing a novel platform of highly selective sodium channel 1.7 inhibitors. From 2007 to 2010, Mr. Abel served as Chief Executive Officer of Corthera, Inc., a biopharmaceutical company, through the sale of the company to Novartis AG in February 2010. Mr. Abel received a B.S. in Business from Indiana University and an M.B.A., with honors, from the University of Chicago.

Mr. Abel was selected to serve on the Adynxx board of directors because of his extensive experience in strategic biopharmaceutical transactions and leadership of clinical-stage companies.

Gregory J. Flesher has served as a member of our board of directors since July 2019. Mr. Flesher has served as the Chief Executive Officer and a member of the board of directors of Novus Therapeutics, Inc.,

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a specialty pharmaceutical company focused on developing products for patients with disorders of the ear, nose and throat, since May 2017. Prior to Novus, Mr. Flesher served as Chief Executive Officer and a member of the board of directors for Otic Pharma, Ltd. from 2015 to 2017. Mr. Flesher has more than 20 years of pharmaceutical industry experience and has been closely involved with several successful drug development programs that have resulted in multiple product approvals and commercial launches in the U.S. and Europe. Prior to Otic Pharma, Mr. Flesher served as Senior Vice President of Corporate Development and Chief Business Officer, and other executive management roles at Avanir Pharmaceuticals, Inc. from 2006 to 2015. Mr. Flesher received his B.S. in Biology from Purdue University and studied Biochemistry and Molecular Biology at Indiana University School of Medicine.

Mr. Flesher was selected to serve on the Adynxx board of directors because of his extensive senior leadership experience at numerous biopharmaceutical companies.

Matthew Ruth has served as a member of our board of directors since May 2019. Mr. Ruth is currently Senior Vice President, US Chief Commercial Officer for Adapt Pharma, a division of Emergent Bio Solutions commercializing Narcan Nasal Spray, a product that can reverse the effects of opioid and heroin overdoses. From 2012 to 2015, Mr. Ruth was Chief Operating Officer for RightCare Solutions. Mr. Ruth earned a Bachelor of Science degree from Missouri State University.

Our board of directors believes that Mr. Ruth’s experience in leading commercial roles at a number of biopharmaceutical companies qualifies him to serve as a member of our board of directors.

Family Relationships

There are no family relationships among any of our directors or executive officers.

Board Composition

Our board of directors consists of seven members. Our certificate of incorporation and bylaws provide that directors are to be elected at each annual meeting of stockholders to hold office until the next annual meeting and until their respective successors are elected and qualified. Vacancies on the board of directors resulting from death, resignation, retirement, disqualification or removal may be filled by the affirmative vote of a majority of the remaining directors then in office, whether or not a quorum of the board of directors is present. Newly created directorships resulting from any increase in the number of directors may, unless the board of directors determines otherwise, be filled only by the affirmative vote of the directors then in office, whether or not a quorum of the board of directors is present. Any director elected as a result of a vacancy shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s successor shall have been elected and qualified.

Director Independence

Under the listing requirements and rules of       , independent directors must comprise a majority of a listed company’s board of directors. Our board of directors has undertaken a review of the composition of our board of directors, our committees and the independence of each director. Based upon information requested from and provided by each director concerning their background, employment and affiliations, including family relationships, the board of directors has determined that all of our directors, except Mr. Orr, due to his position as our chief executive officer, and Dr. Mamet, due to his position as our chief scientific officer, are “independent” as that term is defined under the rules of        .

In making these determinations, the board of directors considered the current and prior relationships that each non-employee director has with us and all other facts and circumstances the board of directors deemed relevant in determining their independence, including the beneficial ownership of capital stock by each non-employee director, and the transactions.

Committees of the Board of Directors

Our board of directors has the authority to appoint committees to perform certain management and administration functions. Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. The composition and responsibilities of

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each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by the board of directors. The charters for each of these committees are available on our website at www.adynxx.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of such website address in this prospectus is an inactive textual reference only.

Audit Committee

Our audit committee consists of Mr. Abel, Mr. Podlesak and Mr. Ruth. The board of directors has determined that each committee member is independent under the listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chairperson of our audit committee is Mr. Abel. The board of directors has determined that Mr. Abel is an “audit committee financial expert” within the meaning of SEC regulations. Our board of directors has also determined that each member of the audit committee has the requisite financial expertise required under the applicable requirements of      . In arriving at this determination, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the life sciences industry.

The primary purpose of the audit committee is to discharge the responsibilities of the board of directors with respect to our accounting, financial, and other reporting and internal control practices and to oversee our independent registered accounting firm. Specific responsibilities of our audit committee include:

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selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

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helping to ensure the independence and performance of the independent registered public accounting firm;

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discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

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developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

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reviewing policies on risk assessment and risk management;

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reviewing related party transactions;

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obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

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approving (or, as permitted, pre-approving) all audit and all permissible non-audit service to be performed by the independent registered public accounting firm.

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Compensation Committee

The compensation committee consists of Mr. Podlesak and Dr. Weber. Our board of directors has determined each member is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The chairperson of the compensation committee is Mr. Podlesak. Our board of directors has determined that each of these individuals is “independent” as defined under the applicable listing standards of        , including the standards specific to members of a compensation committee. The primary purpose of the compensation committee is to discharge the responsibilities of the board of directors to oversee our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of the compensation committee will include:

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reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

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reviewing and recommending to our board of directors the compensation of our directors;

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•

reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

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administering our stock and equity incentive plans;

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selecting independent compensation consultants and assessing whether there are any conflicts of interest with any of the committee’s compensation advisors;

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reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans, severance agreements, change-of-control protections and any other compensatory arrangements for our executive officers and other senior management, as appropriate;

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reviewing and establishing general policies relating to compensation and benefits of our employees; and

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reviewing our overall compensation philosophy.

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Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of Mr. Abel and Mr. Podlesak. Our board of directors has determined each member is independent under      listing standards. The chairperson of our nominating and corporate governance committee is Mr. Podlesak.

Specific responsibilities of our nominating and corporate governance committee include:

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identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors;

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evaluating the performance of our board of directors and of individual directors;

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reviewing developments in corporate governance practices;

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evaluating the adequacy of our corporate governance practices and reporting;

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reviewing management succession plans; and

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developing and making recommendations to our board of directors regarding corporate governance guidelines and matters.

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(3)

1/4 th of the shares subject to the option vested one year after December 16, 2016, the vesting commencement date, and 1/36 th of the shares subject to the option vest monthly thereafter. As of December 31, 2018, 79,074 shares underlying the option were vested.

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(4)

1/4 th of the shares subject to the option vested one year after December 16, 2016, the vesting commencement date, and 1/36 th of the shares subject to the option vest monthly thereafter. As of December 31, 2018, 28,203 shares underlying the option were vested.

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(5)

During the 12 months following a change in control and the three months preceding a change of control, if  (a) the named executive officer is involuntarily terminated without cause or (b) the named executive officer resigns for good reason, and in either case, other than as a result of death or disability (and provided such termination constitutes a separation from service, without regard to any alternative definition thereunder), then the vesting of the option shall be accelerated such that 100% of the total unvested shares under the option shall be vested.

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(6)

All shares subject to this option have vested as of December 31, 2018.

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Employment Arrangements

Upon the closing of the Merger, the executive officers of Private Adynxx were appointed as our executive officers, and each of Alliqua’s then-appointed executive officers resigned. Our executive officers following the consummation of the Merger consist of Mr. Orr, our and Adynxx’s President and Chief Executive Officer, Dr. Mamet, our and Adynxx’s Chief Scientific Officer, and Dr. Manning, our and Adynxx’s Chief Medical Officer.

We have offer letters with each of our executive officers. The offer letters generally provide for at-will employment and set forth the executive officer’s initial base salary, eligibility for employee benefits and confirmation of the terms of previously issued equity grants, including in some cases severance benefits on a qualifying termination of employment. The key terms of employment with our and Adynxx’s named executive officers set forth in the tables above are described below.

Rick Orr

In October 2010, Adynxx entered into an offer letter with Mr. Orr, our President and Chief Executive Officer.

During 2018, Mr. Orr received a base salary of  $435,663. For 2019, Mr. Orr will receive an annual base salary of  $443,913 with an annual target bonus of 40% of such base salary, payable based on the achievement of certain corporate and individual performance goals to be established by our Compensation Committee.

In addition, Mr. Orr will be eligible for 12 months of continued company paid health insurance benefits (assuming he timely elects continued coverage under COBRA). All such severance benefits are subject to Mr. Orr signing a general release in our favor of all known and unknown claims in substantially the form provided in his offer letter. Upon an involuntary termination without cause or termination due to constructive termination, Mr. Orr will be entitled to receive a lump sum cash payment equal to 12 months of his annual base salary and an amount equal to 100% of his most recently paid bonus.

Julien Mamet, Ph.D.

In September 2011, Adynxx entered into an offer letter with Dr. Mamet, our Chief Scientific Officer.

During 2018, Dr. Mamet received a base salary of  $340,540. For 2019, Dr. Mamet will receive an annual base salary of  $348,790 with an annual target bonus of 35% of such base salary, payable based on the achievement of certain corporate and individual performance goals to be established by our Compensation Committee.

Upon an involuntary termination without cause or termination due to constructive termination, Dr. Mamet will be entitled to receive a lump sum cash payment equal to 12 months of his annual base salary. In addition, Dr. Mamet will be eligible for 12 months of continued company paid health insurance benefits (assuming he timely elects continued coverage under COBRA). All such severance benefits are subject to Dr. Mamet signing a general release in our favor of all known and unknown claims in substantially the form provided in his offer letter.

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Donald Manning, M.D.

In January 2012, Adynxx entered into an offer letter with Dr. Manning, our Chief Medical Officer.

During 2018, Dr. Manning received a base salary of  $360,149. For 2019, Dr. Manning will receive an annual base salary of  $368,399 with an annual target bonus of 35% of such base salary, payable based on the achievement of certain corporate and individual performance goals to be established by our Compensation Committee.

In addition, Dr. Manning will be eligible for 12 months of continued company paid health insurance benefits (assuming he timely elects continued coverage under COBRA) and all unvested stock options held by Dr. Manning will immediately vest in full. Upon an involuntary termination without cause or termination due to constructive termination, not within one month prior to or 13 months following a change in control, Dr. Manning will be entitled to receive a lump sum cash payment equal to 9 months of his annual base salary. Upon an involuntary termination without cause or termination due to constructive termination, within one month prior to or 13 months following a change in control, Dr. Manning will be entitled to receive a lump sum cash payment equal to 12 months of his annual base salary.

In addition, Dr. Manning will be eligible for nine months of company paid continued health insurance benefits (assuming he timely elects continued coverage under COBRA). All such severance benefits are subject to Dr. Manning signing a general release in our favor of all known and unknown claims in substantially the form provided in his offer letter.

Employee Benefit Plans

We believe that our ability to grant equity-based awards is a valuable and necessary compensation tool that aligns the long-term financial interests of our employees, consultants and directors with the financial interests of our stockholders. In addition, we believe that our ability to grant options and other equity-based awards helps us to attract, retain and motivate employees, consultants and directors and encourages them to devote their best efforts to our business and financial success. The principal features of our equity incentive plans, our health benefit plan and our 401(k) plan are summarized below. These summaries are qualified in their entirety by reference to the actual text of the plans, which, other than the health benefit plan and 401(k) plan, are filed or incorporated by reference as exhibits to the registration statement of which this prospectus is a part.

2010 Equity Incentive Plan

Upon the closing of the Merger, we assumed the Adynxx 2010 Equity Incentive Plan, or the Adynxx Plan, and all outstanding stock options thereunder. The Adynxx Plan was adopted by the board of directors of Adynxx and approved by Adynxx’s stockholders in December 2010. The Adynxx Plan provides for the granting of stock options to employees and consultants of Adynxx. Options granted under the Adynxx Plan may be either incentive stock options, or ISOs, or nonqualified stock options, or NSOs. ISOs may be granted only to Adynxx employees (including officers and directors who are also employees). NSOs may be granted to Adynxx employees and consultants. Options under the Adynxx Plan may be granted for periods of up to 10 years and at prices no less than 100% of the estimated fair value of the underlying shares of common stock on the date of grant as determined by the Adynxx board of directors; provided, however, that the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. The Adynxx Plan requires that options be exercised no later than 10 years after the grant.

401(k) Plan

We maintain a 401(k) plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to defer compensation up to certain limits imposed by the Code. We have the ability to make matching and discretionary contributions to the 401(k) plan. Currently, we do not make matching contributions to the 401(k) plan. We make a nonelective 401(k) safe harbor contribution on behalf of each employee equal to 3% of their annual salary. The 401(k) plan is intended to be qualified under Section 401(a) of the Code, with the related trust intended to be tax exempt

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under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan are deductible by us when made, and contributions and earnings on those amounts are generally not taxable to a participating employee until withdrawn or distributed from the 401(k) plan.

Health and Welfare Benefits

We pay premiums for medical insurance, dental insurance and vision insurance for all full-time employees, including our named executive officers. These benefits are available to all full-time employees, subject to applicable laws.

Pension Benefits

Adynxx’s named executive officers did not participate in, or otherwise receive any benefits under, any pension or defined benefit retirement plan sponsored by Adynxx during the year ended December 31, 2018.

Nonqualified Deferred Compensation

Adynxx’s named executive officers did not participate in, or earn any benefits under, a non-qualified deferred compensation plan sponsored by Adynxx during the year ended December 31, 2018.

Director Compensation

The following table sets forth information regarding compensation earned by or paid to Adynxx’s non-employee directors during 2018. Adynxx did not have any compensation arrangements or policies with respect to non-employee directors during 2018.

(1)

As of December 31, 2018, Mr. Podlesak held options to purchase an aggregate of 56,275 shares of common stock.

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(2)

As of December 31, 2018, Mr. Weber held options to purchase an aggregate of 56,275 shares of common stock.

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(3)

As of December 31, 2018, Mr Abel held options to purchase an aggregate of 28,137 shares of common stock.

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We expect that our board of directors will adopt a director compensation policy for non-employee directors following the closing of this offering. Pursuant to this policy, we expect that any director who is also an employee of ours or our subsidiary will not receive any additional compensation for his or her service as a director.

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EXECUTIVE COMPENSATION OF ALLIQUA

Alliqua’s named executive officers, consisting of Alliqua’s principal executive officer and the next two most highly compensated executive officers, for the year ended December 31, 2018, were:

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David Johnson, Alliqua’s former President and Chief Executive Officer;

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•

Bradford Barton, Alliqua’s former Chief Operating Officer;

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•

Pellegrino Pionati, Alliqua’s former Chief Strategy and Marketing Officer; and

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•

Joseph Warusz, Alliqua’s former Chief Financial Officer, Treasurer and Secretary.

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Following the consummation of the Merger in May 2019, each of Alliqua’s executive officers, including Alliqua’s named executive officers, resigned and Adynxx’s executive officers were appointed as our executive officers.

Summary Compensation Table

The following table presents all of the compensation paid or awarded to or earned by Alliqua’s former named executive officers during 2017 and 2018:

(1)

The amounts reported represent the aggregate grant date fair value of the awards, calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 — Compensation — Stock Compensation, or ASC 718, with the exception that the amount shown assumes no forfeitures. Alliqua used the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards. Assumptions used in the calculation of these amounts include, for the year ended December 31, 2017, the risk free interest rate of 1.81% to 2.43%, expected term of 5.04 to 6.50 years, expected volatility of 81.94% to 87.00% and no expected dividends. The risk-free interest rate is based on rates of treasury securities with the same expected term as the options. Alliqua used the “simplified method” to calculate the expected term of employee and director stock-based options. The expected term used for consultants is the contractual life. Alliqua utilized an expected volatility figure based on a review of Alliqua’s historical volatility, over a period of time, equivalent to the expected life of the instrument being valued. The expected dividend yield is based upon the fact that Alliqua had not historically paid dividends, and did not expect to pay dividends in the near future.

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(2)

Represents a discretionary year-end performance bonus earned in 2017 paid in 2018.

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(3)

Comprised of  (i) automobile expense allowance payments of  $9,000 and (ii) life insurance premium payments of  $2,400.

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(4)

Comprised of automobile expense allowance payments.

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(5)

Comprised of  (i) automobile expense allowance payments of  $2,927, (ii) vacation payout payments of $11,203 and (iii) severance payments of  $249,600.

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(6)

In May 2018, Mr. Barton resigned as Alliqua’s Chief Operating Officer and Mr. Pionati resigned as Alliqua’s Chief Strategy and Marketing Officer. Mr. Warusz resigned in March 2019. Mr. Johnson resigned in May 2019 in connection with the consummation of the Merger.

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Outstanding Equity Awards as of December 31, 2018

The following table provides information about outstanding equity awards held by each of Alliqua’s named executive officers at December 31, 2018.