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TABLE OF CONTENTS
APPLIED THERAPEUTICS, INC. INDEX TO FINANCIAL STATEMENTS
As filed with the U.S. Securities and Exchange Commission on April 12, 2019.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Applied Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
2834
(Primary Standard Industrial Classification Code Number) |
81-3405262
(I.R.S. Employer Identification Number) |
340 Madison Avenue, 19th Floor
New York, New York 10173
(212) 220-9226
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
Shoshana Shendelman, Ph.D.
President and Chief Executive Officer
340 Madison Avenue, 19th Floor
New York, New York 10173
(212) 220-9226
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to: | ||||
Laura A. Berezin Divakar Gupta Joshua A. Kaufman Jaime L. Chase Cooley LLP 55 Hudson Yards New York, New York 10001 (212) 479-6000 |
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Shoshana Shendelman, Ph.D. President and Chief Executive Officer Applied Therapeutics, Inc. 340 Madison Avenue, 19th Floor New York, New York 10173 (212) 220-9226 |
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Richard D. Truesdell, Jr. Marcel R. Fausten Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 |
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. o
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. o
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. o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý | Smaller reporting company ý | |||
Emerging growth company ý |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ý
CALCULATION OF REGISTRATION FEE
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Title of each Class of Securities
to be Registered |
Proposed Maximum
Aggregate Offering Price (1) |
Amount of
Registration Fee (2) |
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---|---|---|---|---|
Common Stock, $0.0001 par value per share |
$86,250,000 | $10,453.50 | ||
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this 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 prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 12, 2019
PRELIMINARY PROSPECTUS
Shares
Common Stock
This is the initial public offering of common stock of Applied Therapeutics, Inc. We are selling shares of common stock in this offering. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list our shares of common stock on The Nasdaq Global Market under the symbol "APLT."
We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments, if any.
We are an "emerging growth company" as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See "Prospectus SummaryImplications of Being an Emerging Growth Company."
Investing in our common stock involves risks. See "Risk Factors" beginning on page 10 of this prospectus .
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Per share | Total | ||
---|---|---|---|---|
Initial public offering price | $ | $ | ||
Underwriting discounts and commissions (1) | $ | $ | ||
Proceeds to us before expenses | $ | $ |
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of our common stock to purchasers on or about , 2019.
Joint Book-Running Managers
Citigroup | Cowen | UBS Investment Bank |
Lead Manager
Baird
, 2019
"Applied Therapeutics," the Applied Therapeutics logo and other trademarks, trade names or service marks of Applied Therapeutics, Inc. appearing in this prospectus are the property of Applied Therapeutics, Inc. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.
Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside the United States.
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This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, especially the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, the terms "Applied Therapeutics," "the company," "we," "us," "our" and similar references in this prospectus refer to Applied Therapeutics, Inc.
Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in indications of high unmet medical need. We focus on molecules and pathways whose role in the disease process is well known based on prior research, but have previously failed to yield successful products due to poor efficacy and tolerability. Our unique approach to drug development leverages recent technological advances to design improved drugs, employs early use of biomarkers to confirm biological activity and focuses on abbreviated regulatory pathways. We develop product candidates with increased potency and selectivity by leveraging recent technological advances in high throughput crystallography and in situ structural design. Our strategy is also informed by early use of biomarkers to confirm biological activity and target engagement. The result of this unique multifaceted approach to drug development is a portfolio of highly specific and selective product candidates that we believe are significantly de-risked and can move quickly through the development process.
Our first molecular target is aldose reductase, or AR, the first enzyme and rate-limiting step in the polyol pathway, an alternative glucose metabolism pathway. AR is a redox-regulated enzyme that is activated by an altered redox state within the cell, such as oxidative stress, which occurs during hyperglycemia and ischemia. AR activity produces excess sorbitol, which causes osmotic dysregulation within cells and tissues, and is implicated in multiple diseases. The detrimental consequences of aberrent AR activation include broad effects, such as mitochondrial dysfunction and cell death, as well as tissue-specific changes, such as neuronal degeneration in peripheral nerves, collagen crosslinking and fibrosis in cardiac tissue, and damage to blood vessels in the lens of the eye. Prior attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. Our AR inhibitor, or ARI, program currently includes three small molecules, which are all designed to be potent and selective ARIs, and are engineered to have unique tissue permeability profiles to target different disease states, including diabetic complications, heart disease and a rare pediatric metabolic disease.
Our lead product candidate, AT-001, is a novel ARI with broad systemic exposure and peripheral nerve permeability, that we are developing for the treatment of diabetic cardiomyopathy, or DbCM, a fatal fibrosis of the heart, for which no treatments are available. DbCM is estimated to afflict 17% of diabetic patients, equating to an estimated 77 million patients globally. We initially plan to target the 50% of these patients who are within the symptomatic stages of disease we believe most likely to be responsive to treatment. We are also developing AT-001 for diabetic peripheral neuropathy, or DPN, a debilitating neurodegenerative disease that significantly reduces quality of life, and for which there are currently no approved treatments in the United States. Approximately 50% of the global diabetic population, or 226 million diabetic patients, suffer from DPN. We recently completed a Phase 1a/1b clinical trial evaluating AT-001 in 80 patients with type 2 diabetes, in which no drug-related adverse effects or tolerability issues were observed. This trial also demonstrated target engagement and proof of biological activity, as measured by reduction in sorbitol, a biomarker of AR activity. We plan to initiate a Phase 2/3 pivotal clinical trial of AT-001 for the treatment of DbCM in 2019. We plan to collect data
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on motor nerve conduction velocity, or MNCV, in our planned pivotal trial in DbCM patients that also have DPN, which we expect will provide a basis for dose selection in Phase 3 clinical trials of DPN.
Our second product candidate, AT-007, is a central nervous system, or CNS, penetrant ARI that we are developing for the treatment of galactosemia, a devastating rare pediatric metabolic disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. We estimate that the U.S. galactosemia population is approximately 2,800 patients, based on newborn screening data identifying 2,500 infants through 2014, and the estimated birth rate of 80 patients per year. High levels of galactose circulating in the blood and tissues of galactosemia patients enable AR to convert galactose to a toxic metabolite, galactitol, which results in long-term complications ranging from CNS dysfunction to cataracts. We have demonstrated in an animal model of galactosemia that treatment with AT-007 reduces toxic galactitol levels and prevents disease complications. We believe that galactosemia may qualify for accelerated approval, as well as for the rare pediatric disease priority review voucher, or RPD-PRV, program. Additionally, the U.S. Food and Drug Administration, or FDA, recently released draft guidance for industry on drug development for low prevalence, slowly progressing rare metabolic diseases, for which we believe galactosemia qualifies. The guidance allows for a biomarker-based development program if clinical efficacy and a link to a relevant biomarker can be demonstrated in an animal model of disease. We are currently in late stages of preclinical development and intend to advance AT-007 into a Phase 1 clinical trial in 2019.
We are also developing AT-003, an ARI designed to cross through the back of the eye when dosed orally, which has demonstrated strong retinal penetrance, for the treatment of diabetic retinopathy, or DR. DR is an ophthalmic disease that occurs in diabetic patients and for which treatments are currently limited to high-cost biologics requiring intravitreal administration. DR afflicts approximately 35% of diabetic patients, equating to an estimated 158 million patients globally. DR has been linked to AR activity, including elevations in sorbitol and subsequent changes in retinal blood vessels, which distorts vision and leads to permanent blindness. We are currently in late stages of preclinical development of AT-003. AT-003 displayed significant retinal penetration when dosed orally in diabetic rats. The drug was observed to be well tolerated with no adverse effects. Efficacy of AT-003 is currently being explored in two animal models of DRan ischemic injury model (acute damage) and chronic diabetic treatment model. We intend to advance AT-003 into a Phase 1 clinical trial in 2020.
Applying our strategy from our ARI program, we have also developed a program targeting selective inhibition of phosphatidylinositol 3-kinase, or PI3K, subunits that has resulted in an early-stage oncology pipeline. We expect to initially target orphan hematological oncology indications, including peripheral T-cell lymphoma, cutaneous T-cell lymphoma and T-cell acute lymphoblastic leukemia. We are additionally developing selective alpha/gamma inhibitors to target solid tumors that constitutively express PI3K alpha. We plan to initiate our clinical program in these indications in 2020.
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Our Pipeline
The following table shows the status of our current ARI and PI3K inhibitor programs:
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Our Strategy
Our goal is to bring potentially transformative therapies to market across a range of fatal or debilitating diseases for which no treatments are available. The critical components of our strategy include:
Leadership
Our management team and members of our scientific advisory board are composed of accomplished scientists and clinicians with decades of experience developing drugs for a wide range of diseases. Our view is that drug development does not always need to follow the standard approach, which often requires long and costly development programs before drugs become available to patients. By taking a unique and focused approach to drug development, we believe we can significantly shorten development programs and bring lifesaving drugs to patients in urgent need. Since inception, we have raised approximately $38 million in gross proceeds from equity and debt financings with a number of investment firms, including Alexandria Venture Investments, LLC, E Squared Investment Fund, LLC, ETP Global Fund, LP and Syno Ventures Master Fund, LP.
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Risks Associated with Our Business
Our business is subject to a number of risks of which you should be aware before making a decision to invest in our common stock. These risks are more fully described in the section titled "Risk Factors" immediately following this prospectus summary. These risks include, among others, the following:
Our Corporate Information
We were incorporated under the laws of the State of Delaware on January 20, 2016. Our principal executive offices are located at 340 Madison Avenue, 19th Floor, New York, New York 10173, and our telephone number is (212) 220-9226. Our corporate website address is www.appliedtherapeutics.com. Information contained on, or accessible through, our website is not a part of this prospectus. We have included our website in this prospectus solely as an inactive textual reference.
Implications of Being an Emerging Growth Company
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and we may remain an emerging growth company for up to five years following the completion of this offering. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation-related information that would be required if we were not an
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emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.
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Common stock to be offered |
shares | |
Common stock to be outstanding after this offering |
shares |
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Over-allotment option to purchase additional shares |
shares |
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Use of proceeds |
We estimate that the net proceeds from this offering will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase up to additional shares of common stock to cover over-allotments), based on an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
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We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows: |
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approximately $ million to fund our pivotal Phase 2/3 clinical trial for AT-001 for the treatment of diabetic cardiomyopathy; |
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approximately $ million to advance AT-007 for the treatment of galactosemia in adults through our planned Phase 1 clinical trial; |
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approximately $ million to advance AT-003 for the treatment of diabetic retinopathy into our planned Phase 1 clinical trial; and |
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the remainder to fund other research and development activities, working capital and other general corporate purposes. |
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See "Use of Proceeds" for additional information. |
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Risk factors |
You should read the section titled "Risk Factors" for a discussion of factors to consider carefully, together with all the other information included in this prospectus, before deciding to invest in our common stock. |
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Proposed Nasdaq Global Market symbol |
"APLT" |
The number of shares of our common stock to be outstanding after this offering is based on 236,246 shares of common stock outstanding as of December 31, 2018, which includes the (i) issuance and sale of 8,017 shares of Series B preferred stock subsequent to December 31, 2018 and (ii) the
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conversion of all of the outstanding shares of our preferred stock upon the completion of this offering, and excludes:
Unless otherwise indicated, all information contained in this prospectus, including the number of shares of common stock that will be outstanding after this offering, assumes or gives effect to:
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The following tables set forth our summary statement of operations data for the years ended December 31, 2017 and 2018 and the balance sheet data as of December 31, 2018, all of which have been derived from our financial statements appearing elsewhere in this prospectus. The following summary financial data should be read with the sections titled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
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Years Ended
December 31, |
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(in thousands, except share and per share data)
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2017 | 2018 | |||||
Summary of Operations Data: |
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Operating expenses: |
|||||||
Research and development |
$ | 3,703 | $ | 11,471 | |||
General and administrative |
582 | 2,047 | |||||
| | | | | | | |
Total operating expenses |
4,285 | 13,518 | |||||
| | | | | | | |
Loss from operations |
(4,285 | ) | (13,518 | ) | |||
Other income (expense), net: |
|||||||
Interest income (expense), net |
3 | (1,642 | ) | ||||
Loss on extinguishment of debt |
| (221 | ) | ||||
Other expense |
| (1,140 | ) | ||||
| | | | | | | |
Total other income (expense), net |
3 | (3,003 | ) | ||||
| | | | | | | |
Net loss |
$ | (4,282 | ) | $ | (16,521 | ) | |
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| | | | | | | |
| | | | | | | |
Net loss per share: basic and diluted (1) |
$ | (43.76 | ) | $ | (166.47 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares used in computing net loss per share: basic and diluted (1) |
97,858 | 99,244 | |||||
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| | | | | | | |
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Pro forma net loss per share (unaudited): basic and diluted (1) |
$ | (99.61 | ) | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares outstanding used in computing pro forma net loss per share (unaudited): basic and diluted (1) |
165,851 | ||||||
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| | | | | | | |
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As of December 31, 2018 | |||||||||
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(in thousands)
|
Actual |
Pro
Forma (1) |
Pro Forma
as Adjusted (2)(3) |
|||||||
Balance Sheet Data:
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(unaudited)
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Cash and cash equivalents |
$ | 18,748 | $ | 21,879 | $ | |||||
Working capital |
15,818 | 18,949 | ||||||||
Total assets |
20,246 | 23,377 | ||||||||
Preferred stock |
35,410 | | | |||||||
Accumulated deficit |
(21,257 | ) | (21,257 | ) | ||||||
Total stockholders' (deficit) equity |
(19,592 | ) | 18,949 |
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Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Financial Position and Capital Needs
We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future and may never achieve or maintain profitability.
Since inception in January 2016, we have incurred significant operating losses. Our net loss was $4.3 million and $16.5 million for the years ended December 31, 2017 and 2018, respectively. As of December 31, 2018, we had an accumulated deficit of $21.3 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Since inception, we have devoted substantially all of our efforts to research and preclinical and clinical development of our product candidates, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. To date, we have never obtained regulatory approval for, or commercialized, any drugs. It could be several years, if ever, before we have a commercialized drug. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:
Furthermore, following the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
To become and remain profitable, we must succeed in developing and eventually commercializing drugs that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our current and future product candidates, obtaining regulatory approval, procuring commercial-scale manufacturing, marketing and selling any products for which we obtain regulatory approval (including through third parties), as well as discovering or acquiring and developing additional product candidates. We are only in the
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preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are sufficient to offset our expenses and achieve profitability.
Because of the numerous risks and uncertainties associated with drug development, we are unable to accurately predict the timing or amount of expenses or when, or if, we will be able to achieve profitability. If we are required by regulatory authorities to perform studies in addition to those currently expected, or if there are any delays in the initiation and completion of our clinical trials or the development of any of our product candidates, our expenses could increase.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our common stock could also cause you to lose all or part of your investment.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We are a clinical-stage company founded in January 2016, and our operations to date have been largely focused on raising capital, organizing and staffing our company, identifying and developing our product candidates, and undertaking preclinical and clinical development for our product candidates. As an organization, we have not yet demonstrated an ability to successfully complete clinical development, obtain regulatory approvals, manufacture a commercial-scale product or conduct sales and marketing activities necessary for successful commercialization, or arrange for a third party to conduct these activities on our behalf. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.
We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
Additionally, we expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.
We will require substantial additional funding to finance our operations. If we are unable to raise capital when needed, we could be forced to delay, reduce or terminate certain of our development programs or other operations.
Based on our research and development plans, we believe that the $3.1 million of net proceeds from the sale of 8,017 shares of Series B Preferred Stock subsequent to December 31, 2018 and the net proceeds from this offering, together with our existing cash and cash equivalents as of December 31, 2018, will be sufficient to fund our operations through . However, we will need to obtain substantial additional funding in connection with our continuing operations and planned research and clinical development activities. Our future capital requirements will depend on many factors, including:
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Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or altogether terminate our research and development programs or future commercialization efforts.
Raising additional capital may cause dilution to our stockholders, including investors in this offering, restrict our operations or require us to relinquish rights to our product candidates.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest in our company may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as redeeming our shares, making investments, incurring additional debt, making capital expenditures, declaring dividends or placing limitations on our ability to acquire, sell or license intellectual property rights.
If we raise additional capital through future collaborations, strategic alliances or third-party licensing arrangements, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.
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The Tax Cuts and Jobs Act, or the Tax Act, could adversely affect our business and financial condition.
In December 2017, President Trump signed into law the Tax Act that significantly reformed the Internal Revenue Code of 1986, as amended. The Tax Act, among other things, contains significant changes to corporate taxation, including (i) reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, (ii) limitation of the tax deduction for interest expense to 30% of adjusted earnings (with certain exceptions, including for certain small businesses), (iii) limitation of the deduction for post-2017 net operating losses, or NOLs, to 80% of current-year taxable income and elimination of net operating loss carrybacks for post-2017 NOLs, (iv) one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, (v) immediate deductions for certain new investments instead of deductions for depreciation expense over time and (vi) modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as "orphan drugs"). Our federal net operating loss carryovers will be carried forward indefinitely pursuant to the Tax Act. We continue to examine the impact the Tax Act may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. This prospectus does not discuss the Tax Act or the manner in which it might affect us or purchasers of our common stock. We urge our stockholders, including purchasers of common stock in this offering, to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
We have incurred substantial losses since inception and do not expect to become profitable in the near future, if ever. In general, under Section 382 of the United States Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of this offering and/or subsequent changes in our stock ownership (some of which shifts are outside our control). As a result, if, and to the extent that we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income may be subject to limitations.
The Tax Act, among other things, includes changes to U.S. federal tax rates and the rules governing net operating loss carryforwards. For NOLs arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer's ability to utilize NOL carryforwards to 80% of taxable income. In addition, NOLs arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation, and NOLs generated in tax years ending before January 1, 2018 will continue to have a two-year carryback and 20-year carryforward period. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOL is expected to be utilized. The changes in the carryforward/carryback periods, as well as the new limitation on use of NOLs may significantly impact our ability to utilize our NOLs to offset taxable income in the future.
In order to realize the future tax benefits of our NOL carryforwards, we must generate taxable income, of which there is no assurance. Accordingly, we have provided a full valuation allowance for deferred tax assets as of December 31, 2018.
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The report of our independent registered public accounting firm included a "going concern" explanatory paragraph.
The report of our independent registered public accounting firm on our financial statements as of and for the year ended December 31, 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Since inception, we have experienced recurring operating losses and negative cash flows, and we expect to continue to generate operating losses and consume significant cash resources for the foreseeable future. Without additional financing, such as this offering, these conditions raise substantial doubt about our ability to continue as a going concern, meaning that we may be unable to continue operations for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. If we are unable to obtain funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, or we may be unable to continue operations. Although we continue to pursue these plans, there can be no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.
Risks Related to the Development and Commercialization of Our Product Candidates
Our future success is substantially dependent on the successful clinical development, regulatory approval and commercialization of our product candidates. If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates and our ability to generate product revenue will be adversely affected.
We have invested a significant portion of our time and financial resources in the development of AT-001, AT-003 and AT-007. Our business is dependent on our ability to successfully complete development of, obtain regulatory approval for, and, if approved, successfully commercialize our product candidates in a timely manner. We may face unforeseen challenges in our drug development strategy, and we can provide no assurances that our drug design will prove to be effective, that we will be able to take advantage of abbreviated regulatory pathways for any of our product candidates, or that we will ultimately be successful in our future clinical trials.
We have not obtained regulatory approval for any product candidate, and it is possible that any product candidates we may seek to develop in the future will not obtain regulatory approval. Neither we nor any future collaborator is permitted to market any product candidates in the United States or abroad until we receive regulatory approval from the FDA or applicable foreign regulatory agency. The time required to obtain approval or other marketing authorizations by the FDA and comparable foreign regulatory authorities is unpredictable and typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. 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.
Prior to obtaining approval to commercialize any product candidate in the United States or abroad, we must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidate is safe and effective for its intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe that the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it may object to elements of our clinical development program, requiring their alteration.
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Of the large number of products in development, only a small percentage successfully complete the FDA or comparable foreign regulatory authorities approval processes and are commercialized. The lengthy approval or marketing authorization process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval or marketing authorization to market our product candidates, which would significantly harm our business, financial condition, results of operations and prospects.
Even if we eventually complete clinical testing and receive approval of a new drug application, or NDA, or foreign marketing application for our product candidates, the FDA or the comparable foreign regulatory authorities may grant approval or other marketing authorization contingent on the performance of costly additional clinical trials, including post-market clinical trials. The FDA or the comparable foreign regulatory authorities also may approve or authorize for marketing a product candidate for a more limited indication or patient population than we originally request, and the FDA or comparable foreign regulatory authorities may not approve or authorize the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval or other marketing authorization would delay or prevent commercialization of that product candidate and would adversely impact our business and prospects.
In addition, the FDA or comparable foreign regulatory authorities may change their policies, adopt additional regulations or revise existing regulations or take other actions, which may prevent or delay approval of our future product candidates under development on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain approvals, increase the costs of compliance or restrict our ability to maintain any marketing authorizations we may have obtained.
Furthermore, even if we obtain regulatory approval for our product candidates, we will still need to develop a commercial organization, establish a commercially viable pricing structure and obtain approval for coverage and adequate reimbursement from third-party and government payors, including government health administration authorities. If we are unable to successfully commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.
The development of additional product candidates is risky and uncertain, and we can provide no assurances that we will be able to replicate our approach to drug development for other disease indications.
Efforts to identify, acquire or in-license, and then develop, product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our efforts may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development, approved products or commercial revenues for many reasons, including the following:
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We have limited financial and management resources and, as a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater market potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in circumstances under which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. In addition, we may not be successful in replicating our approach to drug development for other disease indications. If we are unsuccessful in identifying and developing additional product candidates or are unable to do so, our business may be harmed.
Success in preclinical studies or earlier clinical trials may not be indicative of results in future clinical trials and we cannot assure you that any ongoing, planned or future clinical trials will lead to results sufficient for the necessary regulatory approvals.
Success in preclinical testing and earlier clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Preclinical studies and Phase 1 clinical trials are primarily designed to test safety, to study pharmacokinetics and pharmacodynamics and to understand the side effects of product candidates at various doses and schedules. Success in preclinical studies and earlier clinical trials does not ensure that later efficacy trials will be successful, nor does it predict final results. Our product candidates may fail to show the desired safety and efficacy in clinical development despite positive results in preclinical studies or having successfully advanced through earlier clinical trials.
In addition, the design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. As an organization, we have limited experience designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of our product candidate development. Any such delays could negatively impact our business, financial condition, results of operations and prospects.
Clinical drug development involves a lengthy and expensive process. We may incur additional costs and encounter substantial delays or difficulties in our clinical trials.
We may not commercialize, market, promote or sell any product candidate without obtaining marketing approval from the FDA or other comparable regulatory authority, and we may never receive such approvals. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans and will receive regulatory approval. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. For example, we intend to conduct an additional Phase 1 clinical trial of AT-007 for the treatment of galactosemia in a pediatric population upon successful completion of the planned Phase 1 clinical trial in adults. Successful completion of the trial in adults may take longer than we expect, and the FDA may express additional concerns or require additional trials in adults, which may delay our clinical development plans for AT-007.
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A failure of one or more clinical trials can occur at any stage of testing. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.
We may experience numerous unforeseen events prior to, during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including the following:
Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenue from future drug sales or other sources. In addition, if we make manufacturing or formulation changes to our product candidates, we may need to conduct additional testing to bridge our modified product candidate to earlier versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our product candidates, if approved, or allow our competitors to bring competing drugs to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business, financial condition, results of operations and prospects.
Additionally, if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our product candidates, we may:
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Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, need to be restructured or be completed on schedule, if at all.
Further, we, the FDA or an IRB may suspend our clinical trials at any time if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory requirements, including the FDA's current Good Clinical Practice, or GCP, regulations, that we are exposing participants to unacceptable health risks, or if the FDA finds deficiencies in our investigational new drug applications, or INDs, or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials. If we experience delays in the commencement or completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our product candidates could be negatively impacted, and our ability to generate revenues from our product candidates may be delayed.
All of our current product candidates that have proceeded to clinical trials target inhibition of aldose reductase. There can be no assurance that aldose reductase inhibitors will ever receive regulatory approval.
All of our current product candidates that have proceeded to clinical trials target inhibition of the aldose reductase enzyme. There are no currently approved aldose reductase inhibitors on the market outside Japan, India and China, and there can be no assurance that aldose reductase inhibitors will ever receive regulatory approval. Prior attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. Our current product candidates, including AT-001, AT-003 and AT-007, may face similar or different challenges that prevent their successful commercialization.
We may not be able to obtain or maintain rare pediatric disease designation or exclusivity for our product candidates, which could limit the potential profitability of our product candidates.
We may seek rare pediatric disease designation from the FDA for AT-007 for the treatment of galactosemia. For the purposes of this program, a "rare pediatric disease" is a serious or life-threatening disease in which the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years or a rare disease or conditions within the meaning of the Orphan Drug Act. Under the FDA's rare pediatric disease priority review voucher, or RPD-PRV, program, upon the approval of an NDA for the treatment of a rare pediatric disease, the sponsor of such application would be eligible for an RPD-PRV that can be used to obtain priority review for a subsequent NDA. The sponsor of the application may transfer (including by sale) the RPD-PRV to another sponsor. The voucher may be further transferred any number of times before the voucher is used, as long as the sponsor making the transfer has not yet submitted the application. Congress has extended the RPD-PRV program until September 30, 2020, with potential for vouchers to be granted until 2022. This program has been subject to criticism, including by the FDA, and it is possible that even if we obtain approval for AT-007 for the treatment of galactosemia and qualify for a RPD-PRV, the program may no longer be in effect at the time of approval. Also, although priority review vouchers
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may be sold or transferred to third parties, there is no guaranty that we will be able to realize any value if we were to sell a priority review voucher.
A breakthrough therapy designation by the FDA for a product candidate may not lead to a faster development or regulatory review or approval process, and it would not increase the likelihood that the product candidate will receive marketing approval.
We may seek a breakthrough therapy designation for one or more product candidates. A breakthrough therapy is defined as a product candidate that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Product candidates designated as breakthrough therapies by the FDA are also eligible for priority review if supported by clinical data at the time of the submission of the NDA.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe that one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to product candidates considered for approval under conventional FDA procedures and it would not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the product candidate no longer meets the conditions for qualification or it may decide that the time period for FDA review or approval will not be shortened.
We may seek fast track designation from the FDA for AT-001 for DbCM. Even if granted, fast track designation may not actually lead to a faster development, regulatory review or approval process.
If a product candidate is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to address unmet needs for this condition, the sponsor may apply for FDA fast track designation. If fast track designation is obtained, the FDA may prioritize interactions with the sponsor concerning the designated development program and initiate review of sections of an NDA before the application is complete, known as "rolling review." Fast track designation would not ensure that we would experience a faster development, regulatory review or approval process compared to conventional FDA procedures or that we would ultimately obtain regulatory approval. Additionally, the FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
We intend to seek approval from the FDA through the use of accelerated registration pathways. If we are unable to obtain approval under an accelerated pathway, we may be required to conduct additional preclinical studies or clinical trials, which could increase the expense of obtaining, reduce the likelihood of obtaining and/or delay the timing of obtaining, necessary marketing approvals. Even if we receive approval from the FDA to utilize an accelerated registration pathway, if our confirmatory trials do not verify clinical benefit, or if we do not comply with rigorous post-marketing requirements, the FDA may seek to withdraw accelerated approval.
We intend to seek an accelerated approval development pathway for our product candidates. Under the accelerated approval provisions of the Federal Food, Drug, and Cosmetic Act, or the FDCA, and the FDA's implementing regulations, the FDA may grant accelerated approval to a product
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designed to treat a serious or life-threatening condition that provides meaningful therapeutic advantage over available therapies and demonstrates an effect on a surrogate endpoint or intermediate clinical endpoint that is reasonably likely to predict clinical benefit. The FDA considers a clinical benefit to be a positive therapeutic effect that is clinically meaningful in the context of a given disease. For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit. The accelerated approval development pathway may be used in cases in which the advantage of a new drug over available therapy may not be a direct therapeutic advantage, but is a clinically important improvement from a patient and public health perspective. If granted, accelerated approval is contingent on the sponsor's agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug's clinical profile or risks and benefits for accelerated approval. The FDA may require that any such confirmatory studies be initiated or substantially underway prior to the submission of an application for accelerated approval. If such post-approval studies fail to confirm the drug's clinical profile or risks and benefits, the FDA may withdraw its approval of the drug. Because we are still in early stages of our clinical trials, we can provide no assurances that our biomarker-based approach will be successful in demonstrating a causal link to the relevant outcomes we are evaluating. If our approach is not successful, we may be required to conduct longer clinical trials.
If we choose to pursue accelerated approval, we intend to seek feedback from the FDA or will otherwise evaluate our ability to seek and receive such accelerated approval. There can be no assurance that, after our evaluation of the feedback from the FDA or other factors, we will decide to pursue or submit an NDA for accelerated approval or any other form of expedited development, review or approval. Furthermore, even if we submit an application for accelerated approval, there can be no assurance that the application will be accepted or that approval will be granted on a timely basis, or at all. The FDA also could require us to conduct further studies or trials prior to considering our application or granting approval of any type. We might not be able to fulfill the FDA's requirements in a timely manner, which would cause delays, or approval might not be granted because our submission is deemed incomplete by the FDA. A failure to obtain accelerated approval or any other form of expedited development, review or approval for a product candidate would result in a longer time period to commercialize such product candidate, could increase the cost of development of such product candidate and could harm our competitive position in the marketplace.
Even if we receive accelerated approval from the FDA, we will be subject to rigorous post-marketing requirements, including the completion of confirmatory post-market clinical trial(s) to verify the clinical benefit of the product, and submission to the FDA of all promotional materials prior to their dissemination. The FDA could seek to withdraw accelerated approval for multiple reasons, including if we fail to conduct any required post-market study with due diligence, a post-market study does not confirm the predicted clinical benefit, other evidence shows that the product is not safe or effective under the conditions of use, or we disseminate promotional materials that are found by the FDA to be false or misleading.
A failure to obtain accelerated approval or any other form of expedited development, review or approval for a product candidate that we may choose to develop would result in a longer time period prior to commercializing such product candidate, could increase the cost of development of such product candidate and could harm our competitive position in the marketplace.
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Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be delayed, made more difficult or rendered impossible by multiple factors outside our control.
Identifying and qualifying patients to participate in our clinical trials is critical to our success. We may encounter difficulties in enrolling patients in our clinical trials, thereby delaying or preventing development and approval of our product candidates. Even once enrolled, we may be unable to retain a sufficient number of patients to complete any of our trials. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data, the number and nature of competing treatments and ongoing clinical trials of competing therapies for the same indication, the proximity of patients to clinical sites and the eligibility criteria for the trial. Because our focus includes rare disorders, there are limited patient pools from which to draw in order to complete our clinical trials in a timely and cost-effective manner.
For example, upon successful completion of the planned Phase 1 clinical trial in adults, we intend to conduct an additional Phase 1 clinical trial of AT-007 for the treatment of galactosemia in a pediatric population. We are doing this in order to obtain efficacy data on patients representing the most vulnerable subset of our intended population. Such patients may be difficult to enroll in this trial, and the lack of data on these patients may negatively impact the approvability or labeling of galactosemia. Likewise, enrollment of our clinical trials could take significantly longer than projected, which would delay any potential approval of AT-007. Furthermore, even if we are able to enroll a sufficient number of patients for our clinical trials, we may have difficulty maintaining enrollment of such patients in our clinical trials.
Our efforts to build relationships with patient communities may not succeed, which could result in delays in patient enrollment in our clinical trials. Any negative results we may report in clinical trials of our product candidates may make it difficult or impossible to recruit and retain patients in other clinical trials of that same product candidate. Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop our product candidates or could render further development impossible. In addition, we may rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements governing their services, we will be limited in our ability to ensure their actual performance.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit their commercial potential or result in significant negative consequences following any potential marketing approval.
During the conduct of clinical trials, patients report changes in their health, including illnesses, injuries and discomforts, to their doctor. Often, it is not possible to determine whether or not the product candidate being studied caused these conditions. Regulatory authorities may draw different conclusions or require additional testing to confirm these determinations, if they occur.
In addition, it is possible that as we test our product candidates in larger, longer and more extensive clinical trials, or as use of these product candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by subjects or patients. Many times, side effects are only detectable after investigational drugs are tested in large-scale pivotal trials or, in some cases, after they are made available to patients on a commercial scale after approval. If additional clinical experience indicates that any of our product candidates have side effects or cause serious or life-threatening side effects, the development of the product candidate may fail or be delayed, or, if the product candidate has received regulatory approval,
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such approval may be revoked, which would harm our business, prospects, operating results and financial condition.
Interim, "top-line" and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publish interim, "top-line" or preliminary data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary or "top-line" data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Differences between preliminary or interim data and final data could significantly harm our business prospects and may cause the trading price of our common stock to fluctuate significantly.
The incidence and prevalence for target patient populations of our product candidates have not been established with precision. If the market opportunities for our product candidates are smaller than we believe they are or any approval we obtain is based on a narrower definition of the patient population, our business may suffer.
We currently focus our drug development on product candidates for the treatment of diseases with high unmet medical need. Our eligible patient population and pricing estimates may differ significantly from the actual market addressable by our product candidates. Our estimates of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on our beliefs and analyses. These estimates have been derived from a variety of sources, including the scientific literature, patient foundations or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of the diseases we are targeting. The number of patients may turn out to be lower than expected. Likewise, the potentially addressable patient population for each of our product candidates may be limited or may not be receptive to treatment with our product candidates, and new patients may become increasingly difficult to identify or access. If the market opportunities for our product candidates are smaller than we estimate, we may not be able to achieve our forecast revenue, which could hinder our business plan and adversely affect our business and results of operations.
We face substantial competition, which may result in others developing or commercializing drugs before or more successfully than us.
The development and commercialization of new drugs is highly competitive. We face potential competition with respect to our current product candidates and will face competition with respect to any other product candidates that we may seek to develop or commercialize in the future from pharmaceutical and biotechnology companies, academic institutions, government agencies and other public and private research institutions.
Our competitors may have an advantage over us due to their greater size, resources and institutional experience. In particular, these companies have greater experience and expertise in securing reimbursement, government contracts and relationships with key opinion leaders, conducting testing and clinical trials, obtaining and maintaining regulatory approvals and distribution relationships to market products and marketing approved drugs. These companies also have significantly greater research and marketing capabilities than we do. If we are not able to compete effectively against existing and potential competitors, our business and financial condition may be harmed.
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As a result of these factors, our competitors may obtain regulatory approval of their drugs before we are able to, which may limit our ability to develop or commercialize our product candidates. Our competitors may also develop therapies that are safer, more effective, more widely accepted or less expensive than ours, and may also be more successful than we are in manufacturing and marketing their drugs. These advantages could render our product candidates obsolete or non-competitive before we can recover the costs of such product candidates' development and commercialization.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
We may explore strategic collaborations that may never materialize or we may be required to relinquish important rights to and control over the development and commercialization of our product candidates to any future collaborators.
Over time, our business strategy includes acquiring or in-licensing additional product candidates for treatments of diseases with high unmet medical need. As a result, we intend to periodically explore a variety of possible strategic collaborations in an effort to gain access to additional product candidates or resources. These strategic collaborations may include partnerships with large strategic partners, particularly for the development of DPN treatments using AT-001. At the current time however, we cannot predict what form such a strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and strategic collaborations can be complicated and time consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic collaborations because of the numerous risks and uncertainties associated with establishing them.
Future collaborations could subject us to a number of risks, including:
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Even if any product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.
Even if any product candidates receive marketing approval, they may fail to gain market acceptance by physicians, patients, third-party payors and others in the medical community. If such product candidates do not achieve an adequate level of acceptance, we may not generate significant drug revenue and may not become profitable. The degree of market acceptance of any product candidate, if approved for commercial sale, will depend on a number of factors, including but not limited to:
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Our efforts to educate physicians, patients, third-party payors and others in the medical community on the benefits of our product candidates may require significant resources and may never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness of our product candidates. Because we expect sales of our product candidates, if approved, to generate substantially all of our revenues for the foreseeable future, the failure of our product candidates to find market acceptance would harm our business.
Even if we obtain regulatory approvals for our product candidates, they will remain subject to ongoing regulatory oversight.
Even if we obtain regulatory approvals for our product candidates, such approvals will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for our product candidates may also be subject to a REMS, limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 trials, and surveillance to monitor the quality, safety and efficacy of the drug. Such regulatory requirements may differ from country to country depending on where we have received regulatory approval.
In addition, drug manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, requirements and adherence to commitments made in the NDA or foreign marketing application. If we, or a regulatory authority, discover previously unknown problems with a drug, such as adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured or if a regulatory authority disagrees with the promotion, marketing or labeling of that drug, a regulatory authority may impose restrictions relative to that drug, the manufacturing facility or us, including requesting a recall or requiring withdrawal of the drug from the market or suspension of manufacturing.
If we fail to comply with applicable regulatory requirements following approval of our product candidates, a regulatory authority may:
Moreover, the FDA strictly regulates the promotional claims that may be made about drug products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product's approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal and administrative penalties.
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Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and harm our business, financial condition, results of operations and prospects.
The FDA's and other regulatory authorities' policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and to spur innovation, but its ultimate implementation is unclear. If we are not able to maintain regulatory compliance with the Cures Act, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.
In addition, we cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA's ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions, including the executive orders, will be implemented and the extent to which they will affect the FDA's ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA's ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be successful in commercializing them, if and when they are approved.
To successfully commercialize any product candidate that may result from our development programs, we will need to build out our sales and marketing capabilities, either on our own or with others. The establishment and development of our own commercial team or the establishment of a contract sales force to market any product candidate we may develop will be expensive and time-consuming and could delay any drug launch. Moreover, we cannot be certain that we will be able to successfully develop this capability. We may seek to enter into collaborations with other entities to utilize their established marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If any current or future collaborators do not commit sufficient resources to commercialize our product candidates, or we are unable to develop the necessary capabilities on our own, we may be unable to generate sufficient revenue to sustain our business. We compete with many companies that currently have extensive, experienced and well-funded marketing and sales operations to recruit, hire, train and retain marketing and sales personnel. We will likely also face competition if we seek third parties to assist us with the sales and marketing efforts of our product candidates. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.
Even if we obtain and maintain approval for our product candidates from the FDA, we may never obtain approval outside the United States, which would limit our market opportunities.
Approval of a product candidate in the United States by the FDA does not ensure approval of such product candidate by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Sales of our product candidates outside the United States will be subject to
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foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable foreign regulatory authorities also must approve the manufacturing and marketing of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for any product candidates, if approved, is also subject to approval. Obtaining approval for our product candidates in the European Union from the European Commission following the opinion of the European Medicines Agency, or the EMA, if we choose to submit a marketing authorization application there, would be a lengthy and expensive process. Even if a product candidate is approved, the EMA may limit the indications for which the drug may be marketed, require extensive warnings on the drug labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our product candidates in certain countries.
Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for our product candidates may be withdrawn. If we fail to comply with the applicable regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business, financial condition, results of operations and prospects could be harmed.
If we commercialize our product candidates outside the United States, a variety of risks associated with international operations could harm our business.
We intend to seek approval to market our product candidates outside the United States, and may do so for future product candidates. If we market approved products outside the United States, we expect that we will be subject to additional risks in commercialization, including:
We have no prior experience in these areas. In addition, there are complex regulatory, tax, labor and other legal requirements imposed by many of the individual countries in which we may operate,
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with which we will need to comply. Many biopharmaceutical companies have found the process of marketing their products in foreign countries to be challenging.
Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any product candidate that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and may face an even greater risk if we commercialize any product candidate that we may develop. If we cannot successfully defend ourselves against claims that any such product candidates caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
Any such outcomes could negatively impact our business, financial condition, results of operations and prospects.
Our insurance policies may be inadequate and potentially expose us to unrecoverable risks.
Although we maintain product liability insurance coverage, such insurance may not be adequate to cover all liabilities that we may incur. We anticipate that we will need to increase our insurance coverage each time we commence a clinical trial and if we successfully commercialize any product candidate. Insurance availability, coverage terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify; however, we may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain appropriate insurance coverage and insurers may not respond as we intend to cover insurable events that may occur. We have observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.
Risks Related to Regulatory Compliance
Our relationships with customers, physicians, and third-party payors are subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, health information privacy and security laws, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors subject us to various federal and state fraud and abuse laws and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute, the federal civil and criminal false claims laws and the law commonly referred
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to as the Physician Payments Sunshine Act and regulations. For additional information on the healthcare laws and regulations that we may be subject to, see "BusinessGovernment Regulation and Product Approval."
Ensuring that our business arrangements with third parties comply with applicable healthcare laws and regulations will likely be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, contractual damages, reputational harm and the curtailment or restructuring of our operations.
If the physicians or other providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs. Even if resolved in our favor, litigation or other legal proceedings relating to healthcare laws and regulations may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could 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 substantial adverse effect on the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, manufacturing, sales, marketing or distribution activities. Uncertainties resulting from the initiation and continuation of litigation or other proceedings relating to applicable healthcare laws and regulations could have an adverse effect on our ability to compete in the marketplace.
Coverage and adequate reimbursement may not be available for our product candidates, which could make it difficult for us to sell profitably, if approved.
Market acceptance and sales of any product candidates that we commercialize, if approved, will depend in part on the extent to which reimbursement for these drugs and related treatments will be available from third-party payors, including government health administration authorities, managed care organizations and other private health insurers. Third-party payors decide which therapies they will pay for and establish reimbursement levels. While no uniform policy for coverage and reimbursement exists in the United States, third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any product candidates that we develop will be made on a payor-by-payor basis. Therefore, one payor's determination to provide coverage for a drug does not assure that other payors will also provide coverage, and adequate reimbursement, for the drug. Additionally, a third-party payor's decision to provide coverage for a therapy does not imply that an adequate reimbursement rate will be approved. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be placed. The position on a payor's list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Patients who are prescribed treatments for their conditions and providers prescribing such 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.
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Third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will be available for any drug that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage and reimbursement may impact the demand for, or the price of, any drug for which we obtain marketing approval. If coverage and adequate reimbursement are not available, or are available only at limited levels, we may not be able to successfully commercialize any product candidates that we develop.
Healthcare legislative reform measures may have a negative impact on our business and results of operations.
In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
Further, in March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the PPACA, was passed, which substantially changed the way healthcare is financed by both governmental and private payors in the United States. Some of the provisions of the PPACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the PPACA. For example, the Tax Act includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly referred to as the "individual mandate." Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called "Cadillac" tax on certain high-cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the "donut hole." In July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA-qualified health plans and health insurance issuers under the PPACA adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the PPACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the PPACA are invalid as well. While the Texas District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to repeal and
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replace the PPACA will impact the PPACA. Congress may consider additional legislation to repeal or repeal and replace other elements of the PPACA. We continue to evaluate the effect that the PPACA and its possible repeal and replacement have on our business.
Other legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendments to the statute, including the BBA, which will remain in effect through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Additional changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and CHIP Reauthorization Act of 2015, which will be fully implemented in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall physician reimbursement.
Further, in the United States there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under government payor programs, and review the relationship between pricing and manufacturer patient programs. While some of the proposed measures will require authorization through additional legislation to become effective, the U.S. Congress and the Trump administration have indicated that they will continue to seek new legislative and/or administrative measures to control drug costs. We expect that additional U.S. federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that the U.S. federal government will pay for healthcare products and services, which could result in reduced demand for our current or any future product candidates or additional pricing pressures. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action in the United States or any other jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing or new requirements or policies, or if we or such third parties are not able to maintain regulatory compliance, our current or any future product candidates we may develop may lose any regulatory approval that may have been obtained and we may not achieve or sustain profitability.
Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.
We expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug, which could have an adverse effect on demand for our product candidates. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products. For additional information on healthcare reform, see "BusinessGovernment Regulation and Product Approval."
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Risks Related to Our Dependence on Third Parties
We intend to rely on third parties to produce clinical and commercial supplies of our product candidates.
We do not own or operate facilities for drug manufacturing, storage and distribution, or testing. We are dependent on third parties to manufacture the clinical supplies of our current and any future product candidates. The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the cGMP requirements, for manufacture of both active drug substance and finished drug product. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, we will not be able to secure and/or maintain regulatory approval for our product candidates. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved. Any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates.
We also intend to rely on third-party manufacturers to supply us with sufficient quantities of our product candidates to be used, if approved, for commercialization. We do not yet have a commercial supply agreement for commercial quantities of drug substance or drug product. If we are not able to meet market demand for any approved product, it would negatively impact our ability to generate revenue, harm our reputation, and could have an adverse effect on our business and financial condition.
Further, our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including:
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In addition, if we enter into a strategic collaboration with a third party for the commercialization of our current or any future product candidates, we will not be able to control the amount of time or resources that they devote to such efforts. If any strategic collaborator does not commit adequate resources to the marketing and distribution of our product candidates, it could limit our potential revenues.
Any of these events could lead to clinical trial delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize our current or any future product candidates once approved. Some of these events could be the basis for FDA action, including injunction, request for recall, seizure, or total or partial suspension of production.
Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business.
Our research and development activities and our third-party manufacturers' and suppliers' activities involve the generation, storage, use and disposal of hazardous materials, including the components of our product candidates and other hazardous compounds and wastes. We and our manufacturers and suppliers are subject to environmental, health and safety laws and regulations governing, among other matters, the use, manufacture, generation, storage, handling, transportation, discharge and disposal of these hazardous materials and wastes and worker health and safety. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers' facilities pending their use and disposal. We cannot eliminate the risk of contamination or injury, which could result in an interruption of our commercialization efforts, research and development efforts and business operations, damages and significant cleanup costs and liabilities under applicable environmental, health and safety laws and regulations. We also cannot guarantee that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials and wastes generally comply with the standards prescribed by these laws and regulations. We may be held liable for any resulting damages costs or liabilities, which 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, health and safety 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. Failure to comply with these environmental, health and safety laws and regulations may result in substantial fines, penalties or other sanctions. We do not currently carry hazardous waste insurance coverage.
We rely on third parties to conduct, supervise and monitor our preclinical studies and clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm our business.
We do not currently have the ability to independently conduct any clinical trials. We intend to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our preclinical studies and clinical trials, and we expect to have limited influence over their actual performance. We rely upon CROs to monitor and manage data for our clinical programs, as well as the execution of future
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preclinical studies. We expect to control only certain aspects of our CROs' activities. Nevertheless, we will be responsible for ensuring that each of our preclinical studies and 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 are required to comply with the good laboratory practices, or GLPs, and GCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities in the form of International Conference on Harmonization guidelines for any of our product candidates that are in preclinical and clinical development. The regulatory authorities enforce GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. Although we rely on CROs to conduct GCP-compliant clinical trials, we remain responsible for ensuring that each of our GLP preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol and applicable laws and regulations. If we or our CROs fail to comply with GCPs, the clinical data 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 approving our marketing applications. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of subjects, we may be required to repeat clinical trials, which would delay the regulatory approval process.
Our reliance on third parties to conduct clinical trials will result in less direct control over the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with CROs and other third parties can be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Such parties may:
These factors may adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or fail to comply with regulatory requirements, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, any product candidate that we develop. As a result, our financial results and the commercial prospects for any product candidate that we develop would be harmed, our costs could increase, and our ability to generate revenue could be delayed. While we will have agreements governing their activities, our CROs will not be our employees, and we will not control whether or not they devote sufficient time and resources to our future clinical and preclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our business. We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may reduce our trade secret protection and allow our potential competitors to access and exploit our proprietary technology.
If our relationship with any of these CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or adding additional CROs involves substantial cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can negatively impact our ability to meet our desired clinical development timelines. While we intend to carefully manage our relationships with our CROs, there can be no assurance that we will not
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encounter challenges or delays in the future or that these delays or challenges will not have a negative impact on our business, financial condition and prospects.
In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the trial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our product candidates.
Risks Related to Our Intellectual Property
Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. If we breach our license agreement with Columbia University or any of the other agreements under which we acquired, or will acquire, the intellectual property rights to our product candidates, we could lose the ability to continue the development and commercialization of the related product.
The licensing of intellectual property is of critical importance to our business and to our current and future product candidates, and we expect to enter into additional such agreements in the future. In particular, our current product candidates AT-001, AT-003 and AT-007 are dependent on our license agreement with The Trustees of Columbia University in the City of New York, or Columbia University. Pursuant to the license agreement with Columbia University, or the 2016 Columbia Agreement, Columbia University granted us an exclusive license under two important patent families, and a nonexclusive license to certain know-how, owned by Columbia University to develop, manufacture or commercialize certain compounds, including AT-001, AT-003 and AT-007, for the diagnosis and treatment of human and animal diseases and conditions. The license grant is worldwide, with the exception of the patent family that covers AT-001 and AT-003. The license grant for the patent family that covers AT-001 and AT-003 excludes patent rights in China, Taiwan, Hong Kong and Macao, which Columbia University has exclusively licensed to a third-party. We cannot prevent Columbia University's third-party licensee from developing, manufacturing or commercializing certain compounds, including AT-001 and AT-003, but not including AT-007, in China, Taiwan, Hong Kong and Macao, and we cannot develop, manufacture or commercialize AT-001 or AT-003 in these countries, which could have a negative effect on our business.
In addition, we do not have the right to control the preparation, filing, prosecution and maintenance of patents and patent applications covering the technology that we license under the 2016 Columbia Agreement. Therefore, we cannot always be certain that these patents and patent applications will be prepared, filed, prosecuted and maintained in a manner consistent with the best interests of our business. Although we have a right to have our comments considered in connection with the prosecution process, if Columbia University fails to prosecute and maintain such patents, or loses rights to those patents or patent applications as a result of its control of the prosecution activities, the rights we have licensed may be reduced or eliminated, and our right to develop and commercialize any of our product candidates that are the subject of such licensed rights could be adversely affected.
If we fail to meet our obligations under the 2016 Columbia Agreement in any material respect, and fail to cure such breach in a timely fashion, then Columbia University may terminate the 2016 Columbia Agreement. If the 2016 Columbia Agreement is terminated, and we lose our intellectual property rights under the 2016 Columbia Agreement, this may result in a complete termination of our product development and any commercialization efforts for AT-001, AT-003 and AT-007. While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the 2016 Columbia Agreement, we may not be able
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to do so in a timely manner, at an acceptable cost or at all. For more information on the 2016 Columbia Agreement, see the section titled "BusinessExclusive License Agreement with Columbia University."
Furthermore, license agreements we enter into in the future may not provide exclusive rights to use intellectual property and technology in all relevant fields of use and in all territories in which we may wish to develop or commercialize our technology and products. As a result, we may not be able to prevent competitors from developing and commercializing competitive products in territories included in all of our licenses.
If we are unable to obtain and maintain patent protection for our product candidates and technology, or if the scope of the patent protection obtained is not sufficiently broad or robust, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our product candidates and technology may be adversely affected.
Our success depends, in large part, on our ability to obtain and maintain patent protection in the United States and other countries with respect to our product candidates and our technology. We and our licensors have sought, and intend to seek, to protect our proprietary position by filing patent applications in the United States and abroad related to our product candidates and our technology that are important to our business.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has, in recent years, been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates or which effectively prevent others from commercializing competitive technologies and product candidates. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our licensors were the first to file a patent application relating to any particular aspect of a product candidate. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States can be initiated by such third party, or by the U.S. Patent and Trademark Office, or USPTO, itself, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable 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.
We or our licensors have not pursued or maintained, and may not pursue or maintain in the future, patent protection for our product candidates in every country or territory in which we may sell our products, if approved. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from infringing our patents in all countries outside the United States, or from selling or importing products that infringe our patents in and into the United States or other jurisdictions.
Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if the patent applications we license or own do issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative products in a non-infringing manner.
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The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Furthermore, our owned and in-licensed patents may be subject to a reservation of rights by one or more third parties. For example, the research resulting in certain of our owned and in-licensed patent rights and technology was funded in part by the U.S. government. As a result, the government may have certain rights, or march-in rights, to such patent rights and technology. When new technologies are developed with government funding, the government generally obtains certain rights in any resulting patents, including a nonexclusive license authorizing the government to use the invention for noncommercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise march-in rights to use or allow third parties to use our licensed technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, our rights in such inventions may be subject to certain requirements to manufacture products embodying such inventions in the United States. Any exercise by the government of such rights could harm our competitive position, business, financial condition, results of operations and prospects.
Obtaining and maintaining our patent rights depends on compliance with various procedural, document submission, fee payment and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and/or patent applications will have to be paid to the USPTO and various government patent agencies outside the United States over the lifetime of our owned and licensed patents and/or applications and any patent rights we may own or license in the future. We rely on our service providers or our licensors to pay these fees. The USPTO and various non-U.S. government patent agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and we are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, nonpayment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our products or technologies, we may not be able to stop a competitor from marketing products that are the same as or similar to our product candidates, which would have an adverse effect on our business. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market and this circumstance could harm our business.
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In addition, if we fail to apply for applicable patent term extensions or adjustments, we will have a more limited time during which we can enforce our granted patent rights. In addition, if we are responsible for patent prosecution and maintenance of patent rights in-licensed to us, any of the foregoing could expose us to liability to the applicable patent owner.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Given the amount of time required for the development, testing and regulatory review of product candidates such as AT-001, AT-003 and AT-007, patents protecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms in the United States and, if available, in other countries where we have or will obtain patent rights. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration of the patent, provided that the patent is not enforceable for more than 14 years from the date of drug approval, which is limited to the approved indication (or any additional indications approved during the period of extension). Furthermore, only one patent per approved product can be extended and only those claims covering the approved product, a method for using it or a method for manufacturing it may be extended. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their drug earlier than might otherwise be the case.
Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a negative impact on the success of our business.
Our commercial success depends, in part, upon our ability and the ability of others with whom we may collaborate to develop, manufacture, market and sell our current and any future product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights and intellectual property of third parties. The biotechnology and pharmaceutical industries are characterized by extensive and complex litigation regarding patents and other intellectual property rights. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current and any future product candidates and technology, including interference proceedings, post grant review and inter partes review before the USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, which could have a negative impact on our ability to commercialize our current and any future product candidates. In order to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of validity. As this is a high burden and requires us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. Moreover, given the vast number of patents in our field of technology, we cannot be certain that we do not infringe existing patents or that we will not infringe patents that may be granted in the future. Other companies and research institutions have filed, and may file in the future, patent applications related to AR inhibitors and their therapeutic use. Some of these patent applications have already been allowed or issued, and others may issue in the future. While we may decide to initiate proceedings to challenge
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the validity of these or other patents in the future, we may be unsuccessful, and courts or patent offices in the United States and abroad could uphold the validity of any such patent. Furthermore, because patent applications can take many years to issue and may be confidential for 18 months or more after filing, and because pending patent claims can be revised before issuance, there may be applications now pending which may later result in issued patents that may be infringed by the manufacture, use or sale of our product candidates. Regardless of when filed, we may fail to identify relevant third-party patents or patent applications, or we may incorrectly conclude that a third-party patent is invalid or not infringed by our product candidates or activities. If a patent holder believes that our product candidate infringes its patent, the patent holder may sue us even if we have received patent protection for our technology. Moreover, we may face patent infringement claims from nonpracticing entities that have no relevant drug revenue and against whom our own patent portfolio may thus have no deterrent effect. If a patent infringement suit were threatened or brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the drug or product candidate that is the subject of the actual or threatened suit.
If we are found to infringe a third party's valid and enforceable intellectual property rights, we could be required to obtain a license from such third party to continue developing, manufacturing and marketing our product candidate(s) and technology. Under any such license, we would most likely be required to pay various types of fees, milestones, royalties or other amounts. Moreover, we may not be able to obtain any required license on commercially reasonable terms or at all.
The licensing or acquisition of third-party intellectual property rights is a competitive area, and more established companies may also pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, capital resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment or at all. If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of the relevant program or product candidate, which could have an adverse effect on our business, financial condition, results of operations and prospects. Furthermore, even if we were able to obtain a license, it could be nonexclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make substantial licensing and royalty payments. We could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology or product candidate. In addition, we could be found liable for monetary damages, including treble damages and attorneys' fees, if we are found to have willfully infringed a patent or other intellectual property right. We may be required to indemnify collaborators or contractors against such claims. A finding of infringement could prevent us from manufacturing and commercializing our current or any future product candidates or force us to cease some or all of our business operations, which could harm our business. Even if we are successful in defending against such claims, litigation can be expensive and time-consuming and would divert management's attention from our core business. 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 an adverse effect on the price of our common stock.
Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects.
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We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Certain of our employees, consultants or advisors are currently, or were previously, employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual's current or former employer. 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. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In addition, we may in the future be subject to claims by our former employees or consultants asserting an ownership right in our patents or patent applications, as a result of the work they performed on our behalf. Although it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own, and we cannot be certain that our agreements with such parties will be upheld in the face of a potential challenge or that they will not be breached, for which we may not have an adequate remedy. The assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.
We may be involved in lawsuits to protect or enforce our patents, the patents of our licensors or our other intellectual property rights, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file legal claims, which can be expensive and time-consuming and are likely to divert significant resources from our core business, including distracting our technical and management personnel from their normal responsibilities. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our owned or licensed patents at risk of being invalidated or interpreted narrowly and could put our owned or licensed patent applications at risk of not issuing. The initiation of a claim against a third party might also cause the third party to bring counterclaims against us, such as claims asserting that our patent rights are invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review, post-grant review, or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is or will be no invalidating prior art, of which we and the patent examiner
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were unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in the defense of any licensed patents against challenge by a third party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or future product candidates. Such a loss of patent protection could harm our business.
We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States. Our business could be harmed if in litigation the prevailing party does not offer us a license, or if the license offered as a result is not on commercially reasonable terms. Any litigation or other proceedings to enforce our intellectual property rights may fail, and even if successful, may result in substantial costs and distract our management and other employees.
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 an adverse effect on the price of our common stock.
We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating or from successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have an adverse effect on our ability to compete in the marketplace.
Changes in U.S. patent law or the patent law of other countries or jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our current and any future product candidates.
Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO-administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. However, the America Invents 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 an adverse effect on our business, financial condition, results of operations, and prospects.
In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to
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obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce patents that we own, have licensed or might obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or have licensed or that we may obtain in the future.
We may not be able to protect our intellectual property rights throughout the world, which could negatively impact our business.
Filing, prosecuting and defending patents covering our current and any future product candidates in all countries throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we or our licensors have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents, and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so 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 intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
Reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Since we rely on third parties to help us discover, develop and manufacture our current and any future product candidates, or if we collaborate with third parties for the development, manufacturing or commercialization of our current or any future product candidates, we must, at times, share trade secrets with them. We may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development partnerships or similar agreements. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar
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agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure could have an adverse effect on our business and results of operations.
In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets. Despite our efforts to protect our trade secrets, we may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these agreements. Moreover, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our confidential information or proprietary technology and processes. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the collaborators, scientific advisors, employees, contractors and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets as a result. Moreover, if confidential information that is licensed or disclosed to us by our partners, collaborators, or others is inadvertently disclosed or subject to a breach or violation, we may be exposed to liability to the owner of that confidential information. Enforcing a claim that a third-party illegally or unlawfully obtained and is using our trade secrets, like patent litigation, is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent and trademark protection for our product candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect our trade secrets, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees, advisors and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective. In addition, we may not be able to obtain adequate remedies for any such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets.
Moreover, our competitors may independently develop knowledge, methods and know-how equivalent to our trade secrets. Competitors could purchase our products and replicate some or all of the competitive advantages we derive from our development efforts for technologies on which we do not have patent protection. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade
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secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
We also seek to preserve the integrity and confidentiality of our data and other confidential information by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and detecting the disclosure or misappropriation of confidential information and enforcing a claim that a party illegally disclosed or misappropriated confidential information is difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach. In addition, our confidential information may otherwise become known or be independently discovered by competitors, in which case we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us.
Any trademarks we may obtain may be infringed or successfully challenged, resulting in harm to our business.
We expect to rely on trademarks as one means to distinguish any of our product candidates that are approved for marketing from the products of our competitors. We have not yet selected trademarks for our product candidates and have not yet begun the process of applying to register trademarks for our current or any future product candidates. Once we select trademarks and apply to register them, our trademark applications may not be approved. Third parties may oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks, and we may not have adequate resources to enforce our trademarks.
In addition, any proprietary name we propose to use with our current or any other product candidate in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.
Intellectual property rights do not necessarily address all potential threats to our business.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business. The following examples are illustrative:
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Risks Related to Our Business Operations, Employee Matters and Managing Growth
We are highly dependent on the services of our Chief Executive Officer and Chairman, Dr. Shoshana Shendelman, and our Chief Medical Officer, Dr. Riccardo Perfetti, and if we are not able to retain these members of our management team or recruit and retain additional management, clinical and scientific personnel, our business will be harmed.
We are highly dependent on our Chief Executive Officer and Chairman, Dr. Shoshana Shendelman, and our Chief Medical Officer, Dr. Riccardo Perfetti. Each of them may currently terminate their employment with us at any time and will continue to be able to do so after the closing of this offering. The loss of the services of either of these persons could impede the achievement of our research, development and commercialization objectives.
Recruiting and retaining other senior executives, qualified scientific and clinical personnel and, if we progress the development of any of our product candidates, commercialization, manufacturing and sales and marketing personnel, will be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize our product candidates. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high-quality personnel, our ability to pursue our growth strategy will be limited.
Our future performance will also depend, in part, on our ability to successfully integrate newly hired executive officers into our management team and our ability to develop an effective working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of management could result in inefficiencies in the development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations. Additionally, we do not currently maintain "key person" life insurance on the lives of our executives or any of our employees.
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We expect to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.
As of December 31, 2018, we had four full-time employees. As the clinical development of our product candidates progresses, we also expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of research, drug development, regulatory affairs and, if any of our product candidates receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer security breaches, which could result in a significant disruption of our product development programs and our ability to operate our business effectively, and adversely affect our business and operating results.
Our internal computer systems, cloud-based computing services and those of our current and any future collaborators and other contractors or consultants are vulnerable to damage or interruption from computer viruses, data corruption, cyber-based attacks, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Furthermore, federal, state and international laws and regulations, such as the European Union's General Data Protection Regulation, or the GDPR, which took effect in May 2018, can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, our software systems include cloud-based applications that are hosted by third-party service providers with security and information technology systems subject to similar risks. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidates could be delayed.
Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in other jurisdictions, provide accurate information to the FDA and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct,
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kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, contractual damages, reputational harm and the curtailment or restructuring of our operations, any of which could have a negative impact on our business, financial condition, results of operations and prospects.
Any future acquisitions or strategic collaborations may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and/or subject us to other risks.
From time to time, we may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary drugs, intellectual property rights, technologies or businesses, as deemed appropriate to carry out our business plan. Any potential acquisition or strategic partnership may entail numerous risks, including:
In addition, if we engage in future acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses, and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities, and this inability could impair our ability to grow or obtain access to technology or drugs that may be important to the development of our business.
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Risks Related to This Offering and Ownership of Our Common Stock
No public market for our common stock currently exists, and a public market may not develop or be liquid enough for you to sell your shares quickly or at market price.
Prior to this offering, there has not been a public market for our common stock. If an active trading market for our common stock does not develop following this offering, you may not be able to sell your shares quickly or at the market price. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to acquire other companies or technologies by using our common stock as consideration. The initial public offering price of our common stock will be determined by negotiations between us and representatives of the underwriters and may not be indicative of the market prices of our common stock that will prevail in the trading market.
The market price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.
The market price of our common stock is likely to be volatile. The stock market in general and the market for biopharmaceutical and pharmaceutical companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this prospectus, the market price for our common stock may be influenced by the following:
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These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from selling their shares at or above the price paid for the shares and may otherwise negatively affect the liquidity of our common stock.
Some companies that have experienced volatility in the trading price of their shares have been the subject of securities class action litigation. Any lawsuit to which we are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our business practices. Defending against litigation is costly and time-consuming, and could divert our management's attention and our resources. Furthermore, during the course of litigation, there could be negative public announcements of the results of hearings, motions or other interim proceedings or developments, which could have a negative effect on the market price of our common stock.
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 shares of our common stock outstanding as of December 31, 2018, upon the completion of this offering, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately % of our outstanding common stock. If our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock acted together, they may be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. The concentration of voting power and transfer restrictions could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in the management of our company in ways with which other stockholders disagree.
If research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or financial analysts. Equity research analysts may elect not to provide research coverage of our common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our shares could decline if one or more equity research analysts downgrade our shares or issue other unfavorable commentary or research about us. If one or more equity research analysts cease coverage of us or fail to publish reports on us regularly, demand for our shares could decrease, which in turn could cause the trading price or trading volume of our common stock to decline.
If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common
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stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $ per share, representing the difference between our pro forma as adjusted net tangible book value per share after this offering and the initial public offering price per share. After this offering, we will also have outstanding options and warrants to purchase common stock with exercise prices lower than the initial public offering price. To the extent these outstanding options or warrants are exercised, there will be further dilution to investors in this offering. See the section titled "Dilution" for additional information.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
You should not rely on an investment in our common stock to provide dividend income. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Investors seeking cash dividends should not purchase our common stock in this offering.
We have broad discretion in the use of our cash and cash equivalents, including the net proceeds from this offering, and may use them ineffectively, in ways with which you do not agree or in ways that do not increase the value of your investment.
Our management will have broad discretion in the application of our cash and cash equivalents, including 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. The failure by our management to apply these funds effectively could result in additional operating losses that could have a negative impact on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest our cash and cash equivalents, including the net proceeds from this offering, in a manner that does not produce income or that loses value. See the section titled "Use of Proceeds" for additional information.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is performing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to certain restrictions described below. These sales, or the perception in the market that holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding shares of common stock based on the number of shares outstanding as of December 31, 2018, and assuming no exercise by the underwriters' over-allotment option. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. The remaining shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the sections titled "Shares Eligible for Future Sale" and "Underwriting." Moreover, upon the completion of this offering, holders of an aggregate of approximately 136,451 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We further intend to register all shares of common stock that we may issue in the future or have issued to date under our equity compensation plans. Once we register these shares, they can be freely sold in the public market
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upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the sections titled "Underwriting" and "Shares Eligible for Future Sale."
We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an "emerging growth company," or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not EGCs, including:
We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile. We may take advantage of some or all of these reporting exemptions until we are no longer an EGC. We will remain an EGC until the earlier of (i) five years following the completion of this offering, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the first fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Under Section 107(b) of the JOBS Act, EGCs can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not EGCs.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
As a public company, and particularly after we are no longer an EGC, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and rules subsequently implemented by the SEC and The Nasdaq Stock Market LLC have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For
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example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an EGC, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, with respect to any state actions or proceedings under Delaware statutory or common law, the Court of Chancery of the State of Delaware is the exclusive forum for:
These exclusive-forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find an exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "aim," "anticipate," "assume," "believe," "contemplate," "continue," "could," "design," "due," "estimate," "expect," "goal," "intend," "may," "objective," "plan," "predict," "positioned," "potential," "seek," "should," "target," "will," "would" and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled "Risk Factors" and elsewhere in this prospectus, regarding, among other things:
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The foregoing list of risks is not exhaustive. Other sections of this prospectus may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.
In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the section titled "Risk Factors" for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, do not protect any forward-looking statements that we make in connection with this offering.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.
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Certain market and industry data included in this prospectus were obtained from market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of the market and industry data used in this prospectus involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled "Risk Factors." 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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We estimate that the net proceeds to us from this offering will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase up to additional shares of common stock to cover over-allotments), based on an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by $ million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares of common stock offered by us, would increase or decrease the net proceeds to us by $ million, assuming the assumed initial public offering price per share remains the same, and after deducting the estimated underwriting discounts and commissions.
The principal purposes of this offering are to increase our capitalization and financial flexibility, establish a public market for our common stock and to facilitate future access to the public equity markets by us, our employees and our stockholders, obtain additional capital to support our operations and increase our visibility in the marketplace.
We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:
We may also use a portion of the remaining net proceeds to in-license, acquire or invest in complementary businesses, technologies, products or assets. However, we have no current commitments or obligations to do so.
This expected use of the net proceeds from this offering represents our intentions based on our current plans and business conditions, which could change in the future as our plans and business conditions evolve. Further, due to the uncertainties inherent in the drug development process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes.
Our management will have broad discretion over the use of the net proceeds from this offering, and our investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. The amounts and timing of our expenditures will depend upon numerous factors including the results of our research and development efforts, the timing and success of preclinical studies and any ongoing clinical trials or clinical trials we may commence in the future, the timing of regulatory submissions and the amount of cash obtained through current and any future collaborations.
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The expected net proceeds from this offering, together with our cash and cash equivalents, will not be sufficient for us to fund any of our product candidates through regulatory approval, and we will need to raise additional capital to complete the development and commercialization of our product candidates. We expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, and license and development agreements. We have based these estimates on assumptions that may prove to be incorrect, and we could expend our available capital resources at a rate greater than we currently expect.
Pending the use of the net proceeds from this offering as described above, we intend to invest the net proceeds in a variety of capital preservation instruments, including short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.
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We have never declared or paid cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business. Any future determination related to dividend policy will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. In addition, our ability to pay cash dividends on our capital stock in the future may be limited by the terms of any future debt or preferred securities we issue or any credit facilities we enter into.
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The following table sets forth our cash and cash equivalents, and our capitalization as of December 31, 2018 on:
You should read this table together with the sections titled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.
|
As of December 31, 2018 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except share and per share amounts)
|
Actual |
Pro
Forma |
Pro Forma
as Adjusted (1) |
|||||||
Cash and cash equivalents |
$ | 18,748 | $ | 21,879 | $ | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Series A convertible preferred stock, $0.0001 par value per share; 56,000 shares authorized, issued and outstanding, actual; 56,000 shares authorized and no shares issued or outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted |
$ | 6,254 | $ | | $ | | ||||
Series B convertible preferred stock, $0.0001 par value per share; 141,000 shares authorized, 72,434 shares issued and outstanding, actual; 141,000 shares authorized and no shares issued or outstanding, pro forma; no shares authorized, issued, or outstanding, pro forma as adjusted |
29,156 | | | |||||||
Stockholders' (deficit) equity: |
||||||||||
Preferred stock, $0.0001 par value per share; no shares authorized, issued and outstanding, actual and pro forma; authorized, no shares issued or outstanding, pro forma as adjusted |
| | | |||||||
Common stock, $0.0001 par value per share; 370,000 shares authorized, 99,795 shares issued and outstanding, actual; 370,000 shares authorized and 236,246 shares issued and outstanding, pro forma; shares authorized and shares issued and outstanding, pro forma as adjusted |
| | | |||||||
Additional paid-in capital |
1,665 | 40,206 | ||||||||
Accumulated deficit |
(21,257 | ) | (21,257 | ) | ||||||
| | | | | | | | | | |
Total stockholders' (deficit) equity |
(19,592 | ) | 18,949 | |||||||
| | | | | | | | | | |
Total capitalization |
$ | 15,818 | $ | 18,949 | $ | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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The number of shares of our common stock to be outstanding after this offering is based on shares of common stock outstanding as of December 31, 2018, and excludes:
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If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.
Our historical net tangible book deficit as of December 31, 2018 was $(19.9) million, or $(199.43) per share of our common stock. Our historical net tangible book deficit represents our total tangible assets less total liabilities and preferred stock. Historical net tangible book deficit per share is our historical net tangible book deficit divided by the number of shares of our common stock outstanding as of December 31, 2018.
Our pro forma net tangible book value as of December 31, 2018 was $18.6 million, or $78.90 per share of our common stock, based on the total number of shares of our common stock outstanding as of December 31, 2018. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock, after giving effect to (i) the issuance and sale of 8,017 shares of Series B Preferred Stock and the receipt of net proceeds of approximately $3.1 million subsequent to December 31, 2018 and (ii) the conversion of all of the outstanding shares of our preferred stock into an aggregate of 136,451 shares of common stock upon completion of this offering.
After giving effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been $ million, or $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to new investors participating in this offering.
The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share |
$ | ||||||
Historical net tangible book deficit per share as of December 31, 2018 |
$ | (199.43 | ) | ||||
Pro forma increase in net tangible book value per share as of December 31, 2018 attributable to the pro forma transactions described above |
278.33 | ||||||
| | | | | | | |
Pro forma net tangible book value per share as of December 31, 2018 |
78.90 | ||||||
Increase in pro forma net tangible book value per share attributable to new investors participating in this offering |
|||||||
| | | | | | | |
Pro forma as adjusted net tangible book value per share after this offering |
|||||||
| | | | | | | |
Dilution per share to new investors participating in this offering |
$ | ||||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution per share to new investors participating in this offering by $ per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase of 1.0 million in the number of shares of common stock offered by us would increase the pro forma as adjusted net tangible book value after this offering by $ per share and decrease the dilution per share to new investors participating in this offering by $ per share, and a decrease of 1.0 million shares of
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common stock offered by us would decrease the pro forma as adjusted net tangible book value by $ per share, and increase the dilution per share to new investors in this offering by $ per share, assuming that the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise in full their option to purchase up to additional shares of common stock from us, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $ per share, representing an immediate increase to existing stockholders of $ per share, and dilution to new investors participating in this offering of $ per share.
The following table summarizes on the pro forma as adjusted basis described above, the differences between the number of shares purchased from us on an as converted basis, the total consideration paid and the weighted-average price per share paid by existing stockholders and by investors purchasing shares in this offering at the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page on this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $ million and, in the case of an increase, would increase the percentage of total consideration paid by new investors to % and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors to %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, an increase or decrease of 1.0 million shares in the number of shares offered by us, would increase or decrease the total consideration paid by new investors by $ million and, in the case of an increase, would increase the percentage of total consideration paid by new investors to % and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors to %, assuming that the assumed initial public offering price remains the same.
If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding upon the completion of this offering.
The foregoing discussion and tables above are based on 236,246 shares of common stock outstanding as of December 31, 2018, which includes the (i) issuance and sale of 8,017 shares of Series B preferred stock subsequent to December 31, 2018 and (ii) the conversion of all of the outstanding shares of our preferred stock upon the completion of this offering, and excludes:
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To the extent that any outstanding options or warrants are exercised, new options or other equity awards are issued under our equity incentive plans, or we issue additional shares in the future, there will be further dilution to new investors participating in this offering.
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The following tables set forth our selected statement of operations data for the years ended December 31, 2017 and 2018, and our selected balance sheet data as of December 31, 2017 and 2018, all of which have been derived from our financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. You should read the following selected financial data together with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and the related notes included elsewhere in this prospectus.
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands, except share and per share data)
|
2017 | 2018 | |||||
Summary of Operations Data: |
|||||||
Operating expenses: |
|||||||
Research and development |
$ | 3,703 | $ | 11,471 | |||
General and administrative |
582 | 2,047 | |||||
| | | | | | | |
Total operating expenses |
4,285 | 13,518 | |||||
| | | | | | | |
Loss from operations |
(4,285 | ) | (13,518 | ) | |||
Other income (expense), net: |
|||||||
Interest income (expense), net |
3 | (1,642 | ) | ||||
Loss on extinguishment of debt |
| (221 | ) | ||||
Other expense |
| (1,140 | ) | ||||
| | | | | | | |
Total other income (expense), net |
3 | (3,003 | ) | ||||
| | | | | | | |
Net loss |
$ | (4,282 | ) | $ | (16,521 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net loss per share: basic and diluted (1) |
$ | (43.76 | ) | $ | (166.47 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares used in computing net loss per share: basic and diluted (1) |
97,858 | 99,244 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Pro forma net loss per share (unaudited): basic and diluted (1) |
$ | (99.61 | ) | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average shares outstanding used in computing pro forma net loss per share (unaudited): basic and diluted (1) |
165,851 | ||||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
As of
December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2017 | 2018 | |||||
Balance Sheet Data: |
|||||||
Cash and cash equivalents |
$ | 3,277 | $ | 18,748 | |||
Working capital |
2,293 | 15,818 | |||||
Total assets |
3,286 | 20,246 | |||||
Preferred stock |
6,254 | 35,410 | |||||
Accumulated deficit |
(4,736 | ) | (21,257 | ) | |||
Total stockholders' (deficit) equity |
(3,961 | ) | (19,592 | ) |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this prospectus, our actual results could differ materially from the results described in or implied by these forward-looking statements.
Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in indications of high unmet medical need. We focus on molecules and pathways whose role in the disease process is well known based on prior research, but have previously failed to yield successful products due to poor efficacy and tolerability. Our unique approach to drug development leverages recent technological advances to design improved drugs, employs early use of biomarkers to confirm biological activity and focuses on abbreviated regulatory pathways. Our first molecular target is aldose reductase, or AR, an enzyme that converts glucose to sorbitol under oxidative stress conditions, and is implicated in multiple diseases. Prior attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. The detrimental consequences of AR activation have been well established by decades of prior research. Our AR program currently includes three small molecules, which are all potent and selective inhibitors of AR, but are engineered to have unique tissue permeability profiles to target different disease states, including diabetic complications, heart disease and a rare pediatric metabolic disease. Using similar strategies to our AR inhibitors, or ARI, program, we have also developed a program targeting selective inhibition of phosphatidylinositol 3-kinase, or PI3K, subunits that produced an early-stage oncology pipeline. The result of this unique multifaceted approach to drug development is a portfolio of highly specific and selective product candidates that we believe are significantly de-risked and can move quickly through the development process.
Since inception in 2016, our operations have focused on developing our product candidates, organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any product candidates approved for sale and have not generated any revenue. We have funded our operations primarily through the sale of equity and equity-linked securities. From inception through December 31, 2018, we have raised an aggregate of $28.7 million of gross proceeds from the sale of shares of our preferred stock.
We have incurred significant operating losses since inception in 2016. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of one or more of our product candidates. Our net loss was $4.3 million and $16.5 million for the years ended December 31, 2017 and 2018, respectively. As of December 31, 2018, we had an accumulated deficit of $21.3 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with our ongoing activities. As of December 31, 2018, we had cash and cash equivalents of $18.7 million.
We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or
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enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.
We believe that the net proceeds from the sales of 8,017 shares of Series B Preferred Stock subsequent to December 31, 2018 and the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for . We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and Capital Resources" below.
Components of Our Results of Operations
Revenue
Since inception, we have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses.
Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase for the foreseeable future as we continue clinical development for our product candidates and continue to discover and develop additional product candidates. If any of our product candidates enter into later stages of clinical development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Historically, we have incurred research and development expenses that primarily relate to the development of AT-001 and our ARI program, and as of 2018, AT-007. As we advance our product candidates, we expect to
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allocate our direct external research and development costs across each of the indications or product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive and finance functions. General and administrative expenses also include professional fees for legal, accounting, auditing, tax and consulting services; travel expenses; and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will increase in the future as we increase our general and administrative headcount to support our continued research and development and potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services; director and officer insurance costs; and investor and public relations costs.
Other Income (Expense), Net
Other income (expense), net consists of interest income (expense), net, loss on extinguishment of debt and other expenses. Interest income (expense), net consists primarily of our interest income on our cash and cash equivalents and interest expense related to the convertible promissory notes. Loss on extinguishment of debt consists of a loss on extinguishment related to the conversion of convertible promissory notes into Series B Preferred Stock. Other expense consists of adjustments to the fair value of embedded derivatives associated with certain conversion features of the convertible promissory notes and adjustments to the fair value of the warrant liability in connection with the convertible promissory notes.
Results of Operations
The following table summarizes our results of operations:
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
(in thousands)
|
|
|
|||||
Operating expenses: |
|||||||
Research and development |
$ | 3,703 | $ | 11,471 | |||
General and administrative |
582 | 2,047 | |||||
| | | | | | | |
Total operating expenses |
4,285 | 13,518 | |||||
| | | | | | | |
Loss from operations |
(4,285 | ) | (13,518 | ) | |||
| | | | | | | |
Other income (expense), net |
3 | (3,003 | ) | ||||
| | | | | | | |
Net loss |
$ | (4,282 | ) | $ | (16,521 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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Research and Development Expenses
The following table summarizes our research and development expenses:
|
Years Ended
December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2017 | 2018 | Increase | |||||||
(in thousands)
|
|
|
|
|||||||
Clinical and pre-clinical |
$ | 2,088 | $ | 5,083 | $ | 2,995 | ||||
Drug manufacturing and formulation |
1,015 | 4,938 | 3,923 | |||||||
Personnel expenses (including stock-based compensation) |
| 793 | 793 | |||||||
Regulatory and other research and development costs |
600 | 657 | 57 | |||||||
| | | | | | | | | | |
Total research and development expenses |
$ | 3,703 | $ | 11,471 | $ | 7,768 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Research and development expenses for the year ended December 31, 2017 were $3.7 million, compared to $11.5 million for the year ended December 31, 2018. The increase of approximately $7.8 million was primarily related to increased activity on our clinical trials, including an increase in clinical and pre-clinical expenses of $3.0 million and drug manufacturing and formulation expenses of $3.9 million, personnel expenses of $0.8 million due to the portion of the chief executive officer's salary that is allocated to research and development, the hiring of research and development personnel, including the chief medical officer, and other expenses of $0.1 million.
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
|
Years Ended
December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands)
|
2017 | 2018 | Increase | |||||||
Personnel expenses (including stock-based compensation) |
$ | 32 | $ | 424 | $ | 392 | ||||
Legal and professional fees |
466 | 853 | 387 | |||||||
Other expenses |
84 | 770 | 686 | |||||||
| | | | | | | | | | |
Total general and administrative expenses |
$ | 582 | $ | 2,047 | $ | 1,465 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
General and administrative expenses were $0.6 million for the year ended December 31, 2017, compared to $2.0 million for the year ended December 31, 2018. The increase of approximately $1.5 million was primarily related to personnel expenses of $0.4 million due to the portion of the chief executive officer's salary that is allocated to general and administrative and the hiring of other personnel, including the chief financial officer, professional and legal fees of $0.4 million due to the closing of multiple financings and increased IP work, and other expenses of $0.7 million, primarily due to recruiting efforts for the chief medical officer and rent.
Other Income (Expense), Net
Other income (expense), net was income of approximately $3,000 for the year ended December 31, 2017, compared to expense of $3.0 million for the year ended December 31, 2018. The change from income to expense was primarily related to interest expense on convertible promissory notes of $1.6 million, a loss on extinguishment related to the conversion of convertible promissory notes into Series B Preferred Stock of $0.2 million, and an increase of the fair value of the derivative liability of $1.0 million and an increase in the fair value of the warrant liability of $0.2 million, both related to the convertible promissory notes.
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Liquidity and Capital Resources
Since our inception through December 31, 2018, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. We expect our existing cash and cash equivalents of $18.7 million as of December 31, 2018, together with the net proceeds from the sale of 8,017 shares of Series B Preferred Stock subsequent to December 31, 2018 and the net proceeds from this offering, will be sufficient to fund our operating expenses and capital expenditure requirements through .
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
(in thousands)
|
2017 | 2018 | |||||
Net cash used in operating activities |
$ | (3,195 | ) | $ | (11,182 | ) | |
Net cash used in investing activities |
| | |||||
Net cash provided by financing activities |
6,470 | 26,653 | |||||
| | | | | | | |
Net increase (decrease) in cash and cash equivalents |
$ | 3,275 | $ | 15,471 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating Activities
During the year ended December 31, 2017, operating activities used $3.2 million, primarily comprising cash research and development spending, which excludes $0.5 million of research and development expense recognized for the non-cash issuance of common stock as partial consideration for the license obtained from Columbia University.
During the year ended December 31, 2018, operating activities used $11.2 million, primarily comprising cash research and development spending related to increased clinical and pre-clinical activities, drug manufacturing and formulation development.
Investing Activities
During the years ended December 31, 2017 and 2018, there were no investing activities.
Financing Activities
During the year ended December 31, 2017, net cash provided by financing activities was $6.5 million, net of cash issuance costs, received from the sale of our Series A convertible preferred stock, or Series A Preferred Stock.
During the year ended December 31, 2018, net cash provided by financing activities was $26.7 million. Cash proceeds, net of cash issuance costs, from the sale of our Series B Preferred Stock was $21.2 million and cash proceeds, net of cash issuance costs, from the sale of convertible promissory notes was $5.6 million. Cash proceeds from the exercise of stock options were approximately $47,000. The net cash provided by financing activities was partially offset by the payment of deferred financing costs related to our initial public offering of $0.1 million.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In
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addition, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We expect that our expenses will increase significantly if and as we:
Furthermore, following the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
Due to the numerous risks and uncertainties associated with the development of our product candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future funding requirements, both near and long-term, will depend on many factors, including:
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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through offerings of securities, private equity financing, debt financings, collaborations or other strategic transactions. The terms of financing may adversely affect the holdings or the rights of our stockholders. If we are unable to obtain funding, we may be required to delay, limit, reduce or terminate some or all of our research and product development, product portfolio expansion or future commercialization efforts.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2018:
|
Payments Due By Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Less Than
1 Year |
1 to 3 Years | 4 to 5 Years |
More Than
5 Years |
|||||||||||
(in thousands)
|
|
|
|
|
|
|||||||||||
Operating lease commitments (1) |
$ | 143 | $ | 143 | $ | | $ | | $ | | ||||||
| | | | | | | | | | | | | | | | |
Total |
$ | 143 | $ | 143 | $ | | $ | | $ | | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Except as disclosed in the table above, we have no long-term debt or capital leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase-order basis. We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the preceding table as the amount and timing of such payments are not known.
We may incur potential contingent payments upon our achievement of clinical, regulatory and commercial milestones, as applicable, or royalty payments that we may be required to make under the 2016 Columbia Agreement pursuant to which we have in-licensed certain intellectual property. Due to the uncertainty of the achievement and timing of the events requiring payment under this agreement, the amounts to be paid by us are not fixed or determinable at this time and are excluded from the table above. See the section titled "BusinessExclusive License Agreement with Columbia University."
Critical Accounting Policies and Significant Judgments and 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 U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial
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statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in greater detail in Note 1 to our financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Accrued Research and Development Expenses
We expense all costs incurred in performing research and development activities. Research and development expenses include materials and supplies, preclinical expenses, manufacturing expenses, contract services and other outside expenses. As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Stock-Based Compensation
We account for our stock-based compensation as expense in the statements of operations based on the awards' grant date fair values. We account for forfeitures as they occur by reversing any expense recognized for unvested awards.
We estimate the fair value of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the lack of a public market for our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to us, including stage of product development and life science industry focus. We use the simplified method as allowed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. The fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period.
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Determination of the Fair Value of Common Stock
As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors, with input from management, considering third-party valuations of our common stock as well as our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation through the date of the option grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .
In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:
The assumptions underlying these valuations represented management's best estimate, which involved inherent uncertainties and the application of management's judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.
Following the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock on the date of grant.
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Options Granted
The following table sets forth, by grant date, the number of shares subject to options granted from January 1, 2017 through December 31, 2018, the per share exercise price of the options, the fair value of common stock per share on each grant date, and the per share estimated fair value of the options:
Grant Date
|
Number of
Shares Subject to Options Granted |
Exercise
Price Per Share |
Estimated
Fair Value Per Share at Grant Date |
Estimated
Per Share Fair Value of Options |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
February 27, 2017 |
250 | $ | 55.26 | $ | 55.26 | $ | 36.51 | ||||||
March 21, 2017 |
3,000 | $ | 55.26 | $ | 55.26 | $ | 36.72 | ||||||
March 8, 2018 |
13,908 | $ | 79.40 | $ | 79.40 | $ | 57.06 | ||||||
June 28, 2018 |
250 | $ | 79.40 | $ | 79.40 | $ | 56.59 | ||||||
December 17, 2018 |
3,863 | $ | 79.40 | $ | 233.50 | $ | 187.74 |
The intrinsic value of all outstanding options as of December 31, 2018 was $ million, based on the estimated fair value of our common stock of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, of which approximately $ million related to vested options and approximately $ million related to unvested options.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our financial statements appearing elsewhere in this prospectus.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities.
As of December 31, 2018, we had cash and cash equivalents of $18.7 million. Our exposure to interest rate sensitivity is impacted by changes in the underlying U.S. bank interest rates. Our surplus cash has been invested in interest-bearing savings accounts from time to time. We have not entered into investments for trading or speculative purposes. We do not believe an immediate one percentage point change in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be significantly affected by changes in market interest rates.
As of December 31, 2018, we had no outstanding debt and are therefore not subject to interest rate risk related to debt.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
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Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in indications of high unmet medical need. We focus on molecules and pathways whose role in the disease process is well known based on prior research, but have previously failed to yield successful products due to poor efficacy and tolerability. Our unique approach to drug development leverages recent technological advances to design improved drugs, employs early use of biomarkers to confirm biological activity and focuses on abbreviated regulatory pathways. Our first molecular target is aldose reductase, or AR, an enzyme that converts glucose to sorbitol under oxidative stress conditions, and is implicated in multiple diseases. Prior attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. The detrimental consequences of aberrent AR activation have been well established by decades of prior research. Our AR inhibitor, or ARI, program currently includes three small molecules, which are all designed to be potent and selective ARIs, and are engineered to have unique tissue permeability profiles to target different disease states, including diabetic complications, heart disease and a rare pediatric metabolic disease. Applying our strategy from our ARI program, we have also developed a program targeting selective inhibition of phosphatidylinositol 3-kinase, or PI3K, subunits that has resulted in an early-stage oncology pipeline. The result of this unique multifaceted approach to drug development is a portfolio of highly specific and selective product candidates that we believe are significantly de-risked and can move quickly through the development process.
Our lead product candidate, AT-001, is a novel ARI with broad systemic exposure and peripheral nerve permeability that we are developing for the treatment of diabetic cardiomyopathy, or DbCM, a fatal fibrosis of the heart. We are also developing AT-001 for diabetic peripheral neuropathy, or DPN, a debilitating neurodegenerative disease that significantly reduces quality of life and for which there are currently no approved treatments in the United States. We recently completed a Phase 1/2 clinical trial studying AT-001 in 80 patients with type 2 diabetes, in which no drug-related adverse effects or tolerability issues were observed. This trial also demonstrated target engagement and proof of biological activity, as measured by reduction in sorbitol, a biomarker of AR activity. We plan to initiate a pivotal Phase 2/3 clinical trial of AT-001 for the treatment of DbCM in 2019, which will also inform our DPN development program.
Our second product candidate, AT-007, is a central nervous system, or CNS, penetrant ARI that we are developing for the treatment of galactosemia, a devastating rare pediatric metabolic disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. High levels of galactose circulating in the blood and tissues of galactosemia patients enable AR to convert galactose to a toxic metabolite, galactitol, which results in long-term complications ranging from CNS dysfunction to cataracts. We have demonstrated in an animal model of galactosemia that treatment with AT-007 reduces toxic galactitol levels and prevents disease complications. We believe that galactosemia may qualify for accelerated approval, as well as for the rare pediatric disease priority review voucher, or RPD-PRV, program. Additionally, the U.S. Food and Drug Administration, or FDA, recently released draft guidance for industry on drug development for low prevalence, slowly progressing rare metabolic diseases, for which we believe galactosemia qualifies. The guidance allows for a biomarker-based development program if clinical efficacy and a link to a relevant biomarker can be demonstrated in an animal model of disease. We are currently in late stages of preclinical development and intend to advance AT-007 into a Phase 1 clinical trial in 2019.
We are also developing AT-003, an ARI designed to cross through the back of the eye when dosed orally, and has demonstrated strong retinal penetrance, for the treatment of diabetic retinopathy, or
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DR. DR is an ophthalmic disease that occurs in diabetic patients and for which treatments are currently limited to high-cost biologics requiring intravitreal administration. DR has been linked to AR activity, including elevations in sorbitol and subsequent changes in retinal blood vessels, which distorts vision and leads to permanent blindness. We are currently in late stages of preclinical development and intend to advance AT-003 into a Phase 1 clinical trial in 2020.
Our management team and scientific advisory board are composed of accomplished scientists and clinicians with decades of experience developing drugs for a wide range of diseases. Our view is that drug development does not always need to follow the standard approach, which often requires long and costly development programs before drugs become available to patients. By taking a unique and focused approach to drug development, we believe we can significantly shorten development programs and bring lifesaving drugs to patients in urgent need. Since inception, we have raised approximately $35 million in gross proceeds from equity and debt financings with a number of investment firms, including Alexandria Venture Investments, LLC, E Squared Investment Fund, LLC, ETP Global Fund, LP and Syno Ventures Master Fund, LP.
Our Strategy
Our goal is to bring potentially transformative therapies to market across a range of fatal or debilitating diseases for which no treatments are available. The critical components of our strategy include:
We
also intend to initiate a Phase 1 clinical trial in 2019 for AT-007 in adult galactosemia patients. We expect this trial to provide critical data on safety, tolerability and
pharmacokinetics, or PK, and will target reduction in galactitol levels, a surrogate biomarker of AR activity in patients with galactosemia. The trial will form the basis of a future trial in
pediatric patients to prevent CNS dysfunction and other devastating consequences of galactosemia.
We intend to complete an investigational new drug application, or an IND, enabling program for AT-003 alongside animal efficacy models in DR to support a Phase 1 clinical trial in diabetic patients.
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Our Pipeline
The following table shows the status of our current ARI and PI3K inhibitor programs:
We seek to protect our proprietary and intellectual property position for our product candidates, our core technology, and other know-how through U.S. and foreign patent protection. To the extent that our platform is not patentable, we rely on trade secret protection and confidentiality agreements to protect our interests. For more information, see the section titled "BusinessIntellectual Property."
Our Product Candidates
Our Aldose Reductase Program
AR is the first enzyme and rate-limiting step in the polyol pathway, an alternative glucose metabolism pathway. AR is a redox-regulated enzyme that is activated by an altered redox state within the cell, which occurs during hyperglycemia and ischemia. AR activation is associated with downstream consequences of hyperglycemia, such as diabetic complications, as well as consequences of ischemia in
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the heart, such as acute myocardial infarction and chronic heart failure. As shown in the figure below, AR activity produces excess sorbitol, which causes osmotic dysregulation within cells and tissues, such as nerve and retina, and is toxic to many cell types, including cardiomyocytes. Sorbitol is also further metabolized to fructose, which initiates a cascade of metabolic dysregulation and inflammatory damage to cells, such as: reactive oxygen species, or ROS, generation; advanced glycation end products, or AGE; protein kinase C, or PKC, activation; and methylglyoxal overproduction. Under non-oxidative, or healthy patient conditions, AR remains largely inactive and less than 3% of a healthy person's glucose is processed by the polyol pathway. However, when the oxidative environment of the cell changes due to hyperglycemia or ischemia, AR is both activated and upregulated, and greater than 30% of the patient's glucose is then shunted through the polyol pathway, resulting in significant downstream damage to cells and tissues. The detrimental consequences of AR activation have been well established by decades of prior research. These include broad effects, such as mitochondrial dysfunction and cell death, as well as tissue-specific changes, such as neuronal degeneration in peripheral nerves, collagen crosslinking and fibrosis in cardiac tissue, and damage to blood vessels in the lens of the eye.
AR Causes Damage to Tissues Under Conditions of Oxidative Stress
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Additionally, as shown in the figure below, abnormal AR activity is associated with conversion of galactose to galactitol in patients with galactosemia. Galactitol, like sorbitol, does not cross the cell membrane and causes damage to cells across a wide range of tissues, including neurons in the brain, retinal cells in the eye and peripheral nerve tissue.
Galactitol Accumulation Results in Tissue Specific Damage
During the 1980s and 1990s, AR was a significant target of drug development due to its established role in a wide range of debilitating indications. Although these programs failed to produce effective drugs with a favorable risk/benefit profile, the prior ARI clinical development programs validated the role of AR in the pathogenesis of several diabetic complications and provided useful information on optimal patient criteria and trial design.
By applying new techniques in crystallography to better understand how the enzyme works, and applying in silico design and medicinal chemistry approaches, we have developed compounds with logarithmically improved potency and increased selectivity. Our technology includes specific compounds that are in various stages of preclinical and clinical development, and is coupled with an understanding of how the enzyme works and a knowledge base of structural approaches to drug the target while controlling drug characteristics, such as PK, solubility and tissue permeability.
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The following table summarizes the current status of our AR program and compound differentiation:
AT-001 for the Treatment of Diabetic Cardiomyopathy
Overview
Our lead product candidate, AT-001, is a novel ARI with broad systemic exposure and peripheral nerve permeability that we are developing for the treatment of DbCM, a fatal fibrosis of the heart, for which no treatments are available. We recently completed a Phase 1/2 clinical trial evaluating AT-001 in 80 patients with type 2 diabetes, in which no drug-related adverse effects or tolerability issues were observed. This trial also demonstrated target engagement and proof of biological activity, as measured by reduction in sorbitol, a biomarker of AR activity. We plan to initiate a pivotal Phase 2/3 clinical trial of AT-001 for the treatment of DbCM in 2019.
Diagnosis and Standard of Care
DbCM is a fatal fibrosis of the heart that occurs in both type 1 and type 2 diabetic patients, which leads to decreased contractility and decreased heart function, eventually resulting in fulminant heart failure. DbCM is caused by metabolic derangements in cardiomyocytes that result in cell death and fibrosis. AR activity has been shown to be a large contributor to these metabolic derangements, and the downstream effect of AR activation is responsible for the cardiomyocyte cell death and fibrosis. DbCM is diagnosed by increased weight of the heart and decreased contractility, which are identified by echocardiographic screening, as well as by exclusion of other forms of heart disease. Epidemiological studies have shown that approximately 17% to 24% of diabetic patients display DbCM in the absence of any other forms of heart disease. These patients do not have hypertension, atherosclerosis, valvular heart disease or ischemia, and the only cause of the cardiomyopathy is the underlying diabetes. Stages of DbCM range from asymptomatic, or stage 1, to acute heart failure, or stage 4. Most patients are not
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diagnosed until stage 2, where heart function approaches 50% of normal and symptoms manifest as extreme shortness of breath during exercise, referred to as decreased exercise tolerance. Exercise tolerance in these patients (as measured by maximum amount of oxygen a person can utilize during intense exercise known as peak VO2) is approximately 25% lower than diabetic patients without DbCM, and decreases by an additional 30% as the patients progress to overt heart failure in later stages of diseases. Patients quickly progress at a steady state of decline to stage 3, which includes marked cavity dilation and severe limitations in daily activities. The final stage of DbCM, stage 4, is represented by acute heart failure resulting in death. The current standard of care is to target glucose control in these patients, as well as hemodynamic modulation of blood flow, through use of beta blockers and diuretics. Both approaches are largely ineffective, and DbCM often results in death within five to ten years of diagnosis. Approximately 24% of DbCM patients progress to overt heart failure or death within 1.5 years of diagnosis, and 37% within 5 years of diagnosis.
Market Opportunity
According to a retrospective epidemiological study, approximately 17% of patients suffering from diabetes develop DbCM. A more recent study completed in France that utilized echocardiographic screening estimates the proportion of diabetic patients to develop DbCM at approximately 24%. The International Diabetes Foundation estimated that there were approximately 451 million patients globally with diabetes in 2017, which is expected to increase to 693 million by 2045. This includes 58.0 million diabetes patients in Europe in 2017, which is expected to increase to 67.0 million in 2045, and 46.0 million in North America, which is expected to increase to 62.0 million in 2045. Based on an estimated prevalence of 17% of diabetic patients who develop DbCM, we estimate that currently there are approximately 77.0 million patients with DbCM globally, with approximately 8.0 million in North America and 10.0 million in Europe. Initially, our development program will target stage 2 and 3 patients, which we estimate constitute approximately 50% of all DbCM patients. We believe these patients represent a symptomatic population that is more likely to be responsive to treatment. Stage 1 and 4 patients represent an additional market opportunity, which we plan to explore in a post-approval setting.
Prior AR-Based Approaches to Treat DbCM
AR activity has been implicated as a strong contributing factor to pathogenesis in DbCM. Pfizer Inc. was developing an ARI, Alond (zopolrestat), for the treatment of DPN and DbCM in a Phase 2 clinical trial that demonstrated favorable outcomes on heart function in DbCM patients, but was discontinued due to an unfavorable risk/benefit profile, with several patients experiencing liver toxicity and significant elevations in both aspartate aminotransferase and alanine aminotransferase, which are enzymes central to identification of liver toxicity and damage. In this trial, patients with early-stage DbCM were identified by echocardiographic screening and were randomized to three treatment groups, which consisted of placebo, 500 mg zopolrestat per day or 1,000 mg zopolrestat per day dosed for one year. Due to liver toxicity seen in another trial with zopolrestat, the 1,000 mg treatment arm was reduced to 500 mg, and the two doses were collapsed into one treatment arm. While patients on placebo displayed decreased heart function over the year of the trial as their disease progressed, patients on zopolrestat displayed a stabilization of heart function and even improvement in heart function in some patients based on hemodynamic endpoints. As shown in the figure below, after one year of ARI treatment, there were statistically significant increases in resting left ventricular ejection fraction, or LVEF (p<0.02), cardiac output (p<0.03), left ventricular, or LV, stroke volume (p<0.004), and exercise LVEF (p<0.001). In placebo-treated subjects, there were statistically significant decreases in exercise LVEF, cardiac output and stroke volume. Exercise LVEF increased with ARI treatment independent of blood pressure, insulin use or the presence of baseline abnormal heart rate variability. There was no change in resting diastolic filling rates in either group. This trial demonstrated that abnormalities in systolic function in patients with DbCM can be stabilized and partially reversed by ARI treatment. We believe this data validates the approach of using an ARI to improve outcomes for patients with DbCM and using our compounds, which demonstrate improved potency and have been well tolerated, may lead to greater clinical utility.
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Cardiac Function at 12 Months on Maximal Exercise
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* Data are mean +/ standard deviation.
As shown in the figure below, when compared to zopolrestat, AT-001 has significantly higher in vitro enzymatic inhibitory activity. IC 50 and IC 90 , or the amount of a compound required to inhibit 90% enzyme activity, are typically calculated by determining the level of enzymatic inhibition at ten-fold dilutions, moving to smaller concentrations of the inhibitory compound. At lower concentrations of compound, AT-001 demonstrated logarithmically greater enzymatic inhibition versus zopolrestat. Similarly, the IC 50 of AT-001 was determined to be 30pM, nearly 1,000 fold lower than that of zopolrestat, which is 10nM.
In vitro
ARI Activity AT-001 versus Zopolrestat
Recently Completed and Ongoing Clinical Trials
We have recently evaluated AT-001 in a placebo-controlled Phase 1/2 single ascending dose, or SAD, and multiple ascending dose, or MAD, clinical trial in 80 type 2 diabetes patients. The primary
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objectives of this trial were to explore the safety, tolerability and PK profile of AT-001. Because AR converts glucose to sorbitol, and AR activity is elevated in diabetic patients, sorbitol normalization was also examined as a pharmacodynamic, or PD, biomarker of target engagement, which provided proof of biological activity in patients.
The Phase 1/2 clinical trial allowed use of concomitant treatments for glucose control, as well as other standard of care treatments for diabetes, such as statins and ACE inhibitors. The FDA permitted us to directly evaluate diabetic patients due to positive data from the preclinical studies, as well as the urgency to develop drugs quickly due to high unmet need. AT-001 was dosed as an active pharmaceutical ingredient, or API, powder in a rapid release capsule and the trial examined both once-daily and twice-daily dosing regimens. We have completed the initial safety, pharmacology and biomarker studies up to seven consecutive days of treatment. No drug-related adverse effects or tolerability issues were observed at any single or multiple doses of AT-001. Treatment with AT-001 did not cause any abnormalities in vital signs or electrocardiogram, and did not cause an increase in glucose levels. Additionally, there were no observed adverse interactions with any concomitant diabetes medications used by patients during the trial.
SAD Portion of the Trial
Our SAD trial was conducted on 40 type 2 diabetes patients, 10 patients per cohort, with 8 patients receiving AT-001 and 2 patients receiving placebo. The patients were dosed under fasted conditions and received breakfast two hours post dose. Hourly blood samples were taken for PK and sorbitol measurements over a 12-hour period and again at 24 hours. Our initial dose of 5 mg/kg dosed orally was observed to have an effect on sorbitol levels in patients. Although we observed an effect on AR activity at the lowest dose of 5 mg/kg, we continued to dose escalate up to 40 mg/kg. Unlike prior compounds that were often limited by tolerability and safety issues, our compound did not demonstrate safety or tolerability limitations up to the maximum tested dose of 40 mg/kg. As shown in the figure below, dose-response impact from 5 mg/kg to 40 mg/kg was observed on PK endpoints, providing adequate information for future dose selection.
PK Timeframe for AT-001 Phase 1/2 SAD Cohorts
(each curve represents the mean of eight patients)
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As shown in the figures below, AT-001 demonstrated a linear PK profile, which we believe evidences a predictable dose response.
AT-001 Maximum Concentration (C max (1) mean) |
AT-001 Area Under the Curve (AUC mean) |
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Because AR converts glucose to sorbitol, and AR activity is elevated in diabetic patients, sorbitol normalization to healthy subject levels can be used as a PD biomarker of target engagement and proof of biological activity. As shown in the figures below, which is representative of the AT-001-treated patients in the trial, as levels of AT-001 increase in the patients' blood, sorbitol levels are significantly reduced.
Representative PK Curves of AT-001 and Whole Blood Sorbitol Levels in Patients Treated with AT-001
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As shown in the figure below, which is representative of the placebo-treated patients in the trial, this effect was not observed in placebo patients, who demonstrated sorbitol increases over the timeframe of drug-related sorbitol reduction, due to food effects on sorbitol. These patients were given breakfast two hours post dose.
Representative Curve of Whole Blood Sorbitol Levels in Placebo-Treated Patients
As shown in the figure below, a dose response was observed when percent reduction in sorbitol levels was calculated at the C max of the drug, which is approximately two hours, demonstrating higher reductions in sorbitol at higher doses of AT-001. Average sorbitol levels of healthy volunteers were observed to be approximately 470 ng/ml and approximately 750 ng/ml for diabetic patients. The average net difference in sorbitol levels between diabetic patients and healthy volunteers represents the approximate amount of sorbitol generated by abnormal AR activity, which is approximately 50% reduction on average. Baseline sorbitol levels seen in healthy volunteers are believed to be primarily due to dietary intake of sorbitol, as well as baseline AR activity, which is approximately 3% glucose metabolism through AR in healthy volunteers.
AT-001 Percent Reduction in Sorbitol, SAD Cohorts A1-A4
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The figure below depicts the average reduction in sorbitol from baseline to C max of two hours from each dose cohort, as captured by the figure above. Based on our trials, we believe the complete inhibition of aberrant AR activity seen in diabetic patients corresponds to an approximately 50% reduction in elevated sorbitol levels to the healthy volunteer average of 470 ng/ml. This was achieved in 25% of patients dosed at 10 mg/kg, 50% of patients dosed at 20 mg/kg and 75% of patients dosed at 40 mg/kg.
AT-001 Mean Reduction in Sorbitol by Dose, SAD Cohorts A1-A4
MAD Portion of the Trial
Our MAD trial was conducted on 40 type 2 diabetes patients, 10 patients per cohort, with 8 patients receiving AT-001 and 2 patients receiving placebo. The patients were dosed for seven consecutive days with 5 mg/kg, 20 mg/kg and 40 mg/kg once daily, or 20 mg/kg twice daily. Hourly blood samples were taken for PK and sorbitol measurements over a 12-hour period and again at 24 hours on days one and seven.
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As shown in the figure below, PK profile of AT-001 was similar on days one and seven, suggesting there was no first pass clearance or other PK effects due to repeat dosing over this time period.
AT-001 Multiple Dose PK ProfileNo First Pass Clearance or Drug Accumulation at 5 mg/kg
As shown in the figure below, effects on sorbitol from baseline to C max of two hours from each dose cohort were similar at day one and day seven, indicating that there is no correction for AT-001 effects in diabetic patients over this time period.
Comparison of % Reduction in Sorbitol from Baseline to C
max
at Day 1 and Day 7 of Dosing
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The figure below shows the effect on sorbitol levels over a 12-hour period in patients treated with 5 mg/kg, 20 mg/kg and 40 mg/kg doses versus placebo. Treatment with AT-001 resulted in dose-dependent AR inhibition as measured by sorbitol reduction over a 10- to 12-hour period.
Effect of AT-001 on Sorbitol Levels Over 12 Hours
Protection from Post-Prandial AR Activation in Diabetic Patients
The diabetic patients enrolled in this trial had well-controlled blood glucose levels. However, these patients still experienced periods of transient worsening of hyperglycemia, specifically following meals when there is excess glucose available. This transient post-prandial response leads to further activation of AR and is seen as an increase in blood sorbitol levels following meals in placebo treated patients, as shown in the figure above and in prior figures. Patients receiving AT-001 not only demonstrated reduced sorbitol levels, but were also protected from post-prandial AR activation.
Phase 1/2 Extension Trial
We have initiated an extension to our Phase 1/2 clinical trial to evaluate the safety, tolerability and PK of AT-001 over a 28-day treatment period. This trial is being conducted on 30 type 2 diabetes patients, 10 patients per cohort, with 8 patients receiving AT-001 and 2 patients receiving placebo. This trial will examine the twice daily and three times daily rapid release formulation used in the Phase 1/2 clinical trial, as well as our extended release pressed tablet formulation, which is designed to sustain drug levels in the bloodstream over a 24-hour period. The tablet formulation utilizes reagents generally recognized as safe, including well-characterized polymers and binders. We will also evaluate enzyme activity levels, sorbitol levels and biomarkers of heart function and heart inflammation.
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Preclinical Studies
In preclinical toxicology studies in dogs and rats, AT-001 was observed to be well tolerated up to 2,000 mg/kg per day, the maximum dose tested. No dose-limiting adverse effects or tolerability issues were observed. Additionally, no drug-related adverse effects were observed in hERG studies, micronucleus assays, Ames testing or any other preclinical safety and toxicology studies required for IND approval. Additionally, in vitro metabolism studies suggested that AT-001 is not significantly metabolized in hepatocytes and it does not inhibit cytochromes.
In preclinical efficacy studies in diabetic and non-diabetic rats and mice, AT-001 was cardioprotective, preventing damage caused by ischemia in the left anterior descending ligation model of cardiac damage. As shown in the figures below, AT-001 in both pre-treatment and post-ischemia dosing models prevented cardiac damage, as measured by ischemic area, hemodynamic endpoints and biomarkers of heart damage.
AT-001 is Cardioprotective in Diabetic Models
Clinical Development Plan
Until recently, development in cardiovascular disease indications often required large outcome-based trials that examined survival and re-hospitalization as primary endpoints. These trials were extremely large, expensive and time-consuming, and were often confounded by comorbidities in the patient population. As a result, very few cardiovascular programs resulted in approved drugs. There has been a recent effort from the Division of Cardiovascular and Renal Products at the FDA, as well as at the European Medicines Agency, or EMA, to streamline drug development for cardiovascular disease to increase the probability of demonstrating a meaningful clinical effect in patients. Specifically in cardiomyopathies, where there is a direct functional link between hemodynamic endpoints, heart contractility and quality of life, there is a unique opportunity to demonstrate benefit of therapy in a smaller number of patients and shorter treatment period than was previously required. Recent clinical development programs in hereditary cardiomyopathies have pioneered smaller trials examining exercise tolerance and/or heart functional class as a primary endpoint. Based on this precedent, we plan to take a similar approach to development of AT-001 for the treatment of DbCM.
Consistent with these developments, at our pre-IND meeting, the FDA indicated that we would not be required to examine survival and re-hospitalization endpoints, and confirmed that exercise tolerance would qualify as an appropriate primary endpoint in our DbCM trial. Accordingly, we expect to design our pivotal Phase 2/3 clinical trial to target this primary endpoint in stages 2 and 3 DbCM
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patients. The primary endpoint in the trial will be stabilization or decrease in slope of decline on exercise tolerance, as measured by timed walk or peak VO 2 , the rate of oxygen consumption measured during exercise. We also plan to evaluate heart function by echocardiogram-based hemodynamic endpoints and quality of life, as well as to explore biomarkers of heart inflammation and damage, and whether these may support accelerated approval. We anticipate that this trial will consist of 525 patients in three cohorts of approximately 175 patients each, including a placebo group, a low dose AT-001 group and a high dose AT-001 group. The trial treatment period will be 12 months, with the possibility of an interim analysis at six months. We plan to initiate this pivotal Phase 2/3 trial in 2019.
AT-001 for the Treatment of Diabetic Peripheral Neuropathy
Overview
We also intend to develop AT-001 for DPN, a debilitating neurodegenerative disease that significantly reduces patients' quality of life, and for which there are currently no FDA-approved treatments. We expect this indication will require a standard clinical development path, and as such we plan to pursue a strategic partnership in order to expand into this indication. Since many patients with DbCM also have DPN, we plan to collect proof-of-concept data through our DbCM program to support our efforts in our DPN program.
Diagnosis and Current Standard of Care
DPN is diagnosed by a simple neurological assessment, usually the Toronto Neuropathy Scoring System, which is administered in the physician's office and examines a patient's ability to feel various types of neurological stimuli on the hands and feet. AR activity has been shown to cause DPN. Epalrestat, an ARI, is approved in Japan, China and India to prevent further neuronal degeneration in DPN patients. However, there are no disease modifying therapies approved in the United States and Europe, and only symptomatic medications, such as Lyrica, are approved for pain associated with DPN. Although epalrestat was approved in Japan in 1992 based on very limited clinical data that would not have been sufficient for other markets, more recent academic studies have demonstrated an effect on MNCV and symptomatic pain endpoints in a wide range of diabetic patients. For example, a multicenter, three-year Phase 3 clinical trial conducted in Japan on epalrestat 150 mg versus placebo demonstrated that epalrestat prevented progression of DPN in diabetic patients versus placebo. Epalrestat prevented degeneration of nerve function, as measured by MNCV, and prevented worsening of symptomatic pain. A statistically significant effect was demonstrated in all patients regardless of low or high levels of glucose attached to their hemoglobin, as tested by a hemoglobin A1C (HbA1C) test.
Epalrestat, which is now generic in Japan, reached peak sales of approximately $226 million in 2001. This is indicative of its widespread use in the Japanese diabetic population, which was approximately five million patients at the time of launch despite significant tolerability issues associated with use and five times daily dosing due to a very short half-life. We do not believe, however, that it is likely to be a candidate for further commercialization. Nevertheless, prior research on epalrestat evinces the role of AR in DPN and provides a clinical trial design to demonstrate efficacy in this indication.
Market Opportunity
Approximately 50% of the global diabetic population, or 226 million diabetic patients, suffer from DPN, with 23.0 million patients in North America and 29.0 million patients in Europe. Due to availability of generic epalrestat in China and India, we view the opportunity in these two markets to be limited as a result of pricing pressures and differentiation requirements with regard to epalrestat. However, we believe a significant market opportunity for a more effective ARI with a favorable dosing regimen still exists in Japan, a less price sensitive market where there is familiarity with the mechanism
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of action in the disease and use of epalrestat is high. As such, although we are currently focused on the U.S. market, we may expand our efforts into Japan opportunistically.
Preclinical Studies
In preclinical studies, AT-001 demonstrated improvements in neuronal degeneration in animal models of DPN and provided good exposure to peripheral nerve tissue, as measured by MNCV in sciatic and tail nerves of diabetic rats. As shown in the figures below, in a type 1 diabetic rat model of peripheral neuropathy, AT-001 treatment prevented peripheral neuronal damage, as measured by MNCV after six weeks of treatment with zopolrestat 30 mg/kg, epalrestat 15 mg/kg, AT-001 0.3 mg/kg, 3 mg/kg or 30 mg/kg, or placebo. The diabetic rats treated with placebo demonstrated a reduction in nerve function as measured by MNCV versus non-diabetic wild-type, or WT, rats, confirming that the six weeks of diabetes duration caused neuronal dysfunction. A dose-dependent reduction in neuronal dysfunction was observed in rats treated with AT-001, and treatment at 30 mg/kg of AT-001 completely prevented neuronal degeneration, with no statistical difference from non-diabetic WT rats. Effects of treatment with AT-001 demonstrated a similar effect versus zopolrestat or epalrestat at lower doses, and an increased effect at higher doses.
Induced Diabetic Rat Models (Six-Week Treatment)
In a type 2 diabetic rat model, AT-001 demonstrated improvements in neuronal degeneration versus epalrestat. Zucker diabetic fatty, or ZDF, rats were treated with epalrestat 30 mg/kg, AT-001 1 mg/kg, 3 mg/kg or 10 mg/kg, or placebo for 12 weeks, and effects on neurons were measured by MNCV. The diabetic rats treated with placebo demonstrated a reduction in nerve function as measured by MNCV versus non-diabetic WT rats, confirming that the 12 weeks of diabetes duration caused neuronal dysfunction. Treatment with AT-001 showed a dose-dependent reduction in neuronal dysfunction, and treatment at 10 mg/kg completely prevented neuronal degeneration, with no statistical difference from non-diabetic WT rats. Effects of treatment with AT-001 demonstrated a similar effect versus epalrestat at a varying dose of 30 mg/kg of epalrestat versus 3 mg/kg of AT-001, and an increased effect at 1/3 the dose of 30 mg/kg of epalrestat versus 10 mg/kg of AT-001.
Clinical Development Plan
Since many DbCM patients often also suffer from DPN, we plan to incorporate DPN endpoints, such as MNCV, as a sub-study into our DbCM pivotal program to provide additional proof-of-concept for AT-001 in DPN. We plan to seek a strategic partnership to develop AT-001 for treatment of DPN and advance the program into Phase 3 clinical trial for this indication.
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AT-007 for the Treatment of Galactosemia
Overview
We are developing AT-007, our CNS penetrant ARI product candidate, for the treatment of galactosemia, a devastating rare pediatric metabolic disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. High levels of galactose circulating in the blood and tissues of galactosemia patients enable AR to convert galactose to a toxic metabolite, galactitol, which results in long-term complications ranging from CNS dysfunction to cataracts. AT-007 was specifically designed to be a CNS penetrant to address AR activity in the brain and potentially prevent CNS consequences of the disease. We believe galactosemia qualifies for accelerated approval under recently released draft FDA guidance for low prevalence, slowly progressing rare metabolic diseases. The guidance allows for a biomarker-based development program if clinical efficacy and a link to a relevant biomarker can be demonstrated in an animal model of disease. We have demonstrated that treatment with AT-007 in an animal model of galactosemia reduces toxic galactitol levels and prevents disease complications. Additionally, we believe that pediatric galactosemia may qualify for the RPD-PRV program. We are currently in late-stage preclinical development and intend to advance AT-007 into a Phase 1 clinical trial for treatment of galactosemia in adults in 2019.
Diagnosis and Standard of Care
Galactosemia is caused by severe deficiency in the GALK or GALT enzymes that metabolize galactose. Galactose is a sugar produced endogenously by the body, and is also a metabolite of lactose. Galactosemia is often fatal in infants within the first weeks of life if they are exposed to dietary lactose in the form of breast milk or dairy-based formula. As such, there is mandatory newborn screening for galactosemia in the United States and many countries in Europe. While prompt identification of infants with galactosemia and immediate implementation of a lactose-restricted diet prevents many fatalities, long-term consequences of disease persist due to endogenous generation of galactose within the body. We are specifically developing AT-007 for patients with severe enzyme deficiencies in GALK, which is referred to as type 2 galactosemia, and GALT, which is referred to as classic galactosemia. In these patients, despite dietary restriction, galactosemia manifests as a combination of CNS and systemic toxicities in tissues, including cognitive dysfunction and intellectual deficiencies, speech and motor pathologies, pre-senile cataracts and tremor, as well as ovarian insufficiency in females.
Unlike severe forms of galactosemia, "clinical variant galactosemia" and "Duarte galactosemia" refer to partial reductions in various galactose metabolism enzymes; however, there does not appear to be any clinical consequence, as remaining activity is sufficient to metabolize galactose within the body. Patients with clinical variant and Duarte galactosemia do not require any intervention, in comparison to patients with severe GALK or GALT enzyme deficiencies.
There are no treatments available for galactosemia, despite movement towards enzyme replacement therapy and gene editing and delivery technologies for many other rare diseases. This is because the major tissue-specific effects of galactosemia are seen in neurons in the brain, and delivery of recombinant enzymes, as well as gene delivery and editing, are difficult to accomplish across the blood-brain barrier and into neuronal cells, and current technologies have not yet been able to achieve therapeutic CNS delivery. Due to endogenous production of galactose within the body, infants with galactosemia develop significant complications even with immediate implementation of, and strict adherence to, a dairy-free diet. CNS complications include cognitive impairment, low IQ and speech and motor deficiencies. In addition, nearly all females develop ovarian insufficiency. Further to the damage that occurs in childhood, many adults also develop persistent cataracts and tremor, due to ongoing tissue deposition of galactitol in the eyes and peripheral nerves.
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AR Activity Causes Toxic Accumulation of Galactitol in Galactosemia
As shown in the figure below, we believe that blocking AR activity shifts galactose metabolism to an alternative enzyme called galactose dehydrogenase, which allows galactose to be metabolized to galactonate, a benign substance that is removed in the urine.
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Market Opportunity
The global incidence of galactosemia is estimated to be 1 in 50,000 to 1 in 90,000, depending on ethnicity. However, we believe that the U.S. galactosemia population is approximately 2,800 patients, based on newborn screening data identifying 2,500 infants through 2014, and the estimated birth rate of 80 patients per year. Prior studies estimated that the U.S. galactosemia population was higher based on the incidence rates, because they did not take into account that, prior to newborn screening, most infants with galactosemia died within a few weeks of birth. As a result, the disease prevalence is significantly lower, and the live population with galactosemia is largely age 40 and younger.
Preclinical Studies
A rat model of classic galactosemia, or GALT null, was recently developed at Emory University, and was shown to display similar levels of galactose and metabolites in blood and tissues to that of galactosemia patients. These rats develop many of the long-term complications associated with galactosemia in humans, including bilateral cataracts, as well as CNS deficiencies in motor coordination, cognition and learning, as quantified by rotarod and water maze testing. Characteristics of this model, including cataracts and high levels of galactose, galactitol and Gal-1P in blood and tissues such as liver and brain, are shown in the figure below.
Animal Model of GALT Deficiency
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As shown in the figures below, treatment with AT-007 in neonatal GALT null rats from day 1 to day 10 significantly reduced galactitol levels in target tissues, including blood, brain and liver, without increasing galactose or Gal-1P levels, and prevented complications associated with galactitol accumulation in tissues, including cataract formation and CNS dysfunction. The effects of AT-007 were dose dependent and corresponded with galactitol reduction. Rats treated with AT-007 also displayed reduced galactonate levels, supporting our hypothesis that ARIs increase metabolism of galactose by galactonate dehydrogenase.
AT-007 Treatment Significantly Reduced Galactitol Levels in Liver, Brain and Plasma
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Similar reductions in galactitol were observed at day 22 and at five months. Additionally, AT-007 prevented cataract formation in newborn rats at day 10, day 22 (as shown in the figure below) and at five months.
AT-007 Treatment Prevented Cataract Formation in Newborn Rats
As shown in the figures below, greater doses of AT-007 reduced galactitol levels and the severity of cataracts.
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AT-007 Galactitol Reduction Dose Response
As shown in the figure below, AT-007 reduced galactonate levels, which we believe supports our hypothesis that AR inhibition activates galactonate dehydrogenase.
AT-007 Reduced Galactonate Levels at Day 22
WT and GALT null rats were treated daily with AT-007 for five months, beginning on the day after birth, and were tested for cognitive outcomes via rotarod and water maze testing. Generally, rotarod tests both learning and motor coordination, while water maze tests intelligence and cognitive ability.
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As shown in the figure below, while galactosemic rats show deficits in learning and motor coordination versus WT rats, treatment with AT-007 was able to prevent these deficiencies and normalize cognitive and motor function.
AT-007 Treatment Prevented CNS Deficits in GALT Null Rats (Rotarod Test)
Clinical Development Plan
We are currently evaluating AT-007 in IND-enabling preclinical studies, and we plan to initiate a Phase 1 clinical trial in adults with galactosemia in 2019. Although much of the CNS damage seen in adults may be permanent and irreversible, prevention of further damage to tissues that occurs throughout adult life, such as cataract formation and tremor, may provide significant quality of life benefits to galactosemic adults. In pediatric studies we will seek to prevent any tissue damage from occurring, including neuronal damage in the brain that results in cognitive, intellectual, speech and motor deficits in infants and children.
The Phase 1 clinical trial will be split into three partsA, B and C. Part A will be designed as a SAD and MAD clinical trial in 24 to 32 healthy volunteers, 6 to 8 patients per cohort, with 2 patients receiving placebo. Part A will evaluate safety, tolerability and PK of AT-007 until maximum tolerated dose is achieved. The MAD portion of the trial will study seven days of consecutive treatment. Part B will be designed as an adaptive trial in 12 to 16 patients, 3 to 4 patients per cohort. Part B will evaluate safety, tolerability and PK in adult patients with galactosemia. Patients will receive either AT-007 or placebo, receiving a single dose four days prior to receiving 27 days of consecutive dosing. Biomarker levels of galactose and galactose metabolites, including galactitol, will also be measured in these patients to determine target engagement and proof of biological activity. The FDA has permitted us to use the same adult galactosemia patients for single and multiple dose exposure, due to the low prevalence of this condition and availability of patients for a clinical trial. If favorable effects are demonstrated in Part B, a Part C extension study examining safety and tolerability over longer dosing periods will be initiated in conjunction with availability of animal safety data.
The FDA recently released draft guidance for industry on development of drugs for low prevalence (< 5,000 U.S. patients), slowly progressing rare diseases. Based on feedback from the FDA at our pre-IND meeting, we believe that galactosemia may qualify as such a disease, permitting an accelerated approval under the new guidance based upon examining surrogate metabolite biomarkers, such as galactitol, rather than clinical endpoints. We will seek to conduct a Phase 1 clinical trial in adults with galactosemia, where safety, tolerability and PK can be explored in conjunction with effects on galactitol levels in various tissues. Pending the successful outcome of the adult trial, we then intend to conduct an additional Phase 1 clinical trial in a pediatric population with a similar objective of demonstrating
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reduction in galactitol levels in various tissues, including the brain. Galactitol levels in the brain can be quantified via magnetic resonance imaging. Based on discussions with the FDA, we plan to transition from adults directly into children ages two to six, followed by infants ages one month to two years. Due to the early role of endogenous galactose production and resulting galactitol levels on neuronal damage, there is an urgency to treat prior to damage occurring. We plan to move as quickly as possible in clinical development from adults to infants and young children. We believe that a pediatric indication in galactosemia may qualify for the RPD-PRV program.
AT-003 for the Treatment of Diabetic Retinopathy
Overview
We are developing AT-003, an ARI designed to cross through the back of the eye when dosed orally, which has demonstrated strong retinal penetrance, for the treatment of DR. DR is an ophthalmic disease that occurs in diabetic patients, and for which treatments are currently limited to intravitreal administration. DR has been linked to AR activity, including elevations in sorbitol and subsequent changes in retinal blood vessels, which distorts vision and leads to permanent blindness. We are currently in late stages of preclinical development and intend to advance AT-003 into a Phase 1 clinical trial for the treatment of DR in 2020.
Diagnosis and Current Standard of Care
DR is diagnosed by routine dilated eye exam by an ophthalmologist. Annual or biennial ophthalmic exams to screen for DR are a recommended standard of care for diabetic patients under current treatment guidelines. Vascular endothelial growth factor, or VEGF, inhibitors, Lucentis (ranibizumab) and Eylea (aflibercept), are approved to treat severe or late-stage DR, but are limited by high cost, the need for intravitreal injection into the eye and the lack of therapeutic benefit in many patients. A need exists for safe, effective and tolerable treatments for DR early in the disease process that provide a benefit to a wide range of patients. AR is an attractive target for DR drug development since AR activity is upstream of VEGF activity in DR pathogenesis. AR has been shown to cause DR by inducing hyperosmolarity in retinal cells due to elevated sorbitol, as well as through fructose-mediated detrimental downstream effects, such as AGE generation and PKC activation. AR knock-out rats are protected from DR development, and several prior ARIs demonstrated efficacy on DR endpoints in clinical trials, but were not approved due to dose-limiting safety concerns.
Market Opportunity
A recent retrospective epidemiological analysis of diabetic patients globally confirmed that DR affects approximately 35% of diabetics, and is a leading cause of blindness worldwide. Based on the 2017 diabetes numbers, the global market for DR is approximately 158 million patients, with anticipated increase to 243 million by 2045. The current market is approximately 16.0 million in North America and 20.0 million in Europe.
Preclinical Studies
AT-003 displayed significant retinal penetration when dosed orally in diabetic rats. AT-003 was observed to be well tolerated over a seven-day dosing period in all doses tested, up to 1,000 mg/kg daily, with no adverse effects observed. Efficacy of AT-003 is currently being explored in two animal models of DRan ischemic injury model (acute damage) and chronic diabetic treatment model.
Clinical Development Plan
Similar to AT-001, we plan to explore the safety, tolerability, PK profile and biomarker effects of AT-003 in a Phase 1a/1b clinical trial in diabetic patients. Assuming positive data in this trial, we plan
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to initiate a pivotal Phase 2/3 clinical trial of AT-003 in patients with DR to prevent disease progression versus placebo, as measured by subjective metrics, including fluoroscein angiography and optical coherence tomography, which are scans used in the examination and management of retinal diseases.
Our Early-Stage PI3K Program
PI3Ks are a family of membrane-based enzymes containing a catalytic subunit that exists in four different isoforms: alpha, beta, delta and gamma. PI3K triggers a signaling cascade that regulates cell proliferation and survival, and is constitutively activated in many tumor cell lines. Prior PI3K inhibitors were nonselective for subunit inhibition, and were plagued by tolerability and safety issues, such as hepatic toxicity, severe diarrhea and colitis, hyperglycemia and hypertension, which are believed to be due to inhibition of the alpha and beta subunits. Selective inhibition of certain PI3K subunits may be advantageous in targeting tumor cells and maximizing response, while avoiding dose-limiting side effects and tolerability issues. Using similar strategies to our ARI program, we have developed highly selective PI3K inhibitors that target the delta subunit, as well as dual delta/gamma selectivity.
AT-104 for the Treatment of Orphan Hematological Oncology
We expect to initially target orphan hematological oncology indications, including peripheral T-cell lymphoma, cutaneous T-cell lymphoma and T-cell acute lymphoblastic leukemia. We plan to initiate our clinical program in these indications in 2020. We are additionally developing selective alpha/gamma inhibitors to target solid tumors that constitutively express PI3K alpha.
Exclusive License Agreement with Columbia University
On October 26, 2016, we entered into a license agreement with Columbia University. Pursuant to the 2016 Columbia Agreement, Columbia University granted us a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in each case to develop, manufacture, and commercialize ARI products, including AT-001, AT-003 and AT-007. The license grant is worldwide with the exception of a single patent family covering AT-001 and AT-003 for which the license grant excludes China, Taiwan, Hong Kong and Macao. Under the 2016 Columbia Agreement, we are obligated to use commercially reasonable efforts to research, discover, develop and market licensed products for commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined time periods. Columbia University retains the right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology, provided that such research is not funded by a commercial entity or for-profit entity or results in rights granted to a commercial or for-profit entity. As the technology licensed to us under the 2016 Columbia Agreement was developed as a result of a U.S. government grant, the licenses granted to us under the agreement are subject to the terms of such grant, and to standard rights of the U.S. government under the Bayh-Dole Act, including the grant to the government of a non-exclusive, worldwide, freedom to operate license under any patents, and the requirement, absent a waiver, to manufacture products substantially in the United States.
As consideration for entering into the 2016 Columbia Agreement, we made a nominal upfront payment to Columbia University and, following the occurrence of certain trigger events, issued to Columbia University shares equal to 5% of our outstanding common stock on a fully diluted basis at the time of issuance. We will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2016 Columbia Agreement. We will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on our, our affiliates' and our sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, we are required to make specified annual minimum royalty payments to
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Columbia University in the mid six figures beginning on the 10 th anniversary of the effective date of the agreement. As of the date of this prospectus, we have not granted any sublicenses under the 2016 Columbia Agreement. However, if we sublicense the rights granted under the 2016 Columbia Agreement to one or more third parties, we will be required to pay to Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and 20%, depending on the stage of development at the time such revenue is received from such third parties.
Columbia University is responsible for the prosecution and maintenance of the licensed patents, in consultation with us, and subject to a requirement to give due consideration to our comments, at our expense. We have the first right, but not the obligation, to control the enforcement of licensed patents exclusively licensed to us against third parties. We are required to indemnify Columbia University for any third-party claims that arise from or relate to the 2016 Columbia Agreement.
The 2016 Columbia Agreement will terminate upon the expiration of all our royalty payment obligations in all countries. We may terminate the 2016 Columbia Agreement for convenience upon 90 days' written notice to Columbia University. At its election, Columbia University may terminate the 2016 Columbia Agreement, or convert the licenses granted to us into non-exclusive, non-sublicensable licenses, in the case of (a) our uncured material breach upon 30 days' written notice (which shall be extended to 90 days if we are diligently attempting to cure such material breach), (b) our failure to achieve the specified development and funding milestone events, or (c) our insolvency.
Sales and Marketing
Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We intend to build a commercial infrastructure to support sales of our product candidates in the United States. We expect to manage sales, marketing and distribution through internal resources and third-party relationships. While we may commit significant financial and management resources to commercial activities, we will also consider collaborating with one or more pharmaceutical companies to enhance our commercial capabilities. Outside the United States, we plan to seek pharmaceutical partners for sales and marketing activities.
Manufacturing
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We depend on third-party contract manufacturing organizations, or CMOs, for all of our requirements of raw materials, drug substance and drug product for our preclinical research and our clinical trials for AT-001, AT-007 and AT-003. We have not entered into long-term agreements with our current CMOs. We intend to continue to rely on CMOs for later-stage development and commercialization of our current products, as well as the development and commercialization of any other product candidates that we may identify. Although we rely on CMOs, we have personnel and third-party consultants with extensive manufacturing experience to oversee the relationships with our contract manufacturers.
We believe the synthesis of the drug substance for AT-001 and AT-007 are reliable and reproducible from readily available starting materials, and the synthetic routes are amenable to large-scale production and do not require unusual equipment or handling in the manufacturing process. We have obtained adequate supplies of the drug substance for AT-001 and AT-007 to satisfy our immediate clinical and preclinical demands.
Drug product formulation development for AT-001 is in progress. We have contracted with a third-party manufacturer capable of both formulation development and drug product manufacturing through commercialization. We may identify a second drug product manufacturer in the future to add additional capacity and redundancy to our supply chain. In our completed Phase 1 SAD/MAD clinical trial of AT-001, we developed and utilized a rapid release capsule formulation filled with API powder. We have also developed an extended release pressed tablet to support once-daily dosing, which we are currently
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evaluating. We plan to dose AT-007 as a powder in a capsule for adult treatment, and will develop a dose suspension formulation for future pediatric treatment.
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, the expertise of our executive and scientific team, research, clinical capabilities, development experience and scientific knowledge provide us with competitive advantages, we face potential competition from many different sources, including pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Product candidates that we successfully develop and commercialize may compete with existing therapies and new therapies that may become available in the future.
Our competitors may have significantly greater financial resources, established presence in the market, expertise in research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and reimbursement and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific, sales, marketing and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in 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.
There are currently no therapies approved to treat DbCM. Entresto, a drug developed by Novartis International AG, or Novartis, is approved for acute heart failure, which can be caused by many conditions, including DbCM. However, we are aware that Novartis may be pursuing a label expansion for earlier treatment of generalized heart failure, which may overlap with our target disease stages in DbCM. Additionally, sponsors of sodium-glucose cotransporter-2, or SGLT2, inhibitors are pursuing broad cardiovascular labels in type 2 diabetes patients, which may include a subset of DbCM patients as part of the larger diabetic population at risk for heart failure. We are also aware of planned Phase 2 clinical trials on glucagon-like peptide-1, or GLP-1, agonists in DbCM, as well as anti-fibrotic therapies in Phase 1 clinical development. Many of these programs are sponsored by large pharmaceutical companies with a strong presence in cardiology and metabolic disease. Additionally, stem-cell targeted initiatives are in various stages of preclinical and early clinical development to stimulate regeneration of cardiac tissue to counter fibrosis in DbCM. There have been prior studies demonstrating effectiveness in DbCM of off-label use of sildenafil, although we do not believe this represents a commercially viable competitive threat.
There are no disease modifying therapies approved to treat DPN outside of Japan, India and China. In these limited markets, epalrestat, another ARI, is approved to prevent worsening of DPN, and despite challenges in compliance due to frequent dosing three to five times daily, the drugs are generic and offer a low cost alternative. A more effective therapy with improved tolerability and dosing may offer an advantage. A re-formulation of proprietary crystalline epalrestat, BNV-222, is in development for DPN in Russia in a 12-month Phase 2/3 clinical trial, which completed enrollment in 2016, but has not yet reported any results.
There are currently no therapies approved to treat galactosemia. Due to the importance of GALK and GALT enzymes within neurons in the CNS, we believe that enzyme replacement therapy is not an effective approach in this indication. Additionally, numerous mutations across ethnicities are responsible for loss of function in GALK or GALT, which presents significant challenges to potential gene editing approaches.
There are several therapies approved to treat severe or late-stage forms of DR, or proliferative DR, such as diabetic macular edema and proliferative DR, including anti-VEGF therapies, Lucentis
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and Eylea, which represents approximately 20% of the larger DR population. There are currently no therapies approved to treat non-proliferative DR, an earlier stage of the disease upstream of vessel or capillary proliferation. However, there are significant additional clinical development efforts for other mechanistic interventions in early-stage or for non-proliferative DR.
The following table summarizes the current competitive landscape for our initial target indications:
Disease
|
Product Type | Stage of Development | ||
---|---|---|---|---|
DbCM | Entresto (sacubitril/valsartan) | Approved for late stages of generalized cardiac heart failure; may pursue earlier stages of heart failure that may overlap with DbCM | ||
|
|
SGLT2 inhibitors |
|
Approved for glucose control with additional label claiming cardiovascular benefit in diabetics; may achieve specific label in DbCM in future studies |
|
|
GLP-1 agonists |
|
Approved; additional studies examining direct CV benefit in DbCM anticipated |
|
|
Anti-fibrotic therapies |
|
Preclinical to Phase 1; may prevent collagen cross-linking and B-catenin remodeling |
DPN |
|
Epalrestat (ARI); |
|
Approved as a generic in Japan, China and India |
BNV-22 epalrestat reformulation | Attempt to reformulate as a novel product in Russia in Phase 2/3 trial (no information available since 2016) | |||
Galactosemia |
|
|
|
None identified |
DR |
|
Anti-VEGFs (Lucentis; Eylea) |
|
Approved for proliferative forms of DRonly 20% of DR population |
|
|
Other mechanisms |
|
Phase 2a development for non-proliferative DR |
Intellectual Property
Our intellectual property is critical to our business and we strive to protect it, including by obtaining and maintaining patent protection in the United States and internationally for our product candidates, new therapeutic approaches and potential indications, and other inventions that are important to our business. Our policy is to seek to protect our proprietary and intellectual property position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important for the development and implementation of our business. We also rely on the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how that is not patentable, we rely on confidentiality agreements to protect our interests. We require our employees, consultants and advisors to enter into confidentiality agreements prohibiting the disclosure of confidential information and requiring disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
Our patent portfolio includes patents and patent applications that are exclusively licensed from Columbia University and patent applications that are owned by us. Our patent portfolio includes patents and patent applications that cover our product candidates AT-001, AT-003, AT-007 and AT-104, and the use of these candidates for therapeutic purposes. Our proprietary technology has been developed primarily through relationships with academic research centers and contract research organizations.
For our product candidates, we will, in general, initially pursue patent protection covering compositions of matter and methods of use. Throughout the development of our product candidates, we seek to identify additional means of obtaining patent protection that would potentially enhance commercial success, including through additional methods of use, process of making, formulation and dosing regimen-related claims.
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In total, our patent portfolio, including patents licensed from Columbia University, comprises seven different patent families, filed in various jurisdictions worldwide, including families directed to composition of matter for AR inhibitors, and a family directed to methods of treating galactosemia and complications associated with galactosemia using AR inhibitors. Our patent portfolio includes issued patents in the United States, Europe, Japan, Australia and Canada. Our patent portfolio is outlined below:
Composition of Matter Patents
AT-001 and AT-003. As of April 1, 2019, we have exclusively licensed from Columbia University a patent family that includes 3 issued patents in the United States, 25 issued patents in Europe, Japan, Canada and Australia, 2 pending applications in the United States, and a pending application in Europe that claim the composition of matter of and certain methods of use with respect to AT-001 and AT-003. The 20-year term of the patents in this family runs through July 2031, absent any available patent term adjustments or extensions.
AT-007. We have exclusively licensed a patent family from Columbia University that includes an issued composition of matter patent in the United States and a pending European patent application that claim the composition of matter of and certain methods of use with respect to AT-007. In addition, we have also filed applications in Japan, China, Canada, Australia, Russia, Brazil, India, Israel, Mexico, New Zealand, Singapore and South Africa. The 20-year term of patents in this family runs through June 2037, absent any available patent term adjustments or extensions.
AT-104. We have exclusively licensed an early-stage patent family from Columbia University that currently includes one pending international patent application filed under the Patent Cooperation Treaty, or PCT, that claims the composition of matter of and certain methods of use with respect to AT-104. We intend to file national phase applications based on this PCT application before applicable deadlines. The 20-year term of any patents in this family that may issue will run through July 2038, absent any available patent term adjustments or extensions.
Methods for Treating Galactosemia
We own a pending PCT patent application that claims methods for treating galactosemia and preventing complications associated with galactosemia using AT-007 and other inhibitors of AR. We plan to file national stage applications in the United States, Europe and other jurisdictions before the deadlines to file such applications. No patents have issued to date, but we expect that the 20-year term of patents that do issue in this family will run through July 2038, absent any available patent term adjustments or extensions.
We expect to file future patent applications on innovations that are developed in the course of advancing our pipeline through preclinical and clinical development.
Patent Term and Term Extensions
Individual patents have terms for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, utility patents issued for applications filed in the United States are granted a term of 20 years from the earliest effective filing date of a non-provisional patent application. In addition, in certain instances, the term of a U.S. patent can be extended to recapture a portion of the United States Patent and Trademark Office, or the USPTO, delay in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the restoration period cannot be longer than five years and the restoration period cannot extend the patent term beyond 14 years from FDA approval. In addition, only one patent applicable to an approved drug is eligible for the extension, and only those claims covering the
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approved drug, a method for using it, or a method of manufacturing may be extended. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. All taxes, annuities or maintenance fees for a patent, as required by the USPTO and various foreign jurisdictions, must be timely paid in order for the patent to remain in force during this period of time.
The actual protection afforded by a patent may vary on a product by product basis, from country to country, and can depend upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions and the availability of legal remedies in a particular country and the validity and enforceability of the patent.
Our patents and patent applications may be subject to procedural or legal challenges by others. We may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and we may be subject to claims that we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For more information, see the section titled "Risk FactorsRisks Related to Our Intellectual Property."
Trademarks and Know-How
In connection with the ongoing development and advancement of our products and services in the United States and various international jurisdictions, we seek to create protection for our marks and enhance their value by pursuing trademarks and service marks where available and when appropriate. In addition to patent and trademark protection, we rely upon know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, by using confidentiality agreements with our commercial partners, collaborators, employees and consultants, and invention assignment agreements with our employees and consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed by our employees and through relationships with third parties. These agreements 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. To the extent that our contractors, commercial partners, collaborators, employees, and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For more information, see the section titled "Risk FactorsRisks Related to Our Intellectual Property."
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local levels, and in other countries, extensively regulate, among other things, the research, development, testing, manufacture, pricing, quality control, 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.
United States Government Regulation
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at any time during the drug development process, approval process or after approval, may subject an applicant to delays and a variety of administrative or judicial
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sanctions, such as the FDA's refusal to approve a pending New Drug Application, or NDA, withdrawal of an approval, imposition of a clinical hold, issuance of warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.
The process required by the FDA before a drug may be marketed in the United States generally involves:
Preclinical Studies
Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold or a partial clinical hold.
In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical Trials
Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to
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be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must continue to oversee the clinical trial while it is being conducted and reapprove the study at least annually. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their ClinicalTrials.gov website.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined. In Phase 1, the drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an initial indication of its effectiveness. In Phase 2, the drug typically is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. In Phase 3, the drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the safety and efficacy of the product for approval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.
Progress reports detailing the results of the clinical trials must be submitted, at least annually, to the FDA, and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions, findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product, and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB's requirements, or if the drug has been associated with unexpected serious harm to patients.
Marketing Approval
Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relating to the product's chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of "filing" of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes 12 months from the date the NDA is submitted to the FDA because the FDA has approximately two months to make a "filing" decision. The FDA may further extend the review process for three additional months to consider new information provided by the applicant to address any outstanding deficiency identified by the FDA following the original submission.
In addition, under the Pediatric Research Equity Act, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data
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requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.
The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries or other risk minimization tools.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are 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. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product's continued safety, quality and purity.
The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. These pre-approval inspections may cover all facilities associated with an NDA submission, including component manufacturing, finished product manufacturing and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical trial sites to assure compliance with GCP requirements.
The testing and approval process for an NDA requires substantial time, effort and financial resources, and takes several years to complete. Data obtained from preclinical and clinical testing are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval of an NDA on a timely basis, or at all.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA's satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug's safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and
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profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. 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.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000, there is no reasonable expectation that sales of the drug in the United States will be sufficient to offset the costs of developing and making the drug available in the United States. Orphan drug designation must be requested before submitting an NDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
If the FDA approves a sponsor's marketing application for a designated orphan drug for use in the rare disease or condition for which it was designated, the sponsor is eligible for a seven-year period of marketing exclusivity, during which the FDA may not approve another sponsor's marketing application for a drug with the same active moiety and intended for the same use or indication as the approved orphan drug, except in limited circumstances, such as if a subsequent sponsor demonstrates its product is clinically superior. During a sponsor's orphan drug exclusivity period, competitors, however, may receive approval for drugs with different active moieties for the same indication as the approved orphan drug, or for drugs with the same active moiety as the approved orphan drug, but for different indications. Orphan drug exclusivity could block the approval of one of our products for seven years if a competitor obtains approval for a drug with the same active moiety intended for the same indication before we do, unless we are able to demonstrate that grounds for withdrawal of the orphan drug exclusivity exist, such as that our product is clinically superior. Further, if a designated orphan drug receives marketing approval for an indication broader than the rare disease or condition for which it received orphan drug designation, it may not be entitled to exclusivity.
Special FDA Expedited Review and Approval Programs
The FDA has various programs, including fast track designation, priority review, accelerated approval and breakthrough therapy designation, which are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
To be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease or condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors. The FDA may review sections of the NDA for a fast track product on a rolling basis before the complete application is submitted. The FDA may do so if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.
The FDA may give a priority review designation to drugs that are designed to treat serious conditions, and if approved, would provide a significant improvement in treatment, or provide a treatment where no adequate therapy exists. A priority review means that the goal for the FDA to
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review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. Under the current PDUFA agreement, these six and ten month review periods are measured from the "filing" date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.
Rare pediatric disease, or RPD, designation by the FDA enables priority review voucher, or PRV, eligibility upon U.S. market approval of a designated drug for rare pediatric diseases. The RPD-PRV program is intended to encourage development of therapies to prevent and treat rare pediatric diseases. The voucher, which is awarded upon NDA or Biologics License Application, or BLA, approval to the sponsor of a designated RPD can be sold or transferred to another entity and used by the holder to receive priority review for a future NDA or BLA submission, which reduces the FDA review time of such future submission from ten to six months.
In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may be eligible for accelerated approval. To qualify, the FDA must determine that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
Breakthrough therapy designation is for a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates as appropriate.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications, manufacturing changes or other labeling claims, are subject to further testing requirements and prior 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 application fees for supplemental applications with clinical data.
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, including a boxed warning, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug's safety after approval, require testing and surveillance programs to monitor the
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product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. 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 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 area of production and quality control to maintain cGMP compliance.
The FDA may also subject a drug to official lot release, which requires manufacturers to submit several items to the FDA with respect to each lot of a drug before it is released to distribution. These items include samples of each lot, a summary of the manufacturing history of the lot and the results of any tests performed on the lot.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label, although physicians, in the practice of medicine, may prescribe approved drugs for unapproved indications. The FDA and other agencies actively enforce the laws and regulations prohibiting their promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal and administrative liability.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.
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Federal and State Fraud and Abuse, Data Privacy and Security, and Transparency Laws and Regulations
In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws and regulations restrict business practices in the biopharmaceutical industry. These laws may impact, among other things, our current and future business operations, including our clinical research activities, and proposed sales, marketing and education programs and constrain the business or financial arrangements and relationships with healthcare providers and other parties through which we market, sell and distribute our products for which we obtain marketing approval. These laws include anti-kickback and false claims laws and regulations, data privacy and security, and transparency laws and regulations, including, without limitation, those laws described below.
The federal Anti-Kickback Statute prohibits any person or entity from, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term "remuneration" has been broadly interpreted to include anything of value. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the 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. 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 statute has been violated.
A person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, 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 federal civil False Claims Act or the civil monetary penalties laws.
Federal civil and criminal false claims laws and civil monetary penalties laws, including the federal civil False Claims Act, which can be enforced by individuals through civil whistleblower and qui tam actions, prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, a false claim for payment to 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 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.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing 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. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
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In addition, 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, impose specified requirements on certain types of individuals and entities 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 independent contractors or agents of covered entities, which include certain healthcare providers, healthcare clearinghouses and health plans, that create, receive, maintain or transmit individually identifiable health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney's fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which are not pre-empted by HIPAA, differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members.
We may also be subject to 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, 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 and local laws that require the registration of pharmaceutical sales representatives.
Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject to significant criminal, civil and administrative penalties including damages, fines, individual imprisonment, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future earnings, disgorgement, exclusion from participation in government healthcare programs 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. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, implementation of corporate compliance programs, reporting of payments or transfers of value to healthcare professionals, and additional data privacy and security requirements.
Coverage and Reimbursement
The future commercial success of our product candidates, if approved, will depend in part on the extent to which third-party payors, such as governmental payor programs at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payors, provide
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coverage of and establish adequate reimbursement levels for our product candidates. Third-party payors generally decide which products they will pay for and establish reimbursement levels for those products. In particular, in the United States, no uniform policy for coverage and reimbursement exists. Private health insurers and other third-party payors often provide coverage and reimbursement for products based on the level at which the government, through the Medicare program, provides coverage and reimbursement for such products, but also on their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement can differ significantly from payor to payor.
In the United States, the European Union, or EU, and other potentially significant markets for our product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of products, particularly for new and innovative products, which often has resulted in average selling prices lower than they would otherwise be. Further, the increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the EU will put additional pressure on product pricing, reimbursement and usage. These pressures can arise from rules and practices of managed care groups, judicial decisions and laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical coverage and reimbursement policies and pricing in general.
Third-party payors are increasingly imposing additional requirements and restrictions on coverage and limiting reimbursement levels for products. For example, federal and state governments reimburse products at varying rates generally below average wholesale price. These restrictions and limitations influence the purchase of products. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of products, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our product candidates, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor's decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Adequate third-party payor reimbursement may not be available to enable us to realize an appropriate return on our investment in product development. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our product candidates, if approved, or exclusion of our product candidates from coverage and reimbursement. The cost containment measures that third-party payors and providers are instituting and any healthcare reform could significantly reduce our revenues from the sale of any approved product candidates.
Healthcare Reform
The United States and some foreign jurisdictions are considering enacting or have enacted a number of additional legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our product candidates profitably, if approved. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts, which include major legislative initiatives to reduce the cost of care through changes in the healthcare system, including limits on the pricing, coverage, and reimbursement of pharmaceutical and biopharmaceutical products, especially under government-funded healthcare programs, and increased governmental control of drug pricing.
There have been several U.S. government initiatives over the past few years to fund and incentivize certain comparative effectiveness research, including creation of the Patient-Centered
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Outcomes Research Institute under the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the PPACA. It is also possible that comparative effectiveness research demonstrating benefits in a competitor's product could adversely affect the sales of our product candidates.
The PPACA became law in March 2010 and substantially changed the way healthcare is financed by third-party payors, and significantly impacts the U.S. pharmaceutical industry. Among other measures that may have an impact on our business, the PPACA establishes an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; and a new formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program. Additionally, the PPACA extends manufacturers' Medicaid rebate liability, expands eligibility criteria for Medicaid programs, and expands entities eligible for discounts under the Public Health Service Act. At this time, we are unsure of the full impact that the PPACA will have on our business.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the PPACA, and we expect such challenges and amendments to continue. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain PPACA provisions or otherwise circumvent requirements for health insurance mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the PPACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA 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 January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called "Cadillac" tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on nonexempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amended the PPACA, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the "donut hole." In July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA qualified health plans and health insurance issuers under the PPACA adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. In December 2018, a U.S. District Court Judge in the Northern District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the PPACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the PPACA are invalid as well. While the Texas District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the PPACA will impact the PPACA.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, the President signed into law the Budget Control Act of 2011, as amended, which, among other things, included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which began in 2013 and, following passage of subsequent legislation, including the BBA, will continue through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was enacted which, among other things, reduced Medicare
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payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further, there has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, 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 generic drugs for low-income patients. Additionally, the Trump administration released a "Blueprint" to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase 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 U.S. Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measures and is implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. Although a number of these and other 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. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine which drugs and suppliers will be included in their healthcare programs. These measures could reduce future demand for our products or put pressure on our pricing.
Additionally, in May 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.
Foreign Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our product candidates. For example, in the EU, we must obtain authorization of a clinical trial application, or CTA, in each member state in which we intend to conduct a clinical trial. Whether or not we obtain FDA approval for a drug, we would need to obtain the necessary approvals
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by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the drug in those countries. The approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
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 a material adverse effect on our business, operating results or financial condition.
Facilities
We lease the space for our principal executive offices in New York, New York, on a three-month basis. We believe that our facilities are adequate to meet our current needs.
Employees
As of April 1, 2019, we had nine full-time employees, seven of whom were primarily engaged in research and development activities. A total of five employees have an M.D. or Ph.D. degree. None of our employees is represented by a labor union and we consider our employee relations to be good.
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The following table sets forth information regarding our executive officers and directors, including their ages as of April 1, 2019:
NAME
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AGE | POSITION(S) | |||
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Executive Officers | |||||
Shoshana Shendelman, Ph.D. | 40 | President, Chief Executive Officer and Director | |||
Les Funtleyder | 49 | Interim Chief Financial Officer and Director | |||
Riccardo Perfetti, M.D., Ph.D. | 59 | Chief Medical Officer | |||
Non-Employee Directors |
|
|
|
|
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Franklin M. Berger, CFA | 69 | Director | |||
Teena Lerner, Ph.D. | 61 | Director | |||
Joel S. Marcus | 71 | Director | |||
Jay S. Skyler, M.D., MACP | 72 | Director |
Executive Officers
Shoshana Shendelman, Ph.D. is our founder and has served as our President and Chief Executive Officer and as a member of our board of directors since January 2016. Prior to founding our company, she founded Clearpoint Strategy Group LLC, a boutique life sciences consulting firm, where she served as the Managing Director from July 2012 to December 2016, and served as a Senior Advisor from January 2017 to December 2018. Prior to that, she served as a scientific consultant and analyst at Bridge Scientific Consulting LLC. Dr. Shendelman received her B.S. in biochemistry from Brandeis University and a Ph.D. in Cellular, Molecular and Biophysical Studies (CMBS) from Columbia University Vagelos College of Physicians and Surgeons.
Les Funtleyder has served as our Interim Chief Financial Officer since December 2018 and a member of our board of directors since June 2016. Mr. Funtleyder also serves as a healthcare portfolio manager at E Squared Capital Management, LLC since January 2014, a senior external advisor with McKinsey and Co. since June 2017, and a consulting partner at Bluecloud Health, a private equity healthcare fund, since December 2013. Mr. Funtleyder previously served as the director of strategic investments and communications of OPKO Health Inc., a publicly traded healthcare company. Mr. Funtleyder currently serves on the board of directors of several private healthcare companies and foundations. Mr. Funtleyder is also an adjunct professor at Columbia University Medical Center. Mr. Funtleyder received his B.A. from Tulane University and MPH from Columbia University Mailman School of Public Health. We believe that Mr. Funtleyder's extensive experience managing and investing in the healthcare industry qualifies him to serve on our board of directors.
Riccardo Perfetti, M.D., Ph.D. has served as our Chief Medical Officer since August 2018. Prior to joining us, Dr. Perfetti served as a Senior Medical Officer, Vice President and Head of Global Medical Affairs, Diabetes and Cardiovascular Business Unit at Sanofi S.A., a publicly traded pharmaceutical company from October 2007 to September 2018. Prior to joining Sanofi, Dr. Perfetti served in various roles at Amgen Inc., a publicly traded biopharmaceutical company, including as a Director and Global Development Leader in diabetes, obesity, metabolism and endocrinology from December 2004 to August 2007. Dr. Perfetti was previously an associate professor of medicine at University of California in Los Angeles and a professor of medicine at the National Institutes of Health, or NIH. Dr. Perfetti practiced as an endocrinologist at Cedars-Sinai Medical Center and also served as Director of the Diabetes Research Laboratory and Director of the Outpatient Diabetes Program. Dr. Perfetti received
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his M.D. and Ph.D. in Endocrinology from University La Sapienza in Rome, Italy and received post-graduate training in endocrinology and molecular biology at NIH.
Non-Employee Directors
Franklin M. Berger, CFA has served as a member of our board of directors since January 2017. Mr. Berger worked at Sectoral Asset Management as a founder of the small-cap focused NEMO Fund from January 2007 through June 2008. Prior to that, he served at J.P. Morgan Securities, most recently as Managing Director, Equity Research and Senior Biotechnology Analyst and served in similar capacities at Salomon Smith Barney and Josephthal & Co. Mr. Berger has served as a member of the board of directors of Kezar Life Sciences, Inc. since November 2016, Five Prime Therapeutics, Inc. since October 2014, Immune Design Corp. since December 2014, Bellus Health, Inc. since May 2010, ESSA Pharma, Inc. since December 2015, and Proteostasis Therapeutics, Inc. since February 2016. Mr. Berger previously served as a member of the board of directors BioTime, Inc. and Seattle Genetics, Inc., both publicly held biotechnology companies. Mr. Berger received a B.A. degree in international relations and an M.A. degree in international economics from Johns Hopkins University, and an M.B.A. degree from the Harvard Business School. We believe that Mr. Berger's financial background and experience in the biotechnology industry combined with his experience serving on the boards of directors of multiple public companies qualifies him to serve on our board of directors.
Teena Lerner, Ph.D. , has served as a member of our board of directors since March 2017. Dr. Lerner has served on the Technology Transfer Advisory Committee of The Rockefeller University since 2000. In 2002, Dr. Lerner founded Rx Capital Management LP, a healthcare equity hedge fund, and served as the Chief Executive Officer until 2006. Prior to that, she was a portfolio manager at Pequot Capital Management, Inc., an investment advisory firm, and served as a Managing Director, Equity Research at Lehman Brothers Holdings Inc., a global financial services firm. Dr. Lerner received a B.S. from City University of New York-Brooklyn College, an MBA from New York University, Stern School of Business, a Ph.D. in Molecular Biology/Retrovirology from The Rockefeller University and a CFA charter from the Institute of Chartered Financial Analysts. We believe that Dr. Lerner's extensive expertise in various areas of the healthcare industry, including as investment banking and research, qualifies her to serve on our board of directors.
Joel S. Marcus has served as a member of our board of directors since January 2017. Mr. Marcus founded Alexandria Real Estate Equities, Inc., or Alexandria Real Estate, a publicly traded real estate investment trust, and currently serves as Executive Chairman after previously serving as its Chairman since May 2007, Chief Executive Officer since March 1997 and a director since its founding in 1994. Mr. Marcus also co-founded and leads Alexandria Venture Investments, LLC, a strategic venture arm of Alexandria Real Estate. Prior to founding Alexandria Real Estate, Mr. Marcus had an extensive legal career specializing in corporate finance and capital markets, venture capital and mergers and acquisitions with special expertise in the biopharmaceutical industry. Mr. Marcus currently serves on the boards of directors of Intra-Cellular Therapies, Inc. and MeiraGTx Holdings plc, each a publicly traded biopharmaceutical company, as well as Atara Biotherapeutics, Inc., a publicly traded immunotherapy company. He also serves on the boards of directors of several private companies. Mr. Marcus received both his B.A. and J.D. from the University of California, Los Angeles. We believe that Mr. Marcus' extensive experience in the life sciences industry and as a chief executive officer and attorney qualifies him to serve on our board of directors.
Jay S. Skyler, M.D., MACP has served on our board of directors since April 2019. Dr. Skyler is a Professor of Medicine, Pediatrics and Psychology and Deputy Director of the Diabetes Research Institute at the University of Miami in Florida, where he has been employed since 1976. Dr. Skyler has also served as Study Chairman for the National Institute of Diabetes & Digestive & Kidney Diseases Type 1 Diabetes clinical trials network. He was previously the President of the American Diabetes Association and Vice-President of the International Diabetes Federation. Dr. Skyler served as a
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director of Amylin Pharmaceuticals, Inc., a pharmaceutical company, until its acquisition by Bristol-Myers Squibb Company in August 2012, and served as a director of MiniMed, Inc., a medical device company, until its acquisition by Medtronic plc. in 2001. Dr. Skyler currently serves on the board of directors of DexCom, Inc., a publicly traded medical device company. He also serves on the boards of directors of several private companies. Dr. Skyler received a B.S. from Pennsylvania State University and an M.D. from Jefferson Medical College. We believe that Dr. Skyler's extensive expertise in the life sciences industry and his experience serving on the board of directors of a public company qualifies him to serve on our board of directors.
Family Relationships and Other Arrangements
There are no family relationships among our directors and executive officers. Mr. Marcus was designated as a director to our board of directors by the majority of the holders of Series A Preferred Stock and Mr. Funtleyder was designated as a director to our board of directors by the majority of the holders of Series B Preferred Stock, each as pursuant to our amended and restated voting agreement, which will terminate upon the closing of this offering.
Board Composition
Our board of directors currently consists of six members. In accordance with our amended and restated certificate of incorporation, which will be effective immediately after the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:
We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.
Director Independence
Under The Nasdaq Stock Market LLC, or Nasdaq, Marketplace Rules, or the Nasdaq Listing Rules, independent directors must comprise a majority of our board of directors as a public company within one year of listing.
Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that all of our directors except Shoshana Shendelman and Les Funtleyder, representing two of our six directors, do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent" as that term is defined under the applicable rules and regulations of the SEC and the listing requirements of the Nasdaq Listing Rules. Our board of directors has determined that Dr. Shendelman, by virtue of her position as our President and Chief
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Executive Officer, and Mr. Funtleyder, by virtue of his position as our Interim Chief Financial Officer, are not independent under applicable rules and regulations of the SEC and the Nasdaq Listing Rules. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee has adopted a written charter that satisfies the applicable rules and regulations of the SEC and Nasdaq Listing Rules, which we will post on our website at www.appliedtherapeutics.com upon completion of this offering.
Audit Committee
The audit committee is responsible for assisting our board of directors in its oversight of the integrity of our financial statements, the qualifications and independence of our independent auditors and our internal financial and accounting controls. The audit committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of our independent auditors, and our independent auditors report directly to the audit committee. The audit committee also prepares the audit committee report that the SEC requires to be included in our annual proxy statement.
Our audit committee consists of , and . Our board of directors has determined that all members are independent under the Nasdaq Listing Rules and Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The chair of our audit committee is . Our board of directors has determined that and are each an "audit committee financial expert" as such term is currently defined in Item 407(d)(5) of Regulation S-K. Our board of directors has also determined that each member of our audit committee can read and understand fundamental financial statements, in accordance with applicable requirements. In arriving at these determinations, the board of directors has examined each audit committee member's scope of experience and the nature of their employment in the corporate finance sector.
Compensation Committee
The compensation committee approves the compensation objectives for the company, the compensation of the chief executive officer and approves, or recommends to our board of directors for approval, the compensation for other executives. The compensation committee reviews all compensation components, including base salary, bonus, benefits and other perquisites.
Our compensation committee consists of , and . Our board of directors has determined that all members are independent under the Nasdaq Listing Rules and are "non-employee directors" as defined in Rule 16b-3 promulgated under the Exchange Act. The chair of our compensation committee is .
Nominating and Corporate Governance Committee
The nominating and corporate governance committee makes recommendations regarding corporate governance, the composition of our board of directors, identification, evaluation and nomination of director candidates and the structure and composition of committees of our board of directors. In
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addition, the nominating and corporate governance committee is responsible for developing and recommending corporate governance guidelines to our board of directors, as applicable to the company.
Our nominating and corporate governance committee consists of , and . The chair of our nominating and corporate governance committee is . Each member of the nominating and corporate governance committee is a non-employee director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act, an independent director as defined by the Nasdaq Listing Rules and is free from any relationship that would interfere with the exercise of his or her independent judgment, as determined by the board of directors in accordance with the applicable Nasdaq Listing Rules.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is currently, or has been at any time, one of our executive officers or employees. None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or on our compensation committee.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics, to be effective upon the completion of this offering, that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, and agents and representatives. The full text of our code of business conduct and ethics will be posted on our website at www.appliedtherapeutics.com upon completion of this offering. The nominating and corporate governance committee of our board of directors will be responsible for overseeing our code of business conduct and ethics and any waivers applicable to any director, executive officer or employee. We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions applicable to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and agents and representatives, on our website identified above.
Limitation on Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which will become effective immediately after the completion of this offering, and our amended and restated bylaws, which will become effective immediately prior to the completion of this offering, limits our directors' liability, and may indemnify our directors and officers to the fullest extent permitted under Delaware General Corporation Law, or the DGCL. The DGCL provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:
These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or recession.
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The DGCL and our amended and restated bylaws provide that we will, in certain situations, indemnify our directors and officers and may indemnify other employees and other agents, to the fullest extent permitted by law. Any indemnified person is also entitled, subject to certain limitations, to advancement, direct payment or reimbursement of reasonable expenses, including attorneys' fees and disbursements, in advance of the final disposition of the proceeding.
In addition, we have entered, and intend to continue to enter, into separate indemnification agreements with some of our directors and officers. These indemnification agreements, among other things, require us to indemnify our directors and officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of their services as a director or officer, or any other company or enterprise to which the person provides services at our request.
We maintain a directors' and officers' insurance policy pursuant to which our directors and officers are insured against liability for actions taken in their capacities as directors and officers. We believe that these provisions in our amended and restated certificate of incorporation and amended and restated bylaws and these indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers or control persons, in the opinion of the SEC, such indemnification is against public policy, as expressed in the Securities Act and is therefore unenforceable.
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EXECUTIVE AND DIRECTOR COMPENSATION
Our named executive officers for the year ended December 31, 2018, which consist of our principal executive officer and our two most highly compensated executive officers, are:
Summary Compensation Table
The following table provides information regarding the compensation earned by our named executive officers for the year ended December 31, 2018.
Name and Principal Position
|
Year |
Salary
($) (1) |
Bonus
($) |
Option
Awards ($) (2) |
All Other
Compensation ($) (3) |
Total
($) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shoshana Shendelman, Ph.D. |
2018 | 500,000 | | 685,554 | | 1,185,554 | |||||||||||||
President and Chief Executive Officer |
|||||||||||||||||||
Les Funtleyder (4) |
2018 | | 30,242 | (5) | | | 30,242 | ||||||||||||
Interim Chief Financial Officer |
|||||||||||||||||||
Riccardo Perfetti, M.D., Ph.D. (6) |
2018 | 167,307 | 275,000 | (7) | 725,241 | 10,221 | 1,177,769 | ||||||||||||
Chief Medical Officer |
Narrative to the Summary Compensation Table
Our board of directors reviews compensation annually for all employees, including our named executive officers. In setting executive base salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long-term results that are in the best interests of our stockholders and a long-term commitment to our company.
Our board of directors has historically determined our executive officers' compensation and has typically reviewed and discussed management's proposed compensation with our chief executive officer for all executives other than our chief executive officer. Based on those discussions and its discretion, our board of directors then approved the compensation of each executive officer. Upon the completion of this offering, the compensation committee will determine our executive officers' compensation and
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follow this process, but the compensation committee itself, rather than our board of directors, will approve the compensation of each executive officer.
Annual Base Salary
Base salaries for our executive officers are initially established through arm's-length negotiations at the time of the executive officer's hiring, taking into account such executive officer's qualifications, experience, the scope of his or her responsibilities and competitive market compensation paid by other companies for similar positions within the industry and geography. Base salaries are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. In making decisions regarding salary increases, we may also draw upon the experience of members of our board of directors with executives at other companies. The 2018 base salaries for our named executive officers were as follows: (a) $500,000 for Dr. Shendelman and (b) $450,000 for each of Mr. Funtleyder and Dr. Perfetti.
Bonus
Our named executive officers are eligible to receive discretionary annual bonuses of up to a percentage of each executive's gross base salary based on individual performance, company performance or as otherwise determined appropriate, as determined by our board of directors. In 2018, under the terms of his offer letter Dr. Perfetti was eligible for an annual discretionary bonus target of up to 40% of his base salary. Dr. Shendelman and Mr. Funtleyder did not have fixed annual target bonus percentages for 2018.
Equity-Based Incentive Awards
Our equity-based incentive awards are designed to align our interests and those of our stockholders with those of our employees and consultants, including our named executive officers. As of December 31, 2018, stock option awards were the only form of equity awards we granted to our named executive officers.
We have historically used stock options as an incentive for long-term compensation to our named executive officers because they are able to profit from stock options only if our stock price increases relative to the stock option's exercise price, which exercise price is set at the fair market value of our common stock on the date of grant. We may grant equity awards at such times as our board of directors determines appropriate. Additional grants may occur periodically in order to specifically incentivize executives with respect to achieving certain corporate goals or to reward executives for exceptional performance.
Prior to this offering, all of the stock options we have granted were made pursuant to our 2016 Equity Incentive Plan, as amended, or the 2016 Plan. Following this offering, we will grant equity incentive awards under the terms of our 2019 Equity Incentive Plan, or the 2019 Plan. The terms of our equity plans are described below under "Equity Incentive Plans."
All options are granted with an exercise price per share that is no less than the fair market value of our common stock on the date of grant of such award. Our stock option awards generally vest over a three-year period, and may be subject to acceleration of vesting and exercisability under certain termination and change in control events. See "Outstanding Equity Awards at Fiscal Year-End" below for additional information.
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Outstanding Equity Awards at Fiscal Year-End
The following table provides information regarding the outstanding equity awards held by our named executive officers as of December 31, 2018. All awards were granted pursuant to the 2016 Plan. See "Equity Incentive Plans2016 Equity Incentive Plan" below for additional information.
|
|
Option Awards | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position
|
Grant Date |
Number of
Securities Underlying Unexercised Options (#) (Exercisable) |
Number of
Securities Underlying Unexercised Options (#) (Unexercisable) |
Option
Exercise Price ($) |
Option
Expiration Date |
||||||||
Shoshana Shendelman, Ph.D. |
|||||||||||||
President and Chief Executive Officer |
March 21, 2017 (1) | 166 | 334 | 55.26 | March 21, 2027 | ||||||||
|
March 8, 2018 (2) | | 13,158 | 79.40 | March 7, 2028 | ||||||||
Les Funtleyder |
|||||||||||||
Interim Chief Financial Officer |
June 21, 2016 (3) | 167 | 167 | 2.21 | June 21, 2026 | ||||||||
Riccardo Perfetti, M.D., Ph.D. |
|||||||||||||
Chief Medical Officer |
December 17, 2018 (4) | | 3,863 | 79.40 | December 16, 2028 |
Employment Arrangements
Below are descriptions of our offer letters with Mr. Funtleyder and Dr. Perfetti. Dr. Shendelman is not currently party to an offer letter with us. The letters generally provide for at-will employment without any specific term and set forth the named executive officer's initial base salary and eligibility for employee benefits. Each of our named executive officers has executed a form of our standard confidential information and inventions assignment agreement.
The key terms of the offer letters with our named executive officers, including potential payments upon termination or change in control, are described below. Additionally, Mr. Funtleyder and Dr. Perfetti are entitled to certain severance benefits pursuant to his agreement, the terms of which are described under "Potential Payments and Benefits upon Termination or Change in Control" below.
Agreement with Les Funtleyder
In December 2018, we entered into an offer letter agreement with Mr. Funtleyder, our Interim Chief Financial Officer. Pursuant to his offer letter, Mr. Funtleyder is entitled to an annual base salary of $450,000, a discretionary annual bonus, and a one-time sign-on bonus of $30,242. Additionally, pursuant to the terms of his offer letter, in March 2019, Mr. Funtleyder was granted an option to purchase 2,887 shares of our common stock that vests as follows: 25% of the shares were vested on the date of grant; 25% of the shares are eligible to vest on the first anniversary of the grant date; 25% of the shares are eligible to vest on the earlier of the pricing of this offering and the second anniversary of the grant date; and the remaining 25% of the shares are eligible to vest upon the earlier of the date
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the price of our common stock achieves a 30% increase over the price of a share in this offering and the third anniversary of the grant date, subject to Mr. Funtleyder's continued employment through each such date. This option grant was intended to represent the right to purchase 1% of our outstanding capital stock on a fully diluted basis as of the date of Mr. Funtleyder's offer letter, and Mr. Funtleyder was entitled to an additional option grant upon completion of the audit for the year ended December 31, 2018 to the extent 2,887 shares of common stock did not represent 1% of our outstanding capital stock as of the date of Mr. Funtleyder's offer letter.
Agreement with Riccardo Perfetti
In April 2018, we entered into an offer letter agreement with Dr. Perfetti, our Chief Medical Officer. Pursuant to his offer letter, Dr. Perfetti is entitled to an annual base salary of $450,000 and a discretionary annual target bonus equal to 40% of his base salary. For the first year of his employment with us, one half of the target bonus was guaranteed. In addition, Dr. Perfetti received a one-time sign-on bonus of $100,000, with $50,000 payable on the first day of his employment and the remainder payable on the one year anniversary of his start date. Pursuant to his offer letter, Dr. Perfetti also received an option to purchase 3,863 shares of our common stock that vest as follows: one-third on August 27, 2019 and the remainder in 24 equal monthly installments thereafter, subject to Dr. Perfetti's continued employment through each such date.
Potential Payments and Benefits upon Termination or Change in Control
Regardless of the manner in which a named executive officer's employment with us terminates, the named executive officer is entitled to receive amounts earned during their term of service, including salary and accrued unused vacation pay. In addition, each of the named executive officers is eligible for the following payments and benefits upon a qualifying termination of employment or a change in control:
Shoshana Shendelman
Dr. Shendelman's outstanding options will vest in full upon the occurrence of a change in control, subject to her continued service through the closing of the change in control (as defined in the 2016 Plan).
Les Funtleyder
In accordance with the terms of his offer letter, if Mr. Funtleyder experiences a qualifying termination by us without cause or by Mr. Funtleyder for good reason, provided Mr. Funtleyder signs and allows to become effective a release of claims in a form acceptable to us, then to the extent not yet vested the 25% of the shares subject to the option granted to him pursuant to his offer letter that are scheduled to vest on the first anniversary of the grant date will vest in full, and the remaining unvested shares subject to the option that are subject to performance-based vesting will remain outstanding and continue to be eligible to vest upon the achievement of the underlying performance milestones for one year following the date of such qualifying termination. For this purpose "cause" is defined as set forth in the 2016 Plan, and "good reason" means resignation by Mr. Funtleyder due to reduction of his base salary, without his consent, by 20% or more in any 12-month period, other than an across-the-board decrease in base salary applicable to all of our executive officers, provided Mr. Funtleyder gives us written notice of his intent to terminate for good reason within 30 days following the salary reduction, we fail to remedy the salary reduction within 30 days following receipt of the notice and Mr. Funtleyder terminates his employment within 30 days following the end of our cure period.
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In addition, Mr. Funtleyder's outstanding options will vest in full upon the occurrence of a change in control, subject to his continued service through the closing of the change in control (as defined in the 2016 Plan).
Riccardo Perfetti
If Dr. Perfetti is involuntarily terminated by us, he is entitled to salary continuation for a period of six months.
In addition, Dr. Perfetti's outstanding options will vest in full upon the occurrence of a change in control, subject to his continued service through the closing of the change in control (as defined in the 2016 Plan).
Health and Welfare and Retirement Benefits; Perquisites
All of our current named executive officers are eligible to participate in our employee benefit plans, including our medical, dental, vision, disability and life insurance plans, in each case on the same basis as all of our other employees. We generally do not provide perquisites or personal benefits to our named executive officers, except in limited circumstances.
401(k) Plan
Our named executive officers are eligible to participate in a defined contribution retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees may defer eligible compensation on a pre-tax or after-tax (Roth) basis, up to the statutorily prescribed annual limits on contributions under the Code. Contributions are allocated to each participant's individual account and are then invested in selected investment alternatives according to the participants' directions. We currently make matching contributions into the 401(k) plan on behalf of participants equal to 100% on participant contributions up to 3% of their compensation and 50% on participant contributions up to an additional 2% of their compensation. Participants are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan's related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan (except for Roth contributions) and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. Our board of directors may elect to adopt qualified or nonqualified benefit plans in the future, if it determines that doing so is in our best interests.
Equity Incentive Plans
2019 Equity Incentive Plan
Our board of directors adopted our 2019 Plan on and our stockholders approved our 2019 Plan on . Our 2019 Plan is a successor to and continuation of the 2016 Equity Incentive Plan, or the 2016 Plan. The 2019 Plan will become effective upon, and no stock awards may be granted under the 2019 Plan until, the date of the underwriting agreement related to this offering. Once the 2019 Plan is effective, no further grants will be made under the 2016 Plan.
Stock Awards. Our 2019 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Code, to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants, including employees and consultants of our affiliates.
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Authorized Shares. Initially, the maximum number of shares of our common stock that may be issued under our 2019 Plan after it becomes effective will be shares, which is the sum of (1) new shares, plus (2) the number of shares (not to exceed shares) (i) that remain available for the issuance of awards under the 2016 Plan at the time our 2019 Plan becomes effective, and (ii) any shares subject to outstanding stock options or other stock awards that were granted under the 2016 Plan that (A) terminate or expire prior to exercise or settlement; (B) are forfeited because of the failure to vest; or (C) are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price. In addition, the number of shares of our common stock reserved for issuance under our 2019 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2020 (assuming the 2019 Plan becomes effective in 2019) through January 1, 2029, in an amount equal to % of the total number of shares of our capital stock outstanding on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by our board of directors. The maximum number of shares of our common stock that may be issued on the exercise of ISOs under our 2019 Plan is shares.
Shares subject to stock awards granted under our 2019 Plan that expire or terminate without being exercised in full or that are paid out in cash rather than in shares do not reduce the number of shares available for issuance under our 2019 Plan. If any shares of common stock issued pursuant to a stock award are forfeited back to or repurchased or reacquired by us for any reason, the shares that are forfeited or repurchased or reacquired will revert to and again become available for issuance under the 2019 Plan. Any shares reacquired in satisfaction of tax withholding obligations or as consideration for the exercise or purchase price of a stock award will again become available for issuance under the 2019 Plan.
The maximum number of shares of common stock subject to stock awards granted under the 2019 Plan or otherwise during any one calendar year to any non-employee director, taken together with any cash fees paid by us to such non-employee director during such calendar year for service on the board of directors, will not exceed $ in total value (calculating the value of any such stock awards based on the grant date fair value of such stock awards for financial reporting purposes), or, with respect to the calendar year in which a non-employee director is first appointed or elected to our board of directors, $ .
Plan Administration. Our board of directors, or a duly authorized committee of our board of directors, will administer our 2019 Plan and is referred to as the "plan administrator" herein. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than officers) to receive specified stock awards and (2) determine the number of shares subject to such stock awards. Under our 2019 Plan, our board of directors has the authority to determine award recipients, grant dates, the numbers and types of stock awards to be granted, the applicable fair market value, and the provisions of each stock award, including the period of exercisability and the vesting schedule applicable to a stock award.
Under the 2019 Plan, the board of directors also generally has the authority to effect, with the consent of any adversely affected participant, (1) the reduction of the exercise, purchase, or strike price of any outstanding award; (2) the cancellation of any outstanding award and the grant in substitution therefore of other awards, cash, or other consideration; or (3) any other action that is treated as a repricing under U.S. GAAP.
Stock Options. ISOs and NSOs are granted under stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for stock options, within the terms and conditions of the 2019 Plan, provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2019 Plan vest at the rate specified in the stock option agreement as determined by the plan administrator.
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The plan administrator determines the term of stock options granted under the 2019 Plan, up to a maximum of 10 years. Unless the terms of an optionholder's stock option agreement provide otherwise, if an optionholder's service relationship with us or any of our affiliates ceases for any reason other than disability, death, or cause, the optionholder may generally exercise any vested options for a period of three months following the cessation of service. This period may be extended in the event that exercise of the option is prohibited by applicable securities laws or our insider trading policy. If an optionholder's service relationship with us or any of our affiliates ceases due to death, or an optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested options for a period of 18 months following the date of death. If an optionholder's service relationship with us or any of our affiliates ceases due to disability, the optionholder may generally exercise any vested options for a period of 12 months following the cessation of service. In the event of a termination for cause, options generally terminate upon the termination date. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (1) cash, check, bank draft or money order, (2) a broker-assisted cashless exercise, (3) the tender of shares of our common stock previously owned by the optionholder, (4) a net exercise of the option if it is an NSO or (5) other legal consideration approved by the plan administrator.
Unless the plan administrator provides otherwise, options generally are not transferable except by will or the laws of descent and distribution. Subject to approval of the plan administrator or a duly authorized officer in each case, (i) an option may be transferred pursuant to a domestic relations order, official marital settlement agreement, or other divorce or separation instrument and (ii) an optionholder may designate a beneficiary who may exercise the option following the optionholder's death.
Tax Limitations on ISOs. The aggregate fair market value, determined at the time of grant, of our common stock with respect to ISOs that are exercisable for the first time by an award holder during any calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and (2) the term of the ISO does not exceed five years from the date of grant.
Restricted Stock Unit Awards. Restricted stock unit awards are granted under restricted stock unit award agreements adopted by the plan administrator. Restricted stock unit awards may be granted in consideration for any form of legal consideration that may be acceptable to our board of directors and permissible under applicable law. A restricted stock unit award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Except as otherwise provided in the applicable award agreement, restricted stock unit awards that have not vested will be forfeited once the participant's continuous service ends for any reason.
Restricted Stock Awards. Restricted stock awards are granted under restricted stock award agreements adopted by the plan administrator. A restricted stock award may be awarded in consideration for cash, check, bank draft or money order, past or future services to us, or any other form of legal consideration that may be acceptable to our board of directors and permissible under applicable law. The plan administrator determines the terms and conditions of restricted stock awards, including vesting and forfeiture terms. If a participant's service relationship with us ends for any reason, we may receive any or all of the shares of common stock held by the participant that have not vested
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as of the date the participant terminates service with us through a forfeiture condition or a repurchase right.
Stock Appreciation Rights. Stock appreciation rights are granted under stock appreciation right agreements adopted by the plan administrator. The plan administrator determines the purchase price or strike price for a stock appreciation right, which generally cannot be less than 100% of the fair market value of our common stock on the date of grant. A stock appreciation right granted under the 2019 Plan vests at the rate specified in the stock appreciation right agreement as determined by the plan administrator.
The plan administrator determines the term of stock appreciation rights granted under the 2019 Plan, up to a maximum of 10 years. If a participant's service relationship with us or any of our affiliates ceases for any reason other than cause, disability, or death, the participant may generally exercise any vested stock appreciation right for a period of three months following the cessation of service. This period may be further extended in the event that exercise of the stock appreciation right following such termination of service is prohibited by applicable securities laws or our insider trading policy. If a participant's service relationship with us, or any of our affiliates, ceases due to disability or death, or a participant dies within a certain period following cessation of service, the participant or a beneficiary may generally exercise any vested stock appreciation right for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock appreciation rights generally terminate immediately upon the occurrence of the event giving rise to the termination of the individual for cause. In no event may a stock appreciation right be exercised beyond the expiration of its term.
Performance Awards. The 2019 Plan permits the grant of performance-based stock and cash awards. Our compensation committee may structure awards so that the stock or cash will be issued or paid only following the achievement of certain pre-established performance goals during a designated performance period.
The performance goals that may be selected include one or more of the following: (i) sales; (ii) revenues; (iii) assets; (iv) expenses; (v) market penetration or expansion; (vi) earnings from operations; (vii) earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization, incentives, service fees or extraordinary or special items, whether or not on a continuing operations or an aggregate or per share basis; (viii) net income or net income per common share (basic or diluted); (ix) return on equity, investment, capital or assets; (x) one or more operating ratios; (xi) borrowing levels, leverage ratios or credit rating; (xii) market share; (xiii) capital expenditures; (xiv) cash flow, free cash flow, cash flow return on investment, or net cash provided by operations; (xv) stock price, dividends or total stockholder return; (xvi) development of new technologies or products; (xvii) sales of particular products or services; (xviii) economic value created or added; (xix) operating margin or profit margin; (xx) customer acquisition or retention; (xxi) raising or refinancing of capital; (xxii) successful hiring of key individuals; (xxiii) resolution of significant litigation; (xxiv) acquisitions and divestitures (in whole or in part); (xxv) joint ventures and strategic alliances; (xxvi) spin-offs, split-ups and the like; (xxvii) reorganizations; (xxviii) recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings; (xxix) strategic business criteria, consisting of one or more objectives based on the following goals: achievement of timely development, design management or enrollment, meeting specified market penetration or value added, payor acceptance, patient adherence, peer reviewed publications, issuance of new patents, establishment of or securing of licenses to intellectual property, product development or introduction (including, without limitation, any clinical trial accomplishments, regulatory or other filings, approvals or milestones, discovery of novel products, maintenance of multiple products in pipeline, product launch or other product development milestones), geographic business expansion, cost targets, cost reductions or savings, customer satisfaction, operating efficiency, acquisition or retention, employee satisfaction, information technology, corporate development (including, without limitation, licenses, innovation,
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research or establishment of third-party collaborations), manufacturing or process development, legal compliance or risk reduction, patent application or issuance goals, or goals relating to acquisitions, divestitures or other business combinations (in whole or in part), joint ventures or strategic alliances; and (xxx) other measures of performance selected by the board of directors.
The performance goals may be based on company-wide performance or performance of one or more business units, divisions, affiliates, or business segments, and may be either absolute or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Our board of directors is authorized at any time in its sole discretion, to adjust or modify the calculation of a performance goal for such performance period in order to prevent the dilution or enlargement of the rights of participants, (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting us, or our financial statements in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions; or (c) in view of the board of director's assessment of our business strategy, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant. Specifically, the board of directors is authorized to make adjustments in the method of calculating attainment of performance goals and objectives for a performance period as follows: (i) to exclude the dilutive effects of acquisitions or joint ventures; (ii) to assume that any business divested by us achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; and (iii) to exclude the effect of any change in the outstanding shares of our common stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends. In addition, the board of directors is authorized to make adjustments in the method of calculating attainment of performance goals and objectives for a performance period as follows: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects of any items that are "unusual" in nature or occur "infrequently" as determined under U.S. GAAP; (v) to exclude the effects to any statutory adjustments to corporate tax rates; and (vi) to make other appropriate adjustments selected by the board of directors.
Other Stock Awards. The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the stock award and all other terms and conditions of such awards.
Changes to Capital Structure. In the event there is a specified type of change in our capital structure, such as a stock split, reverse stock split, or recapitalization, appropriate adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2019 Plan, (2) the class and maximum number of shares by which the share reserve may increase automatically each year, (3) the class and maximum number of shares that may be issued on the exercise of ISOs and (4) the class and number of shares and exercise price, strike price, or purchase price, if applicable, of all outstanding stock awards.
Corporate Transactions. Our 2019 Plan provides that in the event of certain specified significant corporate transactions (or a change in control, as defined below), unless otherwise provided in an award agreement or other written agreement between us and the award holder, the plan administrator may take one or more of the following actions with respect to such stock awards:
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The plan administrator is not obligated to treat all stock awards or portions of stock awards in the same manner and is not obligated to take the same actions with respect to all participants.
Under the 2019 Plan, a corporate transaction is generally the consummation of: (1) a sale of all or substantially all of our assets, (2) the sale or disposition of more than 50% of our outstanding securities, (3) a merger or consolidation where we do not survive the transaction, or (4) a merger or consolidation where we do survive the transaction but the shares of our common stock outstanding immediately before such transaction are converted or exchanged into other property by virtue of the transaction.
Change in Control. In the event of a change in control, the plan administrator may take any of the above-mentioned actions. Awards granted under the 2019 Plan may be subject to additional acceleration of vesting and exercisability upon or after a change in control as may be provided in the applicable stock award agreement or in any other written agreement between us or any affiliate and the participant, but in the absence of such provision, no such acceleration will automatically occur. Under the 2019 Plan, a change in control is generally (1) the acquisition by any person or company of more than 50% of the combined voting power of our then outstanding stock, (2) a merger, consolidation or similar transaction in which our stockholders immediately before the transaction do not own, directly or indirectly, more than 50% of the combined voting power of the surviving entity (or the parent of the surviving entity) in substantially the same proportions as their ownership immediately prior to such transaction, (3) a sale, lease, exclusive license or other disposition of all or substantially all of our assets other than to an entity more than 50% of the combined voting power of which is owned by our stockholders in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction, (4) a complete dissolution or liquidation of the company or (5) when a majority of our board of directors becomes comprised of individuals who were not serving on our board of directors on the date of the underwriting agreement related to this offering, or the incumbent board, or whose nomination, appointment, or election was not approved by a majority of the incumbent board still in office.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend, or terminate our 2019 Plan, provided that such action does not materially impair the existing rights of any participant without such participant's written consent. Certain material amendments also require the approval of our stockholders. No ISOs may be granted after the tenth anniversary of the date our board of directors adopts our 2019 Plan. No stock awards may be granted under our 2019 Plan while it is suspended or after it is terminated.
2016 Equity Incentive Plan
General. Our board of directors adopted and our stockholders approved the 2016 Plan in June 2016. Our board of directors and stockholders have subsequently approved and amended the 2016 Plan in December 2016, November 2018 and , 2019 the purpose of which was to increase the
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number of shares available for issuance under the 2016 Plan. The 2016 Plan will be terminated in connection with our adoption of the 2019 Plan; however, awards outstanding under the 2016 Plan continue in full effect in accordance with their existing terms.
Share Reserve. As of December 31, 2018, 53,689 shares of our common stock were reserved for issuance under the 2016 Plan, and options to purchase 21,774 shares of common stock, at exercise prices ranging from $2.21 to $79.40 per share, or a weighted-average exercise price of $74.43 per share, were outstanding under the 2016 Plan.
Administration. Our board of directors has administered the 2016 Plan since its adoption, however, following this offering, the compensation committee of our board of directors will generally administer the 2016 Plan. Our board of directors has full authority and discretion to take any actions it deems necessary or advisable for the administration of the 2016 Plan. Our board of directors may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (whether granted by us or another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price.
Types of Awards. The 2016 Plan provides for the grant of incentive stock options and nonstatutory stock options to purchase shares of our common stock, equity appreciation rights awards, restricted stock awards, restricted stock units, performance awards and other stock-based awards to employees, members of our board of directors and consultants. Incentive stock options may be granted only to employees.
Options. The exercise price of options granted under the 2016 Plan may not be less than 100% of the fair market value of our common stock on the grant date. Options expire at the time determined by the administrator, but in no event more than ten years after they are granted, and generally expire earlier if the optionholder's service terminates.
Changes in Capitalization. If we at any time change the number of shares of common stock issued without new consideration (such as by stock dividend or stock split), the total number of shares of common stock reserved for issuance under the 2016 Plan, the maximum number of shares of common stock which may be made subject to incentive stock options during the term of the 2016 Plan, and the number of shares of common stock covered by each then outstanding award will be equitably adjusted and the aggregate consideration payable to us, if any, will not be changed.
Corporate Transactions. Unless in connection with a change of control, in the event of any merger, consolidation or reorganization of us with or into another entity other than a merger, consolidation or reorganization in which we are the continuing entity and which does not result in the outstanding shares of our common stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, we may substitute, on an equitable basis for each share of common stock then subject to an outstanding award, the number and the kind of shares of stock, other securities, cash or other property to which holders of shares of common stock will be entitled pursuant to the transaction.
Change of Control. Unless otherwise expressly provided in the applicable award agreement governing an award, upon a change of control, our board of directors (or a committee thereof) may:
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The treatment of awards upon a change of control may vary among the award types and participants in the sole discretion of our board of directors.
In general, a "change of control" means the acquisition of the company by another entity by means of any transaction or series of related transactions, unless our stockholders of record immediately prior to such transaction or series of related transactions hold, immediately after such transaction or series of related transactions, at least 50% of the voting power of the surviving or acquiring entity; or a sale of all or substantially all of our assets, subject to certain exceptions.
Transferability. A participant may not transfer stock awards under the 2016 Plan other than by will, the laws of descent and distribution, or as otherwise provided under the 2016 Plan.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend or terminate the 2016 Plan, provided that such action is approved by our stockholders to the extent stockholder approval is necessary. As described above, the 2016 Plan will terminate upon the effective date of the 2019 Plan.
2019 Employee Stock Purchase Plan
Our board of directors adopted, and our stockholders approved, the 2019 Employee Stock Purchase Plan, or the ESPP, on , 2019. The ESPP will become effective immediately prior to and contingent upon the date of the underwriting agreement related to this offering. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees, and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. The ESPP is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code for U.S. employees.
Share Reserve. Following this offering, the ESPP authorizes the issuance of shares of our common stock under purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each calendar year, beginning on January 1, 2020 (assuming the ESPP becomes effective in 2019) through January 1, 2029, by the lesser of (1) % of the total number of shares of our common stock outstanding on the last day of the calendar month before the date of the automatic increase and (2) shares; provided that before the date of any such increase, our board of directors may determine that such increase will be less than the amount set forth in clauses (1) and (2). As of the date hereof, no shares of our common stock have been purchased under the ESPP.
Administration. Our board of directors administers the ESPP and may delegate its authority to administer the ESPP to our compensation committee. The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of our common stock on specified dates during such offerings. Under the ESPP, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering under the ESPP may be terminated under certain circumstances.
Payroll Deductions. Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in the ESPP and may contribute, normally through payroll deductions, up to % of their earnings (as defined in the ESPP) for the purchase of our common stock under the ESPP. Unless otherwise determined by our board of directors, common stock will be purchased for the accounts of employees participating in the ESPP at a price per share
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that is at least the lesser of (1) 85% of the fair market value of a share of our common stock on the first date of an offering or (2) 85% of the fair market value of a share of our common stock on the date of purchase.
Limitations. Employees may have to satisfy one or more of the following service requirements before participating in the ESPP, as determined by our board of directors, including: (1) being customarily employed for more than 20 hours per week, (2) being customarily employed for more than five months per calendar year or (3) continuous employment with us or one of our affiliates for a period of time (not to exceed two years). No employee may purchase shares under the ESPP at a rate in excess of $25,000 worth of our common stock based on the fair market value per share of our common stock at the beginning of an offering for each calendar year such a purchase right is outstanding. Finally, no employee will be eligible for the grant of any purchase rights under the ESPP if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value under Section 424(d) of the Code.
Changes to Capital Structure. In the event that there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or similar transaction, the board of directors will make appropriate adjustments to: (1) the class(es) and maximum number of shares reserved under the ESPP, (2) the class(es) and maximum number of shares by which the share reserve may increase automatically each year, (3) the class(es) and number of shares subject to and purchase price applicable to outstanding offerings and purchase rights and (4) the class(es) and number of shares that are subject to purchase limits under ongoing offerings.
Corporate Transactions. In the event of certain significant corporate transactions, any then-outstanding rights to purchase our stock under the ESPP may be assumed, continued, or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue, or substitute for such purchase rights, then the participants' accumulated payroll contributions will be used to purchase shares of our common stock within 10 business days before such corporate transaction, and such purchase rights will terminate immediately.
Under the ESPP, a corporate transaction is generally the consummation of: (1) a sale of all or substantially all of our assets, (2) the sale or disposition of more than 50% of our outstanding securities, (3) a merger or consolidation where we do not survive the transaction and (4) a merger or consolidation where we do survive the transaction but the shares of our common stock outstanding immediately before such transaction are converted or exchanged into other property by virtue of the transaction.
ESPP Amendment or Termination. Our board of directors has the authority to amend or terminate our ESPP, provided that except in certain circumstances such amendment or termination may not materially impair any outstanding purchase rights without the holder's consent. We will obtain stockholder approval of any amendment to our ESPP as required by applicable law or listing requirements.
Non-Employee Director Compensation
We have not historically had a formal compensation policy with respect to service on our board of directors, but we have reimbursed our non-employee directors for direct expenses incurred in connection with attending meetings of our board of directors or its committees, and occasionally granted stock options. We expect that our board of directors will adopt a director compensation policy for non-employee directors to be effective following the completion of this offering.
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2018 Director Compensation Table
The following table sets forth information regarding the compensation earned for service on our board of directors by our non-employee directors during the year ended December 31, 2018. No directors received any cash compensation for their service on our board of directors during 2018. Dr. Shendelman and Mr. Funtleyder also served on our board of directors, but did not receive any additional compensation for their service as a director and therefore are not included in the table below. The compensation for Dr. Shendelman and Mr. Funtleyder, as named executive officers, is set forth above under "Summary Compensation Table."
Name
|
Option
Awards (1) ($) |
Total
($) |
|||||
---|---|---|---|---|---|---|---|
Franklin M. Berger, CFA |
26,051 | (2) | 26,051 | ||||
Joel S. Marcus |
| | |||||
Teena Lerner, Ph.D. |
| |
The following table provides information regarding the number of shares of common stock underlying stock options granted to our non-employee directors that were outstanding as of December 31, 2018.
Name
|
Option Awards
Outstanding at December 31, 2018 |
|||
---|---|---|---|---|
Franklin M. Berger, CFA |
1,000 | |||
Joel S. Marcus |
334 | |||
Teena Lerner, Ph.D. |
334 |
Rule 10b5-1 Sales Plans
Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell our common shares on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to compliance with the terms of our insider trading policy. Prior to 180 days after the date of this offering, subject to early termination, the sale of any shares under such plan would be prohibited by the lock-up agreement that the director or officer has entered into with the underwriters.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following includes a summary of transactions since January 20, 2016 (date of inception) and any currently proposed transactions, to which we were or are to be a participant, in which (1) the amount involved exceeded or will exceed the lesser of (i) $120,000 or (ii) 1% of the average of our total assets for the last two completed fiscal years, and (2) any of our directors, executive officers or holders of more than 5% of our capital stock, or any affiliate or member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest, other than compensation and other arrangements that are described under the section titled "Executive and Director Compensation."
We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that we would pay or receive, as applicable, in arm's-length transactions.
Columbia University License Agreements
In October 2016, we entered into the 2016 Columbia Agreement, whereby, among other things, Columbia University granted to us an exclusive license under certain patents, and a non-exclusive license to certain know-how, in each case to develop, manufacture, and commercialize ARI products, including AT-001, AT-003 and AT-007. As partial consideration of Columbia University's execution and delivery of the 2016 Columbia Agreement, Columbia University was issued 8,798 shares of our common stock, the approximate fair value of which was $0.5 million. See the section titled "BusinessExclusive License Agreement with Columbia University" for more information on the 2016 Columbia Agreement.
In January 2019, we entered into a second license agreement with Columbia University, or the 2019 Columbia Agreement, whereby, among other things, Columbia University granted to us an exclusive license under certain patents, and a non-exclusive license to certain know-how, in each case to develop, manufacture and commercialize PI3K inhibitor products. As consideration, we made a nominal upfront payment to Columbia University. See our financial statements included elsewhere in this prospectus for more information on the 2019 Columbia Agreement.
Preferred Stock and Warrant Financings and Convertible Note and Warrant Financing
Series A Preferred Stock Financing and Warrants
Between January and March 2017, we issued an aggregate of 56,000 shares of our Series A Preferred Stock at a price per share of $125.00 in five closings for total gross proceeds of $7.0 million. The first two closings occurred in January 2017, at which time we issued an aggregate of 41,167 shares of our Series A Preferred Stock for gross cash proceeds of approximately $5.2 million. The third and fourth closings occurred in February 2017, at which time we issued an additional 13,566 shares of our Series A Preferred Stock for gross cash proceeds of approximately $1.7 million. The fifth closing occurred in March 2017, at which time we issued an additional 817 shares of our Series A Preferred Stock for gross cash proceeds of $0.1 million. In connection with the last closing of the Series A Preferred Stock financing and pursuant to that certain Placement Agency Agreement by and between us and Brookline Capital Markets, a division of CIM Securities, LLC, or Brookline, serving as placement agent, dated October 7, 2016, as amended and restated on November 23, 2016, in March 2017, certain employees of Brookline were issued 10-year warrants, entitling such individuals to purchase up to an aggregate of 5,600 shares of our common stock at an exercise price of $137.50 per share.
The table below sets forth the number of shares of our Series A Preferred Stock purchased by our directors, holders of more than 5% of our capital stock and their affiliated entities or immediate family members. Each share of Series A Preferred Stock in the table below will automatically convert into one
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share of our common stock immediately upon the completion of this offering. For a description of the material rights and privileges of the Series A Preferred Stock see the section titled "Description of Capital StockPreferred Stock" and Note 4 to the notes to our financial statements included elsewhere in this prospectus.
Name
|
Series A
Preferred Stock (#) |
Aggregate Cash
Purchase Price ($) |
|||||
---|---|---|---|---|---|---|---|
Franklin M. Berger, CFA (1) |
4,417 | 552,125 | |||||
Joel S. Marcus (2) |
2,000 | 250,000 | |||||
Alexandria Venture Investments, LLC (2) |
14,493 | 1,811,625 |
Convertible Note Financing and Warrants
In February 2018, we issued an aggregate principal amount of $6.0 million of convertible notes in two closings, or the 2018 Notes. The first closing occurred on February 8, 2018, at which time we issued an aggregate principal amount of $5.7 million in convertible notes. The second closing occurred on February 14, 2018, at which time we issued a principal amount of $0.3 million in one convertible note. The 2018 Notes accrued interest at a rate of 15% per annum. On November 5, 2018, we closed on a portion of the Series B Preferred Stock financing described below. At that time, all 2018 Notes and the then accrued interest totaling approximately $6.6 million were converted into 19,869 shares of Series B Preferred Stock. In connection with the closing of the convertible note financing and pursuant to that certain Placement Agency Agreement by and between us and Brookline, dated January 18, 2018, in November 2018, certain employees of Brookline were issued 10-year warrants, entitling such individuals to purchase up to an aggregate of 1,391 shares of our common stock at an exercise price of $364.03 per share.
Series B Preferred Stock Financing and Warrants
Between November 2018 and February 2019, we issued an aggregate of 60,582 new shares of our Series B Preferred Stock at a price per share of $413.67 in five closings for total gross cash proceeds of approximately $25.1 million, or the Series B Financing. In connection with the Series B Financing, in November 2018, the $6.0 million of the 2018 Notes and the related $0.6 million of accrued interest converted into 19,869 shares of our Series B Preferred Stock. The first two closings of the Series B Financing occurred in November 2018, at which time we issued an aggregate of 49,747 new shares of our Series B Preferred Stock for total gross cash proceeds of approximately $20.6 million. The third and fourth closings occurred in December 2018, at which time we issued an aggregate of 2,818 new shares of our Series B Preferred Stock for total gross cash proceeds of approximately $1.2 million. The fifth closing occurred in February 2019, at which time we issued 8,017 shares of our Series B Preferred Stock for total gross cash proceeds of approximately $3.3 million.
In connection with the last closing of the Series B Financing and pursuant to that certain Placement Agency Agreement by and between us and Brookline, dated August 28, 2018, or the Series B Placement Agency Agreement, certain employees of Brookline were issued 10-year warrants, entitling such individuals to purchase up to an aggregate of 1,740 shares of our common stock at an exercise price of $455.04. We have also agreed to issue additional warrants to purchase shares of our common stock to such individuals pursuant to the Series B Placement Agency Agreement for a period through 12 months from the last closing date, which number shall represent (i) 2% of the aggregate
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number of shares of Series B Preferred Stock sold to our officers, directors and existing investors as of the date of the Series B Placement Agency Agreement and their respective affiliates; (ii) 4% of the aggregate number of shares of Series B Preferred Stock sold to certain agreed upon investors as listed in the Series B Placement Agency Agreement; and (iii) 6% of the aggregate number of shares of Series B Preferred Stock sold to all other investors; and in each case after accounting for the conversion of all such shares of Series B Preferred Stock into our common stock.
The table below sets forth the number of shares of Series B Preferred Stock purchased by our executive officers, directors, holders of more than 5% of our capital stock and their affiliated entities or immediate family members. Each share of our outstanding preferred stock will automatically convert into one share of our common stock immediately upon the completion of this offering. For a description of the material rights and privileges of the Series B Preferred Stock see Note 4 to the notes to our financial statements included elsewhere in this prospectus.
Name
|
Series B
Preferred Stock (#) |
Cancellation of
Indebtedness (Note Conversion) ($) |
Cash Purchase
Price of Series B Preferred Stock ($) |
Aggregate
Purchase Price ($) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Franklin M. Berger, CFA (1) |
5,334 | 1,272,568 | 615,955 | 1,888,523 | |||||||||
Affiliates of E Squared (2) |
12,231 | 46,608 | 5,001,684 | 5,048,292 | |||||||||
Joel S. Marcus (3) |
2,447 | 288,596 | 651,530 | 940,126 | |||||||||
Entities affiliated with Alexandria Venture (4) |
29,229 | 1,673,052 | 10,000,059 | 11,673,111 |
Investors' Rights Agreement
We are party to an amended and restated investors' rights agreement, dated November 5, 2018, with the holders of our preferred stock, including our directors, Franklin M. Berger, Teena Lerner, Joel S. Marcus and Les Funtleyder, and all holders of more than 5% of our capital stock. This agreement provides that these holders are entitled to certain registration rights, including the right to demand that we file a registration statement or request that their shares be covered by a registration statement that we otherwise file. In addition to the registration rights, this agreement provides for certain information rights and rights of first offer in favor of certain holders of our outstanding preferred stock with regard to certain issuances of our capital stock. The information rights and rights of first offer will terminate upon the completion of this offering. The registration rights will terminate upon the earliest of (i) the closing of a deemed liquidation event, (ii) with respect to each stockholder,
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the date when such stockholder can sell all of its registrable shares without limitation during a three-month period without registration pursuant to Rule 144 of the Securities Act or another similar exemption under the Securities Act and (iii) three years after the completion this offering. For a detailed description of the registration rights, see the section titled "Description of Capital StockRegistration Rights."
Other Transactions
We have entered into certain employment-related agreements with our executive officers that, among other things, provide for compensatory and certain change in control benefits. For a description of these agreements and arrangements, see the section titled "Executive and Director CompensationEmployment Arrangements." We have also entered into agreements with our non-employee directors that provide for compensatory benefits. For a description of these agreements, see the section titled "Executive and Director CompensationNon-Employee Director Compensation."
We have also granted stock options to our executive officers and directors. For a description of these stock options, see the section titled "Executive and Director Compensation."
Indemnification Agreements
We have entered or intend to enter, and intend to continue to enter, into separate indemnification agreements with some of our directors and executive officers, in addition to the indemnification provided for in our bylaws. These indemnification agreements provide our directors and executive officers with contractual rights to indemnification and, in some cases, expense advancement in any action or proceeding arising out of their services as one of our directors or executive officers or as a director or executive officer of any other company or enterprise to which the person provides services at our request. For more information regarding these indemnification agreements, see "ManagementLimitation on Liability and Indemnification Matters."
Related Party Transaction Policy
In connection with this offering, we intend to adopt a written related party transaction policy that sets forth our procedures for the identification, review, consideration and approval or ratification of related party transactions. This policy will become effective upon the effectiveness of the registration statement of which this prospectus is a part. For purposes of this policy only, a "related person transaction" is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any related person are participants involving an amount that exceeds or will exceed the lesser of (1) $120,000 or (2) 1% of the average of our total assets for the last two completed fiscal years. Transactions involving compensation for services provided to us as an employee, consultant or director are not considered related-person transactions under this policy. A "related person" is any executive officer, director, nominee to become a director or a holder of more than 5% of our capital stock, or any affiliate or member of the immediate family of the foregoing.
Under the policy, where a transaction has been identified as a related-person transaction, management must present information regarding the proposed related-person transaction to our audit committee or, where review by our audit committee would be inappropriate due to a conflict of interest, to another independent body of our board of directors, for review. The presentation must include a description of, among other things, all of the parties, the direct and indirect interests of the related persons, the purpose of the transaction, the material facts, the benefits of the transaction to us and whether any alternative transactions are available, an assessment of whether the terms are comparable to the terms available from unrelated third parties and management's recommendation. To identify related party transactions in advance, we rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our audit
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committee or another independent body of our board of directors takes into account the relevant available facts and circumstances including, but not limited to:
All of the transactions described in this section were entered into prior to the adoption of this policy. Although we have not had a written policy for the review and approval of transactions with related persons, our board of directors has historically reviewed and approved any transaction where a director or officer had a financial interest, including the transactions described above. Prior to approving such a transaction, the material facts as to a director's or officer's relationship or interest in the agreement or transaction were disclosed to our board of directors. Our board of directors took this information into account when evaluating the transaction and in determining whether such transaction was fair to us and in the best interest of all our stockholders.
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The following table sets forth information regarding beneficial ownership of our capital stock as of March 31, 2019 by:
The percentage ownership information under the column titled "Before Offering" is based on 236,246 shares of common stock outstanding as of March 31, 2019, assuming the conversion of all of our outstanding shares of preferred stock into an aggregate of 136,451 shares of common stock upon the completion of this offering. The information relating to the number and percentage of shares beneficially owned under the column titled "After Offering" is based on the sale of shares of common stock in this offering. The percentage ownership information assumes no exercise of the underwriters' option to purchase additional shares to cover over-allotments.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable within 60 days of December 31, 2018. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Except as otherwise noted below, the address for each person or entity listed in the table is c/o Applied Therapeutics, Inc., 340 Madison Avenue, 19th Floor, New York, New York 10173.
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|
Percentage of
Shares Beneficially Owned |
||||||
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|
Number of
Shares Beneficially Owned |
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|
Before
Offering |
After
Offering |
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Greater than 5% Stockholders: |
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Shoshana Shendelman, Ph.D. (1) |
90,719 | 37.6 | % | |||||
Entities affiliated with Alexandria Venture (2) |
43,722 | 18.5 | ||||||
Affiliates of E Squared (3) |
12,571 | 5.3 | ||||||
Directors and Named Executive Officers: |
||||||||
Franklin M. Berger, CFA (4) |
10,250 | 4.3 | ||||||
Les Funtleyder (5) |
1,138 | 0.5 | ||||||
Teena Lerner, Ph.D. (6) |
514 | 0.2 | ||||||
Joel S. Marcus (2) (7) |
4,780 | 2.0 | ||||||
Riccardo Perfetti, M.D., Ph.D. |
| | ||||||
Jay S. Skyler, M.D., MACP |
| | ||||||
All current executive officers and directors as a group (seven persons) (8) |
107,401 | 44.4 |
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The following description of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries. You should also refer to the amended and restated certificate of incorporation, the amended and restated bylaws and the amended and restated investors' rights agreement, which are filed as exhibits to the registration statement of which this prospectus is a part.
General
Upon the completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of shares of common stock, par value $0.0001 per share, and shares of preferred stock, par value $0.0001 per share.
Common Stock
Outstanding Shares
As of December 31, 2018, we had 236,246 shares of common stock outstanding, held of record by 56 stockholders, assuming the issuance and sale of 8,017 shares of Series B preferred stock subsequent to December 31, 2018 and the conversion of all of our outstanding shares of preferred stock into 136,451 shares of common stock upon the completion of this offering.
Voting Rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders. The affirmative vote of holders of at least 66 2 / 3 % of the voting power of all of the then-outstanding shares of capital stock, voting as a single class, will be required to amend certain provisions of our amended and restated certificate of incorporation, including provisions relating to amending our amended and restated bylaws, the classified board, the size of our board, removal of directors, director liability, vacancies on our board, special meetings, stockholder notices, actions by written consent and exclusive jurisdiction.
Dividends
Subject to preferences that may apply to any outstanding preferred stock, holders of our common stock are entitled to receive ratably any dividends that our board of directors may declare out of funds legally available for that purpose on a non-cumulative basis.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.
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Preferred Stock
We will not have any preferred shares outstanding following the completion of this offering. Immediately after the completion of this offering, our certificate of incorporation will be amended and restated to delete all references to such shares of preferred stock. Under the amended and restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control that may otherwise benefit holders of our common stock and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.
Stock Options
As of December 31, 2018, 21,774 shares of common stock were issuable upon the exercise of outstanding stock options, at a weighted-average exercise price of $74.43 per share (which excludes 25,734 shares of our common stock issuable upon the exercise of outstanding stock options granted subsequent to December 31, 2018, with an exercise price of $259.44 per share). For additional information regarding terms of our equity incentive plans, see the section titled "Executive and Director CompensationEquity Incentive Plans."
Warrants to Purchase Common Stock
As of December 31, 2018, warrants to purchase a total of 8,731 shares of our common stock were outstanding, at a weighted-average exercise price of $236.87 per share, including warrants to purchase 1,740 shares of our common stock issued subsequent to December 31, 2018.
The warrants to purchase common stock include certain warrants issued to employees of Brookline pursuant to various placement agency agreements and for services rendered by Brookline as placement agent. In connection with entering into the certain placement agency agreement with Brookline in October 2016, as amended and restated in November 2016, we issued warrants to purchase an aggregate of 5,600 shares of our common stock at an exercise price of $137.50 per share to employees of Brookline in March 2017. If unexercised, the warrant will expire on the tenth anniversary of the issue date. In connection with entering into the certain placement agency agreement with Brookline in February 2018, we issued warrants to purchase an aggregate of 1,391 shares of our common stock at an exercise price of $364.03 per share to employees of Brookline in November 2018. If unexercised, the warrant will expire on the tenth anniversary of the issue date. In connection with entering into the certain placement agency agreement with Brookline in August 2018, we issued warrants to purchase an aggregate of 1,740 shares of our common stock at an exercise price of $455.04 per share to employees of Brookline in 2019. Collectively, we refer to these warrants as the common stock warrants. The common stock warrants will neither expire nor be automatically exercised upon the closing of this offering.
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Registration Rights
Upon the completion of this offering, certain holders of shares of our common stock, including those shares of our common stock that will be issued upon the conversion of our preferred stock in connection with this offering, will initially be entitled to certain rights with respect to registration of such shares under the Securities Act. These shares are referred to as registrable securities. The holders of these registrable securities possess registration rights pursuant to the terms of our amended and restated investors' rights agreement and are described in additional detail below. The registration of shares of our common stock pursuant to the exercise of the registration rights described below would enable the holders to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the registration expenses, other than underwriting discounts, selling commissions and stock transfer taxes, of the shares registered pursuant to the demand, piggyback and Form S-3 registrations described below.
Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions and limitations, to limit the number of shares the holders may include. The demand, piggyback and Form S-3 registration rights described below will expire no later than three years after the completion of this offering, or with respect to any particular holder, at such time that such holder can sell its shares under Rule 144 of the Securities Act during any three-month period.
Demand Registration Rights
Upon the completion of this offering, holders of 136,451 shares of our common stock issuable upon conversion of outstanding preferred stock, will be entitled to certain demand registration rights. At any time beginning on the earlier of the fifth anniversary of the date of our amended and restated investors' rights agreement or 180 days following the effectiveness of this registration statement, the holders of a majority of registrable securities may, on not more than one occasion, request that we register all or a portion of their shares, subject to certain specified exceptions.
Piggyback Registration Rights
In connection with this offering, holders of 136,451 shares of our common stock issuable upon conversion of outstanding preferred stock are entitled to rights to notice of this offering and to include their shares of registrable securities in this offering, which the requisite percentage of holders have waived. In the event that we propose to register any of our securities under the Securities Act in another offering, either for our own account or for the account of other security holders, the holders of registrable securities will be entitled to certain "piggyback" registration rights allowing them to include their shares in such registration, subject to specified conditions and limitations.
S-3 Registration Rights
Upon the completion of this offering, the holders of 136,451 shares of our common stock issuable upon conversion of outstanding preferred stock will initially be entitled to certain Form S-3 registration rights. The holders of at least 30% of registrable securities may, on not more than two registrations on Form S-3 within any 12-month period, request that we register all or a portion of their shares on Form S-3 if we are qualified to file a registration statement on Form S-3, subject to specified exceptions. Such request for registration on Form S-3 must cover securities with an aggregate offering price which equals or exceeds $3.0 million, net of selling expenses. The right to have such shares registered on Form S-3 is further subject to other specified conditions and limitations.
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Anti-Takeover Provisions of Delaware Law and Our Charter Documents
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
In general, Section 203 defines a "business combination" to include the following:
In general, Section 203 defines an "interested stockholder" as an entity or person who, together with the person's affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
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Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Among other things, our amended and restated certificate of incorporation and amended and restated bylaws will:
The amendment of any of these provisions would require approval by the holders of at least 66 2 / 3 % of the voting power of all of our then-outstanding common stock entitled to vote generally in the election of directors, voting together as a single class.
The combination of these provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Because our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of
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delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts. We believe that the benefits of these provisions, including increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company, outweigh the disadvantages of discouraging takeover proposals, because negotiation of takeover proposals could result in an improvement of their terms.
Choice of Forum
Our amended and restated certificate of incorporation to be effective upon the closing of this offering, provides that, with respect to any state actions or proceedings under Delaware statutory or common law, the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The enforceability of similar choice of forum provisions in other companies' certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with one or more actions or proceedings described above, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable.
Listing
We have applied to list our common stock on The Nasdaq Global Market under the trading symbol "APLT."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. Future sales of our common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market after the completion of this offering, or the perception that those sales may occur, could adversely affect the prevailing market price for our common stock from time to time or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale in the public market for a period of several months after the completion of this offering due to contractual and legal restrictions on resale described below. Future sales of our common stock in the public market either before or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common stock at such time and our ability to raise equity capital at a time and price we deem appropriate.
Sale of Restricted Shares
Based on the number of shares of our common stock outstanding as of December 31, 2018, upon the closing of this offering and assuming (i) the conversion of all outstanding shares of our preferred stock, including 8,017 shares of Series B Preferred Stock issued and sold subsequent to December 31, 2018, into common stock into an aggregate of 136,451 shares of our common stock upon the completion of this offering, (ii) no exercise of the underwriters' option to purchase additional shares of common stock to cover over-allotments, and (iii) no exercise of outstanding options and warrants, we will have outstanding an aggregate of approximately shares of common stock. Of these shares, all of the shares of common stock to be sold in this offering will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our "affiliates," as such term is defined in Rule 144 of the Securities Act, or Rule 144, or subject to lock-up agreements. All remaining shares of common stock held by existing stockholders immediately prior to the consummation of this offering will be "restricted securities," as such term is defined in Rule 144. These restricted securities were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701 of the Securities Act, or Rule 701, which rules are summarized below.
As a result of the lock-up agreements referred to below and the provisions of Rule 144 and Rule 701 under the Securities Act, based on the number of shares of our common stock outstanding (calculated as of December 31, 2018 on the basis of the assumptions described above and assuming no exercise of the underwriter's option to purchase additional shares to cover over-allotments, and no exercise of outstanding options and warrants), the shares of our common stock (excluding the shares sold in this offering) that will be available for sale in the public market are as follows:
Approximate Number of Shares
|
First Date Available For Sale Into Public Market | |
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shares | 181 days after the date of this prospectus, upon expiration of the lock-up agreements referred to below, subject in some cases to applicable volume, manner of sale and other limitations under Rule 144 and Rule 701. |
We may issue shares of common stock from time to time as consideration for future acquisitions, investments or other corporate purposes. In the event that any such acquisition, investment or other transaction is significant, the number of shares of common stock that we may issue may in turn be significant. We may also grant registration rights covering those shares of common stock issued in connection with any such acquisition and investment.
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In addition, the shares of common stock reserved for future issuance under our 2019 Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements, a registration statement under the Securities Act or an exemption from registration, including Rule 144 and Rule 701.
Rule 144
In general, persons who have beneficially owned restricted shares of our common stock for at least six months, and any affiliate of the company who owns shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144.
Under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, and we are current in our Exchange Act reporting at the time of sale, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our "affiliates" for purposes of Rule 144 at any time during the 90 days preceding a sale and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our "affiliates," is entitled to sell those shares in the public market (subject to the lock-up agreement referred to below, if applicable) without complying with the manner of sale, volume limitations or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than "affiliates," then such person is entitled to sell such shares in the public market without complying with any of the requirements of Rule 144 (subject to the lock-up agreement referred to above, if applicable).
In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, our "affiliates," as defined in Rule 144, who have beneficially owned the shares proposed to be sold for at least six months, are entitled to sell in the public market, upon expiration of any applicable lock-up agreements and within any three-month period, a number of those shares of our common stock that does not exceed the greater of:
Such sales under Rule 144 by our "affiliates" or persons selling shares on behalf of our "affiliates" are also subject to certain manner of sale provisions, notice requirements and to the availability of current public information about us. Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted securities have entered into lock-up agreements as referenced above and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who acquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 before the effective date
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of the registration statement of which this prospectus is a part (to the extent such common stock is not subject to a lock-up agreement) and who are not our "affiliates" as defined in Rule 144 during the immediately preceding 90 days, is entitled to rely on Rule 701 to resell such shares beginning 90 days after the date of this prospectus in reliance on Rule 144, but without complying with the notice, manner of sale, public information requirements or volume limitation provisions of Rule 144. Persons who are our "affiliates" may resell those shares beginning 90 days after the date of this prospectus without compliance with minimum holding period requirements under Rule 144 (subject to the terms of the lock-up agreement referred to below, if applicable).
Lock-up Agreements
In connection with this offering, we, our officers and directors, and holders of all of our other outstanding shares of common stock or securities convertible into or exchangeable for shares of our common stock outstanding upon the completion of this offering, have agreed, subject to certain exceptions, with the underwriters not to directly or indirectly offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of or hedge any shares of our common stock or any options to purchase shares of our common stock, or any securities convertible into or exchangeable for shares of common stock during the period from the date of the lock-up agreement continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives, and certain other exceptions. These agreements are described in the section titled "Underwriting."
In addition to the restrictions contained in the lock-up agreements described above, we have entered into agreements with certain security holders, including the amended and restated investors' rights agreement and our standard form of option agreement, that contain market stand-off provisions imposing restrictions on the ability of such security holders to offer, sell or transfer our equity securities for a period of 180 days following the date of this prospectus.
Registration Rights
Upon the completion of this offering, the holders of 136,451 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described under "Lock-Up Agreements" above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See the section titled "Description of Capital StockRegistration Rights."
Equity Incentive Plans
We intend to file with the SEC a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance under our 2019 Plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations and the lock-up agreements described above, if applicable.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete analysis of all potential U.S. federal income tax consequences relating thereto, does not address the potential application of the Medicare contribution tax on net investment income, and does not address any estate or gift tax consequences or any tax consequences arising under any state, local or non-U.S. tax laws, or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, and applicable Treasury Regulations promulgated thereunder, judicial decisions and published rulings and administrative pronouncements of the Internal Revenue Service, or IRS, all as in effect as of the date hereof. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This discussion is limited to non-U.S. holders who purchase our common stock pursuant to this offering and who hold our common stock as a "capital asset" within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular non-U.S. holder in light of its particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to non-U.S. holders subject to special rules under the U.S. federal income tax laws, including:
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our common stock and the partners in such partnerships are urged to consult their tax advisors about
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the particular U.S. federal income tax consequences to them of holding and disposing of our common stock.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR NON-U.S. TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.
Definition of Non-U.S. Holder
For purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a "U.S. person" or a partnership (including any entity or arrangement treated as a partnership) for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
Distributions on Our Common Stock
As described under the section titled "Dividend Policy," we have not paid and do not anticipate paying dividends. However, if we make cash or other property distributions on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a non-U.S. holder's tax basis in our common stock, but not below zero. Any excess will be treated as gain realized on the sale or other disposition of our common stock and will be treated as described under the section titled "Gain on Disposition of Our Common Stock" below.
Subject to the discussions below regarding effectively connected income, backup withholding and FATCA, dividends paid to a non-U.S. holder of our common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish a valid IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) including a U.S. taxpayer identification number and certifying such non-U.S. holder's qualification for the reduced rate. This certification must be provided before the payment of dividends and must be updated periodically.
Non-U.S. holders that do not provide the required certification on a timely basis, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on our common stock are effectively connected with its U.S. trade or business (and are attributable to such non-U.S. holder's permanent establishment in
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the United States, if required by an applicable tax treaty), the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must generally furnish a valid IRS Form W-8ECI (or applicable successor form) to the applicable withholding agent.
However, any such effectively connected dividends paid on our common stock generally will be subject to federal income tax on a net-income basis at the regular graduated U.S. federal income tax rates in the same manner as if such non-U.S. holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Gain on Disposition of Our Common Stock
Subject to the discussions below regarding backup withholding and FATCA, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the sale or other disposition of our common stock, unless:
Whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our worldwide real property interests plus our trade and business assets. We believe that we are not, and do not anticipate becoming, a USRPHC. However, there can be no assurance that we will not become a USRPHC in the future. Even if we are treated as a USRPHC, gain realized by a non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the non-U.S. Holder owned, directly, indirectly and constructively, no more than 5% of our common stock at all times within the shorter of (a) the five-year period preceding the disposition and (b) the non-U.S. Holder's holding period and (2) our common stock is regularly traded on an established securities market within the meaning of applicable U.S. Treasury regulations. There can be no assurance that our common stock will qualify as regularly traded on an established securities market. If any gain on a non-U.S. Holder's disposition of our common stock is taxable because we are a USRPHC and either the ownership of our common stock exceeds 5% or our common stock is not regularly traded on an established securities market, a non-U.S. Holder will be taxed on such disposition generally in the manner applicable to U.S. persons, and in addition a purchaser of our common stock may be required to withhold tax with respect to that obligation.
Gain described in the first bullet point above generally will be subject to United States federal income tax on a net-income basis at the regular graduated U.S. federal income tax rates in the same manner as if the non-U.S. holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by certain U.S.-source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S.
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federal income tax returns with respect to such losses. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Annual reports are required to be filed with the IRS and provided to each non-U.S. holder indicating the amount of dividends on our common stock paid to such non-U.S. holder and the amount of any tax withheld with respect to those dividends. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with its conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 24% rate, generally will not apply to payments to a non-U.S. holder of dividends on or the gross proceeds of a disposition of our common stock provided the non-U.S. holder furnishes certification of its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, or certain other requirements are met. Backup withholding may apply if the payor has actual knowledge, or reason to know, that the non-U.S. holder is a U.S. person who is not an exempt recipient.
Backup withholding is not an additional tax. If any amount is withheld under the backup withholding rules, the non-U.S. holder should consult with a U.S. tax advisor regarding the possibility of and procedure for obtaining a refund or a credit against the non-U.S. holder's U.S. federal income tax liability, if any.
FATCA
A U.S. federal withholding tax of 30% may apply to dividends and, subject to the discussion of certain proposed U.S. Treasury regulations below, the gross proceeds of a disposition of our common stock paid to a foreign financial institution (as specifically defined by applicable rules), including when the foreign financial institution holds our common stock on behalf of a non-U.S. Holder, unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which may include certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing these withholding and reporting requirements may be subject to different rules. This U.S. federal withholding tax of 30% will also apply to dividends on and, subject to the discussion of certain proposed U.S. Treasury regulations below, the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. Under certain circumstances, a non-U.S. Holder might be eligible for refunds or credits of such taxes.
The U.S. Treasury recently released proposed regulations which, if finalized in their present form, would eliminate the federal withholding tax of 30% applicable to the gross proceeds of a sale or other disposition of our common stock. In its preamble to such proposed regulations, the U.S. Treasury stated that taxpayers may generally rely on the proposed regulations until final regulations are issued.
Prospective investors should consult their own tax advisors regarding the possible impact of these rules on their investment in our common stock, and the possible impact of these rules on the entities through which they hold our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of this 30% withholding tax.
Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed change in applicable laws.
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Citigroup Global Markets Inc., Cowen and Company, LLC and UBS Securities LLC are acting as joint book-running managers of the offering and as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has severally agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter's name.
Underwriter
|
Number of
Shares |
|||
---|---|---|---|---|
Citigroup Global Markets Inc. |
||||
Cowen and Company, LLC |
||||
UBS Securities LLC |
||||
Robert W. Baird & Co. Incorporated |
||||
| | | | |
Total |
||||
| | | | |
| | | | |
| | | | |
The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount from the initial public offering price not to exceed $ per share. If all the shares are not sold at the initial offering price, the underwriters may change the offering price and the other selling terms. The representatives have advised us that the underwriters do not intend to make sales to discretionary accounts.
If the underwriters sell more shares than the total number set forth in the table above, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering.
We, our officers and directors, and all of our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of the representatives, dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock. The representatives in their sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice.
Prior to this offering, there has been no public market for our shares. Consequently, the initial public offering price for the shares was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the price at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our shares will develop and continue after this offering.
We have applied to have our shares listed on The Nasdaq Global Market under the symbol "APLT."
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The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option.
|
No Exercise | Full Exercise | |||||
---|---|---|---|---|---|---|---|
Per share |
$ | $ | |||||
Total |
$ | $ |
We estimate that our portion of the total expenses of this offering will be $ . We have agreed to reimburse the underwriters for expenses relating to clearance of this offering with the Financial Industry Regulatory Authority up to $ .
In connection with the offering, the underwriters may purchase and sell shares in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the over-allotment option, and stabilizing purchases.
Purchases to cover short positions and stabilizing purchases, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the shares. They may also cause the price of the shares to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on The Nasdaq Global Market in the over-the-counter market or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
Conflicts of Interest
The underwriters are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The underwriters and their respective affiliates have in the past performed commercial banking, investment banking and advisory services for us from time to time for which they have received customary fees and
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reimbursement of expenses and may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make because of any of those liabilities.
Notice to Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area, each a "Member State," no offer of the shares of common stock which are the subject of the offering has been, or will be made to the public in that Member State, other than under the following exemptions under the Prospectus Directive:
(a) to any legal entity which is a qualified investor as defined in the Prospectus Directive;
(b) to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the representatives for any such offer; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of the shares of common stock referred to in (a) to (c) above shall result in a requirement for us or any representative to publish a prospectus pursuant to Article 3 of the Prospectus Directive, or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
Each person located in a Member State to whom any offer of shares of our common stock is made or who receives any communication in respect of an offer of shares of our common stock, or who initially acquires any of our shares of common stock will be deemed to have represented, warranted, acknowledged and agreed that (1) it is a "qualified investor" within the meaning of the law in that Member State implementing Article 2(1)(e) of the Prospectus Directive; and (2) in the case of any shares of common stock acquired by it as a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, the shares acquired by it in the offer have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in circumstances in which the prior consent of the representatives has been given to the offer or resale; or where shares of our common stock have been acquired by it on behalf of persons in any Member State other than qualified investors, the offer of those shares of common stock to it is not treated under the Prospectus Directive as having been made to such persons.
We, the representatives and their respective affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgments and agreements.
This prospectus has been prepared on the basis that any offer of shares of our common stock in any Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of shares. Accordingly any person making or intending
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to make an offer in that Member State of shares of our common stock which are the subject of the offering contemplated in this prospectus may only do so in circumstances in which no obligation arises for us or any of the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. Neither we nor the representatives have authorized, nor do they authorize, the making of any offer of shares of our common stock in circumstances in which an obligation arises for us or the representatives to publish a prospectus for such offer.
For the purpose of the provisions above, the expression an "offer of shares of our common stock to the public" in relation to any shares of our common stock in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares of our common stock to be offered so as to enable an investor to decide to purchase or subscribe the shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression "Prospectus Directive" means Directive 2003/71/EC (as amended) and includes any relevant implementing measure in each Member State.
Notice to Prospective Investors in the United Kingdom
This document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are "qualified investors" (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, or the Order, and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons").
Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.
Notice to Prospective Investors in Hong Kong
The shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to Prospective Investors in Japan
The shares offered in this prospectus have not been and will not be registered under the Financial Instruments and Exchange Law of Japan. The shares have not been offered or sold and will not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan
162
(including any corporation or other entity organized under the laws of Japan), except (i) pursuant to an exemption from the registration requirements of the Financial Instruments and Exchange Law and (ii) in compliance with any other applicable requirements of Japanese law.
Notice to Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:
Solely for the purposes of its obligations pursuant to Section 309B of the SFA, we have determined, and hereby notify all relevant persons (as defined in the CMP Regulations 2018), that the shares are "prescribed capital markets products" (as defined in the CMP Regulations 2018) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).
Notice to Prospective Investors in Canada
The shares of our common stock offered in this prospectus may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements,
163
Exemptions and Ongoing Registrant Obligations . Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts , or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
164
The validity of the issuance of our common stock offered in this prospectus will be passed upon for us by Cooley LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell LLP, New York, New York.
Our financial statements at December 31, 2017 and 2018, and for the years then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern as described in Note 1 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act, with respect to the shares of common stock being offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.
You may read our SEC filings, including this registration statement, over the Internet at the SEC's website at www.sec.gov. Upon the completion of this offering, we will be subject to the information reporting requirements of the Exchange Act and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for review on the web site of the SEC referred to above. We also maintain a website at www.appliedtherapeutics.com, at which, following the completion of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Applied Therapeutics, Inc.
We have audited the accompanying balance sheets of Applied Therapeutics, Inc. (the Company) as of December 31, 2017 and 2018, the related statements of operations, convertible preferred stock and stockholders' deficit, and cash flows for each of the two years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations, will require additional capital to fund operations, and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2017.
New
York, New York
March 8, 2019
F-2
Applied Therapeutics, Inc.
Balance Sheets
(in thousands except share and per share data)
The Notes to Financial Statements are an integral part of these statements.
F-3
Applied Therapeutics, Inc.
Statements of Operations
(in thousands except share and per share data)
The Notes to Financial Statements are an integral part of these statements.
F-4
Applied Therapeutics, Inc.
Statement of Convertible Preferred Stock and Stockholders' (Deficit) Equity
(in thousands, except share and per share
data)
|
Convertible Preferred Stock |
|
|
|
|
|
|
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Series A
Convertible Preferred Stock |
Series B
Convertible Preferred Stock |
|
Common Stock
Par value $0.0001 |
|
|
|
|||||||||||||||||||||||
|
|
Additional
Paid-in Capital |
Accumulated
Deficit |
Total
Stockholders' Deficit |
||||||||||||||||||||||||||
|
Shares | Amount | Shares | Amount |
|
Shares | Amount | |||||||||||||||||||||||
January 1, 2017 |
| $ | | | $ | | 90,000 | $ | | $ | 41 | $ | (454 | ) | (413 | ) | ||||||||||||||
Issuance of common stock in exchange for license |
| | | | 8,798 | | 486 | | 486 | |||||||||||||||||||||
Issuance of Series A convertible preferred stock for cash, net of issuance costs of $746 |
56,000 | 6,254 | | | | | | | | |||||||||||||||||||||
Issuance of common stock warrants in connection with the issuance of Series A convertible preferred stock |
| | | | | | 216 | | 216 | |||||||||||||||||||||
Stock-based compensation expense |
| | | | | | 32 | | 32 | |||||||||||||||||||||
Net loss |
| | | | | | | (4,282 | ) | (4,282 | ) | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 |
56,000 | $ | 6,254 | | | 98,798 | $ | | $ | 775 | $ | (4,736 | ) | $ | (3,961 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Series B convertible preferred stock for cash, net of issuance costs of $812 |
| | 52,565 | 20,937 | | | | | | |||||||||||||||||||||
Issuance of Series B convertible preferred stock on extinguishment of convertible promissory notes |
| | 19,869 | 8,219 | | | 101 | | 101 | |||||||||||||||||||||
Issuance of common stock warrants in connection with the issuance of convertible promissory notes |
| | | | | | 242 | | 242 | |||||||||||||||||||||
Issuance of common stock warrants in connection with the issuance of Series B convertible preferred stock |
| | | | | | 228 | | 228 | |||||||||||||||||||||
Exercise of options for common stock issued under Equity Incentive Plan |
| | | | 997 | | 47 | | 47 | |||||||||||||||||||||
Stock-based compensation expense |
| | | | | | 272 | | 272 | |||||||||||||||||||||
Net loss |
| | | | | | | (16,521 | ) | (16,521 | ) | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2018 |
56,000 | $ | 6,254 | 72,434 | $ | 29,156 | 99,795 | $ | | $ | 1,665 | $ | (21,257 | ) | $ | (19,592 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Notes to Financial Statements are an integral part of these statements.
F-5
Applied Therapeutics, Inc.
Statements of Cash Flows
(in thousands)
The Notes to Financial Statements are an integral part of these statements.
F-6
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Business
Applied Therapeutics, Inc. (the "Company") is a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in indications of high unmet medical need. In particular, the Company is currently targeting treatments for cardiovascular disease, galactosemia and diabetic complications.
The Company was incorporated in Delaware on January 20, 2016 and is headquartered in New York, New York.
Going Concern
The Company has evaluated whether there are conditions and events considered in the aggregate that raise substantial doubt about the Company's ability to continue as a going concern.
Through December 31, 2018, the Company has primarily funded its operations with proceeds from the sale of convertible preferred stock (see Note 6). The Company has incurred recurring losses from operations since its inception, including net losses of $4.3 million and $16.5 million for the years ended December 31, 2017 and December 31, 2018, respectively, and has used cash in operations of $3.2 million and $11.2 million for the years ended December 31, 2017 and December 31, 2018, respectively. In addition, as of December 31, 2018, the Company had an accumulated deficit of $21.3 million. The Company expects its operating losses and negative cash flows to continue into the foreseeable future as it continues to develop, manufacture, and commercialize its product candidates.
The Company is seeking to complete an initial public offering ("IPO") of its common stock. In the event the Company does not complete an IPO, and even after the completion of an IPO, the Company expects to seek additional funding through private or public equity financings, debt financings, collaborations, or other strategic transactions. The Company may not be able to obtain funding on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders.
If the Company is unable to obtain funding, the Company will be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
Based on the operating losses incurred since inception, the expectation of continuing operating losses for the foreseeable future, and the need to raise additional capital to finance its operations, the Company has concluded that there is substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
F-7
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and reliance on third-party manufacturers.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Pro Forma Information
The accompanying unaudited pro forma balance sheet as of December 31, 2018 has been prepared to give effect, upon the closing of a qualified IPO, to the conversion of all outstanding convertible preferred stock into 128,434 shares of common stock.
The accompanying unaudited pro forma basic and diluted net loss per share attributable to common stockholders in the statements of operations for the year ended December 31, 2018 have been prepared to give effect, upon the closing of a qualified IPO, to the conversion of all outstanding shares of convertible preferred stock into shares of common stock as of December 31, 2018.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in the statement of convertible preferred stock and stockholders' (deficit) equity as a reduction of proceeds generated as a result of the offering.
Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the statement of operations. The Company recorded deferred offering costs of $0.3 million as of December 31, 2018 in prepaid expenses and other current assets.
Fair Value Measurements
Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels
F-8
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments, with an original maturity of three months or less, to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Common Stock Valuation
The Company utilizes significant estimates and assumptions in determining the fair value of its common stock. The Company has utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the "Practice Aid"), to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the Company's judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold shares of preferred stock, the superior rights and preferences of securities senior to the Company's common stock at the time of, and the likelihood of, achieving a liquidity event, such as an IPO or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.
Convertible Preferred Stock
The Company records shares of its convertible preferred stock at their respective fair values on the dates of issuance less issuance costs. The Company classifies shares of its convertible preferred stock outside of stockholders' deficit when the redemption of such units or shares is outside the Company's control. The Company does not adjust the carrying values of the convertible preferred units or convertible preferred stock to the liquidation preferences of such units or shares until such time as a deemed liquidation event is probable of occurring.
Research and Development
The Company expenses all costs incurred in performing research and development activities. Research and development expenses include salaries and other related costs, materials and supplies,
F-9
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
preclinical expenses, manufacturing expenses, contract services and other outside expenses. As part of the process of preparing the financial statements, the Company is required to estimate their accrued research and development expenses. The Company makes estimates of the accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that time. In addition, there may be instances in which payments made to the Company's vendors will exceed the level of services provided and result in a prepayment of the expense in which case such amounts are reflected as prepaid expenses and other current assets. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual or the amount of prepaid expenses accordingly. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
General and Administrative
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in the Company's executive and finance functions. General and administrative expenses also include professional fees for legal, accounting, auditing, tax and consulting services; travel expenses; and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs.
Stock-Based Compensation
The Company accounts for its stock-based compensation as expense in the statements of operations based on the awards' grant date fair values. The Company accounts for forfeitures as they occur by reversing any expense recognized for unvested awards.
The Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. Due to the lack of a public market for the Company's common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the simplified method as allowed by the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.
F-10
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period.
Income Taxes
The Company uses the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at currently enacted tax rates. These temporary differences primarily relate to net operating loss carryforwards available to offset future taxable income. Valuation allowances are established, if necessary, to reduce a deferred tax asset to the amount that will more likely than not be realized.
The Company recognizes tax liabilities from an uncertain tax position only if it is more likely than not that the tax position will not be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. There are no uncertain tax positions that have been recognized in the accompanying financial statements. The Company is required to file tax returns in the U.S. federal jurisdiction and in the state of New York. The Company's policy is to recognize interest and penalties related to uncertain tax benefits, if any, as part of income tax expense. No such interest and penalties have been accrued as of December 31, 2017 and 2018.
Net Loss per Share and Unaudited Pro Forma Net Loss per Share
Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted-average common stock outstanding. Diluted net loss per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including outstanding warrants and the effect of shares issuable under the Company's stock-based compensation plan, if such effect is dilutive.
Unaudited pro forma net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding after giving effect to the conversion of all outstanding convertible preferred stock into shares of common stock as if such conversion had occurred at January 1, 2018, or the date of original issuance, if later.
Segment Information
Operating segments are defined as components of an enterprise for which separate discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker, the Company's chief executive officer, views the Company's operations and manages its business as a single operating segment, which is the business of discovering and developing its product candidates.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification ("ASC") (ASC Topic 606, Revenue from Contracts with Customers ), the current guidance found in ASC Topic 605, and various other revenue accounting standards for specialized transactions and industries. ASU
F-11
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
No. 2014-09 outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date ("ASU No. 2015-14"), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted for annual periods beginning after December 15, 2016. To date, the Company has not had any arrangements that are within the scope of ASU No. 2014-09, or its predecessor, ASC Topic 605. The Company adopted these pronouncements on January 1, 2017, which did not have any impact on the Company's financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"), which simplifies share-based payment accounting through a variety of amendments. The Company elected to early adopt this guidance effective January 1, 2016, and has elected to account for forfeitures as incurred and therefore no forfeiture estimate is utilized in the year ended December 31, 2017. Adoption of ASU No. 2016-09 did not have a material impact on the Company's financial statements.
In May 2017, the FASB issued ASU No. 2017-09, CompensationStock Compensation (Topic 718): Scope of Modification Accounting ("ASU No. 2017-09"), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU No. 2017-09 as of January 1, 2018, which did not have a material impact on the Company's financial statements.
In June 2018, the FASB issued ASU No. 2018-07, CompensationStock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU No. 2018-07"). These amendments expand the scope of Topic 718, CompensationStock Compensation , which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, EquityEquity-Based Payments to Non-Employees . This standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted as long as ASU No. 2014-09 has been adopted by the Company. The Company adopted ASU No. 2018-07 as of January 1, 2017, which did not have a material impact on the Company's financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which requires lessees to recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. The
F-12
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement . which, eliminates, modifies, and adds disclosure requirements on fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its financial statements.
2. LICENSE AGREEMENT
Columbia University
In October 2016, the Company entered into a license agreement (the "Columbia Agreement") with The Trustees of Columbia University in the City of New York ("Columbia University"). Pursuant to the Columbia Agreement, Columbia University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in each case to develop, manufacture and commercialize aldose reductase inhibitor products, including AT-001, AT-003 and AT-007. The license grant is worldwide with the exception of a single patent family covering AT-001 and AT-003 for which the license grant excludes China, Taiwan, Hong Kong and Macao. Under the Columbia Agreement, the Company is obligated to use commercially reasonable efforts to research, discover, develop and market licensed products for commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined time periods. Columbia University retains the right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology, provided that such research is not funded by a commercial entity or for-profit entity or results in rights granted to a commercial or for-profit entity.
As consideration for entering into the Columbia Agreement, the Company made a nominal upfront payment to Columbia University and, following the occurrence of certain trigger events, issued to Columbia University shares equal to 5% of its outstanding common stock on a fully diluted basis at the time of issue. The common stock had a fair value of $0.5 million, which was recognized as research and development expense for the year ended December 31, 2017. The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the Columbia Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company's, its affiliates' and its sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed products, in the mid six figures beginning on the 10th anniversary of the effective date of the Columbia Agreement. The Company has not granted any sublicenses under the Columbia Agreement. However, if the Company sublicenses the rights granted under the Columbia Agreement to one or more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from
F-13
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
2. LICENSE AGREEMENT (Continued)
such third parties, at percentages between 10% and 20%, depending on the stage of development at the time such revenue is received from such third parties.
The Columbia Agreement will terminate upon the expiration of all the Company's royalty payment obligations in all countries. The Company may terminate the Columbia Agreement for convenience upon 90 days' written notice to Columbia University. At its election, Columbia University may terminate the Columbia Agreement, or convert the licenses granted to the Company into non-exclusive, non-sublicensable licenses, in the case of (a) the Company's uncured material breach upon 30 days' written notice (which shall be extended to 90 days if the Company is diligently attempting to cure such material breach), (b) the Company's failure to achieve the specified development and funding milestone events, or (c) the Company's insolvency.
The Company recorded research and development expense related to the Columbia Agreement of $0.6 million and $0.5 million for the years ended December 31, 2017 and 2018, respectively, and $1.4 million from the execution of the Columbia Agreement through December 31, 2018.
Columbia University is a related party as they have been issued shares of the Company's common stock. As of December 31, 2017, the Company had $0.2 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable. As of December 31, 2018, the Company had $0.1 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable.
3. FAIR VALUE MEASUREMENTS
During the year ended December 31, 2018, the Company had level 3 financial liabilities that were measured at fair value on a recurring basis that were no longer outstanding as of December 31, 2018. There were no transfers between fair value hierarchy levels during the year ended December 31, 2018. There were no financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017.
Derivative Liability
The Company's convertible promissory notes issued on February 5, 2018 (the "2018 Notes") (see Note 4), contained certain features which met the criteria to be bifurcated and accounted for separately from the 2018 Notes (the "Derivative Liability"). The Derivative Liability was recorded at fair value of $1.9 million upon the issuance of the 2018 Notes and was subsequently remeasured at fair value at each reporting period and immediately before extinguishment. Changes in the fair value of the Derivative Liability were recognized as a component of other income (expense), net in the statement of operations.
The Derivative Liability was initially valued and remeasured using a "with-and-without" method. The "with-and-without" methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative is the fair value of the derivative, recorded as the Derivative Liability. The Derivative Liability is settled when the underlying debt instrument is settled either through conversion or extinguishment into equity at a variable price, which is a redemption feature, or held to maturity. In November 2018, the Derivative Liability was settled in connection with the extinguishment of the 2018 Notes.
F-14
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
Warrant Liability
In connection with the issuance of the 2018 Notes, the Company had a contingent obligation to issue common stock warrants ("2018 Notes Warrants") upon the conversion of the 2018 Notes into Series B convertible preferred stock ("Series B Preferred Stock") (see Note 6 and Note 7). As the obligation to issue the 2018 Notes Warrants was not initially for a fixed number of warrants, it was recorded as a liability (the "Warrant Liability") at fair value of $0.1 million upon the issuance of the 2018 Notes and was subsequently remeasured at fair value each reporting period and immediately before the 2018 Notes were extinguished. Changes in the fair value of the Warrant Liability were recognized in other income (expense), net in the statement of operations. In November 2018, in connection with the conversion of the 2018 Notes into Series B Preferred Stock, the 2018 Notes Warrants were issued and reclassified to equity.
The 2018 Notes Warrants were initially valued and remeasured using a Black-Scholes option pricing model with the range of assumptions as follows:
Contractual term (in years) |
10.0 | |
Volatility |
74.48% - 76.56% | |
Risk-free interest rate |
2.85% - 3.20% | |
Dividend yield |
0.00% |
The following table provides a roll forward of the aggregate fair values of the Company's Derivative Liability and Warrant Liability, for which fair value is determined using Level 3 inputs (in thousands):
|
Derivative
Liability |
Warrant
Liability |
|||||
---|---|---|---|---|---|---|---|
Balance as of January 1, 2018 |
$ | | $ | | |||
Initial fair value of Derivative Liability |
1,896 | | |||||
Initial fair value of Warrant Liability |
| 74 | |||||
Change in fair value |
972 | 168 | |||||
Extinguishment of Derivative Liability in connection with extinguishment of 2018 Notes |
(2,868 | ) | | ||||
Reclassification of Warrant Liability into 2018 Notes Warrants |
| (242 | ) | ||||
| | | | | | | |
Balance as of December 31, 2018 |
$ | | $ | | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The inputs utilized by management to value the Derivative Liability and 2018 Notes Warrants are highly subjective. The assumptions used in calculating the fair value of the Derivative Liability and 2018 Notes Warrants represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the fair value of the Derivative Liability and 2018 Notes Warrants may be materially different in the future.
4. CONVERTIBLE PROMISSORY NOTES
On February 5, 2018, the Company issued the 2018 Notes in the aggregate principal amount of $6.0 million. The 2018 Notes bore interest at a rate of 15.0% per annum, were unsecured and were due
F-15
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
4. CONVERTIBLE PROMISSORY NOTES (Continued)
and payable, including accrued interest, on August 8, 2019. In the event of a qualified sale of preferred stock to one or more investors resulting in gross proceeds to the Company of at least $8.0 million, all principal and accrued and unpaid interest under the 2018 Notes was automatically convertible into a number of shares of the Company's preferred stock issued in such a financing equal to the outstanding principal and accrued but unpaid interest under the 2018 Notes, divided by an amount equal to 80% of the lowest price per share of the preferred stock sold in the financing. In the event of a corporate transaction or change of control event, the 2018 Notes contained a put option whereby the Company was required to pay to the holders of 2018 Notes an amount equal to (i) the principal amount then outstanding under the 2018 Notes plus any accrued but unpaid interest, plus (ii) an amount equal to 30% of the outstanding principal amount.
The terms of the 2018 Notes provided that (i) all outstanding principal and interest was due and payable in cash upon an event of acceleration, as defined in the 2018 Notes agreement; (ii) amounts outstanding under the 2018 Notes were not prepayable without the written consent of the holders of more than 50% of the outstanding principal of the 2018 Notes, and in addition to the balance the Company will prepay, the Company will also pay the noteholders an amount equal to 15% of the principal amount of the 2018 Notes that the Company is prepaying; and (iii) with respect to subordination, the Company has no outstanding indebtedness for borrowed money or any other liabilities, other than accounts payable arrangements with vendors entered into in the ordinary course of business and consistent with usual trade terms and will not issue or incur additional indebtedness for borrowed money while the 2018 Notes remain outstanding. There were no financial or negative covenants associated with the 2018 Notes.
The Derivative Liability represents the conversion feature in the event of a qualified financing and the put option, which each met the definition of an embedded derivative and were required to be combined and accounted for as a separate unit of accounting. The Company recorded the issuance-date fair value of the Derivative Liability of $1.9 million as a debt discount and Derivative Liability in the Company's balance sheet.
In connection with the 2018 Notes, the Company paid legal costs and bank fees of $0.4 million and was obligated to issue the 2018 Notes Warrants (see Note 3 and Note 7) with an initial fair value of $0.1 million, which were capitalized and recorded as a debt discount. The debt discount, which included legal costs, bank fees, the Derivative Liability and 2018 Notes Warrants, was amortized using the effective interest method over the term of the loan. The Company recognized interest expense of $1.6 million, including amortization of the debt discount of $0.9 million, during the year ended December 31, 2018 in connection with the 2018 Notes.
In November 2018, in connection with the Company's issuance and sale of Series B Preferred Stock, all of the outstanding principal and accrued interest under the 2018 Notes, totaling $6.6 million, was automatically converted into 19,869 shares of Series B Preferred Stock at a price equal to 80% of the $413.67 per share price paid by investors in the Series B Preferred Stock financing.
The Company accounted for the conversion of the 2018 Notes as a debt extinguishment and recognized a loss on extinguishment of debt of $0.2 million within other income (expense), net in the Company's statement of operations and $0.1 million within additional paid-in-capital related to the amount of unpaid and accrued interest as of the extinguishment date that was not converted into Series B Preferred Stock. The loss on extinguishment was calculated as the difference between (i) the fair value of the 19,869 shares of Series B convertible preferred stock issued to settle the 2018 Notes of
F-16
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
4. CONVERTIBLE PROMISSORY NOTES (Continued)
$8.2 million and (ii) the carrying value of the 2018 Notes, net of the unamortized debt discount, of $5.1 million plus the then-current fair value of the Derivative Liability associated with the 2018 Notes at the time of the extinguishment of $2.9 million.
5. STOCK-BASED COMPENSATION
In 2016, the Company adopted, and its stockholders approved, the 2016 Equity Incentive Plan, as amended (the "2016 Plan"), which provides for the granting of options at the discretion of the board of directors or any subcommittee of the Board to its employees, officers and independent contractors. Under the terms of the 2016 Plan, options may not be granted at an exercise price less than fair market value of the Company's common stock on the date of the grant. As of December 31, 2017 and 2018, there were 24,353 shares and 53,689 shares, respectively, reserved by the Company to grant under the 2016 Plan and an aggregate of 19,603 shares and 30,918 shares, respectively remained available for future grants. Stock options awarded under the 2016 Plan expire 10 years after the grant and typically vest over three years.
Total stock-based compensation expense recorded for employees, directors and non-employees during the years ended December 31, 2017 and 2018 was as follows (in thousands):
|
Years Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Research and development |
$ | | $ | 140 | |||
General and administrative |
32 | 132 | |||||
| | | | | | | |
Total stock-based compensation expense |
$ | 32 | $ | 272 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The weighted-average fair value of options granted during the year ended December 31, 2017 and 2018 was $36.70 per share and $85.06 per share, respectively. As of December 31, 2017 and 2018, the total unrecognized stock-based compensation balance for unvested options was $0.1 million and $1.3 million, respectively, which is expected to be recognized over 2.1 years as of each date. The total fair value of options vested during the year ended December 31, 2017 and 2018 was less than $1,000 and approximately $40,000, respectively.
The following table summarizes the information about options outstanding at December 31, 2018 (in thousands, except share and per share data):
|
Options
Outstanding |
Weighted-
Average Exercise Price |
Weighted-Average
Remaining Contractual Term (in years) |
Aggregate
Intrinsic Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2017 |
4,750 | $ | 49.68 | 9.09 | $ | 27 | |||||||
Options granted |
18,021 | $ | 79.40 | ||||||||||
Options exercised |
(997 | ) | $ | 46.43 | $ | 33 | |||||||
| | | | | | | | | | | | | |
Outstanding at December 31, 2018 |
21,774 | $ | 74.43 | 9.14 | $ | 4,029 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Exercisable at December 31, 2018 |
1,336 | $ | 48.62 | 8.01 | $ | 282 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Nonvested at December 31, 2018 |
20,438 | $ | 76.11 | 9.22 | $ | 3,747 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
F-17
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
5. STOCK-BASED COMPENSATION (Continued)
Valuation Assumptions
The fair value of each option award granted is estimated on the date of the grant using the Black-Scholes option valuation model based on the weighted average assumptions noted in the table below for those options granted in the years ended December 31, 2017 and 2018.
|
Years Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Expected term (in years) |
6.0 | 5.9 | |||||
Volatility |
75.06% | 71.78% | |||||
Risk-free interest rate |
2.09% | 2.71% | |||||
Dividend yield |
0.00% | 0.00% |
6. STOCKHOLDERS' EQUITY
As of December 31, 2018, the authorized capital stock of the Company consists of 370,000 shares of common stock, par value $0.0001 per share, and 197,000 shares of convertible preferred stock, par value $0.0001 per share, of which 56,000 are designated as Series A convertible preferred stock ("Series A Preferred Stock") and 141,000 are designated as Series B Preferred Stock (collectively, with the Series A Preferred Stock, the "Preferred Stock"). As of December 31, 2017, the Company had 98,798 shares of common stock issued and outstanding and 56,000 shares of Series A Preferred Stock issued and outstanding. As of December 31, 2018, the Company had 99,795 shares of common stock issued and outstanding, 56,000 shares of Series A Preferred Stock issued and outstanding and 72,434 shares of Series B Preferred Stock issued and outstanding.
Common Stock
In February 2017, the Company issued 8,798 shares of common stock, with a fair value of $0.5 million, as consideration pursuant to a license agreement with Columbia University (see Note 2).
Voting
The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of the stockholders. There is no cumulative voting.
Preferred Stock
In January 2017, the Company issued 56,000 shares of Series A Preferred Stock at $125.00 per share for gross proceeds of $7.0 million. Issuance costs were $0.7 million, which included the issuance of warrants to purchase common stock (see Note 7).
Between November and December 2018, the Company issued an aggregate of 52,565 shares of its Series B Preferred Stock at $413.67 per share for gross proceeds of $21.7 million. Issuance costs were $0.8 million, which included the obligation to issue warrants to purchase common stock (see Note 7). In addition, all of the outstanding principal and accrued interest under the 2018 Notes were automatically converted into an aggregate of 19,869 shares of its Series B Preferred Stock.
F-18
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
As of December 31, 2017 and 2018, Preferred Stock consisted of the following (in thousands, except share data):
|
As of December 31, 2017 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Preferred
Stock Authorized |
Preferred
Stock Issued and Outstanding |
Carrying
Value |
Liquidation
Value |
Common Stock
Issuable Upon Conversion |
|||||||||||
Series A Preferred Stock |
64,000 | 56,000 | $ | 6,254 | $ | 7,000 | 56,000 | |||||||||
| | | | | | | | | | | | | | | | |
Total |
64,000 | 56,000 | $ | 6,254 | $ | 7,000 | 56,000 | |||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
As of December 31, 2018 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Preferred
Stock Authorized |
Preferred
Stock Issued and Outstanding |
Carrying
Value |
Liquidation
Value |
Common stock
Issuable Upon Conversion |
|||||||||||
Series A Preferred Stock |
56,000 | 56,000 | $ | 6,254 | $ | 7,000 | 56,000 | |||||||||
Series B Preferred Stock |
141,000 | 72,434 | 29,156 | 29,964 | 72,434 | |||||||||||
| | | | | | | | | | | | | | | | |
Total |
197,000 | 128,434 | $ | 35,410 | $ | 36,964 | 128,434 | |||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The following is a summary of the rights and privileges of the common and preferred stockholders as of December 31, 2018:
Voting
The holders of Preferred Stock have the right to one vote for each share of common stock into which such Preferred Stock could be converted and will vote together with the holders of common stock as a single class.
Dividends
Dividends are payable to holders of Preferred Stock prior to payment of any dividend to holders of common stock. Dividends are payable when and if declared out of funds legally available and such dividends are not cumulative. In the event the board of directors of the Company declares a dividend payable on the common stock, the holders of the Preferred Stock would be entitled to receive the amount of dividends per share of Preferred Stock that would be payable on the number of whole shares of the common stock into which each share of such Preferred Stock held by each holder could be converted into.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, or a Deemed Liquidation Event (as defined below), the holders of shares of Preferred Stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock by reason of their ownership thereof, in an amount per share equal to the greater of (i) the original issue price ($125.00 per share for Series A Preferred Stock and $413.67 per share for Series B Preferred Stock) plus any dividends declared but unpaid thereon or (ii) such amount per share as would have been payable had each series of Preferred
F-19
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
Stock been converted into common stock immediately prior to a liquidation, dissolution or winding up of the Company or Deemed Liquidation Event. If upon any such liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, the proceeds shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled, the holders of shares of Preferred Stock shall share ratably in any distribution of the proceeds in proportion to the respective amounts which would otherwise be payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable with respect to such shares were paid in full. After the payment of all preferential amounts to be paid to the holders of shares of Preferred Stock, the remaining proceeds shall be distributed among the holders of shares of common stock pro rata based on the number of shares held by each such holder.
A Deemed Liquidation Event is defined as: (i) a merger where the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (ii) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
Protective Provisions
At any time when any shares of Preferred Stock remain outstanding, the Company shall not take any of the following actions without the vote or written consent of the holders of a majority of the then outstanding shares of Preferred Stock separately as a class: (i) liquidate, dissolve or wind-up the business and affairs of the Company, effect any merger, consolidation or any other Deemed Liquidation Event, or consent to any of the foregoing, in each case other than in the event that such event would provide the holders of the Preferred Stock a return per each share of Preferred Stock, including all distributions and dividends paid to such holders prior to such event by the Company, if any, of at least two (2) times the Series B Original Issue Price in the twenty-four (24) months following the Series B Original Issue Date (November 5, 2018) or three (3) times the Series B Original Issue Price thereafter; (ii) amend, alter, or repeal any provision of the Certificate of Incorporation or the Company's bylaws in a manner that adversely affects the powers, preferences or rights of the Preferred Stock; (iii) create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock unless the same ranks junior to the Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption, or increase the authorized number of shares of Preferred Stock; (iv) purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or
F-20
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
declare any dividend or make any distribution on, any shares of capital stock of the Company other than (a) redemptions of or dividends or distributions on the Preferred Stock as expressly authorized herein, (b) dividends or other distributions payable on the common stock solely in the form of additional shares of common stock and (c) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Company or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof; (v) create, or authorize the creation of, or issue, or authorize the issuance of any debt security, or permit any subsidiary to take any such action with respect to any debt security, if the aggregate indebtedness of the Company and its subsidiaries for borrowed money following such action would exceed $2.0 million other than equipment leases or bank lines of credit; (vi) create, or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more other subsidiaries) by the Company, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Company, or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license or otherwise dispose (in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary; or (vi) increase or decrease the authorized number of directors of the Company.
Optional Conversion Rights
Each share of Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time after issuance, and without the payment of additional consideration into such number of fully paid and nonassessable shares of common stock as is determined by dividing the original issue price ($125.00 per share for Series A Preferred Stock and $413.67 per share for Series B Preferred Stock) by the series conversion price ($125.00 per share for Series A Preferred Stock and $413.67 per share for Series B Preferred Stock) in effect at the time of conversion. As of December 31, 2018, the Preferred Stock is convertible in to common stock on a one-for-one basis.
Mandatory Conversion Rights
All outstanding shares of Preferred Stock shall automatically be converted into shares of common stock, at the then effective conversion rate, upon either (a) the closing of the sale of shares of common stock to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30.0 million of proceeds, net of the underwriting discount and commissions, to the Company, or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Preferred Stock.
Redemption
The Preferred Stock is redeemable upon the occurrence of a Deemed Liquidation Event, which is not solely in control of the Company. Therefore, the Preferred Stock has been classified as temporary equity.
F-21
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
7. WARRANTS
Warrants Issued with Series A Preferred Stock
On January 26, 2017, in connection with the sale and issuance of the Series A Preferred Stock, the Company issued equity-classified warrants to purchase 5,600 shares of common stock (the "2017 Warrants"), valued at $0.2 million, and included in the issuance costs of the Series A Preferred Stock (see Note 4). The warrants vested immediately and have an exercise price of $137.50 per share and expire on March 13, 2027.
The fair value of warrants issued is estimated using the Black-Scholes option pricing model with the following assumptions for the 2017 Warrants.
Contractual term (in years) |
10.0 | |||
Volatility |
76.95 | % | ||
Risk-free interest rate |
2.62 | % | ||
Dividend yield |
0.00 | % |
Warrants Issued with the 2018 Notes
On January 18, 2018, the Company entered into a placement agent agreement through which it became obligated to issue common stock warrants in connection with the issuance of the 2018 Notes. The obligation to issue the 2018 Notes Warrants was recorded as a liability at its fair value (see Note 3), which was initially $0.1 million, and was included in the issuance costs of the 2018 Notes (see Note 4). On November 5, 2018, in connection with the extinguishment of the 2018 Notes into shares of Series B Preferred Stock, the Company issued the 2018 Notes Warrants, which were equity-classified warrants upon issuance, to purchase 1,391 shares of common stock, valued at $0.3 million. The 2018 Notes Warrants vested immediately upon issuance and have an exercise price of $364.03 per share and expire on November 4, 2028.
Warrants Issued with Series B Preferred Stock
In November and December 2018, in connection with the sale and issuance of the Series B Preferred Stock, the Company was obligated to issue equity-classified warrants to purchase 1,308 shares of common stock (collectively the "2018 Warrants"), valued in the aggregate at $0.2 million, which was included in the issuance costs for the Series B Preferred Stock (see Note 6). The warrants vest immediately upon issuance, have an exercise price of $455.04 per share and expire 10 years from the date of issuance.
The fair value of the 2018 Warrants is estimated using the Black-Scholes option pricing model with the following assumptions:
Contractual term (in years) |
10.0 | |||
Volatility |
74.48 | % | ||
Risk-free interest rate |
3.20 | % | ||
Dividend yield |
0.00 | % |
The inputs utilized by management to value the warrants are highly subjective. The assumptions used in calculating the fair value of the warrants represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if
F-22
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
7. WARRANTS (Continued)
factors change and the Company uses different assumptions, the fair value of the warrants may be materially different in the future.
8. INCOME TAXES
The Company's current tax provision for the years ended December 31, 2017 and 2018 is $0 and $0, respectively. The Company's deferred tax provision for the years ended December 31, 2017 and 2018 is $0.
Deferred income tax assets and liabilities consist of the following (in thousands):
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Deferred tax assets |
|||||||
Accrued expenses |
$ | 335 | $ | | |||
Stock-based compensation |
11 | 98 | |||||
Capitalized startup costs |
38 | 35 | |||||
Net operating losses |
1,200 | 6,176 | |||||
| | | | | | | |
Total deferred tax assets |
1,584 | 6,309 | |||||
Less: valuation allowance |
(1,584 |
) |
(6,309 |
) |
|||
| | | | | | | |
Net deferred tax asset (liability) |
$ | | $ | | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred tax assets result primarily from unutilized net operating losses, capitalized startup costs and timing differences as a result of the Company reporting its income tax returns. As of December 31, 2018, the Company had approximately $3.6 million of federal and state net operating losses ("NOLs") carried forward expiring through 2037. Additionally, the Company generated approximately $14.2 million of NOLs in 2018 which, for federal income tax purposes, do not expire but are limited to offsetting up to 80% of future taxable income.
The NOL carry forwards are subject to review and possible adjustment by the U.S. and state tax authorities. NOL carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders, as defined under Sections 382 Internal Revenue Code. This could limit the amount of NOLs that the Company can utilize annually to offset future taxable income or tax liabilities. As of December 31, 2018, the Company has not performed such an analysis. Subsequent ownership changes and proposed future changes to tax rules in respect of the utilization of losses carried forward may further affect the limitation in future years.
In assessing the realizability of the Company's deferred tax assets, management considers whether or not it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company's assessment is based on the weight of available evidence, including cumulative losses since inception and expected future losses and, as such, the Company does not believe it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been established and no deferred tax assets and related tax benefit have been recognized in the accompanying financial statements. At December 31, 2017 and 2018, the Company recorded valuation allowances of $1.6 million and $6.3 million, respectively, representing an increase in the valuation
F-23
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
8. INCOME TAXES (Continued)
allowance of $4.7 million in 2018 due to the uncertainty regarding the realization of such deferred tax assets, to offset the benefits of net operating losses generated during those years.
The U.S. federal statutory corporate tax rate reconciles to the Company's effective tax rate for the years ended December 31, 2017 and 2018:
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Federal statutory rate |
34.0 | % | 21.0 | % | |||
State and local taxes net of federal tax benefit |
11.3 | 13.5 | |||||
Tax rate change |
(13.8 | ) | 0.3 | ||||
Change in valuation allowance |
(32.2 | ) | (28.5 | ) | |||
Permanently disallowed interest expense |
| (6.3 | ) | ||||
Other |
0.7 | | |||||
| | | | | | | |
Total |
0.0 | % | 0.0 | % | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act ("Tax Act"), which made significant changes to the U.S. federal income tax law. The Tax Act affected 2018 and forward, including but not limited to a reduction in the federal corporate rate from 35.0% to 21.0%, elimination of the corporate alternative minimum tax, a new limitation on the deductibility of certain executive compensation, limitations on NOLs generated after December 31, 2017 and various other items. These changes did not have a material impact on the Company's financial statements due to the accumulated NOLs in the United States.
9. BENEFIT PLANS
The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code in 2018. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Matching contributions to the plan may be made at the discretion of the Company's board of directors. The Company made approximately $11,000 in matching contributions to the plan during the year ended December 31, 2018.
10. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per common share is computed by giving the effect of all potential shares of common stock, including stock options, preferred shares, warrants and instruments convertible into common stock, to the extent dilutive. Basic and diluted net loss per common share was the same for the years ended December 2017 and 2018, as the inclusion of all potential common shares outstanding would have been anti-dilutive.
F-24
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
10. NET LOSS PER COMMON SHARE (Continued)
The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per share data):
|
Years Ended
December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Numerator: |
|||||||
Net loss |
$ | (4,282 | ) | $ | (16,521 | ) | |
| | | | | | | |
Denominator: |
|||||||
Weighted-average common stock outstanding |
97,858 | 99,244 | |||||
| | | | | | | |
Net loss per share, basic and diluted |
$ | (43.76 | ) | $ | (166.47 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company's potential dilutive securities, which include Preferred Stock, stock options and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at December 31, 2017 and 2018, from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2017 | 2018 | |||||
Preferred Stock |
56,000 | 128,434 | |||||
Options to purchase common stock |
4,750 | 21,774 | |||||
Warrants to purchase common stock |
5,600 | 8,299 |
Unaudited Pro Forma Net Loss Per Share
The unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2018 has been prepared to give effect to adjustments arising upon the completion of a qualified IPO. The unaudited pro forma basic and diluted weighted-average common shares outstanding used in the calculation of unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2018 has been prepared to give effect, upon a qualified IPO, to the conversion of all outstanding shares of Preferred Stock into common stock as if the proposed IPO had occurred on the later of January 1, 2018 or the issuance date of the preferred stock.
F-25
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
10. NET LOSS PER COMMON SHARE (Continued)
Unaudited pro forma basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
11. RELATED PARTIES
In December 2018, the Company entered into an agreement (the "LaunchLabs Agreement") with ARE-LaunchLabs NYC LLC ("Alexandria LaunchLabs"), a subsidiary of Alexandria Real Estate Equities, Inc. for use of specified premises within the Alexandria LaunchLabs space. A member of the Company's board of directors is the founder and executive chairman of Alexandria Real Estate Equities, Inc. During the year ended December 31, 2018, the Company made payments to Alexandria LaunchLabs of approximately $13,000 under the LaunchLabs Agreement, which was recognized in research and development expenses. As of December 31, 2018, there were no amounts due to Alexandria LaunchLabs under the LaunchLabs Agreement.
12. SUBSEQUENT EVENTS
Issuance of Series B Preferred Stock
In February 2019, the Company issued an aggregate of 8,017 shares of its Series B Preferred Stock to investors and certain members of its board of directors at a price per share of $413.67 for proceeds of $3.1 million, net of issuance costs of $0.2 million. The rights and privileges of the Series B Preferred Stock are the same as the rights and privileges of the Series B Preferred Stock issued in earlier closings. In connection with the Series B Preferred Stock issuance, the Company is obligated to issue warrants to purchase shares of common stock to the placement agent.
F-26
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
12. SUBSEQUENT EVENTS (Continued)
Columbia University
In January 2019, the Company entered into a license agreement with Columbia University ("2019 Columbia Agreement"). Pursuant to the 2019 Columbia Agreement, Columbia University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in each case to develop, manufacture and commercialize PI3K inhibitor products. As consideration, the Company made a nominal upfront payment to Columbia University. The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2019 Columbia Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company's, its affiliates' and its sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed products, in the mid six figures beginning on the 10th anniversary of the effective date of the 2019 Columbia Agreement. If the Company sublicenses the rights granted under the 2019 Columbia Agreement to one or more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from such sublicensees, at percentages ranging from 10% to 50%, depending on the passage of time or the stage of development of the applicable product at the time such revenue is received from such sublicenses.
F-27
Shares
Common Stock
PRELIMINARY PROSPECTUS
, 2019
Citigroup
Cowen
UBS Investment Bank
Baird
Until , 2019 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of our common stock being registered. All amounts are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the Financial Industry Regulatory Authority, or FINRA, filing fee and The Nasdaq Global Market, or Nasdaq, listing fee.
Item
|
Amount | |||
---|---|---|---|---|
SEC registration fee |
$ | 10,453.50 | ||
FINRA filing fee |
13,437.50 | |||
Nasdaq listing fee |
125,000 | |||
Printing expenses |
* | |||
Legal fees and expenses |
* | |||
Accounting fees and expenses |
* | |||
Transfer agent fees and expenses |
* | |||
Miscellaneous expenses |
* | |||
| | | | |
Total |
$ | * | ||
| | | | |
| | | | |
| | | | |
Item 14. Indemnification of Directors and Officers.
As permitted by Section 102 of the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:
These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.
As permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws provide that:
II-1
Our amended and restated certificate of incorporation and our amended and restated bylaws provide for the indemnification provisions described above and elsewhere herein. We have entered or will enter into, and intend to continue to enter into, separate indemnification agreements with our directors and officers that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements generally require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also generally require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.
The Registrant has purchased and currently intends to maintain insurance on behalf of each and every person who is or was a director or officer of the Registrant against any loss arising from any claim asserted against him or her and incurred by him or her in any such capacity, subject to certain exclusions.
The form of underwriting agreement for this initial public offering provides for indemnification by the underwriters of us and our officers and directors who sign this registration statement for specified liabilities, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
The following list sets forth information as to all securities we have sold since January 20, 2016 (date of inception) up to the date of the prospectus that is a part of this registration statement:
II-2
Markets, a division of CIM Securities, LLC, pursuant to that certain placement agency agreement, dated October 7, 2016, as amended and restated on November 23, 2016.
The offers, sales and issuances of the securities described in paragraph (1) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were employees, directors or bona fide consultants of the Registrant and received the securities under the 2016 Plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about the Registrant.
The offers, sales and issuances of the securities described in paragraphs (2) through (8) above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and Rule 506 promulgated under Regulation D as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act and had adequate access, through employment, business or other relationships, to information about the Registrant. No underwriters were involved in these transactions.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The exhibits listed below are filed as part of this registration statement.
Exhibit
Number |
Description | ||
---|---|---|---|
1.1 | * | Form of Underwriting Agreement. | |
3.1 | Amended and Restated Certificate of Incorporation, as currently in effect. | ||
3.2 | * | Form of Amended and Restated Certificate of Incorporation, to be effective immediately after to the completion of this offering. | |
|
II-3
II-4
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
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Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 12, 2019.
APPLIED THERAPEUTICS, INC. | ||||
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By: |
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/s/ SHOSHANA SHENDELMAN Shoshana Shendelman, Ph.D. President and Chief Executive Officer |
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shoshana Shendelman, Ph.D. and Les Funtleyder, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE
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TITLE
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DATE
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/s/ SHOSHANA SHENDELMAN
Shoshana Shendelman, Ph.D. |
President, Chief Executive Officer and Director
(Principal Executive Officer) |
April 12, 2019 | ||
/s/ LES FUNTLEYDER Les Funtleyder |
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Interim Chief Financial Officer and Director (Principal Financial and Accounting Officer) |
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April 12, 2019 |
/s/ FRANKLIN M. BERGER Franklin M. Berger, CFA |
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Director |
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April 12, 2019 |
/s/ TEENA LERNER Teena Lerner, Ph.D. |
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Director |
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April 12, 2019 |
/s/ JOEL S. MARCUS Joel S. Marcus |
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Director |
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April 12, 2019 |
/s/ JAY S. SKYLER Jay S. Skyler, M.D., MACP |
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Director |
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April 12, 2019 |
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
APPLIED THERAPEUTICS, INC.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
Applied Therapeutics, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the General Corporation Law ),
DOES HEREBY CERTIFY:
1. That the name of this corporation is Applied Therapeutics, Inc., and that this corporation was originally incorporated pursuant to the General Corporation Law on January 20, 2016.
2. That the Board of Directors duly adopted resolutions proposing to further amend and restate the Amended and Restated Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:
RESOLVED , that the Amended and Restated Certificate of Incorporation of this corporation be further amended and restated in its entirety to read as follows:
FIRST: The name of this corporation is Applied Therapeutics, Inc. (the Corporation ),
SECOND: The address of the registered office of the Corporation in the State of Delaware is 251 Little Falls Drive, Wilmington, DE 19808 in the County of New Castle. The name of its registered agent at such address is Corporation Service Company.
THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.
FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 567,000 consisting of (i) 370,000 shares of Common Stock, $0.0001 par value per share ( Common Stock ), and (ii) 197,000 shares of Preferred Stock, $0.0001 par value per share ( Preferred Stock ),
The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK
1. General . The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.
2. Voting . The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings); provided, however , that, except as otherwise required by law, holders of Common Stock, as such, shalt not be entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to the Certificate of Incorporation or pursuant to the General Corporation Law. There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by (in addition to any vote of the holders of one or more series of Preferred Stock that may be required by the terms of the Certificate of Incorporation) the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law.
B. PREFERRED STOCK
56,000 shares of the Preferred Stock of the Corporation are hereby designated Series A Preferred Stock , and 141,000 shares of the Preferred Stock of the Corporation are hereby designated Series B Preferred Stock , with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to sections or subsections in this Part B of this Article Fourth refer to sections and subsections of Part B of this Article Fourth.
1. Dividends . The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents required elsewhere in the Certificate of Incorporation) the holders of each series of Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of such series of Preferred Stock in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of such series of Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of such series of Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of such series of Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and
(B) multiplying such fraction by an amount equal to the Applicable Original Issue Price (as defined below); provided that, if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of each series of Preferred Stock pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Preferred Stock dividend for such series. The Series A Original Issue Price shall mean $125.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock. The Series B Original Issue Price shall mean $413.67 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock. The Applicable Original Issue Price shall mean the Series A Original Issue Price with respect to the Series A Preferred Stock and the Series B Original Issue Price with respect to the Series B Preferred Stock, as the case may be.
2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales .
2.1 Preferential Payments to Holders of Preferred Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to (i) with respect to the Series A Preferred Stock, the greater of (A) the Series A Original Issue Price, plus any dividends declared but unpaid thereon or (B) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount payable pursuant to this sentence is hereinafter referred to as the Series A Liquidation Amount ); and (ii) with respect to the Series B Preferred Stock, the greater of (A) the Series B Original Issue Price, plus any dividends declared but unpaid thereon or (B) such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount payable pursuant to this sentence is hereinafter referred to as the Series B Liquidation Amount ). If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled under this Subsection 2.1 , the holders of shares of Preferred Stock shalt share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
2.2 Payments to Holders of Common Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.
2.3 Deemed Liquidation Events.
2.3.1 Definition . Each of the following events shall be considered a Deemed Liquidation Event unless the holders of at least a majority of the voting power of the then outstanding shares of Preferred Stock elect otherwise by written notice sent to the Corporation at least ten (10) days prior to the effective date of any such event:
(a) a merger or consolidation in which
(i) the Corporation is a constituent party or
(ii) a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation,
except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation ( provided that , for the purpose of this Subsection 2.3.1 , all shares of Common Stock issuable upon exercise of Options (as defined below) outstanding immediately prior to such merger or consolidation or upon conversion of Convertible Securities (as defined below) outstanding immediately prior to such merger or consolidation shall be deemed to be outstanding immediately prior to such merger or consolidation and, if applicable, converted or exchanged in such merger or consolidation on the same terms as the actual outstanding shares of Common Stock are converted or exchanged); or
(b) the sale, lease, transfer or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer or other disposition is to a wholly owned subsidiary of the Corporation.
2.3.2 Effecting a Deemed Liquidation Event .
(a) The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the Merger Agreement ) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1 and 2.2 .
(b) In the event of a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(ii) or 2.3.1(b) , if the Corporation does not effect a dissolution of the
Corporation under the General Corporation Law within 90 days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Preferred Stock no later than the 90th day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (ii) to require the redemption of such shares of Preferred Stock, and (ii) if the holders of at least a majority of the then outstanding shares of Preferred Stock so request in a written instrument delivered to the Corporation not later than 120 days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Corporation), together with any other assets of the Corporation available for distribution to its stockholders (the Available Proceeds ), to the extent legally available therefor, on the 150th day after such Deemed Liquidation Event, to redeem, on a pari passu basis, all outstanding shares of Preferred Stock at a price per share equal to (i) the Series A Liquidation Amount with respect to the Series A Preferred Stock, or (ii) the Series B Liquidation Amount with respect to the Series B Preferred Stock, as the case may be. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall ratably redeem each holders shares of Preferred Stock to the fullest extent of such Available Proceeds, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. Prior to the distribution or redemption provided for in this Subsection 2.3.2(b) , the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.
2.3.3 Amount Deemed Paid or Distributed . The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer or other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the Board of Directors of the Corporation.
2.3.4 Allocation of Escrow and Contingent Consideration . In the event of a Deemed Liquidation Event pursuant to Subsection 2.3.1(a)(i), if any portion of the consideration payable to the stockholders of the Corporation is placed into escrow and/or is payable to the stockholders of the Corporation subject to contingencies (the Additional Consideration ), the Merger Agreement shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the Initial Consideration ) shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1 and 2.2 as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon release from escrow or satisfaction of contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1 and 2.2 after taking into account the previous payment of the Initial Consideration as part of the same transaction.
3. Voting .
3.1 General . On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of Preferred Stock shall vote together with the holders of Common Stock as a single class.
3.2 Election of Directors . The holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation (the Series A Director ), the holders of Series B Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation (the Series B Director and, together with the Series A Director, the Preferred Directors ) and the holders of record of the shares of Common Stock, exclusively and as a separate class, shall be entitled to elect three (3) directors of the Corporation (the Common Directors ). Any director elected as provided in the preceding sentence of this Section 3.2 may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting exclusively and as a separate class, pursuant to the first sentence of this Subsection 3.2 , then any directorship not so filled shall remain vacant until such time as the holders of the Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship, voting exclusively and as a separate class (except that prior to the time the first share of Series B Preferred Stock is issued, any vacancies in the office of the Series B Director, the Series A Director or the Common Directors may be filled (either contingently or otherwise) by a majority of the directors then in office). Except as otherwise provided in this Subsection 3.2 , the holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Series A Preferred Stock and Series B Preferred Stock), exclusively and voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this Subsection 3.2 , a vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series pursuant to this Subsection 3.2 . The rights of the holders of the Series A Preferred Stock under the first sentence of this Subsection 3.2 shall terminate on the first date following the Series B Original Issue Date (as defined below) on which there are no issued and outstanding shares of Series A Preferred Stock, and the rights of the holders of the Series B Preferred Stock under the first sentence of this Subsection 3.2 shall terminate on
the first date following the Series B Original Issue Date (as defined below) on which there are no issued and outstanding shares of Series B Preferred Stock.
3.3 Preferred Stock Protective Provisions . At any time when any shares of Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio , and of no force or effect:
(a) liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any merger, consolidation or any other Deemed Liquidation Event, or consent to any of the foregoing, in each case other than in the event that such liquidation, dissolution, wind-up, merger, consolidation or other Deemed Liquidation Event would provide the holders of the Preferred Stock a return per each share of Preferred Stock, including all distributions and dividends paid to such holders of the Preferred Stock prior to such event by the Corporation, if any, of at least two (2) times the Series B Original Issue Price in the twenty-four (24) months following the Series B Original Issue Date or three (3) times the Series B Original Issue Price thereafter;
(b) amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of the Corporation in a manner that adversely affects the powers, preferences or rights of the Preferred Stock;
(c) purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Corporation other than (i) redemptions of or dividends or distributions on the Preferred Stock as expressly authorized herein, (ii) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock, and (iii) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Corporation or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof;
(d) create, or authorize the creation of, or issue, or authorize the issuance of any debt security, or permit any subsidiary to take any such action with respect to any debt security, if the aggregate indebtedness of the Corporation and its subsidiaries for borrowed money following such action would exceed $5,000,000 other than equipment leases or bank lines of credit; or
(e) increase or decrease the authorized number of directors constituting the Board of Directors.
4. Optional Conversion .
The holders of the Preferred Stock shall have conversion rights as follows (the Conversion Rights ):
4.1 Right to Convert.
4.1.1 Conversion Ratio . Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by (i) in the case of the Series A Preferred Stock, dividing the Series A Original Issue Price by the Series A Conversion Price (as defined below) in effect at the time of conversion, and (ii) in the case of the Series B Preferred Stock, dividing the Series B Original Issue Price by the Series B Conversion Price (as defined below) in effect at the time of the conversion. The Series A Conversion Price for each share of Series A Preferred Stock shall initially be equal to $125.00. The Series B Conversion Price for each share of Series B Preferred Stock shall initially be equal to $413.67. The Applicable Conversion Price shall mean the Series A Conversion Price with respect to the Series A Preferred Stock and the Series B Conversion Price with respect to the Series B Preferred Stock, as the case may be. The initial Applicable Conversion Prices, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.
4.1.2 Termination of Conversion Rights . In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock.
4.2 Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.
4.3 Mechanics of Conversion.
4.3.1 Notice of Conversion . In order for a holder of Preferred Stock to voluntarily convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, then or destruction of such certificate), at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates and, if applicable, any event on which such conversion is contingent. Such notice shall state such holders name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such certificates (or lost certificate affidavit and agreement) and notice shall be the time of conversion (the Conversion Time ), and the shares of Common Stock issuable upon conversion of the shares represented by such certificate shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time, (i) issue and deliver to such holder of Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion in accordance with the provisions hereof and a certificate for the number (if any) of the shares of Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, (ii) pay in cash such amount as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and (iii) pay all declared but unpaid dividends on the shares of Preferred Stock converted.
4.3.2 Reservation of Shares . The Corporation shall at all times when any Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duty authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the Applicable Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Applicable Conversion Price.
4.3.3 Effect of Conversion . All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Subsection 4.2 and to receive payment of any dividends declared but unpaid thereon. Any shares of Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.
4.3.4 No Further Adjustment . Upon any such conversion, no adjustment to the Applicable Conversion Price shall be made for any declared but unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.
4.3.5 Taxes . The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4 . The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.
4.4 Adjustments to Conversion Price for Diluting Issues .
4.4.1 Special Definitions . For purposes of this Article Fourth, the following definitions shall apply:
(a) Option shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.
(b) Series B Original Issue Date shall mean the date on which the first share of Series B Preferred Stock was issued.
(c) Convertible Securities shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.
(d) Additional Shares of Common Stock shall mean all shares of Common Stock issued (or, pursuant to Subsection 4.4.3 below, deemed to be issued) by the Corporation after the Series B Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, Exempted Securities ):
(i) shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Preferred Stock or, unless also issued on Preferred Stock, on Common Stock;
(ii) shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Subsection 4.5 , 4.6 , 4.7 or 4.8 ;
(iii) shares of Common Stock or Options issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries, pursuant to any plan, agreement or arrangement (including the vesting and other terms of each award) approved by the Board of Directors of the
Corporation as of the date hereof or approved after the date hereof by the Board of Directors of the Corporation, including at least one Preferred Director;
(iv) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security;
(v) shares of Common Stock, Options or Convertible Securities issued pursuant to that certain Exclusive License Agreement, as amended from time to time, by and between the Corporation and The Trustees of Columbia University in the City of New York approved by the Board of Directors of the Corporation; or
(vi) shares of Common Stock, Options or Convertible Securities issued pursuant to that certain Series B Preferred Stock Purchase Agreement, as amended from time to time, by and among the Corporation and the parties named therein.
4.4.2 No Adjustment of Conversion Price . No adjustment in the Applicable Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.
4.4.3 Deemed Issue of Additional Shares of Common Stock .
(a) If the Corporation at any time or from time to time after the Series B Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.
(b) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Applicable Conversion Price pursuant to the terms of Subsection 4.4.4 , are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Applicable Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Applicable Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Applicable Conversion Price to an amount which exceeds the lower of the Applicable Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Applicable Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.
(c) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Applicable Conversion Price pursuant to the terms of Subsection 4.4.4 (either because the consideration per share (determined pursuant to Subsection 4.4.5 ) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Applicable Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series B Original Issue Date), are revised after the Series B Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Subsection 4.4.3(a) ) shall be deemed to have been issued effective upon such increase or decrease becoming effective.
(d) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Applicable Conversion Price pursuant to the terms of Subsection 4.4.4 , the Applicable Conversion Price shall be readjusted to such Applicable Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.
(e) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration
payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Applicable Conversion Price provided for in this Subsection 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses and (c) of this Subsection 4.4.3 ). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Applicable Conversion Price that would result under the terms of this Subsection 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Applicable Conversion Price that such issuance or amendment took place at the time such calculation can first be made.
4.4.4 Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock . In the event the Corporation shall at any time after the Series B Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4.4.3 ), without consideration or for a consideration per share less than the Applicable Conversion Price in effect immediately prior to such issuance or deemed issuance then the Applicable Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:
CP2 = CP1* (A + B) / (A + C).
For purposes of the foregoing formula, the following definitions shall apply:
(a) CP2 shall mean the Applicable Conversion Price in effect immediately after such issue of Additional Shares of Common Stock
(b) CP 1 shall mean the Applicable Conversion Price in effect immediately prior to such issue of Additional Shares of Common Stock;
(c) A shall mean the number of shares of Common Stock outstanding immediately prior to such issue of Additional Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Preferred Stock) outstanding (assuming exercise of any outstanding Options therefor) immediately prior to such issue);
(d) B shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP1); and
(e) C shall mean the number of such Additional Shares of Common Stock issued in such transaction.
4.4.5 Determination of Consideration . For purposes of this Subsection 4.4 the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:
(a) Cash and Property : Such consideration shall:
(i) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest;
(ii) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors of the Corporation; and
(iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors of the Corporation.
(b) Options and Convertible Securities . The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4.4.3 , relating to Options and Convertible Securities, shall be determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by
(ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.
4.4.6 Multiple Closing Dates . In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Applicable Conversion Price pursuant to the terms of Subsection 4.4.4 , and such issuance dates occur within a period of no more than 90 days from the first such issuance to the final such issuance, then, upon the final such issuance, the Applicable Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).
4.5 Adjustment for Stock Splits and Combinations . If the Corporation shall at any time or from time to time after the Series B Original Issue Date effect a subdivision of the outstanding Common Stock, the Applicable Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series B Original Issue Date combine the outstanding shares of Common Stock, the Applicable Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.
4.6 Adjustment for Certain Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Applicable Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Applicable Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.
Notwithstanding the foregoing, (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Applicable Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Applicable Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.
4.7 Adjustments for Other Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.
4.8 Adjustment for Merger or Reorganization, etc . Subject to the provisions of Subsection 2.3 , if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but none of the Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Subsections 4.4 , 4.6 or 4.7 ), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Preferred Stock to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Applicable Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Preferred Stock.
4.9 Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Applicable Conversion Price pursuant to this Section 4 , the Corporation at its expense shall, as promptly as reasonably practicable, but in any event not later than 10 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Preferred Stock (but in any event not later than 10 days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Applicable Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Preferred Stock.
4.10 Notice of Record Date . In the event:
(a) the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or
(b) of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or
(c) of the voluntary or involuntary dissolution, liquidation or winding- up of the Corporation,
then, and in each such case, the Corporation will send or cause to be sent to the holders of the Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Preferred Stock and the Common Stock. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice.
5. Mandatory Conversion .
5.1 Upon either (a) the closing of the sale of shares of Common Stock to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30,000,000 of proceeds, net of the underwriting discount and commissions, to the Corporation (a Qualified
Public Offering ) or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Preferred Stock (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the Mandatory Conversion Time ), (i) all outstanding shares of Preferred Stock shalt automatically be converted into shares of Common Stock, at the then effective conversion rate and (ii) such shares may not be reissued by the Corporation.
5.2 Procedural Requirements . All holders of record of shares of Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to this Section 5 . Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Preferred Stock shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Preferred Stock converted pursuant to Section 5.1 , including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender the certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Section 5.2 . As soon as practicable after the Mandatory Conversion Time and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Preferred Stock, the Corporation shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof, together with cash as provided in Section 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Preferred Stock converted. Such converted Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.
6. Redeemed or Otherwise Acquired Shares . Any shares of Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following redemption.
7. Waiver . Except as otherwise provided in this Certificate of Incorporation, any of the rights, powers, preferences and other terms of the Preferred Stock set forth herein may be
waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of the holders of at least a majority of the shares of Preferred Stock then outstanding.
8. Notices . Any notice required or permitted by the provisions of this Article Fourth to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.
FIFTH: Subject to any additional vote required by the Certificate of Incorporation or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.
SIXTH: Subject to any additional vote required by the Certificate of Incorporation, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation.
SEVENTH: Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.
EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.
NINTH: To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article Ninth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article Ninth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.
TENTH: The following indemnification provisions shall apply to the persons enumerated below.
1. Right to Indemnification of Directors and Officers . The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an Indemnified Person ) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a Proceeding ), by reason of the fact that such
person, or a person for whom such person is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys fees) reasonably incurred by such Indemnified Person in such Proceeding. Notwithstanding the preceding sentence, except as otherwise provided in Section 3 of this Article Tenth, the Corporation shall be required to indemnify an Indemnified Person in connection with a Proceeding (or part thereof) commenced by such Indemnified Person only if the commencement of such Proceeding (or part thereof) by the Indemnified Person was authorized in advance by the Board of Directors.
2. Prepayment of Expenses of Directors and Officers . The Corporation shall pay the expenses (including attorneys fees) incurred by an Indemnified Person in defending any Proceeding in advance of its final disposition, provided, however , that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the Indemnified Person to repay all amounts advanced if it should be ultimately determined that the Indemnified Person is not entitled to be indemnified under this Article Tenth or otherwise.
3. Claims by Directors and Officers . If a claim for indemnification or advancement of expenses under this Article Tenth is not paid in full within 30 days after a written claim therefor by the Indemnified Person has been received by the Corporation, the Indemnified Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnified Person is not entitled to the requested indemnification or advancement of expenses under applicable law.
4. Indemnification of Employees and Agents . The Corporation may indemnify and advance expenses to any person who was or is made or is threatened to be made or is otherwise involved in any Proceeding by reason of the fact that such person, or a person for whom such person is the legal representative, is or was an employee or agent of the Corporation or, while an employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys fees) reasonably incurred by such person in connection with such Proceeding. The ultimate determination of entitlement to indemnification of persons who are non-director or officer employees or agents shall be made in such manner as is determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing sentence, the Corporation shall not be required to indemnify a person in connection with a Proceeding initiated by such person if the Proceeding was not authorized in advance by the Board of Directors.
5. Advancement of Expenses of Employees and Agents . The Corporation may pay the expenses (including attorneys fees) incurred by an employee or agent in defending any Proceeding in advance of its final disposition on such terms and conditions as may be determined by the Board of Directors.
6. Non-Exclusivity of Rights . The rights conferred on any person by this Article Tenth shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, the Bylaws of the Corporation, agreement, vote of stockholders or disinterested directors or otherwise.
7. Other Indemnification . The Corporations obligation, if any, to indemnify any person who was or is serving at its request as a director, officer or employee of another Corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise shall be reduced by any amount such person may collect as indemnification from such other Corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise.
8. Insurance . The Board of Directors may, to the full extent permitted by applicable law as it presently exists, or may hereafter be amended from time to time, authorize an appropriate officer or officers to purchase and maintain at the Corporations expense insurance: (a) to indemnify the Corporation for any obligation which it incurs as a result of the indemnification of directors, officers and employees under the provisions of this Article Tenth; and (b) to indemnify or insure directors, officers and employees against liability in instances in which they may not otherwise be indemnified by the Corporation under the provisions of this Article Tenth.
9. Amendment or Repeal . Any amendment, repeal or modification of the foregoing provisions of this Article Tenth shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. The rights provided hereunder shall inure to the benefit of any Indemnified Person and such persons heirs, executors and administrators.
ELEVENTH: The Corporation renounces, to the fullest extent permitted by law, any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An Excluded Opportunity is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, Covered Persons ), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Persons capacity as a director of the Corporation.
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IN WITNESS WHEREOF, this Second Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation on this 5th day of November, 2018.
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By: |
/s/ Shoshana Shendelman |
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Shoshana Shendelman, President |
Applied Therapeutics, Inc.
(a Delaware corporation)
BY-LAWS
ARTICLE I
Offices
SECTION 1.01. Registered Office . Applied Therapeutics, Inc. (the Corporation ) shall maintain its registered office in the State of Delaware at Corporation Service Company, 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, 19808. The Corporation may also have offices in such other places in the United States or elsewhere as the Board of Directors may, from time to time, appoint or as the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Annual Meetings . Meetings of stockholders may be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors shall determine. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as described in Section 2.02 of these By-Laws in accordance with the General Corporation Law of the State of Delaware (the Code ). Stockholders may act by written or electronic transmission of consent to elect directors; provided , however , that if such consent is less than unanimous, such action by written or electronic transmission of consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could have been elected at an annual meeting held at the effective time of such action are vacant and are filled by such action. If the Board of Directors fails to determine the time, date, and place for the annual meeting and the stockholders have not elected directors by written or electronic transmission of consent as permitted by law, it shall be held, beginning in the year after the date of incorporation, at the principal office of the Corporation at 10 oclock a.m. Delaware time on the tenth (10th) day of October if not a legal holiday, and if a legal holiday, then on the next day that is not a legal holiday thereafter of each year.
SECTION 2.02. Special Meetings . Special meetings of stockholders, unless otherwise prescribed by statute, may be called by the Chairman of the Board of Directors, the President or by resolution of the Board of Directors and shall be called by the President or Secretary upon the written request of not less than 10% in interest of the stockholders entitled to
vote thereat. Notice of each special meeting shall be given in accordance with Section 2.03 of these By-Laws. Unless otherwise permitted by law, business transacted at any special meeting of stockholders shall be limited to the purpose stated in the notice.
If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxy holders not physically present at a meeting of stockholders may, by means of remote communication:
(a) participate in a meeting of stockholders; and
(b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication;
provided , that
(i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder;
(ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and
(iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.
SECTION 2.03. Notice of Meetings . Whenever stockholders are required or permitted to take any action at a meeting, a written notice or electronic transmission, in the manner provided in the Code, of notice of the meeting, which shall state the place, if any, date and time of the meeting, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purposes for which the meeting is called, shall be mailed to or transmitted electronically to each stockholder of record entitled to vote thereat. Such notice shall be given not less than 10 days nor more than 60 days before the date of any such meeting.
SECTION 2.04. Quorum . Unless otherwise required by law or the Certificate of Incorporation, the holders of a majority of the issued and outstanding stock entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders. When a quorum is once present to organize a meeting, the quorum is not broken by the subsequent withdrawal of any stockholders.
SECTION 2.05. Voting . Unless otherwise provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Upon the request of not less than l 0% in interest of the stockholders
entitled to vote at a meeting, voting shall be by written ballot, unless otherwise provided in the Certificate of Incorporation; if authorized by the stockholders, such requirement of a written ballot shall be satisfied, if authorized by the Board of Directors, by a ballot submitted by electronic transmission, provided , that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxyholder.
All elections of directors shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast affirmatively or negatively.
SECTION 2.06. Chairman of Meetings . The Chairman of the Board of Directors, if one is elected, or, in his or her absence or disability, the President of the Corporation, shall preside at all meetings of the stockholders.
SECTION 2.07. Secretary of Meeting . The Secretary of the Corporation shall act as Secretary at all meetings of the stockholders. In the absence or disability of the Secretary, the Chairman of the Board of Directors or the President shall appoint a person to act as Secretary at such meetings.
SECTION 2.08. Consent of Stockholders in Lieu of Meeting . Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not Jess than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporations registered office shall be made by hand or by certified or registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed in the first paragraph of this Section 2.08. A telegram, cablegram, or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed, and dated for the purposes of this Section 2.08 to the extent permitted by law. Any such consent shall be delivered in accordance with the Code. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing or electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date of such meeting had
been the date that written consents signed by a sufficient number of stockholders or members to take the action were delivered to the Corporation as provided by law.
Any copy, facsimile, or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used; provided , that such copy, facsimile, or other reproduction shall be a complete reproduction of the entire original writing.
SECTION 2.09. Adjournment . At any meeting of stockholders of the Corporation, if less than a quorum be present, a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present. Any business may be transacted at the adjourned meeting that might have been transacted at the meeting originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
ARTICLE III
Board of Directors
SECTION 3.01. Powers . The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. The Board of Directors shall exercise all of the powers and duties conferred by law except as provided by the Certificate of Incorporation or these By-Laws.
SECTION 3.02. Number and Term . The number of directors shall be fixed at no less than one (1) nor more than ten (10). Within the limits specified above, the number of directors shall be fixed from time to time by the Board of Directors. The Board of Directors shall be elected by the stockholders at their annual meeting, and each director shall be elected to serve for the term of one year and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Directors need not be stockholders.
SECTION 3.03. Resignations . Any director may resign at any time upon notice given in writing or by electronic transmission. The resignation shall take effect at the time specified therein, and if no time is specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective.
SECTION 3.04. Removal . Any director or the entire Board of Directors may be removed either with or without cause at any time by the affirmative vote of the holders of two-thirds of the shares then entitled to vote for the election of directors at any annual or special meeting of the stockholders called for that purpose or by written or electronic transmission of consent as permitted by law.
SECTION 3.05. Vacancies and Newly Created Directorships . Vacancies occurring in the Board of Directors and newly created directorships may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director or by the stockholders in the manner set forth in Article II of these By-Laws. Any director so chosen shall bold office for the unexpired term of his or her predecessor and until his or her successor shall be elected and qualify or until his or her earlier death, resignation, or removal. The Board of Directors may not fill the vacancy created by removal of a director by electing the director so removed.
SECTION 3.06. Meetings . The newly elected directors shall hold their first meeting to organize the Corporation, elect officers and transact any other business that may properly come before the meeting. An annual organizational meeting of the Board of Directors shall be held immediately after each annual meeting of the stockholders, or at such time and place as may be noticed for the meeting.
Regular meetings of the Board of Directors may be held without notice at such places and times as shall be determined from time to time by written or electronic transmission of consent of a resolution of the directors.
Special meetings of the Board of Directors shall be called by the President or by the Secretary on the written or electronic transmission of such request of any director with at least two days notice to each director, unless waived by each director, and shall be held at such place as may be determined by the directors or as shall be stated in the notice of the meeting.
SECTION 3.07. Quorum. Voting, and Adjournment . A majority of the total number of directors or any committee thereof shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of such adjourned meeting need not be given if the time and place of such adjourned meeting are announced at the meeting so adjourned.
SECTION 3.08. Committees . The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, including but not limited to an Executive Committee, an Audit Committee, a Governance Committee and a Compensation Committee, each such committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee to replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to
the stockholders, any action or matter expressly required by law to be submitted to stockholders for approval; (b) adopting, amending, or repealing any by-law of the Corporation; or (c) recommending a dissolution of the Corporation or a revocation of a dissolution of the Corporation. All committees of the Board of Directors shall keep minutes of their meetings and shall report their proceedings to the Board of Directors when requested or required by the Board of Directors.
SECTION 3.09. Action Without a Meeting . Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or any committee thereof, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed in the minutes of proceedings of the Board of Directors. Such filing shall be in paper form if the minutes are maintained in paper form or shall be in electronic form if the minutes are maintained in electronic form.
SECTION 3.10. Compensation . The Board of Directors shall have the authority to fix the compensation of directors for their services. A director may also serve the Corporation in other capacities and receive compensation therefor.
SECTION 3.11. Remote Meeting . Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting by means of conference telephone or other communications equipment in which all persons participating in the meeting can hear each other. Participation in a meeting by means of conference telephone or other communications equipment shall constitute the presence in person at such meeting.
ARTICLE IV
Officers
SECTION 4.01. Number . The officers of the Corporation shall include a President and a Secretary, both of whom shall be elected by the Board of Directors and who shall hold office for a term of one year and until their successors are elected and qualify or until their earlier resignation or removal. In addition, the Board of Directors may elect a Chairman of the Board of Directors, one or more Vice Presidents, including Executive Vice Presidents, a Treasurer and one or more Assistant Treasurers, and one or more Assistant Secretaries, who shall hold their office for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. The initial officers shall be elected at the first meeting of the Board of Directors and, thereafter, at the annual organizational meeting of the Board of Directors. Any number of offices may be held by the same person.
SECTION 4.02. Other Officers and Agents . The Board of Directors may appoint such other officers and agents as it deems advisable, who shall hold their office for such
terms and shall exercise and perform such powers and duties as shall be determined from time to time by the Board of Directors.
SECTION 4.03. Chairman . The Chairman of the Board of Directors shall be a member of the Board of Directors and shall preside at all meetings of the Board of Directors and of the stockholders. In addition, the Chairman of the Board of Directors shall have such powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors.
SECTION 4.04. President . The President shall be the Chief Executive Officer of the Corporation. He or she shall exercise such duties as customarily pertain to the office of President and Chief Executive Officer and shall have general and active management of the property, business, and affairs of the Corporation, subject to the supervision and control of the Board of Directors. He or she shall perform such other duties as prescribed from time to time by the Board of Directors or these By-Laws.
In the absence, disability, or refusal of the Chairman of the Board of Directors to act, or the vacancy of such office, the President shall preside at all meetings of the stockholders and of the Board of Directors. Except as the Board of Directors shall otherwise authorize, the President shall execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and, when so affixed, the seal shall be attested by the signature of the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer.
SECTION 4.05. Vice Presidents . Each Vice President, if any are elected, of whom one or more may be designated an Executive Vice President, shall have such powers and shall perform such duties as shall be assigned to him or her by the President or the Board of Directors.
SECTION 4.06. Treasurer . The Treasurer, if elected, shall have the general care and custody of the funds and securities of the Corporation, and shall deposit all such funds in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected by the Board of Directors. He or she shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever. He or she shall exercise general supervision over expenditures and disbursements made by officers, agents, and employees of the Corporation and the preparation of such records and reports in connection therewith as may be necessary or desirable. He or she shall, in general, perform all other duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the President or the Board of Directors.
SECTION 4.07. Secretary . The Secretary shall be the Chief Administrative Officer of the Corporation and shall (a) cause minutes of all meetings of the stockholders and directors to be recorded and kept; (b) cause all notices required by these By-Laws or otherwise to be given properly; (c) see that the minute books, stock books, and other nonfinancial books, records, and papers of the Corporation are kept properly; and (d) cause all reports, statements, returns, certificates, and other documents to be prepared and filed when and as required. The
Secretary shall have such further powers and perform such other duties as prescribed from time to time by the President or the Board of Directors.
SECTION 4.08. Assistant Treasurers and Assistant Secretaries . Each Assistant Treasurer and each Assistant Secretary, if any are elected, shall be vested with a11 the powers and shall perform all the duties of the Treasurer and Secretary, respectively, in the absence or disability of such officer, unless or until the Board of Directors shall otherwise determine. In addition, Assistant Treasurers and Assistant Secretaries shall have such powers and shall perform such duties as shall be assigned to them by the President or the Board of Directors.
SECTION 4.09. Corporate Funds and Checks . The funds of the Corporation shall be kept in such depositories as shall from time to time be prescribed by the Board of Directors. All checks or other orders for the payment of money shall be signed by the President or the Treasurer or such other person or agent as may from time to time be authorized and with such countersignature, if any, as may be required by the Board of Directors.
SECTION 4.10. Contracts and Other Documents . The President or the Treasurer, or such other officer or officers as may from time to time be authorized by the Board of Directors or any other committee given specific authority by the Board of Directors during the intervals between the meetings of the Board of Directors, shall have power to sign and execute on behalf of the Corporation deeds, conveyances, and contracts, and any and all other documents requiring execution by the Corporation.
SECTION 4.11. Compensation . The compensation of the officers of the Corporation shall be fixed from time to time by the Board of Directors (subject to any employment agreements that may then be in effect between the Corporation and the relevant officer). None of such officers shall be prevented from receiving such compensation by reason of the fact that he or she is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary, in any other capacity and receiving such compensation by reason of the fact that be or she is also a director of the Corporation.
SECTION 4.12. Ownership of Stock of Another Corporation . Unless otherwise directed by the Board of Directors, the President or the Treasurer, or such other officer or agent as shall be authorized by the Board of Directors, shall have the power and authority, on behalf of the Corporation, to attend and to vote at any meeting of stockholders of any corporation in which the Corporation bolds stock and may exercise, on behalf of the Corporation, any and all of the rights and powers incident to the ownership of such stock at any such meeting, including the authority to execute and deliver proxies and consents on behalf of the Corporation.
SECTION 4.13. Delegation of Duties . In the absence, disability, or refusal of any officer to exercise and perform his or her duties, the Board of Directors may delegate to another officer such powers or duties.
SECTION 4.14. Resignation and Removal . Any officer of the Corporation may be removed from office for or without cause at any time by the Board of Directors. Any officer may resign at any time in the same manner prescribed under Section 3.03 of these By-Laws.
SECTION 4.15. Vacancies . The Board of Directors shall have power to fill vacancies occurring in any office.
ARTICLE V
Stock
SECTION 5.01. Certificates of Stock . Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number and class of shares of stock in the Corporation owned by him or her. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The Board of Directors shall have the power to appoint one or more transfer agents and/or registrars for the transfer or registration of certificates of stock of any class, and may require stock certificates to be countersigned or registered by one or more of such transfer agents and/or registrars.
SECTION 5.02. Transfer of Shares . Shares of stock of the Corporation shall be transferable upon its books by the holders thereof, in person or by their duly authorized attorneys or legal representatives, upon surrender to the Corporation by delivery thereof to the person in charge of the stock and transfer books and ledgers. Such certificates shall be cancelled and new certificates shall thereupon be issued. A record shall be made of each transfer. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented, both the transferor and transferee request the Corporation to do so. The Board of Directors shall have power and authority to make such rules and regulations as it may deem necessary or proper concerning the issue, transfer, and registration of certificates for shares of stock of the Corporation.
SECTION 5.03. Lost, Stolen, Destroyed, or Mutilated Certificates . A new certificate of stock may be issued in the place of any certificate previously issued by the Corporation alleged to have been lost, stolen, or destroyed, and the Board of Directors may, in their discretion, require the owner of such lost, stolen, or destroyed certificate, or his or her legal representative, to give the Corporation a bond, in such sum as the Board of Directors may direct, in order to indemnify the Corporation against any claims that may be made against it in connection therewith. A new certificate of stock may be issued in the place of any certificate previously issued by the Corporation that has become mutilated without the posting by the owner of any bond upon the surrender by such owner of such mutilated certificate.
SECTION 5.04. List of Stockholders Entitled To Vote . The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by the Code or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 5.05. Dividends . Subject to the provisions of the Certificate of Incorporation and the Code, the Board of Directors may at any regular or special meeting, declare dividends upon the stock of the Corporation. Before the declaration of any dividend, the Board of Directors may set apart, out of any funds of the Corporation available for dividends, such sum or sums as from time to time in their discretion may be deemed proper for working capital or as a reserve fund to meet contingencies or for such other purposes as shall be deemed conducive to the interests of the Corporation.
SECTION 5.06. Record Date . In order that the Corporation may determine the stockholders entitled to notice of or to vote at, any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which record date: (a) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than 60 nor less than 10 days before the date of such meeting; (b) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than 10 days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (c) in the case of any other action, shall not be more than 60 days prior to such other action. If no record date is fixed, (l) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with applicable law, or, if prior action of the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however , that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 5.07. Registered Stockholders . Prior to the surrender to the Corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the Corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof.
ARTICLE VI
Notice and Waiver of Notice
SECTION 6.01. Notice . If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in the Code.
SECTION 6.02. Waiver of Notice . A written waiver of any notice, signed by a stockholder or director, or waiver by electronic transmission by such person, whether given before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such person. Neither the business nor the purpose of any meeting need by specified in such a waiver. Attendance at any meeting shall constitute waiver of notice except attendance for the sole purpose of objecting to the timeliness of notice.
ARTICLE VII
Indemnification
SECTION 7.01. Right to Indemnification . Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a proceeding), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, or trustee of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to an employee benefit plan (an indemnitee), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, or trustee, or in any other capacity while serving as a director, officer, or trustee, must be indemnified and held harmless by the Corporation to the fullest extent authorized by the Code, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide prior to such amendment), against all expense, liability, and loss (including attorneys fees, judgments, fines, ERISA excise taxes, or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however , that, except as provided in Section 7.03 of these By-Laws with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection
with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors.
SECTION 7.02. Right to Advancement of Expenses . In addition to the right to indemnification conferred in Section 7.01 of these By-Laws, an indemnitee shall also have the right to be paid by the Corporation the expenses (including attorneys fees) incurred in defending any such proceeding in advance of its final disposition (an advancement of expenses); provided, however , that, if the Code as then in effect requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (an undertaking), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a final adjudication) that such indemnitee is not entitled to be indemnified for such expenses under this Section 7.02 or otherwise.
SECTION 7.03. Right of Indemnitee to Bring Suit . If a claim under Section 7.01 or 7.02 of these By-Laws is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (a) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (b) any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Code. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that identification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Code, nor an actual detem1ination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VII or otherwise shall be on the Corporation.
SECTION 7.04. Non-Exclusivity of Rights . The rights to indemnification and to the advancement of expenses conferred in this Article VII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporations
Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested directors, or otherwise.
SECTION 7.05. Insurance . The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the Corporation or another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under the Code.
SECTION 7.06. Indemnification of Employees and Agents of the Corporation . The Corporation shall grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VII with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
SECTION 7.07. Nature of Rights . The rights conferred upon indemnitees in this Article VII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, or trustee and shall inure to the benefit of the indemnitees heirs, executors, and administrators. Any amendment, alteration, or repeal of this Article VII that adversely affects any right of an indemnitee or it successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment, alteration, or repeal.
ARTICLE VIII
Miscellaneous
SECTION 8.01. Amendments . In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to adopt, amend, and repeal these By-Laws subject to the power of the holders of capital stock of the Corporation to adopt, amend or repeal the By-Laws.
SECTION 8.02. Electronic Transmission . For purposes of these By-Laws, electronic transmission means any form of communication not directly involving the physical transmission of paper that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
SECTION 8.03. Corporate Seal . The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in charge of the Secretary.
SECTION 8.04. Fiscal Year . The fiscal year of the Corporation shall be fixed by resolution of the board of directors.
SECTION 8.05. Loans . The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary(ies), including any officer or employee who is a director of the Corporation or its subsidiary(ies), whenever, in the judgment of the directors, such loan, guaranty, or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty, or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of the capital stock of the Corporation. Nothing in this Section 8.05 shall be deemed to deny, limit, or restrict the powers of guaranty or warranty of the Corporation at common law or under the Code.
SECTION 8.06. Section Headings . Section headings in these By-Laws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein.
SECTION 8.07. Inconsistent Provisions; Changes in Delaware Law . If any provision of these By-Laws is or becomes inconsistent with any provision of the Certificate of Incorporation, the Code or any other applicable law, the provision of these By-Laws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect. If any of the provisions of the Code referred to above are modified or superceded, the references to those provisions is to be interpreted to refer to the provisions as so modified or superceded.
Date of Adoption: January 20, 2016
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of Applied Therapeutics, Inc., a Delaware corporation, hereby certifies that the By-Laws to which this Certificate is attached were duly adopted by the Board of Directors of the corporation as of January 20, 2016.
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/s/ Shoshana Shendelman |
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Name: |
Shoshana Shendelman |
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Title: |
Secretary |
APPLIED THERAPEUTICS, INC.
AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
November 5, 2018
TABLE OF CONTENTS
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Page |
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1. |
Definitions |
1 |
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2. |
Registration Rights |
4 |
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2.1 |
Demand Registration |
4 |
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2.2 |
Company Registration |
6 |
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2.3 |
Underwriting Requirements |
6 |
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2.4 |
Obligations of the Company |
7 |
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2.5 |
Furnish Information |
9 |
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2.6 |
Expenses of Registration |
9 |
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2.7 |
Delay of Registration |
9 |
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2.8 |
Indemnification |
9 |
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2.9 |
Reports Under Exchange Act |
12 |
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2.10 |
Limitations on Subsequent Registration Rights |
12 |
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2.11 |
Market Stand-off Agreement |
12 |
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2.12 |
Restrictions on Transfer |
13 |
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2.13 |
Termination of Registration Rights |
14 |
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3. |
Information and Observer Rights |
15 |
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3.1 |
Delivery of Financial Statements |
15 |
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3.2 |
Inspection |
16 |
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3.3 |
Termination of Information Rights |
16 |
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3.4 |
Confidentiality |
16 |
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4. |
Rights to Future Stock Issuances |
17 |
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4.1 |
Right of First Offer |
17 |
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4.2 |
Termination |
18 |
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5. |
Additional Covenants |
18 |
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5.1 |
Employee Agreements |
18 |
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5.2 |
Employee Stock |
18 |
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5.3 |
Matters Requiring Investor Director Approval |
19 |
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5.4 |
Insurance |
20 |
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5.5 |
Board Matters |
20 |
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5.6 |
Successor Indemnification |
20 |
AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT is made as of the 5 th day of November, 2018, by and among Applied Therapeutics, Inc., a Delaware corporation (the Company ), each of the investors listed on Schedule A hereto, each of which is referred to in this Agreement as an Investor , any Additional Purchaser (as defined in the Purchase Agreement) that becomes a party to this Agreement in accordance with Section 6.9 hereof, and Shoshana Shendelman (the Founder ).
RECITALS
WHEREAS , certain of the Investors (the Existing Investors ) hold shares of the Companys Series A Preferred Stock and/or shares of Common Stock issued upon conversion thereof and possess registration rights, information rights, rights of first offer, and other rights pursuant to that certain Investors Rights Agreement dated as of January 26, 2017, by and among the Company and such Existing Investors (the Prior Agreement ); and
WHEREAS , the Existing Investors are holders of a majority of the Registrable Securities of the Company (as defined in the Prior Agreement), and desire to amend and restate the Prior Agreement in its entirety and to accept the rights created pursuant to this Agreement in lieu of the rights granted to them under the Prior Agreement; and
WHEREAS , certain of the Investors are parties to that certain Series B Preferred Stock Purchase Agreement of even date herewith by and among the Company and such Investors (as the same may be amended and/or restated from time to time, the Purchase Agreement ), under which certain of the Companys and such Investors obligations are conditioned upon the execution and delivery of this Agreement by such Investors, Existing Investors holding a majority of the Registrable Securities, and the Company;
NOW, THEREFORE , the Company and the Existing Investors hereby agree that the Prior Agreement shall be amended and restated, and the parties to this Agreement further agree as follows:
1. Definitions . For purposes of this Agreement:
1.1 Affiliate means , with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, officer, director or trustee of such Person or any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person.
1.2 Common Stock means shares of the Companys common stock, par value $0.0001 per share.
1.3 Damages means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof) arises
out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.
1.4 Derivative Securities means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Common Stock, including options and warrants.
1.5 Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
1.6 Excluded Registration means (i) a registration relating to the sale or grant of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, equity incentive or similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (iv) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.
1.7 FOIA Party means a Person that, in the determination of the Board of Directors, may be subject to, and thereby required to disclose non-public information furnished by or relating to the Company under, the Freedom of Information Act, 5 U.S.C. 552 (FOIA), any state public records access law, any state or other jurisdictions laws similar in intent or effect to FOIA, or any other similar statutory or regulatory requirement.
1.8 Form S-1 means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.
1.9 Form S-3 means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.
1.10 Founder Registrable Securities means (i) the shares of Common Stock held by the Founder, and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, such shares.
1.11 GAAP means generally accepted accounting principles in the United States, as in effect from time to time.
1.12 Holder means any holder of Registrable Securities who is a party to this Agreement.
1.13 Immediate Family Member means a child, stepchild, grandchild,
1.14 parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, of a natural person referred to herein.
1.15 Initiating Holders means, collectively, Holders who properly initiate a registration request under this Agreement.
1.16 IPO means the Companys first underwritten public offering of its Common Stock under the Securities Act.
1.17 Major Investor means any Investor that, individually or together with such Investors Affiliates, holds at least 12,087 shares of Registrable Securities (as adjusted for any stock split, stock dividend, combination, or other recapitalization or reclassification effected after the date hereof).
1.18 New Securities means, collectively, equity securities of the Company, whether or not currently authorized, as well as rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible or exchangeable into or exercisable for such equity securities.
1.19 Person means any individual, corporation, partnership, trust, limited liability company, association or other entity.
1.20 Preferred Directors means the Series A Director and the Series B Director.
1.21 Preferred Stock means, collectively, shares of the Companys Series A Preferred Stock and Series B Preferred Stock.
1.22 Registrable Securities means (i) the Common Stock issuable or issued upon conversion of the Preferred Stock; (ii) any Common Stock, or any Common Stock issued or issuable (directly or indirectly) upon conversion and/or exercise of any other securities of the Company, acquired by the Investors after the date hereof; (iii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (i) and (ii) above and (iv) the Founder Registrable Securities, provided , however , that such Founder Registrable Securities shall not be deemed Registrable Securities and the Founder shall not be deemed a Holder for purposes of Section 2.1 (and any other applicable section with respect to registrations under Section 2.1) and Section 2.10 ; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Section 6.1 , and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Section 2.13 of this Agreement.
1.23 Registrable Securities then outstanding means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.
1.24 Restricted Securities means the securities of the Company required to bear the legend set forth in Section 2.12(b) hereof.
1.25 SEC means the Securities and Exchange Commission.
1.26 SEC Rule 144 means Rule 144 promulgated by the SEC under the Securities Act.
1.27 SEC Rule 145 means Rule 145 promulgated by the SEC under the
1.28 Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
1.29 Selling Expenses means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Section 2.6 .
1.30 Series A Director means any director of the Company that the holders of record of the Series A Preferred Stock are entitled to elect pursuant to the Companys Certificate of Incorporation.
1.31 Series A Preferred Stock means shares of the Companys Series A Preferred Stock, par value $0.0001 per share.
1.32 Series B Director means any director of the Company that the holders of record of the Series B Preferred Stock are entitled to elect pursuant to the Companys Certificate of Incorporation.
1.33 Series B Preferred Stock means shares of the Companys Series B Preferred Stock, par value $0.0001 per share.
2. Registration Rights . The Company covenants and agrees as follows:
2.1 Demand Registration .
(a) Form S-1 Demand . If at any time after the earlier of (i) five (5) years after the date of this Agreement or (ii) six (6) months after the effective date of the registration statement for the IPO, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to the Registrable Securities then outstanding having an anticipated aggregate offering price, net of Selling Expenses, of at least $15,000,000, then the Company shall (x) within ten (10) days after the date such request is given, give notice thereof (the Demand Notice ) to all Holders
other than the Initiating Holders; and (y) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3 .
(b) Form S-3 Demand . If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Holders of at least thirty percent (30%) of the Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $3,000,000, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3 .
(c) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Section 2.1 a certificate signed by the Companys chief executive officer stating that in the good faith judgment of the Companys Board of Directors it would be materially detrimental to the Company and its stockholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing, and any time periods with respect to filing or effectiveness thereof shall be tolled correspondingly, for a period of not more than one hundred twenty (120) days after the request of the Initiating Holders is given; provided , however , that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other stockholder during such one hundred twenty (120) day period other than an Excluded Registration.
(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(a) (i) during the period that is sixty (60) days before the Companys good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected one registration pursuant to Section 2.1(a) ; or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request
made pursuant to Section 2.1(b) . The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(b) (i) during the period that is thirty (30) days before the Companys good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two registrations pursuant to Section 2.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as effected for purposes of this Section 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration (other than as a result of a material adverse change to the Company), elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.6, in which case such withdrawn registration statement shall be counted as effected for purposes of this Section 2.1(d) .
2.2 Company Registration . If the Company proposes to register (including, for this purpose, a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 2.3 , cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.6 .
2.3 Underwriting Requirements .
(a) If, pursuant to Section 2.1 , the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1 , and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holders Registrable Securities in such registration shall be conditioned upon such Holders participation in such underwriting and the inclusion of such Holders Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 2.3 , if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling
Holders; provided, however , that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares.
(b) In connection with any offering involving an underwriting of shares of the Companys capital stock pursuant to Section 2.2 , the Company shall not be required to include any of the Holders Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be allocated among the selling Holders in proportion (as nearly as practicable to) the number of Registrable Securities owned by each selling Holder or in such other proportions as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering, or (ii) the number of Registrable Securities included in the offering be reduced below thirty percent (30%) of the total number of securities included in such offering, unless such offering is the IPO, in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other stockholders securities are included in such offering. For purposes of the provision in this Section 2.3(b) concerning apportionment, for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing Persons, shall be deemed to be a single selling Holder, and any pro rata reduction with respect to such selling Holder shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such selling Holder, as defined in this sentence.
2.4 Obligations of the Company . Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of
the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however , that (i) such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such one hundred twenty (120) day period shall be extended for up to 180 days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;
(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;
(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;
(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;
(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;
(f) use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;
(h) promptly make available for inspection by the selling Holders, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Companys officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter,
attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;
(i) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and
(j) after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus.
2.5 Furnish Information . It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holders Registrable Securities.
2.6 Expenses of Registration . All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2 , including all registration, filing, and qualification fees; printers and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements, not to exceed $25,000.00 of one counsel for the selling Holders ( Selling Holder Counsel ), shall be borne and paid by the Company; provided, however , that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b) , as the case may be; provided further that if, at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b) . All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.
2.7 Delay of Registration . No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.
2.8 Indemnification . If any Registrable Securities are included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and stockholders of each such Holder; legal counsel and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however , that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.
(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however , that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Sections 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.
(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8 , give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however , that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8 , to the extent that such failure materially prejudices the indemnifying partys ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8 .
(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 2.8 , then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however , that, in any such case, (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holders liability pursuant to this Section 2.8(d) , when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b) , exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.
(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2 , and otherwise shall survive the termination of this Agreement.
2.9 Reports Under Exchange Act . With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:
(a) make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO;
(b) use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and
(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety
(90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies); (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company; and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).
2.10 Limitations on Subsequent Registration Rights . From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would (i) provide to such holder or prospective holder the right to include securities in any registration on other than either a pro rata basis with respect to the Registrable Securities or on a subordinate basis after all Holders have had the opportunity to include in the registration and offering all shares of Registrable Securities that they wish to so include or (ii) allow such holder or prospective holder to initiate a demand for registration of any securities held by such holder or prospective holder; provided that this limitation shall not apply to any additional Investor who becomes a party to this Agreement in accordance with Section 6.9 .
2.11 Market Stand-off Agreement . Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the registration by the Company of shares of its Common Stock or any other equity securities under the Securities Act on a registration statement on Form S-1, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days (plus up to an additional thirty-four (34) days to the
extent requested by the underwriters in order to facilitate compliance with FINRA Rule 2711(f)(4) or NYSE Rule 472(f)(4) or any successor or similar rule or regulation)) in the case of an the IPO), (i) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Stock (whether such shares or any such securities are then owned by the Holder or are thereafter acquired) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise. The foregoing provisions of this Section 2.11 (x) shall apply only to the IPO, (y) shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, or the transfer of any shares to any trust for the direct or indirect benefit of the Holder or the immediate family of the Holder, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, and (z) shall be applicable to the Holders only if all officers, directors, and all stockholders individually owning more than one percent (1%) of the Companys outstanding Common Stock (after giving effect to conversion into Common Stock of all outstanding Preferred Stock) are subject to similar restrictions. The underwriters in connection with such registration are intended third-party beneficiaries of this Section 2.11 and shall have the right, power, and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Section 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements.
2.12 Restrictions on Transfer .
(a) The Preferred Stock and the Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize and shall issue stop-transfer instructions to its transfer agent with respect to any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Preferred Stock and the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.
(b) Each certificate or instrument representing (i) the Preferred Stock, (ii) the Registrable Securities, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Section 2.12(c)) be stamped or otherwise imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Section 2.12 .
(c) The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 2 . Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction, the Holder thereof shall give notice to the Company of such Holders intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holders expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a no action letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or no action letter (x) in any transaction in compliance with SEC Rule 144 or (y) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration; provided that each transferee agrees in writing to be subject to the terms of this Section 2.12. Each certificate or instrument evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Section 2.12(b) , except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.
2.13 Termination of Registration Rights . The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Section 2.1 or Section 2.2 shall terminate upon the earliest to occur of:
(a) the closing of a Deemed Liquidation Event, as such term is defined in the Companys Certificate of Incorporation;
(b) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holders shares without limitation during a three-month period without registration; and
(c) the third anniversary of the IPO.
3. Information and Observer Rights .
3.1 Delivery of Financial Statements . The Company shall deliver to each Major Investor, provided that the Board of Directors has not reasonably determined that such Major Investor is a competitor of the Company:
(a) as soon as practicable, but in any event within one hundred twenty
(120) days after the end of each fiscal year of the Company, (i) a balance sheet as of the end of such year, (ii) statements of income and of cash flows for such year, and (iii) a statement of stockholders equity as of the end of such year;
(b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited statements of income and of cash flows for such fiscal quarter, and an unaudited balance sheet as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP);
(c) as soon as practicable, but in any event thirty (30) days before the end of each fiscal year, an operating budget for the next fiscal year prepared on a monthly basis, including balance sheets, income statements, and statements of cash flow for such months (the Annual Budget );
(d) promptly following the end of each fiscal quarter, a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the period, the Common Stock issuable upon conversion or exercise of any outstanding securities convertible or exercisable for Common Stock, the exchange ratio or exercise price applicable thereto, and the number of shares of issued stock options, and stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Major Investors to calculate their respective percentage equity ownership, voting percentage and liquidation preference in the Company, and certified by the chief financial officer or chief executive officer of the Company as being true, complete, and correct; and
(e) upon request of a Major Investor, such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Major Investor may from time to time reasonably request, as it relates to such Major Investors compliance and reporting requirements; provided, however, that the Company shall not be
obligated under this Section 3.1(e) to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in a form acceptable to the Company); or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries. Notwithstanding anything else in this Section 3.1 to the contrary, the Company may cease providing the information set forth in this Section 3.1 during the period starting with the date sixty (60) days before the Companys good-faith estimate of the date of filing of a registration statement if it reasonably concludes it must do so to comply with the SEC rules applicable to such registration statement and related offering; provided that the Companys covenants under this Section 3.1 shall be reinstated at such time as the Company is no longer actively employing its commercially reasonable efforts to cause such registration statement to become effective.
3.2 Inspection . The Company shall permit each Major Investor (provided that the Board of Directors has not reasonably determined that such Major Investor is a competitor of the Company), at such Major Investors expense, to visit and inspect the Companys properties; examine its books of account and records; and discuss the Companys affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Major Investor; provided, however , that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
3.3 Termination of Information Rights . The covenants set forth in Section 3.1 and Section 3.2 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act or (iii) upon a Deemed Liquidation Event, as such term is defined in the Companys Certificate of Incorporation, whichever event occurs first.
3.4 Confidentiality . Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Companys intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 3.4 by such Investor), (b) is or has been independently developed or conceived by the Investor without use of the Companys confidential information, or (c) is or has been made known or disclosed to the Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however , that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection
with monitoring its investment in the Company; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Section 3.4 ; (iii) to any Affiliate, partner, member, stockholder, or wholly owned subsidiary of such Investor in the ordinary course of business, provided that such Investor informs such Person that such information is confidential and directs such Person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, provided that the Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.
4. Rights to Future Stock Issuances .
4.1 Right of First Offer . Subject to the terms and conditions of this Subsection 4.1 and applicable securities laws, if the Company proposes to offer or sell any New Securities, the Company shall first offer such New Securities to each Major Investor. Each Major Investor shall be entitled to apportion the right of first offer hereby granted to it, in such proportions as it deems appropriate, among (i) itself, (ii) its Affiliates and (iii) its beneficial interest holders, such as limited partners, members or any other Person having beneficial ownership, as such term is defined in Rule 13d-3 promulgated under the Exchange Act, of such Major Investor ( Investor Beneficial Owners ); provided that each such Affiliate or Investor Beneficial Owner (x) is not a competitor of the Company (as reasonably determined by the Board of Directors) or FOIA Party, unless such partys purchase of New Securities is otherwise consented to by the Board of Directors, (y) agrees to enter into this Agreement and each of the Voting Agreement and Right of First Refusal and Co-Sale Agreement of even date herewith among the Company, the Investors and the other parties named therein, as an Investor under each such agreement ( provided that any competitor of the Company (as reasonably determined by the Board of Directors) or FOIA Party shall not be entitled to any rights as a Major Investor under Subsections 3.1 , and 3.2 and as an Investor under this Subsection 4.1 hereof), and (z) agrees to purchase at least such number of New Securities as are allocable hereunder to the Major Investor holding the fewest number of shares of Preferred Stock and any other Derivative Securities.
(a) The Company shall give notice (the Offer Notice ) to each Major Investor, stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such New Securities.
(b) By notification to the Company within twenty (20) days after the Offer Notice is given, each Major Investor may elect to purchase or otherwise acquire, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the Common Stock then held by such Major Investor (including all shares of Common Stock then issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held by such Major Investor) bears to the total Common Stock of the Company then outstanding (assuming full conversion and/or exercise, as applicable, of all Preferred Stock and other Derivative Securities). At the expiration of such twenty (20) day period, the Company shall promptly notify each Major Investor that elects to purchase or acquire all the shares available to it (each, a Fully Exercising Investor ) of any other Major Investors failure to do likewise. The closing of any sale pursuant to this Subsection 4.1(b) shall occur within the later of one hundred and twenty (120) days of the
date that the Offer Notice is given and the date of initial sale of New Securities pursuant to Subsection 4.1(c).
(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or acquired as provided in Subsection 4.1(b) , the Company may, during the ninety (90) day period following the expiration of the periods provided in Subsection 4.1(b) , offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Investors in accordance with this Subsection 4.1.
(d) The right of first offer in this Subsection 4.1 shall not be applicable to (i) Exempted Securities (as defined in the Companys Certificate of Incorporation); (ii) the issuance of shares of Preferred Stock pursuant to the Purchase Agreement; and (iii) shares of Common Stock issued in the IPO.
4.2 Termination .
The covenants set forth in Subsection 4.1 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon a Deemed Liquidation Event, as such term is defined in the Companys Certificate of Incorporation, whichever event occurs first.
5. Additional Covenants .
5.1 Employee Agreements . The Company will cause each person now or hereafter employed by it or by any subsidiary (or engaged by the Company or any subsidiary as a consultant/independent contractor) with access to confidential information and/or trade secrets to enter into a nondisclosure and proprietary rights assignment agreement. In addition, the Company shall not amend, modify, terminate, waive, or otherwise alter, in whole or in part, any of the above-referenced agreements or any restricted stock agreement between the Company and any employee, without the consent of the Board of Directors.
5.2 Employee Stock . Unless otherwise approved by the Board of Directors, all future employees and consultants of the Company who purchase, receive options to purchase, or receive awards of shares of the Companys capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (i) vesting of shares over a four (4) year period, with the first twenty-five percent (25%) of such shares vesting following twelve (12) months of continued employment or service, and the remaining shares vesting in equal monthly installments over the following thirty-six (36) months, and (ii) a market stand-off provision substantially similar to that in Section 2.11 . In addition, unless otherwise approved by the Board of Directors, the Company shall retain a right of first refusal on employee transfers until the Companys IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.
5.3 Matters Requiring Investor Director Approval . So long as the holders of Series A Preferred Stock are entitled to elect a Preferred Director, the Company hereby covenants and agrees with each of the Investors that it shall not, without approval of the Board of Directors, which approval must include the affirmative vote of at least one Preferred Director:
(a) make, or permit any subsidiary to make, any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless the Company owns at least 75% of such entity;
(b) make, or permit any subsidiary to make, any loan or advance to any Person in excess of $2,000,000, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the Board of Directors;
(c) guarantee, directly or indirectly, or permit any subsidiary to guarantee, directly or indirectly, any indebtedness in excess of $2,000,000 except for trade accounts of the Company or any subsidiary arising in the ordinary course of business;
(d) make any investment in excess of $2,000,000 inconsistent with any investment policy approved by the Board of Directors;
(e) incur any aggregate indebtedness in excess of $5,000,000 that is not already included in the Annual Budget approved by the Board of Directors, other than trade credit incurred in the ordinary course of business, except (the Debt Exceptions ) (i) as otherwise set forth in any other budget approved by a majority of the Board of Directors, which majority includes at least one Preferred Director, or (ii) renewals of, or drawdowns under, credit or capital lease facilities existing as of the date hereof with accredited financial institutions previously approved by the Board of Directors;
(f) otherwise enter into or be a party to any transaction with any director, officer, or employee of the Company or any associate (as defined in Rule 12b-2 promulgated under the Exchange Act) of any such Person except for transactions contemplated by the Annual Budget, this Agreement or the Purchase Agreement, or transactions resulting in payments to or by the Company in an aggregate amount less than $250,000 per year;
(g) hire, terminate, or change the compensation of the executive officers, including approving any option grants or stock awards to executive officers, other than (i) plans or presentations approved by a majority of the Board of Directors, which majority includes at least one Preferred Director or otherwise contemplated in any Annual Budget or (ii) amounts less than $100,000 individually or $1,000,000 per year in the aggregate
(h) change the principal business of the Company, or exit the current line of business;
(i) create, or hold capital stock in, any subsidiary that is not at least 75% owned (either directly or through one or more other subsidiaries) by the Company, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Company, or
permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license or otherwise dispose (in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary;
(j) sell, assign, license, pledge, or encumber material technology or intellectual property in excess of $5,000,000 annually in the aggregate, other than licenses granted in the ordinary course of business and other than the transfer or spin-out of the novel selective PI3k inhibitor technology licensed from Columbia University; or
(k) enter into any corporate strategic relationship involving the payment, contribution, or assignment by the Company or to the Company of money or assets greater than $5,000,000.
5.4 Insurance . The Company shall obtain and maintain, during the term of this Agreement, director and officer liability insurance with an underwriter and with terms acceptable to the Board of Directors, including the Preferred Directors.
5.5 Board Matters . Unless otherwise determined by the vote of a majority of the directors then in office, the Board of Directors shall meet at least quarterly in accordance with an agreed-upon schedule. The Company shall reimburse the directors for all reasonable out-of-pocket travel expenses (excluding room accommodations, airfare or other long-distance travel expenses) incurred (consistent with the Companys travel policy) in connection with attending in-person meetings of the Board of Directors or committees of the Board of Directors. Each committee of the Board of Directors shall include at least one Preferred Director.
5.6 Successor Indemnification . If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately before such transaction, whether such obligations are contained in the Companys Bylaws, its Certificate of Incorporation, or elsewhere, as the case may be.
5.7 Termination of Covenants . The covenants set forth in this Section 5 , except for Section 5.6 , shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon a Deemed Liquidation Event, as such term is defined in the Companys Certificate of Incorporation, whichever event occurs first.
6. Miscellaneous .
6.1 Successors and Assigns . The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities or Preferred Stock that (i) is an Affiliate of a Holder; or (ii) is a Holders Immediate Family Member or trust for the benefit of an individual Holder or one or more of such Holders Immediate Family Members; provided, however, that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable
Securities or Preferred Stock with respect to which such rights are being transferred; and (y) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Section 2.11. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
6.2 Governing Law . This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
6.3 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
6.4 Titles and Subtitles . The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.
6.5 Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (i) personal delivery to the party to be notified; (ii) when sent, if sent by electronic mail or facsimile during the recipients normal business hours, and if not sent during normal business hours, then on the recipients next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto or on the signature pages hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Section 6.5 . If notice is given to the Company, a copy shall also be sent to Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, MA 02109, Attention: Rosemary G. Reilly.
6.6 Amendments and Waivers . Any term of this Agreement may be amended, modified or terminated, and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding; provided that the Company may in its sole discretion waive compliance with Section 2.12(c) (and the Companys failure to object promptly in writing after notification of a proposed assignment allegedly in violation of Section 2.12(c) shall be deemed to be a waiver); and provided further that any provision hereof may be waived by any waiving party on such partys own behalf,
without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended , modified or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, modification, termination, or waiver applies to all Investors in the same fashion (it being agreed that a waiver of the provisions of Section 5 with respect to a particular transaction shall be deemed to apply to all Investors in the same fashion if such waiver does so by its terms, notwithstanding the fact that certain Investors may nonetheless, by agreement with the Company, purchase securities in such transaction). Further, this Agreement may not be amended, modified or terminated, and no provision hereof may be waived, in each case, in any way which would adversely affect the rights of the Founder hereunder in a manner disproportionate to any adverse effect such amendment, modification, termination or waiver would have on the rights of the Investors hereunder, without also the written consent of the Founder. Notwithstanding the foregoing, Schedule A hereto may be amended by the Company from time to time to add transferees of any Registrable Securities in compliance with the terms of this Agreement without the consent of the other parties; and Schedule A hereto may also be amended by the Company after the date of this Agreement without the consent of the other parties to add information regarding any additional Investor who becomes a party to this Agreement in accordance with Subsection 6.9 The Company shall give prompt notice of any amendment or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, modification, termination, or waiver. Any amendment, modification, termination, or waiver effected in accordance with this Section 6.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.
6.7 Severability . In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.
6.8 Aggregation of Stock . All shares of Registrable Securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.
6.9 Additional Investors . Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of Preferred Stock after the date hereof, whether pursuant to the Purchase Agreement or otherwise, any purchaser of such shares of Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed an Investor for all purposes hereunder. No action or consent by the Investors shall be required for such joinder to this Agreement by such additional Investor, so long as such additional Investor has agreed in writing to be bound by all of the obligations as an Investor hereunder.
6.10 Entire Agreement . This Agreement (including any Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement among the parties with respect
to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.
6.11 Dispute Resolution . The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the federal and state courts located within the geographic boundaries of the United States District Court for the Southern District of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the federal and state courts located within the geographic boundaries of the United States District Court for the Southern District of New York, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. Each of the parties to this Agreement consents to personal jurisdiction for any equitable action sought in the U.S. District Court for the Southern District of New York or any court of the State of New York having subject matter jurisdiction.
WAIVER OF JURY TRIAL: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
6.12 Delays or Omissions . No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or nondefaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
6.13 Acknowledgment . The Company acknowledges that the Investors are in the business of venture or angel capital investing and therefore review the business plans and related proprietary information of many enterprises, including enterprises which may have
products or services which compete directly or indirectly with those of the Company. Nothing in this Agreement shall preclude or in any way restrict the Investors from investing or participating in any particular enterprise whether or not such enterprise has products or services which compete with those of the Company.
6.14 Effect on Prior Agreement . Upon the execution and delivery of this Agreement by the Company and holders of a majority of the Registrable Securities (as defined in the Prior Agreement) party to the Prior Agreement, the Prior Agreement automatically shall terminate and be of no further force and effect and shall be amended and restated in its entirety as set forth in this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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APPLIED THERAPEUTICS, INC. |
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Shoshana Shendelman |
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Chief Executive Officer |
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FOUNDER: |
/s/ Shoshana Shendelman |
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SHOSHANA SHENDELMAN |
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Address: 340 Madison Avenue, 19th Floor |
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New York, NY 10173 |
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IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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Alexandria Venture Investments, LLC |
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By: Alexandria Real Estate Equities, Inc., its managing member |
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/s/ Aaron Jacobson |
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(Signature of authorized officer) |
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Print Name: Aaron Jacobson |
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Title: SVP - Venture counsel |
[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Brandon Jones |
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Brandon Jones |
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IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Bruce C Conway |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Charles J Magolske |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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Cynergy Brookline Healthcare Fund LLC |
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/s/ Richard Prati |
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Richard Prati |
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Manager |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Ed Ilyadzhanov |
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Ed Ilyadzhanov |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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ETP Global Fund, LP |
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/s/ James Hu |
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James Hu |
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Title: |
Managing Partner |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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The Gary Cook Family Trust |
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By: |
/s/ Gary W. Cook |
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Print Name: |
Gary W. Cook |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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GS Venture Partners LLC |
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By: |
/s/ Gregg Smith |
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(Signature of authorized officer) |
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Print Name: |
Gregg Smith |
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Title: |
Manager |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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Hessler Finance Ltd |
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By: |
/s/ Attilio Scotti |
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Attilio Scotti |
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Title: |
Director |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Jeff Rogers |
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Jeff Rogers |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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/s/ Joel S. Marcus |
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Joel S. Marcus |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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/s/ Neal Polan |
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Neal Polan |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Pamela Silver |
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Pamela Silver |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Peter J. Crowley |
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Signature |
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Peter J. Crowley |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Richard A. Smith |
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Signature |
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Richard A. Smith |
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By: |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Robert R. Penn |
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Signature |
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Robert R. Penn |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Starlight Investment Holdings Limited |
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Print Name of Entity |
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By: |
/s/ Nicola Hodge |
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Print Name: |
Nicola Hodge |
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Title: |
Director |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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If an entity: |
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Syno Venture Master Fund |
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Print Name of Entity |
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By: |
/s/ Justin Xiang |
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(Signature of authorized officer) |
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Print Name: |
Justin Xiang |
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Title: |
General Partner |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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Thornapple River Capital-Venture Fund LLC |
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/s/ Genesis Gnanga |
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(Signature of authorized officer) |
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Genesis Gnanga |
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Title: |
Manager |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Timothy Hogue |
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Timothy Hogue |
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(Signature of authorized officer) |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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Warwick Capital Partners, LLC |
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By: |
/s/ Edgar D. Jannotta, Jr. |
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(Signature of authorized officer) |
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Print Name: |
Edgar D. Jannotta, Jr. |
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Title: |
Manager |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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Print Name of Entity |
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By: |
/s/ Aaron Jacobson |
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(Signature of authorized officer) |
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Print Name: |
Aaron Jacobson |
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Title: |
SVP Venture Counsel |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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Print Name |
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Ernest W. Moody Revocable Trust |
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Print Name of Entity |
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By: |
/s/ Ernest W. Moody |
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(Signature of authorized officer) |
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Print Name: |
Ernest W. Moody |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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/s/ Lars Bader |
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Signature |
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Lars Bader |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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/s/ Nicholas Finegold |
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Signature |
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Nicholas Finegold |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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Print Name |
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Satterfield Vintage Investments LP |
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Print Name of Entity |
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By: |
/s/ Thomas A. Satterfield Jr. |
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(Signature of authorized officer) |
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Print Name: |
Thomas A. Satterfield Jr. |
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Title: |
President of General Partner |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Steven J. Wice |
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Signature |
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Steven J. Wice |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Franklin M. Berger |
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Signature |
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Franklin M. Berger |
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Print Name |
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If an entity: |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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Edgar D Jannotta, Jr Exempt Family Trust |
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Print Name of Entity |
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By: |
/s/ Erika C Pearsall |
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(Signature of authorized officer) |
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Print Name: |
Erika C Pearsall |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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Edgar D Jannotta, Jr Revocable Trust |
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Print Name of Entity |
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By: |
/s/ Edgar D Jannotta, Jr. |
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(Signature of authorized officer) |
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Print Name: |
Edgar D Jannotta, Jr. |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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Alexandra S Jannotta Revocable Trust |
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Print Name of Entity |
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By: |
/s/ Jeffrey C Pearsall |
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(Signature of authorized officer) |
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Print Name: |
Jeffrey C Pearsall |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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Samantha R Jannotta Revocable Trust |
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Print Name of Entity |
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By: |
/s/ Jeffrey C Pearsall |
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(Signature of authorized officer) |
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Print Name: |
Jeffrey C Pearsall |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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Maxwell H Jannotta Revocable Trust |
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Print Name of Entity |
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By: |
/s/ Jeffrey C Pearsall |
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(Signature of authorized officer) |
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Print Name: |
Jeffrey C Pearsall |
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Title: |
Trustee |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ William J. Cassano |
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Signature |
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William J. Cassano |
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Print Name |
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If an entity: |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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/s/ Les Funtleyder |
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Signature |
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Les Funtleyder |
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Print Name |
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If an entity: |
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Print Name of Entity |
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By: |
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(Signature of authorized officer) |
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Print Name: |
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Title: |
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[Signature page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first written above.
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INVESTORS: |
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If an individual: |
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Signature |
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Print Name |
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If an entity: |
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A1, a Series of E Squared Investment Fund, LLC |
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Print Name of Entity |
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By: |
/s/ Tyler MacKay |
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(Signature of authorized officer) |
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Print Name: |
Assure Fund Management II, LLC |
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Title: |
Manager of the Fund |
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[Signature page to Investors Rights Agreement]
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 5 OF THIS WARRANT AND A RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT, AS AMENDED FROM TIME TO TIME, AMONG CERTAIN STOCKHOLDERS OF APPLIED THERAPEUTICS, INC. AND APPLIED THERAPEUTICS, INC.
Warrant No. CW- |
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Number of Shares: |
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(subject to adjustment) |
Date of Issuance: March 13, 2017 |
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Applied Therapeutics, Inc.
Common Stock Purchase Warrant
(Void after , 2027)
Applied Therapeutics, Inc., a Delaware corporation (the Company), for value received, hereby certifies that , or his registered assigns (the Registered Holder), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, at any time or from time to time on or after the date of issuance and on or before 5:00 p.m. (New York time) , 2028 up to shares of the Companys Common Stock, par value $0.0001 per share (Common Stock), at a purchase price of $ per share. The shares purchasable upon exercise of this Common Stock Purchase Warrant (Warrant), and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the Warrant Shares and the Purchase Price, respectively. The Common Stock shall have the rights, restrictions and privileges set forth in the certificate of incorporation of the Company, as amended or restated from time to time (the Certificate of Incorporation).
1. Exercise .
(a) The Registered Holder may, at its option, elect to exercise this Warrant, in whole or in part and at any time or from time to time, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise (including payment pursuant to Section 1(b) below). The Registered Holder shall be deemed to become the holder of record of the Warrant Shares on the date on which this Warrant is surrendered and payment of the Purchase Price is made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, Registered Holder shall be deemed to become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open
(b) In lieu of exercising this Warrant for cash, the Registered Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being exercised) by surrender of
this Warrant at the principal office of the Company together with notice of such election (a Net Exercise). A Registered Holder who Net Exercises shall have the rights described in Section 1 hereof, and the Company shall issue to such Registered Holder a number of Warrant Shares computed using the following formula:
X = |
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Y(A-B) |
A |
Where
X = The number of Warrant Shares to be issued to the Registered Holder.
Y = The number of Warrant Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being cancelled (at the date of such calculation).
A = The fair market value of one (1) Warrant Share (at the date of such calculation).
B = The Purchase Price (as adjusted to the date of such calculation).
For purposes of this Section 1(b), the fair market value of a Warrant Share shall mean the average of the closing prices of the Warrant Shares (or equivalent shares of common stock issuable upon conversion of the Warrant Shares) quoted in the over-the-counter market in which the Warrant Shares (or equivalent shares of common stock issuable upon conversion of the Warrant Shares) are traded or the closing price quoted on any exchange or electronic securities market on which the Warrant Shares (or equivalent shares of common stock issuable upon conversion of the Warrant Shares) are listed, whichever is applicable, as published in The Wall Street Journal for the thirty (30) trading days prior to the date of determination of fair market value (or such shorter period of time during which such Warrant Shares were traded over-the-counter or on such exchange).
In the event that this Warrant is exercised pursuant to this Section 1(b) in connection with the consummation of the Companys sale of its common stock or other securities pursuant to a registration statement under the Securities Act of 1933, as amended (the Act) (other than a registration statement relating either to sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or a SEC Rule 145 transaction) (the Initial Offering), the fair market value per Warrant Share shall be the product of (a) the per share offering price to the public of the Initial Offering, and (b) the number of shares of common stock into which each Exercise Share is convertible at the time of such exercise.
If the Warrant Shares are not traded on the over-the-counter market, an exchange or an electronic securities market, the fair market value shall be deemed to be the amount most recently determined in good faith by the Board of Directors (the Board) to represent the fair market value per Warrant Share (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Registered Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 days after such request, notify the Registered Holder of the fair market value per Warrant Share and furnish the Registered Holder with reasonable documentation of the Boards determination of such fair market value. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the date of exercise of this Warrant, then (A) the Board shall make, and shall provide or cause to be provided to the Registered Holder notice of, a determination of the fair market value per Warrant Share within 15
days of a request by the Registered Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Registered Holder. Notwithstanding the foregoing, if the Registered Holder advises the Board in writing that the Registered Holder disagrees with the Boards determination in accordance with this paragraph, then the Company and the Registered Holder shall agree upon a reputable investment banking firm to undertake such valuation. All fees and expenses of such investment banking firm shall be paid fifty percent (50%) by the Company and fifty percent (50%) by the Registered Holder.
2. Adjustments .
(a) Adjustment for Stock Splits and Combinations . If the Company shall at any time or from time to time after the Date of Issuance set forth above effect a subdivision of the outstanding Common Stock or combine the outstanding shares of Common Stock, the Company shall promptly provide notice of such subdivision or combination to the Registered Holder. Upon the surrender of this Warrant by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Registered Holder, at the Companys expense, a new Warrant, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct (a Replacement Warrant), (i) with a Purchase Price that (A) in the event of a subdivision, has been proportionately decreased to reflect such subdivision, and (B) in the event of a combination, has been proportionately increased to reflect such combination, and (ii) calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant determined by dividing (A) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (B) the Purchase Price in effect immediately after such adjustment. Any adjustment (and the Replacement Warrant) under this paragraph shall be deemed effective at the close of business on the date the subdivision or combination becomes effective.
(b) Adjustment for Certain Dividends and Distributions . In the event the Company at any time, or from time to time after the Date of Issuance shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Company shall promptly provide notice of such dividend or other distribution to the Registered Holder. Upon the surrender of this Warrant by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Registered Holder, at the Companys expense, a Replacement Warrant with a Purchase Price that shall be decreased to an amount determined by multiplying the Purchase Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution;
provided , however , that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed
accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.
(c) Adjustments for Other Dividends and Distributions . In the event the Company at any time or from time to time after the Date of Issuance shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company (other than shares of Common Stock) or in cash or other property (other than regular cash dividends paid out of earnings or earned surplus, determined in accordance with generally accepted accounting principles), then and in each such event provision shall be made so that the Registered Holder shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable hereunder, the kind and amount of securities of the Company, cash or other property which the Registered Holder would have been entitled to receive had this Warrant been exercised on the date of such event and had the Registered Holder thereafter, during the period from the date of such event to and including the date of exercise of this Warrant, retained any such securities receivable during such period, giving application to all adjustments called for during such period under this Section 2 with respect to the rights of the Registered Holder.
(d) Adjustment for Reorganization . If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a), 2(b) or 2(c)) (collectively, a Reorganization), then, following such Reorganization, the Registered Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Registered Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant.
3. Miscellaneous .
(a) Fractional Shares . The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay the value thereof to the Registered Holder in cash on the basis of the Fair Market Value per share of Common Stock.
(b) No Impairment . The Company shall not, by amendment of its Certificate of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of Section 2 and in taking all such action as may be reasonably necessary or appropriate to protect the Registered Holders rights under Section 2 against impairment.
(c) Acknowledgement . In order to avoid doubt, it is acknowledged that the holder of this Warrant shall be entitled to the benefit of all adjustments in the number of shares of Common Stock of the Company issuable upon conversion of the Common Stock which occur prior to the exercise of this Warrant, including without limitation, any increase in the number of shares of Common Stock issuable upon conversion as a result of a dilutive issuance of capital stock.
(d) Shareholder Agreements . As a condition precedent to the exercise of this Warrant, the Registered Holder must become a party to that certain Voting Agreement, as amended from time to time, by and among the Company and certain stockholders of the Company (the Voting Agreement) as a Key Holder and a Stockholder thereunder, and that certain Right of First Refusal and Co-Sale Agreement, as amended from time to time, by and among the Company and certain stockholders of the Company (the Right of First Refusal Agreement) as a Key Holder and a Stockholder thereunder, and therefore be bound by and subject to all terms and provisions of the Voting Agreement and the Right of First Refusal Agreement applicable to a Key Holder and a Stockholder, provided, however that if the Registered Holder is already a party to the Voting Agreement or the Right of First Refusal Agreement as a Key Holder and a Stockholder, the Registered Holder shall not be required to again enter into the Voting Agreement or the Right of First Refusal Agreement, as the case may be.
4. Investment Representations . The initial Registered Holder represents and warrants to the Company as follows:
(a) Investment . It is acquiring the Warrant, and (if and when it exercises this Warrant) it will acquire the Warrant Shares, for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Registered Holder has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof.
(b) Accredited Investor . The Registered Holder is an accredited investor as defined in Rule 501(a) under the Act.
(c) Experience . The Registered Holder has made such inquiry concerning the Company and its business and personnel as it has deemed appropriate; and the Registered Holder has sufficient knowledge and experience in finance and business that it is capable of evaluating the risks and merits of its investment in the Company.
5. Transfers, etc .
(a) This Warrant and the Warrant Shares shall not be sold or transferred unless either they first shall have been registered under the Act, or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder to an Affiliate, provided that the transferee in each case agrees in writing to be subject to the terms of this Section 5, or a transfer made in accordance with Rule 144 under the Act. For purposes hereof, Affiliate of another person shall mean any person who, directly or indirectly, controls, is controlled by or is under common control with such person, including, without limitation, any general partner, managing member, officer or director of such person or any venture capital fund now or hereafter existing that is controlled by one or more general partners (or member thereof) or managing members of, or shares the same management company (or member thereof) with, such person.
(b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form:
The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the Securities Act), or applicable state securities laws. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration in effect with respect to the securities under the Securities Act and registration or qualification under applicable state securities laws or, if reasonably requested by this corporation, an opinion of counsel satisfactory to this corporation and/or its counsel that such registration or qualification is not required.
The shares represented by this certificate are subject to a Voting Agreement, as may be amended from time to time (a copy of which may be obtained upon written request from the Company), and by accepting any interest in such shares the person accepting such interest shall be deemed to agree to and shall become bound by all the provisions of that Voting Agreement, including certain restrictions on transfer and ownership set forth therein.
The sale, pledge, hypothecation or transfer of the securities represented by this certificate is subject to, and in certain cases prohibited by, the terms and conditions of a certain Right of First Refusal and Co-Sale Agreement by and among the stockholder, the Company and certain other holders of stock of the Company. Copies of such agreement may be obtained upon written request to the secretary of the corporation.
The first legend above shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as (i) a period of at least one year, as determined in accordance with paragraph (d) of Rule 144 under the Act, has elapsed since the later of the date the Warrant Shares were acquired from the Company or an affiliate of the Company, and (ii) the Warrant Shares become eligible for resale pursuant to Rule 144(b)(1)(i) under the Act.
(c) This Warrant and all rights evidenced hereby may be transferred by the Registered Holder to any person or entity, other than a competitor of the Company, as reasonably determined by the Board, in accordance with applicable law, including, without limitation, the Act.
(d) Notwithstanding any other provision of this Warrant, the Warrant Shares may only be transferred in accordance with the Right of First Refusal Agreement.
(e) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its address as shown on the warrant register by written notice to the Company requesting such change.
(f) Subject to the provisions of Section 5 hereof and the provisions of the Right of First Refusal Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency).
6. Notices of Record Date, etc . In the event:
(a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant or the conversion of the Common Stock) for the purpose of entitling or enabling them to receive any dividend or other
distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity and its Common Stock is not converted into or exchanged for any other securities or property), or any transfer, license or lease of all or substantially all of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,
then, and in each such case, the Company will send or cause to be sent to the Registered Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice.
7. Reservation of Stock . The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant.
8. Exchange or Replacement of Warrants .
(a) Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Registered Holder, at the Companys expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant.
(b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor.
9. Lock-Up .
(a) Agreement to Lock-Up . Upon the request of the managing underwriter, the Registered Holder hereby agrees to enter into an agreement that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Companys initial public offering (the IPO) and ending on the date specified by the Company and the managing underwriter, or such other period of 180 days and up to an additional 34 days as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (1) the
publication or other distribution of research reports; and (2) analyst recommendations and opinions, including, but not limited to, the restrictions contained in FINRA Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto), (A) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Capital Stock (as defined in the Right of First Refusal Agreement) held immediately prior to the effectiveness of the registration statement for the IPO or (B) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Capital Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of Capital Stock or other securities, in cash or otherwise. The foregoing provisions of this Section 10 shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Registered Holder if all officers, directors and holders of more than one percent (1%) of the outstanding Common Stock (after giving effect to the conversion into Common Stock of all outstanding preferred stock) enter into similar agreements. The underwriters in connection with the IPO are intended third-party beneficiaries of this Section 10 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. The Registered Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the IPO that are consistent with this Section 10 or that are necessary to give further effect thereto.
(b) Stop Transfer Instructions . In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the shares of Capital Stock of the Registered Holder (and transferees and assignees thereof) until the end of such restricted period.
10. Notices . All notices and other communications from the Company to the Registered Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Registered Holder. All notices and other communications from the Registered Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered (i) two business days after being sent by certified or registered mail, return receipt requested, postage prepaid, or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery.
11. No Rights as Stockholder . Until the exercise of this Warrant, the Registered Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company. Notwithstanding the foregoing, in the event (i) the Company effects a split of the Common Stock by means of a stock dividend and the Purchase Price of and the number of Warrant Shares are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), and (ii) the Registered Holder exercises this Warrant between the record date and the distribution date for such stock dividend, the Registered Holder shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.
12. Amendment or Waiver . Any term of this Warrant may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and the Registered Holder. No waivers of any term, condition or provision of this Warrant,
in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.
13. Section Headings . The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties.
14. Governing Law . This Warrant and any controversy arising out of or relating to this Warrant shall be governed by and construed in accordance with the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.
15. Counterparts . This Warrant may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
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EXECUTED as of the Date of Issuance indicated above.
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EXHIBIT I
PURCHASE FORM
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The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ), hereby elects to purchase ( check applicable box )
The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ), hereby elects to purchase ( check applicable box ):
o shares of the Common Stock of Applied Therapeutics, Inc. covered by such Warrant; or
The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of ( check applicable box or boxes ):
o $ in lawful money of the United States; and/or
o the cancellation of such portion of the attached Warrant as is exercisable for a total of Warrant Shares (using a fair market value of $ per share for purposes of this calculation); and/or
o the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b).
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EXHIBIT II
ASSIGNMENT FORM
FOR VALUE RECEIVED, hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ) with respect to the number of shares of Common Stock of Applied Therapeutics, Inc. covered thereby set forth below, unto:
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THE STATE OF
COUNTY OF
BEFORE ME, the undersigned authority, on this date personally appeared of , known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed.
GIVEN UNDER MY HAND and SEAL OF OFFICE this day of , 20 .
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THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. NO SUCH DISTRIBUTION OR RESALE MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION RELATED THERETO OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS.
APPLIED THERAPEUTICS, INC.
WARRANT
This Warrant (this Warrant ) is issued as of November 5, 2018 (the Date of Issue ), by Applied Therapeutics, Inc., a Delaware corporation (the Company ), to (the Holder ).
1. Issuance of Warrant; Term; Price .
1.1 Issuance . The Company hereby grants to the Holder the right to purchase up to shares of Companys Common Stock, par value $0.0001 per share ( Common Stock ), all subject to the terms and conditions set forth in this Warrant. The shares of Common Stock purchasable upon the exercise of this Warrant are referred to herein as the Warrant Shares and, individually, each as a Warrant Share. This Warrant is being issued pursuant to that certain Placement Agency Agreement between the Company and Brookline Capital Markets, a division of CIM Securities, LLC, a Colorado limited liability company, dated as of January 18, 2018 (as the same may be further amended and restated from time to time, the Placement Agency Agreement ), which relates to the sale of certain securities in an offering by the Company of certain securities of the Company to certain accredited investors, which offering is being made pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act ). Capitalized but undefined terms used herein shall have the meaning set forth in the Placement Agency Agreement.
1.2 Term . Subject to Section 1.4, this Warrant shall terminate and no longer be exercisable on the earliest to occur of (i) a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, (ii) the occurrence of a Deemed Liquidation Event (as defined in the Second Amended and Restated Certificate of Incorporation of the Company dated November 5, 2018 (as the same may be further amended or restated from time to time, the Charter )) or (iii) 5:00 p.m., Eastern time, on November 4, 2028. For purposes of this Warrant, Expiration Date means the date upon which this Warrant expires in accordance with the terms of this Section 1.2.
1.3 Warrant Price . Subject to adjustment as provided in this Warrant, the exercise price (the Warrant Price ) per Warrant Share for which all or any of the Warrant Shares may be purchased pursuant to this Warrant is equal to $ .
1.4 Exercise upon the Occurrence of an Event Described in Section 1.2 . Notwithstanding anything herein to the contrary, contingent upon and effective immediately prior to any of the events set forth in clauses (i) and (ii) of Section 1.2, to the extent not previously exercised, this Warrant shall automatically be exercised by the Holder pursuant to Section 7 herein without any further action necessary on the part of the Holder (a Sale Exercise ) unless the Holder notifies the Company in writing to the contrary prior to such automatic exercise; provided, however, that such automatic exercise shall not occur and this Warrant shall instead be terminated upon and effective as of the occurrence of any of the events set forth in clauses (i) and (ii) of Section 1.2, if the Exercise Price equals or exceeds the Market Price calculated in accordance with Section 7.3 in connection with such Sale Exercise. The Company shall provide notice to the Holder at least 10 business days prior to the consummation of any of the events set forth in clauses (i) and (ii) of Section 1.2.
2. Adjustment of Warrant Price, Number and Kind of Shares . The Warrant Price and the number and kind of Warrant Shares issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of the following events:
2.1 Issuance of Common Stock . If, after the Date of Issue, the Company issues or sells any shares ( Additional Shares ) of its Common Stock or any shares of its Preferred Stock, $0.0001 par value per share ( Preferred Stock ), other than Exempted Securities (as defined in the Charter), without consideration or for consideration per share less than the Warrant Price in effect immediately prior to such issuance or sale, then immediately upon such issuance or sale, the Warrant Price in effect immediately prior to such issuance or sale shall be reduced (and in no event increased) to a Warrant Price determined in accordance with the following formula:
WP2 = WP1* (A + B) / (A + C).
For purposes of the foregoing formula, the following definitions shall apply:
WP2 shall mean the applicable Warrant Price in effect immediately after such issue or sale of Additional Shares;
WP1 shall mean the applicable Warrant Price in effect immediately prior to such issue or sale of Additional Shares;
A shall mean the number of shares of Common Stock outstanding immediately prior to such issue or sale of Additional Shares (treating for this purpose as outstanding all shares of Common Stock (i) issuable upon exercise of options outstanding immediately prior to such issue, (ii) issuable upon conversion or exchange of convertible securities (including the Preferred Stock) outstanding immediately prior to such issue, and (iii) reserved for issuance under the Companys equity incentive plan);
B shall mean the number of Additional Shares that would have been issued if such Additional Shares had been issued at a price per share equal to WP1 (determined by
dividing the aggregate consideration received by the Company in respect of such issue by WP1); and
C shall mean the number of such Additional Shares issued in such transaction.
2.2 Stock Dividends . If at any time on or after the Date of Issue and prior to the Expiration Date, the Company shall pay a dividend with respect to Common Stock payable in Common Stock (except any distribution accounted for in Section 2.1), then the Warrant Price shall be adjusted (and the number of Warrant Shares issuable upon exercise of this Warrant proportionately increased), from and after the record date for stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend plus the number of shares of Common Stock issuable in payment of such dividend.
2.3 Subdivision . If the Company at any time prior to the Expiration Date shall subdivide its Common Stock, the Warrant Price shall be proportionately decreased (and the number of Warrant Shares issuable upon exercise of this Warrant proportionately increased to the nearest whole).
2.4 Reclassification, Reorganization and Consolidation . Subject to Section 1.2, in case of any reclassification, capital reorganization or change in the type of securities of the Company issuable upon exercise of this Warrant (other than as a result of a subdivision, combination or stock dividend provided for in Section 2.2 or Section 2.3) or consolidation or merger (including reverse merger) involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property, then, as a condition of such reclassification, reorganization, change, consolidation or merger, lawful provision shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities or property receivable in connection with such reclassification, reorganization, change, consolidation or merger by a holder of the same number and type of securities as were purchasable as Warrant Shares by the Holder immediately prior to such reclassification, reorganization, change, consolidation or merger. In any such case set forth above in this Section 2.4 appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities or property deliverable upon exercise hereof, and appropriate adjustments shall be made to the Warrant Price per Warrant Share payable hereunder, provided the aggregate Warrant Price shall remain, as nearly as reasonably may be, the same.
2.5 Other Impairment . The Company will not, by amendment of its Charter or Bylaws, as each may be amended and restated from time to time, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Section 2, but will at all times in good faith assist in the carrying out of all such terms and
conditions and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment.
2.6 Notice to Holder . The Company shall, promptly after issuing any stock that would trigger adjustment to the Warrant Price under Section 2.1, making any subdivision or combination provided for in Section 2.3, reclassification, capital reorganization or change in the type of securities of the Company issuable upon exercise of this Warrant provided for in Section 2.4 or stock dividend provided for in Section 2.2, give written notice (by email and first class mail, postage prepaid) to the Holder at the electronic and physical mailing addresses of the Holder shown on the Companys books. That notice shall set forth, in reasonable detail, the event requiring the adjustment and the method by which the adjustment was calculated, and specify the Warrant Price then in effect after the adjustment and the increased or decreased number of Warrant Shares issuable upon exercise of this Warrant. Upon the surrender of this Warrant by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 8 hereof, issue and deliver to or upon the order of the Holder, at the Companys expense, a new Warrant incorporating any changes required by the application of this Section 2, in the name of the Holder or as the Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct.
3. No Fractional Warrant Shares . No fractional Warrant Shares will be issued in connection with any exercise hereunder. In lieu of any fractional shares that would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one Warrant Share on the date of exercise, as determined in good faith by the Companys Board of Directors.
4. No Stockholder Rights . This Warrant as such shall not entitle the Holder to any of the rights of a stockholder of the Company until the Holder has exercised this Warrant in accordance with Section 6 or Section 7.
5. Reservation of Stock . The Company covenants that all Warrant Shares issuable upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. In the event that there is an insufficient number of shares of Common Stock reserved for issuance pursuant to the exercise of this Warrant, the Company will take appropriate action to authorize an increase in the capital stock to allow for such issuance or similar issuance acceptable to the Holder. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock upon the exercise of this Warrant.
6. Exercise of Warrant . This Warrant may be exercised by Holder by the surrender of this Warrant (with the Notice of Exercise form attached as Exhibit A) at the principal office of the Company, accompanied by payment in full of the purchase price of the shares purchased by (a) wire transfer, (b) a check or checks made payable to the order of the Company, or (c) with the consent of the Company, cancellation of debt or other amounts owed to the Holder by the
Company. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Warrant Shares issuable upon such exercise shall be treated for all purposes as the holder of such securities of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person entitled to receive the same a certificate or certificates for the number of full Warrant Shares issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The Warrant Shares issuable upon exercise hereof shall, upon their issuance, be fully paid and nonassessable. If this Warrant shall be exercised in part only, the Company shall, at the time of delivery of the certificate representing the Warrant Shares in respect of which this Warrant has been exercised, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Warrant Shares purchasable under this Warrant, which new warrant shall, in all other respects, be identical to this Warrant.
7. Cashless Exercise Election .
7.1 Right to Convert . In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion hereof (the Conversion Right ) into shares of Warrant Shares as provided in this Section 7. Upon exercise of the Conversion Right with respect to a particular number of Warrant Shares subject to this Warrant (the Converted Warrant Shares ), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of Warrant Shares determined as follows:
where
X = the number of Warrant Shares to be issued to the Holder
Y = the number of Converted Warrant Shares being surrendered in connection with the exercise of the Conversion Right
A = the Market Price (as defined below) of one Converted Warrant Share issuable upon exercise of the Conversion Right on the Conversion Date (as defined below)
B = the Warrant Price of one Converted Warrant Share immediately prior to the exercise of the Conversion Right
7.2 Method of Exercise . The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant that are being surrendered (referred to in Section 7.1 as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon such surrender of this Warrant (the Conversion Date ). Certificates for the Warrant Shares issuable upon exercise of the Conversion Right (or any other securities deliverable in lieu thereof under Section 2) shall be issued as of the Conversion Date and shall be delivered to the Holder promptly following the Conversion Date.
7.3 Determination of Fair Market Value . For purposes of this Section 7, the fair market value (the Market Price ) of a share of Common Stock or Warrant Share as of a particular date means:
(i) If the Warrant is exercised in connection with and contingent upon a firmly underwritten initial public offering of the Company pursuant to an effective registration statement under the Securities Act (the IPO ), then the initial Price to Public specified in the final prospectus with respect to such offering;
(ii) If the Warrant is exercised in connection with and contingent upon a Deemed Liquidation Event, then the value ascribed to each share of Common Stock in such Deemed Liquidation Event, as applicable;
(iii) If the Warrant is exercised following the IPO, the average of the closing price of the Common Stock quoted in the over-the-counter market in which the Common Stock is traded or the closing price quoted on any exchange or electronic securities market on which the Common Stock is listed, whichever is applicable, for the 30 trading days prior to the date of determination of the Market Price (or such shorter period of time during which such Common Stock was traded over-the-counter or on such exchange); and
(iv) If neither of the immediately preceding clauses (i), (ii) or (iii) is applicable, then the fair market value as determined in good faith by the Board of Directors of the Company.
8. Transfers . By accepting this Warrant, Holder understands that this Warrant and any securities issuable upon exercise of this Warrant have not been registered for sale under Federal or state securities laws, including the Securities Act, and are being offered and sold to Holder pursuant to one or more exemptions from the registration requirements of such securities laws. In the absence of an effective registration of such securities or an exemption therefrom, any certificates for such securities shall bear the legend set forth on the first page hereof. Holder understands that Holder must bear the economic risk of Holders investment in this Warrant and any securities obtainable upon exercise of this Warrant for an indefinite period of time, as this Warrant and such securities have not been registered under federal or state securities laws and therefore cannot be sold unless subsequently registered under such laws or unless an exemption from such registration is available.
Subject to the transfer restrictions referred to in the legend described in Section 9, this Warrant and all rights under this Warrant are transferrable, in whole or in part, without charge to Holder, upon the surrender of this Warrant with a properly executed assignment (in the form of Exhibit B) delivered to the Company; provided, however, that no Holder of this Warrant may sell, transfer, negotiate or assign all or any portion of this Warrant to any competitors of the Company (as determined in the Companys reasonable discretion). Upon such surrender, the Company at its expense will execute and deliver to or upon the order of the applicable Holder a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces therefor for the number of the Warrant Shares of the Company as measured on the date of exercise called for on the face or faces of the Warrant or Warrants so surrendered.
9. Restricted Securities . Holder acknowledges that this Warrant is, and each of the Warrant Shares issuable upon the due exercise hereof will be, a restricted security. Accordingly, each certificate evidencing the Warrant Shares issued upon exercise of this Warrant, or transfer of such Warrant Shares (other than a transfer registered under the Securities Act or any subsequent transfer of shares so registered), shall be stamped or imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities laws or required under the Existing Governance Documents):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. THE SHARES MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS.
10. Investment Representations . The Holder represents that the Holder (i) has such knowledge and experience in financial and business matters that the Holder is capable of evaluating the merits and risks of the purchase of this Warrant and the Warrant Shares purchasable pursuant to the terms of this Warrant and of protecting the Holders interests in connection therewith, (ii) is an accredited investor within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and (iii) is able to bear the economic risk of the purchase of the Warrant and the Warrant Shares pursuant to the terms of this Warrant.
11. Loss of Warrant . Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will execute and deliver a new Warrant of like terms.
12. Notice of Dividends and Distributions and Certain Events . For so long as any part of this Warrant remains outstanding and unexercised, the Company shall, upon the declaration of a cash dividend upon its Common Stock or other distribution to the holders of its Common Stock and at least 10 days prior to the record date, notify the Holder of such declaration, which notice will contain, at a minimum, the following information: (a) the date of the declaration of the dividend or distribution; (b) the amount of such dividend or distribution; (c) the record date of such dividend or distribution; and (d) the payment date or distribution date of such dividend or distribution. Further, for so long as this Warrant remains outstanding and unexercised, at least 10 days prior to the applicable record or effective date on which a Holder would need to hold Common Stock in order to participate in or vote with respect to such transaction, the Company shall deliver a notice to the Holder of (i) any Company authorization or approval or entry into any agreement contemplating, or plan to solicit stockholder approval for, a Deemed Liquidation Event, or (ii) any
Company authorization for the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; provided, however, that failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
13. Taxes . The Company shall pay all issue taxes and other governmental charges (but not including any income taxes of the Holder) that may be imposed in respect of the issuance or delivery of the Warrant Shares or any portion thereof.
14. Miscellaneous . This Warrant shall be construed in accordance with the laws of the State of Delaware, without regard to its conflicts of laws or choice of law provisions. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. This Warrant shall be binding upon any successors or assigns of the Company and inure to the benefit of the Holder and any successors or assigns.
15. Amendment; Waiver . Any term of this Warrant may be amended or waived only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section 15 shall be binding upon the Holder, each future holder of this Warrant, and the Company.
16. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes. The Company shall promptly forward to the Holder an original of the copy of this Warrant previously delivered to Holder.
17. Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (iii) three days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company and Holder at the addresses listed on the signature page hereto or at such other address as the Company or Holder may designate from time to time by notice to the other party in accordance with this Section 17.
18. Market Stand-off Agreement . The Holder hereby agrees that, if so requested by the managing underwriters or the Company in connection with the Companys initial public offering, the Holder will not without the prior written consent of such managing underwriters (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of the Companys capital stock acquired through the exercise of this Warrant, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Companys capital stock acquired through the exercise of this Warrant, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of securities, in cash or otherwise for a period of up to 180 days after the date of the final prospectus relating to the initial public offering. The Holder acknowledges and agrees that the Companys managing underwriters are intended third party beneficiaries of this Section 18 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the initial public offering that are consistent with this Section 18 or that are necessary to give further effect thereto.
19. Register . The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the undersigned have duly executed this Warrant as of the date first above written.
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Exhibit A
Notice of Exercise
TO: APPLIED THERAPEUTICS, INC.
o The undersigned hereby elects to purchase shares of Common Stock of Applied Therapeutics, Inc., a Delaware corporation (the Company ), pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.
o The undersigned hereby elects to convert the attached Warrant into Warrant Shares in the manner specified in Section 7 of the Warrant by exercising the undersigneds Conversion Right. This conversion is exercised with respect to of the Warrant Shares covered by the Warrant.
[Check the box next to the paragraph above that applies.]
1. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:
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2. The undersigned represents that the aforesaid shares of stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
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Exhibit B
Form of Assignment
[To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.]
FOR VALUE RECEIVED, the right to purchase Warrant Shares of Common Stock of Applied Therapeutics, Inc., pursuant to the foregoing Warrant and all rights evidenced thereby, is hereby assigned to:
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NOTE: The signature to this assignment form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
Exhibit 4.5
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. NO SUCH DISTRIBUTION OR RESALE MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT OR QUALIFICATION RELATED THERETO OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS.
APPLIED THERAPEUTICS, INC.
WARRANT
This Warrant (this Warrant ) is issued as of [ · ], 2019 (the Date of Issue ), by Applied Therapeutics, Inc., a Delaware corporation (the Company ), to [ · ] (the Holder ).
1. Issuance of Warrant; Term; Price .
1.1. Issuance . The Company hereby grants to the Holder the right to purchase up to [ · ] shares of Companys Common Stock, par value $0.0001 per share ( Common Stock ), all subject to the terms and conditions set forth in this Warrant. The shares of Common Stock purchasable upon the exercise of this Warrant are referred to herein as the Warrant Shares and, individually, each as a Warrant Share . This Warrant is being issued pursuant to that certain Placement Agency Agreement between the Company and Brookline Capital Markets, a division of CIM Securities, LLC, a Colorado limited liability company, dated as of August 28, 2018 (as the same may be further amended and restated from time to time, the Placement Agency Agreement ), which relates to the sale of certain securities in an offering by the Company of certain securities of the Company to certain accredited investors, which offering is being made pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act ). Capitalized but undefined terms used herein shall have the meaning set forth in the Placement Agency Agreement.
1.2. Term . Subject to Section 1.4, this Warrant shall terminate and no longer be exercisable on the earliest to occur of (i) a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, (ii) the occurrence of a Deemed Liquidation Event (as defined in the Second Amended and Restated Certificate of Incorporation of the Company dated November 5 , 2018 (as the same may be further amended or restated from time to time, the Charter )) or (iii) 5:00 p.m., Eastern time, on [ · ], 2029. For purposes of this Warrant, Expiration Date means the date upon which this Warrant expires in accordance with the terms of this Section 1.2.
1.3. Warrant Price . Subject to adjustment as provided in this Warrant, the exercise price (the Warrant Price ) per Warrant Share for which all or any of the Warrant Shares may be purchased pursuant to this Warrant is equal to $455.04.
1.4. Exercise upon the Occurrence of an Event Described in Section 1.2 . Notwithstanding anything herein to the contrary, contingent upon and effective immediately prior to any of the events set forth in clauses (i) and (ii) of Section 1.2, to the extent not previously exercised, this Warrant shall automatically be exercised by the Holder pursuant to Section 7 herein without any further action necessary on the part of the Holder (a Sale Exercise ) unless the Holder notifies the Company in writing to the contrary prior to such automatic exercise; provided, however, that such automatic exercise shall not occur and this Warrant shall instead be terminated upon and effective as of the occurrence of any of the events set forth in clauses (i) and (ii) of Section 1.2, if the Exercise Price equals or exceeds the Market Price calculated in accordance with Section 7.3 in connection with such Sale Exercise. The Company shall provide notice to the Holder at least 10 business days prior to the consummation of any of the events set forth in clauses (i) and (ii) of Section 1.2.
2. Adjustment of Warrant Price, Number and Kind of Shares . The Warrant Price and the number and kind of Warrant Shares issuable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of the following events:
2.1. Issuance of Common Stock . If, after the Date of Issue, the Company issues or sells any shares ( Additional Shares ) of its Common Stock or any shares of its Preferred Stock, $0.0001 par value per share ( Preferred Stock ), other than Exempted Securities (as defined in the Charter), without consideration or for consideration per share less than the Warrant Price in effect immediately prior to such issuance or sale, then immediately upon such issuance or sale, the Warrant Price in effect immediately prior to such issuance or sale shall be reduced (and in no event increased) to a Warrant Price determined in accordance with the following formula:
WP2 = WP1* (A + B) / (A + C).
For purposes of the foregoing formula, the following definitions shall apply:
WP2 shall mean the applicable Warrant Price in effect immediately after such issue or sale of Additional Shares;
WP1 shall mean the applicable Warrant Price in effect immediately prior to such issue or sale of Additional Shares;
A shall mean the number of shares of Common Stock outstanding immediately prior to such issue or sale of Additional Shares (treating for this purpose as outstanding all shares of Common Stock (i) issuable upon exercise of options outstanding immediately prior to such issue, (ii) issuable upon conversion or exchange of convertible securities (including the Preferred Stock) outstanding immediately prior to such issue, and (iii) reserved for issuance under the Companys equity incentive plan);
B shall mean the number of Additional Shares that would have been issued if such Additional Shares had been issued at a price per share equal to WP1 (determined by dividing the aggregate consideration received by the Company in respect of such issue by WP1); and
C shall mean the number of such Additional Shares issued in such transaction.
2.2. Stock Dividends . If at any time on or after the Date of Issue and prior to the Expiration Date, the Company shall pay a dividend with respect to Common Stock payable in Common Stock (except any distribution accounted for in Section 2.1), then the Warrant Price shall be adjusted (and the number of Warrant Shares issuable upon exercise of this Warrant proportionately increased), from and after the record date for stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend plus the number of shares of Common Stock issuable in payment of such dividend.
2.3. Subdivision . If the Company at any time prior to the Expiration Date shall subdivide its Common Stock, the Warrant Price shall be proportionately decreased (and the number of Warrant Shares issuable upon exercise of this Warrant proportionately increased to the nearest whole).
2.4. Reclassification, Reorganization and Consolidation . Subject to Section 1.2, in case of any reclassification, capital reorganization or change in the type of securities of the Company issuable upon exercise of this Warrant (other than as a result of a subdivision, combination or stock dividend provided for in Section 2.2 or Section 2.3) or consolidation or merger (including reverse merger) involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property, then, as a condition of such reclassification, reorganization, change, consolidation or merger, lawful provision shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities or property receivable in connection with such reclassification, reorganization, change, consolidation or merger by a holder of the same number and type of securities as were purchasable as Warrant Shares by the Holder immediately prior to such reclassification, reorganization, change, consolidation or merger. In any such case set forth above in this Section 2.4 appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities or property deliverable upon exercise hereof, and appropriate adjustments shall be made to the Warrant Price per Warrant Share payable hereunder, provided the aggregate Warrant Price shall remain, as nearly as reasonably may be, the same.
2.5. Other Impairment . The Company will not, by amendment of its Charter or Bylaws, as each may be amended and restated from time to time, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Section 2, but will at all times in good faith assist in the carrying out of all such terms and conditions and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment.
2.6. Notice to Holder . The Company shall, promptly after issuing any stock that would trigger adjustment to the Warrant Price under Section 2.1, making any subdivision or combination provided for in Section 2.3, reclassification, capital reorganization or change in the type of securities of the Company issuable upon exercise of this Warrant provided for in Section 2.4 or stock dividend provided for in Section 2.2, give written notice (by email and first class mail, postage prepaid) to the Holder at the electronic and physical mailing addresses of the Holder shown on the Companys books. That notice shall set forth, in reasonable detail, the event requiring the adjustment and the method by which the adjustment was calculated, and specify the Warrant Price then in effect after the adjustment and the increased or decreased number of Warrant Shares issuable upon exercise of this Warrant. Upon the surrender of this Warrant by the Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 8 hereof, issue and deliver to or upon the order of the Holder, at the Companys expense, a new Warrant incorporating any changes required by the application of this Section 2, in the name of the Holder or as the Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct.
3. No Fractional Warrant Shares . No fractional Warrant Shares will be issued in connection with any exercise hereunder. In lieu of any fractional shares that would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one Warrant Share on the date of exercise, as determined in good faith by the Companys Board of Directors.
4. No Stockholder Rights . This Warrant as such shall not entitle the Holder to any of the rights of a stockholder of the Company until the Holder has exercised this Warrant in accordance with Section 6 or Section 7.
5. Reservation of Stock . The Company covenants that all Warrant Shares issuable upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. In the event that there is an insufficient number of shares of Common Stock reserved for issuance pursuant to the exercise of this Warrant, the Company will take appropriate action to authorize an increase in the capital stock to allow for such issuance or similar issuance acceptable to the Holder. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Warrant Stock upon the exercise of this Warrant.
6. Exercise of Warrant . This Warrant may be exercised by Holder by the surrender of this Warrant (with the Notice of Exercise form attached as Exhibit A ) at the principal office of the Company, accompanied by payment in full of the purchase price of the shares purchased by (a) wire transfer, (b) a check or checks made payable to the order of the Company, or (c) with the consent of the Company, cancellation of debt or other amounts owed to the Holder by the Company. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Warrant Shares issuable upon such exercise shall be treated for all purposes as the
holder of such securities of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person entitled to receive the same a certificate or certificates for the number of full Warrant Shares issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The Warrant Shares issuable upon exercise hereof shall, upon their issuance, be fully paid and nonassessable. If this Warrant shall be exercised in part only, the Company shall, at the time of delivery of the certificate representing the Warrant Shares in respect of which this Warrant has been exercised, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Warrant Shares purchasable under this Warrant, which new warrant shall, in all other respects, be identical to this Warrant.
7. Cashless Exercise Election .
7.1. Right to Convert . In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion hereof (the Conversion Right ) into shares of Warrant Shares as provided in this Section 7. Upon exercise of the Conversion Right with respect to a particular number of Warrant Shares subject to this Warrant (the Converted Warrant Shares ), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of Warrant Shares determined as follows:
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X = the number of Warrant Shares to be issued to the Holder
Y = the number of Converted Warrant Shares being surrendered in connection with the exercise of the Conversion Right
A = the Market Price (as defined below) of one Converted Warrant Share issuable upon exercise of the Conversion Right on the Conversion Date (as defined below)
B = the Warrant Price of one Converted Warrant Share immediately prior to the exercise of the Conversion Right
7.2. Method of Exercise . The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant that are being surrendered (referred to in Section 7.1 as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon such surrender of this Warrant (the Conversion Date ). Certificates for the Warrant Shares issuable upon exercise of the Conversion Right (or any other securities deliverable in lieu thereof under Section 2) shall be issued as of the Conversion Date and shall be delivered to the Holder promptly following the Conversion Date.
7.3. Determination of Fair Market Value . For purposes of this Section 7, the fair market value (the Market Price ) of a share of Common Stock or Warrant Share as of a particular date means:
(i) If the Warrant is exercised in connection with and contingent upon a firmly underwritten initial public offering of the Company pursuant to an effective registration statement under the Securities Act (the IPO ), then the initial Price to Public specified in the final prospectus with respect to such offering;
(ii) If the Warrant is exercised in connection with and contingent upon a Deemed Liquidation Event, then the value ascribed to each share of Common Stock in such Deemed Liquidation Event, as applicable;
(iii) If the Warrant is exercised following the IPO, the average of the closing price of the Common Stock quoted in the over-the-counter market in which the Common Stock is traded or the closing price quoted on any exchange or electronic securities market on which the Common Stock is listed, whichever is applicable, for the 30 trading days prior to the date of determination of the Market Price (or such shorter period of time during which such Common Stock was traded over-the-counter or on such exchange); and
(iv) If neither of the immediately preceding clauses (i), (ii) or (iii) is applicable, then the fair market value as determined in good faith by the Board of Directors of the Company.
8. Transfers . By accepting this Warrant, Holder understands that this Warrant and any securities issuable upon exercise of this Warrant have not been registered for sale under Federal or state securities laws, including the Securities Act, and are being offered and sold to Holder pursuant to one or more exemptions from the registration requirements of such securities laws. In the absence of an effective registration of such securities or an exemption therefrom, any certificates for such securities shall bear the legend set forth on the first page hereof. Holder understands that Holder must bear the economic risk of Holders investment in this Warrant and any securities obtainable upon exercise of this Warrant for an indefinite period of time, as this Warrant and such securities have not been registered under federal or state securities laws and therefore cannot be sold unless subsequently registered under such laws or unless an exemption from such registration is available.
Subject to the transfer restrictions referred to in the legend described in Section 9, this Warrant and all rights under this Warrant are transferrable, in whole or in part, without charge to Holder, upon the surrender of this Warrant with a properly executed assignment (in the form of Exhibit B ) delivered to the Company; provided, however, that no Holder of this Warrant may sell, transfer, negotiate or assign all or any portion of this Warrant to any competitors of the Company (as determined in the Companys reasonable discretion). Upon such surrender, the Company at its expense will execute and deliver to or upon the order of the applicable Holder a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces therefor for the number of the Warrant Shares of the Company as measured on the date of exercise called for on the face or faces of the Warrant or Warrants so surrendered.
9. Restricted Securities . Holder acknowledges that this Warrant is, and each of the Warrant Shares issuable upon the due exercise hereof will be, a restricted security. Accordingly, each certificate evidencing the Warrant Shares issued upon exercise of this Warrant, or transfer of such Warrant Shares (other than a transfer registered under the Securities Act or any subsequent transfer of shares so registered), shall be stamped or imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities laws or required under the Existing Governance Documents):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. THE SHARES MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS.
10. Investment Representations . The Holder represents that the Holder (i) has such knowledge and experience in financial and business matters that the Holder is capable of evaluating the merits and risks of the purchase of this Warrant and the Warrant Shares purchasable pursuant to the terms of this Warrant and of protecting the Holders interests in connection therewith, (ii) is an accredited investor within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and (iii) is able to bear the economic risk of the purchase of the Warrant and the Warrant Shares pursuant to the terms of this Warrant.
11. Loss of Warrant . Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will execute and deliver a new Warrant of like terms.
12. Notice of Dividends and Distributions and Certain Events . For so long as any part of this Warrant remains outstanding and unexercised, the Company shall, upon the declaration of a cash dividend upon its Common Stock or other distribution to the holders of its Common Stock and at least 10 days prior to the record date, notify the Holder of such declaration, which notice will contain, at a minimum, the following information: (a) the date of the declaration of the dividend or distribution; (b) the amount of such dividend or distribution; (c) the record date of such dividend or distribution; and (d) the payment date or distribution date of such dividend or distribution. Further, for so long as this Warrant remains outstanding and unexercised, at least 10 days prior to the applicable record or effective date on which a Holder would need to hold Common Stock in order to participate in or vote with respect to such transaction, the Company shall deliver a notice to the Holder of (i) any Company authorization or approval or entry into any agreement contemplating, or plan to solicit stockholder approval for, a Deemed Liquidation Event, or (ii) any Company
authorization for the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; provided, however, that failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
13. Taxes . The Company shall pay all issue taxes and other governmental charges (but not including any income taxes of the Holder) that may be imposed in respect of the issuance or delivery of the Warrant Shares or any portion thereof.
14. Miscellaneous . This Warrant shall be construed in accordance with the laws of the State of Delaware, without regard to its conflicts of laws or choice of law provisions. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. This Warrant shall be binding upon any successors or assigns of the Company and inure to the benefit of the Holder and any successors or assigns.
15. Amendment; Waiver . Any term of this Warrant may be amended or waived only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section 15 shall be binding upon the Holder, each future holder of this Warrant, and the Company.
16. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes. The Company shall promptly forward to the Holder an original of the copy of this Warrant previously delivered to Holder.
17. Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (iii) three days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company and Holder at the addresses listed on the signature page hereto or at such other address as the Company or Holder may designate from time to time by notice to the other party in accordance with this Section 17.
18. Market Stand-off Agreement . The Holder hereby agrees that, if so requested by the managing underwriters or the Company in connection with the Companys initial public offering, the Holder will not without the prior written consent of such managing underwriters (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of the Companys capital stock acquired through the exercise of this Warrant, or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of the Companys capital stock acquired through the exercise of this Warrant, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of securities, in cash or otherwise for a period of up to 180 days after the date of the final prospectus relating to the initial public offering. The Holder acknowledges and agrees that the Companys managing underwriters are intended third party beneficiaries of this Section 18 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the initial public offering that are consistent with this Section 18 or that are necessary to give further effect thereto.
19. Register . The Company will maintain a register containing the name and address of the Holder of this Warrant. The Holder may change its address as shown on the warrant register by written notice to the Company requesting such change.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the undersigned have duly executed this Warrant as of the date first above written.
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Exhibit A
Notice of Exercise
TO: APPLIED THERAPEUTICS, INC.
o The undersigned hereby elects to purchase shares of Common Stock of Applied Therapeutics, Inc., a Delaware corporation (the Company ), pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.
o The undersigned hereby elects to convert the attached Warrant into Warrant Shares in the manner specified in Section 7 of the Warrant by exercising the undersigneds Conversion Right. This conversion is exercised with respect to of the Warrant Shares covered by the Warrant.
[Check the box next to the paragraph above that applies.]
1. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:
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2. The undersigned represents that the aforesaid shares of stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
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Exhibit B
Form of Assignment
[To assign the foregoing warrant, execute
this form and supply required information.
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FOR VALUE RECEIVED, the right to purchase Warrant Shares of Common Stock of Applied Therapeutics, Inc., pursuant to the foregoing Warrant and all rights evidenced thereby, is hereby assigned to:
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NOTE: The signature to this assignment form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
Exhibit 10.5
Applied Therapeutics, Inc.
2016 Equity Incentive Plan
(Adopted as of June 21, 2016)
1. Purpose. The Applied Therapeutics, Inc. 2016 Equity Incentive Plan (the Plan), is intended to provide incentives which will attract and retain highly competent persons as officers, directors, key employees and independent contractors of Applied Therapeutics, Inc. (Company) and its subsidiaries, by providing them opportunities to acquire shares of common stock of the Company (Common Stock) or to receive monetary payments based on the value of such shares pursuant to the Awards (as defined below) described herein.
2. Participants. Participants will consist of such officers, key employees, directors, and independent contractors of the Company and its subsidiaries, as the Companys Board of Directors (Board), in its sole discretion, determine to be significantly responsible for the success and future growth and profitability of the Company and whom the Board may designate from time to time to receive Awards under the Plan (Participants). Designation of a Participant in any year shall not require the Board to designate such person to receive an Award in any other year or, once designated, to receive the same type or amount of Awards as granted to the Participant or any other Participant in any year. The Board shall consider such factors as it deems pertinent in selecting Participants and in determining the amount, type and terms and conditions of their respective Awards. At the Boards discretion, the Board may delegate to the Committee (as defined below), the authority to designate and select Participants and types of Awards.
3. Administration.
(a) Except for those powers expressly reserved for the Board, the Plan will be administered by any subcommittee of the Board appointed by the Board to administer the Plan or, if no committee is appointed to administer the Plan, the Board (the Committee). The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary or appropriate for the proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan and any Awards granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants and their legal representatives. No member of the Board, and no employee of the Company shall be liable for any act or failure to act hereunder, by any other Board member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated or, except in circumstances involving his bad faith, gross negligence or fraud, for any act or failure to act by the member or employee.
(b) The Committee may delegate to one or more of its members or to one or more officers of the Company, or to one or more agents or advisors, such administrative duties or powers as it may deem advisable, and the Committee, or any person to whom duties or powers have been delegated as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. If administration is delegated by the Committee to any such person, as described above, the Committee may
terminate all or any portion of such persons authority under the Plan at any time and revisit in the Committee all or any portion of the administration of the Plan.
4. Types of Awards. Awards under the Plan may be granted in any one or a combination of (i) Stock Options, (ii) Equity Appreciation Rights, (iii) Restricted Stock and Restricted Stock Units, (iv) Performance Awards and (v) Other Stock-Based Awards, each as described below (collectively, Awards). Each Award shall be made pursuant to a written agreement, certificate, resolution, or such other evidence approved by the Committee that sets forth the terms and conditions of the Awards granted.
5. Shares Reserved under the Plan.
(a) Subject to adjustment under Section 12 hereof, there is hereby reserved for issuance under the Plan 10,000 shares of Common Stock of the Company, which may be authorized but unissued or treasury shares. All shares available under the Plan are available for each type of Award under the Plan including, for the avoidance of doubt, Incentive Stock Options.
(b) If there is a lapse, expiration, termination or cancellation of any Stock Option granted under this Plan prior to the issuance of shares in connection with such option, or if shares are issued under the Plan in connection with an Award hereunder and thereafter such shares are reacquired by the Company, those shares may again be used for new Awards under the Plan. In addition, any shares exchanged or surrendered by a Participant as full or partial payment of the exercise price under any Stock Option exercised under this Plan, any shares retained by the Company pursuant to a Participants tax withholding election, and any shares covered by an Award which is settled in cash, shall be added back to the shares available for Awards under the Plan. The Board shall determine the appropriate methodology for calculating the number of Shares available for issuance pursuant to the Plan.
(c) The Committee may grant Awards under the Plan in substitution for stock and stock based awards held by employees, directors, consultants or advisors of another company (an Acquired Company) in connection with a merger, consolidation or similar transaction involving such Acquired Company and the Company or an Affiliate, or the acquisition by the Company or an Affiliate of property or stock of the Acquired Company. Notwithstanding any other provision of this Plan, the Committee may direct that substitute Awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. For purposes of this Plan, an Affiliate means an entity in which the Company has a direct or indirect equity interest, whether now or hereafter existing; provided however, that with respect to an Incentive Stock Option, an Affiliate means a parent corporation (as defined in Section 424(e) of the Internal Revenue Code of 1986, as amended (the Code) or a subsidiary corporation (as defined in Code Section 424(f)) with respect to the Company, whether now or hereafter existing.
6. Stock Options. Stock Options will consist of Awards from the Company, which will enable the holder to purchase a specific number of shares of Common Stock, at set terms and at a fixed purchase price. Stock Options may be incentive stock options within the meaning of Code Section 422 (Incentive Stock Options) or Stock Options that do not
constitute Incentive Stock Options (Nonqualified Stock Options). The Committee will have the authority to grant to any Participant one or more Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options. Each Stock Option shall be evidenced by a written option agreement in such form and shall be subject to such terms and conditions as the Committee may approve from time to time, including without limitation the following:
(a) Exercise Price. Each Stock Option granted hereunder shall have such per share exercise price as the Committee may determine at the Date of Grant; provided, however, that other than in the case of a permitted substitution of Stock Options under Section 5(c) hereof, the per share exercise price for any Stock Options awarded hereunder shall not be less than 100% of the Fair Market Value of the Common Stock on the date the Stock Option is granted.
(b) Payment of Exercise Price. The Committee shall determine the acceptable form of consideration for exercising a Stock Option, including the method of payment. In the case of an Incentive Stock Option, the Committee shall determine the acceptable form of consideration at the time of grant. To the extent approved by the Committee in its discretion and as set out in the applicable Award agreement, the exercise price of a Stock Option may be paid (i) in United States dollars in cash or by check; (ii) through delivery of shares of Common Stock then owned by the Participant having a Fair Market Value equal, as of the date of exercise, to the exercise price of the Stock Option; (iii) by having the Company retain from the shares of Common Stock otherwise issuable upon exercise of the Stock Option, a number of shares having a Fair Market Value equal, as of the date of exercise, to the exercise price of the Stock Option (a net-exercise); (iv) payment of such other lawful consideration as the Committee may determine in its sole discretion; or (v) by any combination of (i), (ii), (iii) and (iv) above. Notwithstanding the foregoing, the Committee shall accept only such payment on exercise of an Incentive Stock Option as is permitted by Code Section 422.
(c) Exercise Period. Stock Options granted under the Plan shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee; provided, however, that Incentive Stock Options shall not be exercisable more than 10 years after the date they are granted. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its sole discretion set forth in the option agreement at the Date of Grant, including but not limited to limitations on exercisability following termination of the Participants employment or consulting relationship.
(d) Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Company or one of its subsidiaries (within the meaning of Code Section 424(f)) at the Date of Grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option plans of the Company) shall not exceed $100,000. Incentive Stock Options may not be granted to any Participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Code Section 424(d)) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Stock on the Date
of Grant and the exercise of such option is prohibited by its terms after the expiration of five years from the Date of Grant of such option.
(e) Notification upon Disqualifying Disposition of an Incentive Stock Option. Each Participant awarded an Incentive Stock Option under the Plan shall notify the Company in writing immediately after the date he makes a disqualifying disposition of any Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including, without limitation, any sale) of such Common Stock before the later of (A) two years after the Date of Grant of the Incentive Stock Option or (B) one year after the date of exercise of the Incentive Stock Option.
(f) Redesignation as Nonqualified Stock Options. Stock Options designated as Incentive Stock Options that fail to meet the requirements of Code Section 422 shall be redesignated as Nonqualified Stock Options automatically without further action by the Committee on the date of such failure to meet the requirements of Code Section 422.
(g) Termination of Employment or Service Provider Relationship. Unless otherwise provided by the Committee and set forth in the Award, in the event a Participants employment or service, as applicable, is terminated before exercise of a vested Stock Option, unless otherwise required by law, such Stock Options will be held subject to Section 11; provided that the time periods for exercising Incentive Stock Options shall be as prescribed by the Code. If the Committee determines, subsequent to a Participants termination of employment or service, as applicable, but before exercise of a Stock Option, that either before or after the Participants termination of employment or service, as applicable, the Participant engaged in conduct that constitutes Cause, then the Participants right to exercise any Option shall be forfeited immediately.
(h) Limitation of Rights in Shares. The recipient of a Stock Option shall not be deemed for any purpose to be a shareholder of the Company with respect to any of the shares subject thereto except to the extent that the Stock Option shall have been exercised and, in addition, a certificate shall have been issued and delivered to the Participant.
(i) Cause, as used in connection with the termination of a Participants employment or service, is defined in any employment agreement between the Company and such Participant, or in the absence of any such employment agreement, means: (1) an unauthorized use or disclosure by the Participant of the Companys confidential information or trade secrets, or the violation of any agreement with the Company containing non-competition, non- solicitation, non-disparagement or other restrictive covenant; (2) a material breach by the Participant of any agreement between the Participant and the Company and the Participant fails to remedy such condition within ten (10) days of such breach; (3) a material failure by the Participant to comply with the Companys written policies or rules and the Participant fails to remedy such non-compliance within ten (10)) days of such failure to comply; (4) the Participants violation of a federal or state law or regulation directly or indirectly applicable to the business of the Company or its affiliates, which violation was or is reasonably likely to be injurious to the Company or its affiliates; (5) the Participants (i) conviction of, or plea of guilty or no contest to, any crime under the laws of the United States or any State thereof (with the exception of minor vehicular accidents which do not result in bodily harm) or (ii)
committing of any act of moral turpitude, dishonesty or fraud against, or the misappropriation of material property belonging to, the Company or its affiliates; (6) the Participants gross negligence or willful misconduct that was or is or is likely to be materially injurious to the Company or its affiliates; (7) a continuing failure by the Participant to perform assigned duties after receiving written notification of such failure from the Board and the Participant fails to remedy such condition within ten (10) days after receiving such written notification; or (8) a failure by the Participant to cooperate in good faith with a governmental or internal investigation of the Company or its directors, officers or employees, if the Company has requested the Participants cooperation. Whether an act constitutes Cause shall be determined by the Board in its sole discretion.
7. Equity Appreciation Rights. Equity Appreciation Rights will consist of Awards from the Company, which will entitle the holder to receive a payment based on the appreciation in the Fair Market Value of the shares subject thereto up to a specified date or dates. The Committee may, in its discretion, grant Equity Appreciation Rights to the holders of any Stock Options granted hereunder. In addition, Equity Appreciation Rights may be granted independently of and without relation to Stock Options. Each Equity Appreciation Right shall be subject to such terms and conditions consistent with the Plan as the Committee shall impose from time to time, including the following:
(a) Each Equity Appreciation Right will entitle the holder to receive the appreciation in the Fair Market Value of the shares of Common Stock referenced therein up to the date the right is subject to a payout event. In the case of a right issued in relation to a Stock Option, such appreciation shall be measured from not less than the exercise price of such Stock Option and in the case of a right issued independently of any Stock Option, such appreciation shall be measured from the applicable strike price specified by the Committee in the applicable Award agreement relating to any such Equity Appreciation Right.
(b) Each Equity Appreciation Right will be payable at such time or times following the first to occur of the applicable payout event(s) as set forth by the Committee in the applicable Award agreement. Payment of such appreciation shall be made in cash or in shares of Common Stock, or a combination thereof, as determined by the Committee.
8. Restricted Stock and Restricted Stock Units.
(a) Restricted Stock will consist of Awards of shares of Common Stock to Participants either with or without consideration therefor from Participants. Each Award of Restricted Stock shall be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, restrictions on the sale or other disposition of shares, restrictions requiring the forfeiture of shares to the Company upon termination of the Participants employment or service with the Company or one of its Affiliates prior to satisfying a prescribed period of service. In the case of an Award of Restricted Stock, the Committee may require the Participant to deliver a duly signed stock power, endorsed in blank, relating to the shares covered by such an Award, and may also require that the stock certificates evidencing such shares be held in custody until the service restrictions thereon shall have lapsed.
Each Restricted Stock Award involving actual shares of Common Stock shall specify whether the Participant shall have, with respect to the shares of Common Stock subject thereto, all of the rights of a holder of shares of Common Stock of the Company, including the right to receive dividends, if applicable, and to vote the shares.
(b) Restricted Stock Units will consist of Awards that entitle the Participant to receive shares of Common Stock and/or cash after a prescribed period of service. The period of service, number of reference shares of Common Stock, and other conditions and limitations applicable to each Award of Restricted Stock Units shall be as determined by the Committee and shall be stated in the applicable Award agreement. The Committee, in its sole discretion, may impose such other restrictions on Restricted Stock Units as it may deem advisable or appropriate including, without limitation, restrictions requiring the forfeiture of Restricted Stock Units to the Company upon termination of the Participants employment or service with the Company or one of its Affiliates prior to satisfying the prescribed period of service.
9. Other Stock-Based Awards. Other Stock Based Awards will consist of other types of equity-based or equity-related Awards not otherwise described by the terms of the Plan in such amounts and subject to such terms and conditions, as the Board or the Committee shall determine Such Awards may involve the transfer of actual shares of Common Stock, or payment in cash or otherwise of amounts based on the value of Common Stock.
10. Performance Awards.
(a) Performance Awards will consist of Awards for which the Committee has set performance goals at its discretion which, depending on the extent to which they are met, will determine the number of shares of Common Stock and/or cash value of Awards that will be paid out to the Participants. Performance Awards may be granted to Participants at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number, amount and timing of Performance Awards granted to each Participant. Performance Awards may take such form as may be determined by the Committee, including without limitation, cash, Stock Options, Awards of shares of Common Stock, Awards of Restricted Stock or Restricted Stock Units, Other Stock-Based Awards or any combination thereof. Performance Awards may be awarded as short-term or long-term incentives.
(b) Performance Awards under the Plan may be made subject to the attainment of one or more of the specified performance goals, as determined by the Committee in its sole discretion. Performance goals may be based upon Company-wide, Affiliate, divisional, project team, and/or individual performance. The Board or the Committee shall have the authority at any time to make adjustments to performance goals for any outstanding Performance Awards which the Board or the Committee deems necessary or desirable unless at the time of establishment of such goals the Board or the Committee shall have precluded its authority to make such adjustments.
(c) Payment of earned Performance Awards shall be made in accordance with terms and conditions prescribed by the Committee. Performance Awards shall be payable in cash or in shares Common Stock, or a combination thereof, as determined by the Committee.
11. Effect of Termination of Service on Awards; Forfeiture.
(a) The Committee may provide, by rule or regulation or in any Award, or may determine in any individual case, the circumstances in which Awards shall be exercised, vested, paid or forfeited in the event a Participant ceases to be an employee, director or other service provider prior to the end of a performance period, period of restriction or the exercise, vesting or settlement of such Award. Unless otherwise determined by the Committee if, with respect to any Award, (1) Participants termination of employment or service, as applicable, occurs before the end of the period of restriction or the vesting date applicable to such Award (or the applicable portion of such Award) or (2) any performance goals are not achieved in whole or in part (as determined by the Committee) by the end of the period for measuring such performance goals, then all such then unvested and/or unearned Awards shall be forfeited by the Participant.
(b) Awards under the Plan shall not be affected by the change of a Participants status within or among the Company and any subsidiaries or Affiliates, so long as the Participant remains an employee, officer, director or other service provider. For purposes of the Plan and any Award hereunder, if an entity that the Participant is employed by or otherwise providing services to ceases to be a subsidiary or an Affiliate, a Participant shall be deemed to terminated employment or service, as applicable, on the date of the entitys change in status, unless the Participant continues as an employee or service provider in respect of the Company or another subsidiary or Affiliate (after giving effect to the change in status).
12. Adjustment Provisions.
(a) If the Company shall at any time change the number of shares of Common Stock issued without new consideration to the Company (such as by stock dividend or stock split), the total number of shares of Common Stock reserved for issuance under the Plan, the maximum number of shares of Common Stock which may be made subject to Incentive Stock Options during the term of the Plan, and the number of shares of Common Stock covered by each then outstanding Award shall be equitably adjusted and the aggregate consideration payable to the Company, if any, shall not be changed.
(b) Unless otherwise provided in Section 13, in the event of any merger, consolidation or reorganization of the Company with or into another entity other than a merger, consolidation or reorganization in which the Company is the continuing entity and which does not result in the outstanding shares of Common Stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, there may be substituted, on an equitable basis as determined by the Committee, for each share of Common Stock then subject to an Award under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of shares of Common Stock of the Company will be entitled pursuant to the transaction.
13. Change of Control of the Company; Consequences of a Change of Control.
(a) Unless otherwise expressly provided in the applicable Award agreement, upon the occurrence of a Change of Control of the Company, the Board or the Committee may
(1) provide for the acceleration of vesting or to cause the lapse of restrictions with respect to, all or any portion of an Award, (2) cancel an Award for a cash payment equal to the Fair Market Value (as determined in the sole discretion of the Board) which, in the case of Stock Options and Equity Appreciation Rights, shall be deemed to be equal to the excess, if any, of the value of the consideration to be paid in the Change of Control transaction to holders of the same number of shares of Common Stock subject to such Stock Options or Equity Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the shares of Common Stock subject to such Stock Options or Equity Appreciation Rights) over the aggregate exercise price (in the case of Stock Options) or strike price (in the case of Equity Appreciation Rights), (3) provide for the issuance of a substitute Award that will substantially preserve the otherwise applicable terms of any affected Award previously granted hereunder as determined by the Board in its sole discretion, (4) terminate unvested Stock Options without providing accelerated vesting or (5) take any other action with respect to the Awards the Board or the Committee deems appropriate. For the avoidance of doubt, the treatment of Awards upon a Change of Control of the Company may vary among the Award types and Participants in the sole discretion of the Board. Unless otherwise determined by the Board (on the same basis or on different bases as the Board shall specify), any repurchase rights or other rights of the Company that relate to an Award shall continue to apply to consideration, including cash, that has been substituted, assumed or amended for an Award pursuant to this Section 13(a). The Company may hold in escrow all or any portion of any such consideration in order to effectuate any continuing restrictions.
(b) For purposes of this Plan, a Change of Control of the Company shall mean: the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation or stock transfer, but excluding any such transaction effected primarily for the purpose of changing the domicile of the Company or a bona-fide financing of the Company), unless the Companys stockholders of record immediately prior to such transaction or series of related transactions hold, immediately after such transaction or series of related transactions, at least 50% of the voting power of the surviving or acquiring entity (provided that the sale by the Company of its securities for the purposes of raising additional funds shall not constitute a Change of Control hereunder); or a sale of all or substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change of Control of the Company shall not be deemed to have occurred under Section 13 solely because (1) the Company, (2) an Affiliate or Initial Stockholders, (3) any one or more members of executive management of the Company or its subsidiaries, (4) any employee stock ownership plan or any other employee benefit plan of the Company or any Affiliate or (5) any combination of the Persons referred to in the preceding clauses (1) through (4) becomes the actual or beneficial owner (within the meaning of rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the Exchange Act)) of 50% or more of the Voting Securities of the Company.
(c) As used in this Section 13, the following terms shall have the meanings set forth below:
Initial Stockholders means the stockholders of the Company immediately prior to any transaction which may constitute a Change of Control.
Person means any individual, corporation, partnership, group, association or other person, as such term is used in section 14(d) of the Exchange Act.
Voting Securities means, with respect to any Person, any securities entitled to vote (including by the execution of action by written consent) generally in the election of directors of such Person (together with direct or indirect options or other rights to acquire any such securities).
14. Nontransferability. Unless otherwise set forth in the applicable written Award agreement, each Award granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the Participants lifetime, only by the Participant or, in the event of a Participants disability, by the Participants personal representative. In the event of the death of a Participant, exercise of any Award or payment with respect to any Award shall be made only by or to the executor or administrator of the estate of the deceased Participant or the person or persons to whom the deceased Participants rights under the benefit shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at the discretion of the Committee, a grant of a Stock Option may permit the transfer thereof by the Participant solely to members of the Participants immediate family or trusts or family partnerships or limited liability companies for the benefit of such persons, subject to such terms and conditions as may be established by the Committee.
15. Repurchase of Shares.
(a) Upon any termination of a Participants employment or service with the Company or a subsidiary or Affiliate, unless otherwise provided in the Award, the Company will be entitled (in its sole and absolute discretion) to repurchase at the Companys election all or any of the Common Stock received hereunder or acquired upon exercise of a grant held by a Participant (whether or not previously acquired by the Participant in connection with the exercise of a Stock Option or Equity Appreciation Right or upon settlement of any other Award and including any Common Stock received as a result of the exercise of any Award after the Participants termination date) (the Repurchase Option). If the Company elects to exercise the Repurchase Option with respect to Shares held by any Participant pursuant to this Section 15, it shall deliver written notice (the Repurchase Notice) to such Participant to such effect within 90-days after the occurrence of the event giving rise to the Repurchase Option. For the avoidance of doubt, this Repurchase Option does not apply to Common Stock purchased by or granted to a Participant under an agreement that is not part of this Plan.
(b) The repurchase price (the Repurchase Price) for a Participants Common Stock to be repurchased (the Surrendered Securities) shall be the Fair Market Value of such Surrendered Securities on the date of termination of employment or service; provided that in the case of a termination of a Participants employment or service by the Company for Cause, the Repurchase Price shall be the lesser of the Fair Market Value of the Surrendered Securities on the date of termination of employment or service and the original exercise price (or other amount paid with respect to an Award, if any, in the case of Awards other than Stock Options and Equity Appreciation Rights) paid for such Surrendered Securities or the Fair Market Value of such Surrendered Securities on the original date of purchase, as applicable. Notwithstanding anything to the contrary in the Plan, if the Company determines, following a
Participants termination of employment or service with the Company, but prior to the last date on which a Repurchase Option can be exercised, that either before or after the Participants termination of employment or service with the Company, the Participant engaged in conduct that constitutes Cause, then the Participant will be treated as having terminated employment or service for Cause for purposes of determining the Repurchase Price.
(c) (1) Within ten (10) business days after the Repurchase Price for the Surrendered Securities has been determined, the Company shall send a notice to such holder of the Surrendered Securities setting forth the consideration to be paid for such securities and the time and place for the closing of the transaction, which date shall not be more than twenty (20) days nor less than five (5) days after the delivery of such notice. At such closing, the holder of the Surrendered Securities shall deliver all certificates (if any exist) evidencing the Surrendered Securities to be repurchased to the Company, and the Company shall pay for the Surrendered Securities to be repurchased pursuant to the Repurchase Option by delivery of a check or wire transfer in the aggregate amount of the Repurchase Price for such securities.
(2) The Company shall be entitled to receive customary representations and warranties from such holder that he or she is the record and beneficial owner of the Surrendered Securities free and clear of any liens, and that he or she will transfer and deliver valid title to such securities free and clear of any liens.
(d) Notwithstanding anything to the contrary contained in this Plan, all repurchases of Surrendered Securities by the Company shall be subject to applicable state and federal laws and regulations and, to the extent applicable, the Companys debt and equity financing agreements. If any of the foregoing prohibits (in the discretion of the Company) the repurchase of Surrendered Securities which are otherwise permitted or required hereunder, the time periods provided in this Section 15 (other than the time period for delivery of the notice in Section 15(a)) shall be suspended, and the Company may make such repurchases as soon as it is permitted to do so under such restrictions; provided that, notwithstanding the foregoing, in no event shall the time periods provided in this Section 15 be suspended for more than three (3) months and that the Company shall in any event have formally notified Participant in writing of its election to repurchase within the time period specified in Section 15(a).
(e) In the event the Company delivers a Repurchase Notice to a Participant but does not elect to repurchase all Shares held by such Participant, the Shares held by such Participant which the Company has not elected to repurchase in the Repurchase Notice shall no longer be subject to the Repurchase Option.
16. Other Provisions. Awards under the Plan may also be subject to such other provisions (whether or not applicable to the Award granted to any other Participant) as the Committee determines appropriate, including without limitation, provisions to assist the Participant in financing the acquisition of Common Stock, provisions for the acceleration of exercisability or vesting and/or early termination of Awards in the event of a Change of Control of the Company, provisions for the payment of the value of Awards to Participants in the event of a Change of Control of the Company, provisions relating to treatment of Awards upon an offering of Company equity on a national securities exchange, provisions for the forfeiture of, or restrictions on resale or other disposition of, Common Stock acquired under any form of Award,
provisions to comply with Federal and State securities laws, or understandings or conditions as to the Participants employment in addition to those specifically provided for under the Plan.
17. Time of Granting of Awards; Fair Market Value. The date of grant (Date of Grant) of an Award shall be the date specified by the Committee on which an Award under this Plan will become effective (which date shall in no event be earlier than the date on which the Committee takes action with respect thereto), provided that in the case of an Incentive Stock Option, the Date of Grant shall be the later of the date on which the Committee makes the determination granting such Incentive Stock Option or the date of commencement of the Participants employment relationship with the Company or one of its Affiliates. Except as otherwise expressly provided in a written Award, for purposes of this Plan and any Awards hereunder, Fair Market Value shall mean the amount determined in good faith by the Committee as the fair market value of shares of the Company on such basis as it deems appropriate taking into account, if applicable, the requirements of Section 409A of the Code.
18. Tenure. A Participants right, if any, to continue to serve the Company as an officer, employee, or otherwise, shall not be enlarged or otherwise affected by his or her designation as a Participant under the Plan, nor shall this Plan in any way interfere with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award.
19. Withholding. All payments or distributions made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to the Plan, it may require the recipient to remit to it an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. The Committee may, in its sole discretion and subject to such rules as it may adopt, permit an Award holder to pay all or a portion of the minimum required federal, state and local withholding taxes arising in connection with (a) a Stock Option or an Equity Appreciation Right or (b) the receipt or vesting of a Restricted Stock Award or a Performance Award, by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount to be withheld.
20. Code Section 409A. The Plan, and Awards granted under it, are intended to be administered in a manner so that awards thereunder are exempt from Section 409A except to the extent specifically provided otherwise in an Award agreement. For avoidance of doubt, Stock Options and Equity Appreciation Rights are intended to qualify for the stock rights exemptions from Section 409A of the Code (Section 409A). Where reasonably possible and practicable, the Plan shall be administered in a manner to avoid the imposition on Participants of immediate tax recognition and additional taxes pursuant to such Section 409A. Notwithstanding the foregoing, neither the Company nor the Committee shall have any liability to any person in the event Section 409A applies to any such Award in a manner that results in adverse tax consequences for the Participant or any of his or her transferees.
21. Duration, Amendment and Termination. This Plan shall terminate upon the earlier of a termination by the Board, or at such time as there shall be no remaining shares
available for grant hereunder, or ten-year anniversary of effective date. Also, by mutual agreement between the Company and a Participant hereunder, under this Plan or under any other present or future plan of the Company, Awards may be granted to such Participant in substitution and exchange for, and in cancellation of, any Awards previously granted such Participant under this Plan, or any other present or future plan of the Company. The Board may amend the Plan from time to time or terminate the Plan at any time, subject to any requirement of stockholder approval required by applicable law, regulation, or stock exchange rule. The Board may amend the terms of any previously-granted Award agreement, but only if (a) the Board determines that such change is necessary or desirable for legal compliance reasons; (b) the amendment is beneficial to the Participant; or (c) the Participant consents to such amendment.
22. Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws).
23. Shareholder Approval. The Plan was adopted by the Board on June 21, 2016 and was approved by the Companys shareholders on June 21, 2016.
24. Shareholder Agreements. Notwithstanding anything to the contrary herein, it shall be a condition to the receipt of any shares of Common Stock of the Company hereunder that the Participant executes the Companys Voting Agreement, Right of First Refusal and Co-Sale Agreement or similar agreements, each as amended from time to time, as required by the Company, the Board or the Committee. In the event that the Participant fails to do so, then the Participants right to receive any shares of Common Stock of the Company shall be forfeited immediately.
Applied Therapeutics, Inc.
Amendment to 2016 Equity Incentive Plan
WHEREAS, Applied Therapeutics, Inc., a Delaware corporation (the Company ), has adopted the Applied Therapeutics, Inc. 2016 Equity Incentive Plan, effective June 21, 2016 (the Plan ); and
WHEREAS, pursuant to Section 21 of the Plan, the Board of Directors of the Company desires to amend Section 5(a) of the Plan to increase the number of shares of Common Stock reserved for issuance under the Plan to a total of 22,941 shares of Common Stock.
NOW THEREFORE, the Plan is hereby amended as follows, effective as of December 15, 2016:
1. Section 5(a) of the Plan is hereby amended by replacing such section in its entirety with the following:
(a) Subject to adjustment under Section 12 hereof, there is hereby reserved for issuance under the Plan 24,353 shares of Common Stock of the Company, which may be authorized but unissued or treasury shares. All shares available under the Plan are available for each type of Award under the Plan including, for the avoidance of doubt, Incentive Stock Options.
2. All other terms and conditions of the Plan shall remain in full force and effect.
3. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed in its name and on behalf on this 15 day of December, 2016, effective as stated herein.
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/s/ Shoshana Shendelman |
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Shoshana Shendelman |
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Chief Executive Officer |
Applied Therapeutics, Inc.
Amendment No. 2 to 2016 Equity
Incentive Plan, as amended
WHEREAS, Applied Therapeutics, Inc., a Delaware corporation (the Company ), has adopted the Applied Therapeutics, Inc. 2016 Equity Incentive Plan, effective June 21, 2016, as amended (the Plan ); and
WHEREAS, pursuant to Section 21 of the Plan, the Board of Directors of the Company amended, and the stockholders of the Company approved, Section 5(a) of the Plan to increase the number of shares of the Companys common stock (the Common Stock ) reserved for issuance under the Plan to a total of 53,689 shares of Common Stock.
NOW THEREFORE, the Plan is hereby amended as follows, effective as of November 5, 2018:
1. Section 5(a) of the Plan is hereby amended by replacing such section in its entirety with the following:
(a) Subject to adjustment under Section 12 hereof, there is hereby reserved for issuance under the Plan 53,689 shares of Common Stock, which may be authorized but unissued or treasury shares. All shares available under the Plan are available for each type of Award under the Plan including, for the avoidance of doubt, Stock Options.
2. All other terms and conditions of the Plan shall remain in full force and effect.
3. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan.
[Signature page follows]
IN WITNESS WHEREOF, the Company has caused this instrument to be executed in its name and on behalf on this 5th day of November 2018, effective as stated herein.
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/s/ Shoshana Shendelman, Ph.D. |
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Shoshana Shendelman, Ph.D. |
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Chief Executive Officer |
[Signature Page to Applied Therapeutics, Inc. Board Consent]
APPLIED THERAPEUTICS, INC.
2016 EQUITY INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
1. Grant of Option .
Applied Therapeutics, Inc., a Delaware corporation (the Company), hereby grants to [name] (the Optionholder), an option, pursuant to the Applied Therapeutics, Inc. 2016 Equity Incentive Plan (the Plan), to purchase an aggregate of [number] shares of Common Stock, $0.0001 par value per share (Common Stock), of the Company at a price of $ [exercise price] per share, purchasable as set forth in and subject to the terms and conditions of this option agreement (this Agreement) and the Plan. This option is intended to be an incentive stock option within the meaning of Code Section 422. The date of grant of this option is [grant date] and is hereinafter referred to as the date of grant.
2. Exercise of Option and Provisions for Termination .
(a) Except as otherwise provided herein, this option may be exercised as to not more than the following number of shares covered by this option as follows:
25% on each of the first four anniversaries of the date of grant.
(b) This option may not be exercised at any time after the tenth anniversary of the grant date or, if the Optionholder owns (after the application of the attribution rules of Code Section 424(d)) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (a 10% holder), the fifth anniversary date.
(c) Subject to the conditions hereof, this option shall be exercisable by the Optionholder giving written notice of exercise to the Company, specifying the number of shares to be purchased and the purchase price to be paid therefor and accompanied by payment in accordance with Section 3 hereof. Such exercise shall be effective upon receipt by the Company of the written notice together with the required payment. The Optionholder shall be entitled to purchase less than the number of shares covered hereby, provided that no partial exercise of this option shall be for less than one whole share.
(d) Subject to Section 2(e) below, if the Optionholder ceases to be employed by the Company or one of its subsidiaries for any reason other than death, disability or a termination of employment for Cause, this option shall immediately terminate; provided , that any portion of this option which was otherwise exercisable on the date of termination of the Optionholders employment may be exercised within the three-month period following the date on which the Optionholders employment terminated, but in no event after the tenth anniversary of the grant date or, if the Optionholder is a 10% holder, the fifth anniversary of such date. Any such exercise may be made only to the extent of the number of shares subject to this option which are purchasable upon the date of such termination of employment. If the Optionholder dies during such three-month period, this option shall be exercisable by the Optionholders personal representatives, heirs or legatees to the
same extent and during the same period that the Optionholder could have exercised this option on the date of his or her death.
(e) If the Optionholder dies while an employee of the Company or any subsidiary of the Company or ceases to be employed by the Company or a subsidiary as a result of a disability, any portion of this option which was otherwise exercisable on the date of the Optionholders death or his or her employment termination may be exercised prior to the earlier of the expiration of (i) twelve months from the date of such death or employment termination or (ii) the tenth anniversary of the grant date or, if the Optionholder is a 10% holder, the fifth anniversary of such date by the Optionholder or the Optionholders personal representatives, heirs or legatees, as applicable. Disability shall be determined under the relevant Company disability policy in place at the time the Optionholder ceases to be employed by the Company or, if no such policy exists, in the Committees good-faith determination.
(f) If the Optionholders employment terminates for Cause, the Option will terminate immediately upon such termination of employment and the Optionholder is prohibited from exercising the Option, whether vested or unvested, at any time after such termination. Notwithstanding anything to the contrary in this Agreement, if the Company determines, subsequent to the Optionholders termination of employment or service, as applicable, but before exercise of all or any part of the Option, that either before or after the Optionholders termination of employment or service, as applicable, the Optionholder engaged in conduct that constitutes Cause, then the Optionholders right to exercise all or any part of the Option shall be forfeited immediately.
(g) If the Optionholder violates the confidentiality, non-solicit or non-compete obligations applicable to the Optionholder set forth in a written agreement between the Optionholder and the Company, the Option will terminate immediately, effective on the date of the Optionholders first violation of such obligations, as determined by the Company, and the Optionholder is prohibited from exercising the Option, whether vested or unvested, at any time after such date.
3. Payment of Purchase Price .
(a) Payment of the purchase price for shares purchased upon exercise of this option shall be made by delivery to the Company of cash or check payable to the order of the Company in an amount equal to the purchase price of such shares, or, if the Optionholder elects and the Company permits, by delivery of shares of Common Stock of the Company having a fair market value equal in amount to the purchase price of such shares or by entering into a net exercise arrangement. Another method of payment may be used if authorized by the Plan and the Company permits.
(b) For the purposes hereof, the fair market value of any share of the Companys Common Stock to be delivered to the Company in exercise of this option shall be determined in good faith by the Board of Directors of the Company, in accordance with the terms of the Plan.
(c) If the Optionholder elects to exercise options by delivery of shares of Common Stock of the Company, the certificate or certificates representing the shares of Common Stock of the Company to be delivered shall be duly executed in blank by the Optionholder or shall be accompanied by a stock power duly executed in blank suitable for purposes of transferring such shares to the Company. Fractional shares of Common Stock of the Company will not be accepted in payment of the purchase price of shares acquired upon exercise of this option.
4. Delivery of Shares .
The Company shall, upon payment of the purchase price for the number of shares purchased and paid for, make prompt delivery of such shares to the Optionholder, provided that if any law or regulation requires the Company to take any action with respect to such shares before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to complete such action. No shares shall be issued and delivered upon exercise of any option unless and until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of 1933, any applicable listing requirements of any national securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, shall have been fully complied with.
5. Non-transferability of Option .
Except as provided in Sections 2(d), (e), and (f) hereof, this option is personal and no rights granted hereunder shall be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) nor shall any such rights be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this option or of such rights contrary to the provisions hereof, or upon the levy of any attachment or similar process upon this option or such rights, this option and such rights shall become null and void.
6. No Special Employment Rights .
Nothing contained in the Plan or this Agreement shall be construed or deemed by any person under any circumstances to bind the Company or any of its subsidiaries to continue the employment of the Optionholder for the period within which this option may be exercised. However, during the period of the Optionholders employment, the Optionholder shall render diligently and faithfully the services which are assigned to the Optionholder from time to time by the Board of Directors or by the executive officers of the Company and its subsidiaries and shall at no time take any action which directly or indirectly would be inconsistent with the best interests of the Company or of its subsidiaries.
7. Rights as a Stockholder .
The Optionholder shall have no rights as a stockholder with respect to any shares which may be purchased by exercise of this option unless and until a certificate or certificates representing such shares are duly issued and delivered to the Optionholder. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.
8. Recapitalization .
In the event that dividends are payable in shares of Common Stock or in the event there are splits, sub-divisions or combinations of shares of Common Stock subsequent to the date of grant, the number of shares subject to this option shall be increased or decreased proportionately, as the case may be, and the number of shares deliverable upon the exercise thereafter of this option shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price.
9. Withholding Taxes .
Whenever shares are to be issued upon exercise of this option, the Company shall have the right to require the Optionholder to remit to the Company an amount sufficient to satisfy any federal, state and local minimum tax withholding requirements prior to the delivery of any certificate or certificates for such shares. Notwithstanding anything to the contrary in this Agreement, the Optionholder shall be entitled to satisfy any minimum required tax withholding obligations by directing the Company to withhold shares of Common Stock issuable to the Optionholder upon exercise of the options under this Agreement.
10. Notification upon Disqualifying Disposition of an Incentive Stock Option . The Optionholder shall notify the Company in writing immediately after the date he or she makes a disqualifying disposition of any Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including, without limitation, any sale) of such Common Stock before the later of (a) two years after the Date of Grant of the Incentive Stock Option or (b) one year after the date of exercise of the Incentive Stock Option.
11. Companys Repurchase Right .
All shares purchased upon exercise of the option under this Agreement shall be subject to the Companys repurchase right as determined under the Plan.
12. Permitted Transfers .
The Optionholder may not sell, transfer, pledge, assign or otherwise alienate or hypothecate all or any portion of the option, other than by will or by the laws of descent and distribution. The Company will not be required (i) to transfer on its books all or any portion of the option or Shares that have been sold or transferred, or (ii) to treat as owner of all or any portion of the option or Shares, to accord the right to vote as such owner or to pay distributions, if any, to any transferee to whom all or any portion of the option or Shares have been transferred, in violation of the Plan, this Agreement, or any other Shareholders Agreement.
(a) During the Optionholders lifetime, only the Optionholder or his or her guardian or legal representative may exercise the option. The Board may, in its discretion, require a guardian or legal representative to supply it with the evidence the Board reasonably deems necessary to establish the authority of the guardian or legal representative to exercise the option on behalf of the Optionholder or transferee, as the case may be.
(b) Upon an exercise of the option, the Optionholder shall join in and enter into the Companys Shareholders Agreements (or similar agreements) with respect to all shares of Common Stock.
13. Investment Representation, Etc .
(a) The Optionholder represents that any shares purchased upon exercise of this option shall be acquired by the Optionholder for his or her own account for investment and not with a view to, or for sale in connection with, any distribution of such shares, nor with any present intention of distributing or selling such shares. By making payment upon exercise of this option, the
Optionholder shall be deemed to have reaffirmed, as of the date of such payment, the representations made in this Section 13.
(b) Upon execution of the Shareholders Agreement by the Optionholder, the Company shall have affixed to all stock certificates representing shares of Common Stock issued to the Optionholder upon exercise of this option a legend evidencing such agreement.
(c) All stock certificates representing shares of Common Stock issued to the Optionholder upon exercise of this option shall, at the election of the Company, have affixed thereto a legend substantially in the following form:
The shares of stock represented by this certificate (i) are subject to the restrictions on transfer and a repurchase option, all contained in an Incentive Stock Option Agreement between the Company and the holder of this certificate (a copy of which is available without charge from the Company), and (ii) have not been registered under the Securities Act of 1933 and may not be transferred, sold or otherwise disposed of in the absence of an effective registration statement with respect to the shares evidenced by this certificate, filed and made effective under the Securities Act of 1933, or an opinion of counsel satisfactory to the Company to the effect that registration under such Act is not required.
14. Miscellaneous .
(a) Except as provided herein, this Agreement may not be amended or otherwise modified unless evidenced in writing and signed by the Company and the Optionholder.
(b) All notices under this Agreement shall be mailed or delivered by hand to the parties at their respective addresses set forth beneath their names below or at such other address as may be designated in writing by either of the parties to one another.
(c) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
Date of Grant: |
APPLIED THERAPEUTICS, INC. |
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OPTIONHOLDERS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof.
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APPLIED THERAPEUTICS, INC.
2016 EQUITY INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
1. Grant of Option .
Applied Therapeutics, Inc., a Delaware corporation (the Company), hereby grants to [name] (the Optionholder), an option, pursuant to the Applied Therapeutics, Inc. 2016 Equity Incentive Plan (the Plan), to purchase an aggregate of [number] shares of Common Stock, $0.0001 par value per share (Common Stock), of the Company at a price of $ [exercise price] per share, purchasable as set forth in and subject to the terms and conditions of this option agreement (this Agreement) and the Plan. This option is intended to be a nonqualified stock option. The date of grant of this option is [grant date] and is hereinafter referred to as the date of grant.
2. Exercise of Option and Provisions for Termination .
(a) Except as otherwise provided herein, this option may be exercised as to not more than the following number of shares covered by this option as follows:
25% on each of the first four anniversaries of the date of grant.
(b) This option may not be exercised at any time after the tenth anniversary of the grant date.
(c) Subject to the conditions hereof, this option shall be exercisable by the Optionholder giving written notice of exercise to the Company, specifying the number of shares to be purchased and the purchase price to be paid therefor and accompanied by payment in accordance with Section 3 hereof. Such exercise shall be effective upon receipt by the Company of the written notice together with the required payment. The Optionholder shall be entitled to purchase less than the number of shares covered hereby, provided that no partial exercise of this option shall be for less than one whole share.
(d) Subject to Section 2(e) below, if the Optionholder ceases to be employed by, and is no longer providing any services (whether as a consultant, advisor, director or in any other capacity) to, the Company or one of its subsidiaries for any reason other than death, disability or a termination from Service for Cause, this option shall immediately terminate; provided, that any portion of this option which was otherwise exercisable on the date of termination of the Optionholders Service may be exercised within the three-month period following the date on which the Optionholder ceased to provide any Services, but in no event after the tenth anniversary of the grant date. Any such exercise may be made only to the extent of the number of shares subject to this option which are purchasable upon the date of such termination of Service. If the Optionholder dies during such three-month period, this option shall be exercisable by the Optionholders personal representatives, heirs or legatees to the same extent
and during the same period that the Optionholder could have exercised this option on the date of his or her death. For purposes of this Agreement, while the Optionholder is an employee of the Company or one of its subsidiaries or is providing services to the Company or a subsidiary of the Company as a consultant, advisor, director or another type of service provider, the Optionholder will be considered to be in Service or providing Services.
(e) If the Optionholder dies while providing Services to the Company or any subsidiary of the Company or ceases to provide Services to the Company or a subsidiary as a result of a disability, any portion of this option which was otherwise exercisable on the date of the Optionholders death or his or her termination of Services may be exercised prior to the earlier of the expiration of (i) twelve months from the date of such death or termination of Services or (ii) the tenth anniversary of the grant date by the Optionholder or the Optionholders personal representatives, heirs or legatees, as applicable. Disability shall be determined under the relevant Company disability policy in place at the time the Optionholder ceases to provide Services to the Company or, if no such policy exists, in the Committees good-faith determination.
(f) If the Optionholders Service terminates for Cause, the Option will terminate immediately upon such termination of Service and the Optionholder is prohibited from exercising the Option, whether vested or unvested, at any time after such termination. Notwithstanding anything to the contrary in this Agreement, if the Company determines, subsequent to the Optionholders termination of employment or service, as applicable, but before exercise of all or any part of the Option, that either before or after the Optionholders termination of employment or service, as applicable, the Optionholder engaged in conduct that constitutes Cause, then the Optionholders right to exercise all or any part of the Option shall be forfeited immediately.
(g) If the Optionholder violates the confidentiality, non-solicit or non-compete obligations applicable to the Optionholder set forth in a written agreement between the Optionholder and the Company, the Option will terminate immediately, effective on the date of the Optionholders first violation of such obligations, as determined by the Company, and the Optionholder is prohibited from exercising the Option, whether vested or unvested, at any time after such date.
3. Payment of Purchase Price .
(a) Payment of the purchase price for shares purchased upon exercise of this option shall be made by delivery to the Company of cash or check payable to the order of the Company in an amount equal to the purchase price of such shares, or, if the Optionholder elects and the Company permits, by delivery of shares of Common Stock of the Company having a fair market value equal in amount to the purchase price of such shares or by entering into a net exercise arrangement. Another method of payment may be used if authorized by the Plan and the Company permits.
(b) For the purposes hereof, the fair market value of any share of the Companys Common Stock to be delivered to the Company in exercise of this option shall be determined in good faith by the Board of Directors of the Company, in accordance with the terms of the Plan.
(c) If the Optionholder elects to exercise options by delivery of shares of Common Stock of the Company, the certificate or certificates representing the shares of Common Stock of the Company to be delivered shall be duly executed in blank by the Optionholder or shall be accompanied by a stock power duly executed in blank suitable for purposes of transferring such shares to the Company. Fractional shares of Common Stock of the Company will not be accepted in payment of the purchase price of shares acquired upon exercise of this option.
4. Delivery of Shares .
The Company shall, upon payment of the purchase price for the number of shares purchased and paid for, make prompt delivery of such shares to the Optionholder, provided that if any law or regulation requires the Company to take any action with respect to such shares before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to complete such action. No shares shall be issued and delivered upon exercise of any option unless and until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of 1933, any applicable listing requirements of any national securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, shall have been fully complied with.
5. Non-transferability of Option .
Except as provided in Sections 2(d), (e), and (f) hereof, this option is personal and no rights granted hereunder shall be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) nor shall any such rights be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this option or of such rights contrary to the provisions hereof, or upon the levy of any attachment or similar process upon this option or such rights, this option and such rights shall become null and void.
6. No Special Employment or Service Rights .
Nothing contained in the Plan or this Agreement shall be construed or deemed by any person under any circumstances to bind the Company or any of its subsidiaries to continue the Service of the Optionholder for the period within which this option may be exercised. However, during the period of the Optionholders Service, the Optionholder shall render diligently and faithfully the Services which are assigned to the Optionholder from time to time by the Board of Directors or by the executive officers of the Company and its subsidiaries and shall at no time take any action which directly or indirectly would be inconsistent with the best interests of the Company or of its subsidiaries.
7. Rights as a Stockholder .
The Optionholder shall have no rights as a stockholder with respect to any shares which may be purchased by exercise of this option unless and until a certificate or certificates representing such shares are duly issued and delivered to the Optionholder. Except as otherwise
expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.
8. Recapitalization .
In the event that dividends are payable in shares of Common Stock or in the event there are splits, sub-divisions or combinations of shares of Common Stock subsequent to the date of grant, the number of shares subject to this option shall be increased or decreased proportionately, as the case may be, and the number of shares deliverable upon the exercise thereafter of this option shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price.
9. Withholding Taxes .
Whenever shares are to be issued upon exercise of this option, the Company shall have the right to require the Optionholder to remit to the Company an amount sufficient to satisfy any federal, state and local minimum tax withholding requirements prior to the delivery of any certificate or certificates for such shares. Notwithstanding anything to the contrary in this Agreement, the Optionholder shall be entitled to satisfy any minimum required tax withholding obligations by directing the Company to withhold shares of Common Stock issuable to the Optionholder upon exercise of the options under this Agreement.
10. Companys Repurchase Right .
All shares purchased upon exercise of the option under this Agreement shall be subject to the Companys repurchase right as determined under the Plan.
11. Permitted Transfers .
The Optionholder may not sell, transfer, pledge, assign or otherwise alienate or hypothecate all or any portion of the option, other than by will or by the laws of descent and distribution. The Company will not be required (i) to transfer on its books all or any portion of the option or Shares that have been sold or transferred, or (ii) to treat as owner of all or any portion of the option or Shares, to accord the right to vote as such owner or to pay distributions, if any, to any transferee to whom all or any portion of the option or Shares have been transferred, in violation of the Plan, this Agreement, or any other Shareholders Agreement.
(a) During the Optionholders lifetime, only the Optionholder or his or her guardian or legal representative may exercise the option. The Board may, in its discretion, require a guardian or legal representative to supply it with the evidence the Board reasonably deems necessary to establish the authority of the guardian or legal representative to exercise the option on behalf of the Optionholder or transferee, as the case may be.
(b) Upon an exercise of the option, the Optionholder shall join in and enter into the Companys Shareholders Agreements (or similar agreements) with respect to all shares of Common Stock.
12. Investment Representation, Etc .
(a) The Optionholder represents that any shares purchased upon exercise of this option shall be acquired by the Optionholder for his or her own account for investment and not with a view to, or for sale in connection with, any distribution of such shares, nor with any present intention of distributing or selling such shares. By making payment upon exercise of this option, the Optionholder shall be deemed to have reaffirmed, as of the date of such payment, the representations made in this Section 12.
(b) Upon execution of the Shareholders Agreement by the Optionholder, the Company shall have affixed to all stock certificates representing shares of Common Stock issued to the Optionholder upon exercise of this option a legend evidencing such agreement.
(c) All stock certificates representing shares of Common Stock issued to the Optionholder upon exercise of this option shall, at the election of the Company, have affixed thereto a legend substantially in the following form:
The shares of stock represented by this certificate (i) are subject to the restrictions on transfer and a repurchase option, all contained in an Nonqualified Stock Option Agreement between the Company and the holder of this certificate (a copy of which is available without charge from the Company), and (ii) have not been registered under the Securities Act of 1933 and may not be transferred, sold or otherwise disposed of in the absence of an effective registration statement with respect to the shares evidenced by this certificate, filed and made effective under the Securities Act of 1933, or an opinion of counsel satisfactory to the Company to the effect that registration under such Act is not required.
13. Miscellaneous .
(a) Except as provided herein, this Agreement may not be amended or otherwise modified unless evidenced in writing and signed by the Company and the Optionholder.
(b) All notices under this Agreement shall be mailed or delivered by hand to the parties at their respective addresses set forth beneath their names below or at such other address as may be designated in writing by either of the parties to one another.
(c) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
Date of Grant: |
APPLIED THERAPEUTICS, INC. |
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OPTIONHOLDERS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof.
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Applied Therapeutics Inc. 340 Madison Avenue, 19 th Floor New York, NY 10173 212.220.9319 www.appliedtherapeutics.com |
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CONFIDENTIAL
Dear Mr. Funtleyder:
Applied Therapeutics Inc., a Delaware corporation (the Company ), is pleased to provide this offer to you for the position of Interim Chief Financial Officer ( Interim CFO ) on the terms described below.
1. Position. The position of Interim CFO will report directly to the Companys CEO. Your primary duties will be to direct financial operations and reporting, regulatory activities, and other customary support that a CFO provides. By signing this letter, you confirm, subject to paragraph 3 below, that you are under no contractual or other legal obligations that would prohibit you from performing your duties with the Company upon your specified start date as outlined below. The anticipated start date is December 26, 2018 (the Start Date ).
2. Compensation and Employee Benefits. You will be paid a starting salary at the rate of $450,000 per year, to be reviewed annually. You will also be eligible for a discretionary annual bonus.
You will be granted a nonqualified stock option pursuant to the Companys 2016 Equity Incentive Plan (the Plan ) to purchase 2,887 shares of Common Stock of the Company (the Option ), at an exercise price that is equal to the fair market value of the Common Stock on the date of grant, which will vest as set forth in the following schedule, subject to your continuous service for the Company through each such vesting date: (1) 25% to vest upon starting the position; (2) 25% to vest on the earlier of pricing of the Initial Public Offering ( IPO ) or the second year anniversary of the date of grant ( Performance Milestone No. 1 ); (3) 25% to vest upon the earlier of stock price reaching a 30% increase over the IPO offering price or the third year anniversary of the date of grant ( Performance Milestone No. 2 , together with Performance Milestone No. 1 the Performance Milestones ); and (4) 25% to vest upon the one year anniversary of the date of grant (the One-Year Milestone ). Such option package is intended to represent approximately 1.0% of the Companys outstanding capital stock on a fully diluted basis, as that term is defined by the Company, on the date hereof ( Outstanding Capital Stock ). Upon completion of the Companys audit for the year ended December 31, 2018, the Company shall review the Outstanding Capital Stock and, in the event that it is determined that it differs from 288,743 shares on a fully diluted basis, then the number of shares granted pursuant to this option package shall be revised to reflect the revised number of shares of capital stock of the Company outstanding on the date hereof, and shall be proportionately prorated for vesting purposes. The complete terms and conditions of your Option will be as set forth in the Plan, and the stock option agreement or grant notice provided by the Company. Subject to your continued service, you will be eligible for additional equity grants in the future in the Boards discretion.
The Options may be assigned by you to an entity controlled by you, subject to your notifying the Companys CEO, and compliance with applicable securities laws, provided
that no such assignment will occur to the extent it would prevent the Company from registering its equity plan on a Form S-8 following an IPO.
Provided that you execute and allow to become effective a release of claims in a form acceptable to the Company within the timeframes set forth therein, which shall in no event be more than sixty (60) days, then the Option with respect only to the One-Year Milestone shall immediately be accelerated and shall vest upon the occurrence of a Qualifying Termination (as defined below), and for the one year period following the effective date of a Qualifying Termination: (a) your Option will remain outstanding, and (b) the portion of your Option subject to the Performance Milestones will vest upon achievement of the Performance Milestones within that one year period, provided that in no event may the Option vest or continue in effect after the expiration of the term of the Option or any earlier termination of the Option as permitted by the Plan (e.g., upon a change in control or other corporate transaction).
The Option shall immediately be accelerated and shall vest upon the occurrence of a Change of Control (as defined in the Plan).
A Qualifying Termination is defined as follows:
(i) Termination of your employment by the Company without Cause (as defined in the Plan); or
(ii) Resignation by you due to reduction of your base salary, without your consent, by 20% or more in any 12-month period (other than an across- the-board decrease in base salary applicable to all executive officers of the Company) ( Good Reason ). You shall only be deemed to have resigned for Good Reason pursuant to this definition if: (1) you give the Company written notice of your intent to resign for Good Reason within thirty (30) days following the first occurrence of the salary reduction you believe constitutes Good Reason; (2) the Company fails to remedy such salary reduction within thirty (30) days following receipt of the written notice (the Cure Period ); and (3) you voluntarily terminate your employment within thirty (30) days following the end of the Cure Period.
In addition, the Company will pay you a one-time signing bonus in the amount of $30,242, less deductions required by law (the Sign-On Bonus ). This Sign-On Bonus will be paid on the first regularly scheduled payroll date after the Start Date.
As a regular employee of the Company you will also be eligible to participate in a number of Company-sponsored benefits (customarily available to executive employees), which will be provided to you.
3. Confidential Information and Invention Assignment Agreement. You will be required. as a condition of your serving as the Companys Interim CFO, to sign the Companys standard Employee Confidential Information and Inventions, Non-Solicitation and Non-Competition Assignment Agreement (the Proprietary Agreement ) except as hereinafter stated. It is understood that you will continue to hold a number of positions,
responsibilities and business relationships outside of the Company, including, amongst others, a position at E Squared Capital. The Proprietary Agreement shall provide, as applicable to your situation, that, while you render services to the Company, you agree (i) not to engage in any other position as CFO of a competing biotech company, and (ii) not to compete with the business of the Company, provided that the scope of the noncompetition provision will not preclude you from performing your normal advisory services for E Squared Capital, the details of which qualification will be set forth as agreed upon in the Proprietary Agreement.
4. Relationship. The arrangement with the Company is for no specific period of time. Your agreement with the Company will be at will, meaning that either you or the Company may terminate at any time and for any reason, with or without cause, upon 30 days prior written notice.
5. Withholding Taxes. All forms of compensation referred to in this letter are subject to applicable withholding and payroll taxes.
6. Entire Agreement. This letter supersedes and replaces any prior understandings or agreements, whether oral, written or implied, between you and the Company regarding the matters described in this letter.
If you wish to accept this offer, please sign and date and return them to me. As required, by law, your agreement with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States as well as providing any necessary tax identification documentation the Company may request. This offer, if not accepted, will expire at the close of business on December 28, 2018.
With the formalities covered, we are thrilled you are joining the team.
Very truly yours,
Applied Therapeutics Inc.
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/s/ Shoshana Shendelman , PhD |
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Shoshana Shendelman , PhD |
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Chief Executive Officer |
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ACCEPTED AND AGREED
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/s/ Les Funtleyder |
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Name: |
Les Funtleyder |
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Applied Therapeutics Inc.
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CONFIDENTIAL
Riccardo Perfetti, MD, PhD
Dear Dr. Perfetti:
Applied Therapeutics Inc., a Delaware corporation (the Company ), is pleased to provide this offer to you for the position of Chief Medical Officer on the terms described below.
1. Position. The position of Chief Medical Officer (CMO) will report directly to the Companys CEO. Your primary duties will be to direct clinical research and development programs, regulatory activities, medical marketing strategy, KOL engagement and other customary support that a CMO provides. By signing this letter, you confirm that you are under no contractual or other legal obligations that would prohibit you from performing your duties with the Company upon your specified start date as outlined below.
2. Compensation and Employee Benefits. You will be paid a starting salary at the rate of $450,000 per year, to be reviewed annually. You will also be eligible for a discretionary annual bonus, at a target rate of 40% of your salary. For the first year, a minimum of half of the 40% bonus will be guaranteed. Additionally, you will receive a sign-on bonus of $100,000, of which $50,000 will be paid on first day of employment, and the remaining $50,000 paid on the one-year anniversary of your start date.
The CMO will be granted options, which will vest over three years subject to continuation of service (33% to vest on the first anniversary of issuance, and then monthly thereafter in straight line vesting for a period of 24 months thereafter). Such option package will represent approximately 2.0% of current stock on a fully diluted basis (3,863 shares).
As a regular employee of the Company you will also be eligible to participate in a number of Company-sponsored benefits (customarily available to executive employees) which, will be provided to you. Such benefits will include a customary 6 month severance package.
3. Confidential Information and Invention Assignment Agreement. You will be required, as a condition of your to serving as the Companys CMO, to sign the Companys standard Confidential Information and Invention Assignment Agreement.
4. Relationship. The arrangement with the Company is for no specific period of time. Your agreement with the Company will be at will, meaning that either you or the Company may terminate at any time and for any reason, with or without cause, upon 30 days prior written notice.
5. Outside Activities/Non - Compete. While you render services to the Company, you agree that you will not engage in any other employment, consulting or other business activity without the written consent of the Company. In addition, while you render services to the company, you will not assist any person or entity in competing with the Company, in preparing to compete with the Company or in hiring any employees or
consultants of the Company. In addition, for a period of one year following your separation from the Company, you agree not to solicit or engage in any commercial relationship with any employees, consultants or current or prospective shareholders, business partners or other business relationships or prospects of the Company.
6. Withholding Taxes. All forms of compensation referred to in this letter are subject to applicable withholding and payroll taxes.
7. Entire Agreement. This letter supersedes and replaces any prior understandings or agreements, whether oral, written or implied, between you and the Company regarding the matters described in this letter.
If you wish to accept this offer, please sign and date and return them to me. As required, by law, your agreement with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States as well as providing any necessary tax identification documentation the Company may request. This offer, if not accepted, will expire at the close of business on May 16, 2018.
With the formalities covered, we are thrilled you are joining the team. As discussed, your start date will be on or around August 27, 2018 or a date to be mutually agreed.
Very truly yours, |
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Applied Therapeutics Inc. |
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/s/ Shoshana Shendelman, PhD |
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Name: |
Shoshana Shendelman, PhD |
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Title: |
Chief Executive Officer |
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ACCEPTED AND AGREED |
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By: |
/s/ Riccardo Perfetti, MD, PhD |
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Name: |
Riccardo Perfetti, MD, PhD |
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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted because it is not material and would be competitively harmful if publicly disclosed.
EXECUTION VERSION
CONFIDENTIAL
EXCLUSIVE LICENSE AGREEMENT
This EXCLUSIVE LICENSE AGREEMENT (this, Agreement), dated October 26, 2016 (the Effective Date), is by and between THE TRUSTEES OF COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK, a New York corporation (Columbia), and APPLIED THERAPEUTICS, INC., a Delaware corporation (Company).
1. Definitions.
a. Affiliate shall mean any corporation or other entity that directly or indirectly controls, is controlled by, or is under common control with, another corporation or entity. Control means direct or indirect ownership of, or other beneficial interest in, fifty percent (50%) or more of the voting stock, other voting interest, or income of a corporation or other entity.
b. Commercially Reasonable Efforts shall mean the level of efforts and expenditure of resources required to carry out such obligation in a manner consistent with the efforts and resources Company typically devotes to a product of similar market potential, at a similar stage in its development or product life, taking into account all relevant factors, including, without limitation, safety and efficacy, product profile, cost to develop, cost and availability of supply, the time required to complete development, the competitiveness of the marketplace (including the proprietary position and anticipated market share of the product), the patent position with respect to such product (including the ability to obtain or enforce, or have obtained or enforced, such patent rights), the third-party patent landscape relevant to the product, the regulatory structure involved, the likelihood of regulatory approval, the anticipated or actual profitability of the applicable product and other technical, commercial, legal, scientific, regulatory and medical consideration.
c. Cover or Covered By shall mean with respect to a product and a claim of a patent or patent application, that the making, having made, use, selling, offering for sale or import of the product would, in the country in which such action occurs, (i) in the case of a claim in an issued patent, infringe the claim, or (ii) in the case of a claim in a pending patent application, infringe the claim if it existed in an issued patent; in each case of (i) and (ii) in the absence of the licenses granted under this Agreement.
d. [*] Patents shall mean all Patents with claims Covering [*] Technology.
e. [*] Technology shall mean aldose reductase inhibitors and uses of thereof, as described in invention disclosure document [*].
f. Designee shall mean a corporation or other entity that is employed by, under contract to, or in partnership with (i) Company, (ii) a Sublicensee, (iii) an Affiliate of Company or (iv) an Affiliate of a Sublicensee, wherein such corporation or other entity is granted the right to make, use, sell, promote, distribute, market, import, or export Products.
g. Field shall mean the diagnosis and treatment of [*].
h. License Year shall mean the one year period from the Effective Date of this Agreement or an anniversary thereof to the next anniversary of the Effective Date.
i. Net Sales shall mean the actual consideration paid to Company, its Affiliates or Sublicensees by a Third Party customer for sales of Product, minus [*]. In the event a Product is co-packaged, co-formulated or otherwise sold in a manner that includes one or more active therapeutic ingredients in addition to a Product (such Product, a Combination Product), then Net Sales, for purposes of determining royalty payments on such Combination Product, will be calculated by multiplying the Net Sales of the Combination Product by the fraction A over A+B, in which A is the net selling price of the Product portion of the Combination Product when such Product is sold separately during the applicable accounting period in which the sales of the Combination Product were made, and B is the aggregate net selling price of the other active therapeutic ingredient of the Combination Product when such other active therapeutic ingredient are sold separately during the accounting period in question. All net selling prices of the Product portion of the Combination Product and of the other active therapeutic ingredient of such Combination Product will be calculated as the average net selling price of the said ingredients during the applicable accounting period for which the Net Sales are being calculated in the particular country where the Combination Product is sold. In the event that, in any country or countries, no separate sale of either such above designated Products or such above designated other active therapeutic ingredient of the Combination Product are made during the accounting period in which the sale was made or if the net retail selling price for an active therapeutic ingredient cannot be determined for an accounting period, Net Sales allocable to the Product in each such country will be determined by mutual agreement reached in good faith by Columbia and Company prior to the end of the accounting period in question based on an equitable method of determining same that takes into account, on a country by country basis, variations in potency, the relative contribution of the Product and each other active therapeutic ingredient in the combination, and relative value to the end user of the Product and each such other active therapeutic ingredient.
j. Net Sublicensing Revenue shall mean any and all payments received by Company from Sublicensees in consideration for granting such Sublicensees a sublicense of the rights granted to Company under this Agreement, including, without limitation, sublicense issue fees, lump sum payments, option fees, milestone payments (but only to the extent such milestone payments are in excess of the milestone payments required to be paid by Company under this Agreement) or other similar payments, provided, however, that Net Sublicensing Revenue shall exclude (i) payments made to finance research and development of Products, including without limitation, those payments intended to pay for the purchase or use of equipment, supplies, products or services, and/or the use of employees and/or consultants, (ii) payments made by a Sublicensee in consideration of the issuance by Company of equity or debt securities and not in consideration of the sublicense of rights under this Agreement, (iii) and royalties on Net Sales. To the extent Company receives compensation for both a grant of a sublicense of rights granted under this Agreement and the grant of other rights or licenses or undertaking of other obligations, such compensation will be reasonably apportioned between that amount attributable to the sublicense of rights granted hereunder, which shall be deemed Net Sublicensing Revenue, and that amount attributable to the grant of other rights or licenses or undertaking of other obligations, which shall be excluded from Net Sublicensing Revenue, such apportionment to be reasonably agreed upon by the parties. However, if the parties cannot agree upon such apportionment, senior management from each party will meet to discuss such apportionment and if senior management is unable to reach agreement, each party will select an independent expert with experience in valuation on intellectual property licenses in biotechnology, and the experts so chosen will agree upon such apportionment which shall be final and binding on the parties.
k. Other Product shall mean any product that (i) is not a Patent Product and (ii) the manufacture, use, sale, offering for sale or importation of which would not have been possible but for the use of the Technical Information.
l. Patent or Patents shall mean: (i) the United States and foreign patents and/or patent applications listed in Exhibit A; (ii) any United States and foreign patents and/or patent applications that claim priority to the patents and/or patent applications listed in Exhibit A; (iii) any and all claims of continuation-in-part applications that claim priority to the United States or foreign patents and/or patent applications described in subsections (i) and (ii), but provided only where such claims are directed to inventions disclosed in the manner provided in the first paragraph of 35 U.S.C. Section 112 in the United States and foreign patents and/or patent applications described in subsections (i) and (ii), and such claims in any patents issuing from such continuation-in-part applications; (iv) any and all foreign patent applications, foreign patents or related foreign patent documents that claim priority or are otherwise foreign counterparts of the patents and/or patent applications described in subsections (i), (ii) or (iii); (v) any and all divisionals, continuations, reissues, re-examinations, renewals, substitutions and extensions of any of the foregoing; and (vi) any and all patents issuing from any of the foregoing. For the avoidance of doubt, Patents shall not include any patents or patent applications based on research conducted after the Effective Date, except as otherwise agreed in a separate writing.
m. Patent Product shall mean any product, the manufacture, use, sale, offering for sale or importation of which is Covered by a Valid Claim of a Patent.
n. Product or Products shall mean a Patent Product and/or an Other Product.
o. Royalty Term shall mean, on a country-by-country and Product-by-Product basis, (a) with respect to a Patent Product, the period commencing on first commercial sale of the Patent Product in such country and ending on the last to expire Valid Claim Covering the Product in such country and (b) with respect to an Other Product, the period commencing on first commercial sale of the Other Product in such country and ending [*] thereafter.
p. Sublicensee shall mean any Third Party that Company has granted a sublicense of the rights granted to it pursuant to this Agreement. An Affiliate of Company exercising rights hereunder shall not be considered a Sublicensee.
q. Technology means (i) aldose reductase inhibitors and the use thereof, as described in invention disclosure documents [*] and (ii) the [*] Technology.
r. Technical Information shall mean any know-how, technical information and data provided by Columbia related to the Technology that (i) is developed by Columbia under the direction of [*] or an individual working under [*] direction prior to the Effective Date, (ii) has not been disclosed to or is not generally available to the public prior to the Effective Date, and (iii) is described and documented as disclosed to Company in a technology transfer memorandum signed by Columbia and Company.
s. Territory shall mean: (i) with respect to all Patents other than the [*] Patents, global except China, Taiwan, Hong Kong and Macao and (ii) with respect to the [*] Patents only, global.
t. Third Party shall mean any entity or person other than Company, Columbia and their respective Affiliates.
u. Valid Claim shall mean a claim of an issued and unexpired patent or a pending claim of a pending patent application that has not been (i) abandoned, finally rejected or expired without the
[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.
possibility of appeal or refiling, (ii) held to be invalid, revoked or unenforceable through a final judgment of a court or other governmental agency of competent jurisdiction from which no appeal can be or is taken, (iii) admitted to be invalid or unenforceable through reissue, disclaimer or otherwise; except that Valid Claim shall exclude any claim in a pending patent application that has not been granted within [*] following the earliest claimable priority date, unless and until such claim is granted.
2. License.
a. Columbia grants to the Company and any Affiliate thereof, upon and subject to all the terms and conditions of this Agreement (including Section 3(a) hereof):
i. an exclusive license under the Patents to discover, develop, manufacture, have made, use, sell, offer to sell, have sold, import, export, distribute, rent or lease Products in the Field and throughout the Territory; and
ii. a non-exclusive license to use Technical Information to discover, develop, manufacture, have made, use, sell, offer to sell, have sold, import, export, distribute, rent or lease Products in the Field and throughout the Territory.
b. Columbia grants to Company the right to grant sublicenses of the licenses granted in Section 2(a) without Columbias consent, provided that: (i) the Sublicensee agrees to abide by and be subject to all the terms and provisions of this Agreement applicable to the Company; (ii) the Sublicensee shall [*] under this Agreement; (iii) in the event any Sublicensee (or any entity or person acting on its behalf) initiates any proceeding or otherwise asserts any claim challenging the validity or enforceability of any Patent in any court, administrative agency or other forum, Company shall, upon written request by Columbia, terminate forthwith the sublicense agreement with such Sublicensee, and the sublicense agreement shall provide for such right of termination by Company; (iv) the sublicense agreement shall provide that, in the event of any inconsistency between the sublicense agreement and this Agreement, this Agreement shall control; (v) the Sublicensee will submit quarterly reports to Company consistent with the reporting provision of Section 5(a) herein; (vi) Company remains fully liable for the performance of its and its Sublicensees obligations hereunder; (vii) Company notifies Columbia of any grant of a sublicense within [*] after execution of such sublicense and upon written request of Columbia, provides a copy of the executed sublicense to Columbia; and (viii) no such sublicense or attempt to obtain a Sublicensee shall relieve Company of its diligence obligations under this Agreement, nor shall it relieve Company of its obligations to pay Columbia any and all license fees, royalties and other payments due under this Agreement.
All rights and licenses granted by Columbia to Company under this Agreement are subject to (i) any limitations imposed by the terms of any government grant, government contract or government cooperative agreement applicable to the technology that is the subject of this Agreement, and (ii) applicable requirements of 35 U.S.C. Sections 200 et seq ., as amended, and implementing regulations and policies. Without limitation of the foregoing, Company agrees that, to the extent required under 35 U.S.C. Section 204, any Product used, sold, distributed, rented or leased by Company and its Affiliates and Sublicensees, and their respective Designees (collectively, the Sellers) in the United States will be manufactured substantially in the United States. In addition, Company agrees that, to the extent required under 35 U.S.C. Section 202(c)(4), the United States government is granted a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any Patent throughout the world.
c. All rights not specifically granted herein are reserved to Columbia. Except as expressly provided under this Section 2, no right or license is granted (expressly or by implication or estoppel) by Columbia to Company or its Affiliates or Sublicensees under any tangible or intellectual
property, materials, patent, patent application, trademark, copyright, trade secret, know-how, technical information, data or other proprietary right.
3. Reservation of Rights for Research Purposes; Freedom of Publication.
a. Notwithstanding the exclusive license granted to Company in Section 2(a)(i), Columbia reserves the right to (x) practice the Patents for academic research and educational purposes in the Field and (y) permit other entities (and such entities researchers) to practice and use such Patents for academic research and educational purposes in the Field; in each case of (i) and (ii) solely for non- commercial purposes which do not involve (i) [*] or (ii) [*]. Columbia shall obtain from all entities or individuals who are given permission to practice and use such Patents an agreement in writing to limit such use to academic research and educational purposes in accordance with the foregoing sentence. Nothing in this Agreement shall be interpreted to limit in any way the right of Columbia and its faculty or employees to practice and use such Patents for any purpose outside the Field or to license or permit such use outside the Field by third parties.
b. Company acknowledges that Columbia is dedicated to free scholarly exchange and to public dissemination of the results of its scholarly activities. Columbia and its faculty and employees shall have the right to publish, disseminate or otherwise disclose any information relating to its research activities, including Technical Information.
4. Fees, Royalties and Payment .
a. Importance of Technical Information . Company has requested, and Columbia has agreed, to grant Company certain rights to Technical Information as set forth in Section 2(a)(ii). Company desires to exercise these rights in order to develop and commercialize the technology licensed under this Agreement. Because of the importance of Technical Information, Company has agreed to pay certain royalties to Columbia on Other Products, as specified below, even if it is not Covered by a Patent, in order to obtain rights to Technical Information. Company has agreed to these payments because of the commercial value of Technical Information, separate and distinct from the commercial value of the Patents. Company acknowledges that it would not have entered into this Agreement without receiving the rights to the Technical Information specified in Section 2(a)(ii). Company further acknowledges that licenses to Technical Information and each patent and application within the definition of Patents were separately available from a license to the Patents, and that for convenience and because of the preference of Company, the parties executed a combined license to the Patents and Technical Information.
b. In consideration of the licenses granted under Section 2(a) of this Agreement, the Company shall pay to Columbia as follows:
i. License Fee : A nonrefundable, non-recoverable and non-creditable license issue fee in the sum of [*], payable upon execution of this Agreement;
ii. Royalties :
A. During the Royalty Term, with respect to sales of Products by the Sellers in the Territory, a nonrefundable and non-recoverable royalty of:
(1) [*]% on the first [*] cumulative, global Net Sales of Patent Products;
(2) [*]% on all Net Sales of Patent Products after the first [*]
cumulative, global Net Sales of Patent Products; and
(3) [*]% on Net Sales of Other Products.
B. If Company enters into any license agreement with a Third Party for patent rights that are necessary or essential for Company to commercialize a Product, Company may offset any royalty payments under such Third Party agreement from royalties payable under the Agreement, provided that (1) no single royalty payment may be reduced by more than [*], and (2) Company uses commercially reasonable efforts to procure from such Third Party similar royalty offset provisions.
C. Notwithstanding the foregoing, beginning on the tenth (10 th ) anniversary of the Effective Date and continuing on each anniversary of the Effective Date thereafter during the Royalty Term, Company shall pay to Columbia a nonrefundable and non-recoverable minimum royalty payment in the amount of [*]. Each such minimum royalty payment will be credited against earned royalties accrued during the same License Year in which the minimum royalty payment is due and payable. To the extent minimum royalty payments exceed the earned royalties accrued during the same License Year, this excess amount cannot be carried over to any other subsequent License Year, either to decrease the earned royalties due in that License Year or to decrease the minimum royalty payments due in that License Year.
c. In consideration of Companys right to sublicense third parties granted under Section 2(b) of this Agreement, Company shall pay to Columbia the following nonrefundable, non- recoverable and non-creditable amounts:
i. [*] of Net Sublicensing Revenue received by Company [*];
ii. [*] of Net Sublicensing Revenue received by Company [*]; and
iii. [*] of Net Sublicensing Revenue received by Company [*].
d. Development Milestone Payments : In the event that the Company, Sublicensees, or their Affiliates (collectively Developer) develops a Product for potential commercial sale in the Territory, the following nonrefundable, non-recoverable and non-creditable milestone payments shall be made by Company to Columbia with respect to the first Product to achieve the following events (each, a Milestone Event):
[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.
Milestone Event |
|
Milestone Payment |
[*] |
|
[*] |
For purposes of the foregoing Milestone Events, the following definitions shall apply:
i. [*] means [*].
ii. [*] means [*].
iii. [*] means [*].
iv. [*] means [*].
v. [*] means, [*].
e. Highest Royalty Due . Columbia shall not be entitled to more than [*] on the same Product sale under Section 4b(ii)(A). To the extent a Product was a Patent Product as of the date of first commercial sale but subsequently ceases being a Patent Product but is still an Other Product, Columbia shall be entitled to the Other Product royalty rate on the Product, but only for the remainder of the Royalty Term for the Product as an Other Product, with the Royalty Term being deemed to have commenced as of the date first commercial sale of the Patent Product. By way of example, but not by way of limitation, if the manufacture of a Product is Covered by the claim of a Patent, and the
manufacture of that Product would not have been possible but for the use of the Technical Information, the Product is a Patent Product, not an Other Product, and Company must pay the royalty specified in Section 4(b)(ii)(A)(1) or Section 4(b)(ii)(A)(2), as applicable. If, after some period of time (for example, five years) of paying the royalties specified in Section 4b(ii)(A)(1) or Section 4b(ii)(A)(2) on the Product, the Product ceases to be a Patent Product, Company must continue to pay royalties on the Product as an Other Product as specified in Section 4(b)(ii)(A)(3) for the remainder of the Royalty Term, which is measured from the first bona fide commercial sale of the Patent Product on a country-by-country and product-by-product basis.
g. No Non-Monetary Consideration . Without Columbias prior written consent, the Sellers shall not solicit or accept any consideration for the sale of any Product other than as will be accurately reflected in Net Sales. Furthermore, Company shall not enter into any transaction with any Affiliate that would circumvent its monetary or other obligations under this Agreement.
h. Sale Below Fair Market Value . In the event that any Seller sells Product to a Third Party to whom it also sells other products, the price for Licensed Product shall not be established such that Net Sales is below fair market value with the intent of increasing market share for other products sold by such Seller to such Third Party or for the purpose of reducing the amount of royalties payable on the Net Sales of Product. If the sale of Product under such circumstances results in Net Sales below the fair market value of Product, then the Net Sales of Product in such transaction shall be deemed to be the fair market value for purposes of calculating payments owed to Columbia under this Agreement.
i. Rate Adjustment on Challenge; Payment of Costs and Expenses .
(i) In the event Company (or any entity or person acting on its behalf) initiates any proceeding or otherwise asserts any claim challenging the validity or enforceability of any Patent in any court, administrative agency or other forum (Challenge), all royalty rates set forth in Sections 4(b)(ii) shall be [*] on and after the date of such Challenge for the remaining term of this Agreement. Notwithstanding the foregoing, a Challenge excludes (A) any bona fide patent infringement defense against a claim of infringement of any Patent brought by Columbia or a Third Party or (B) in response to a claim by Columbia that a royalty payment is due, a claim brought by Company asserting that the Royalty Term for the applicable product has expired because there is no longer a Valid Claim of a Patent Covering such product in the applicable country.
(ii) If, after a final decision is rendered on a Challenge, there exists at least one Valid Claim among the claims Challenged by Company, Company shall pay all costs and expenses incurred by Columbia (including actual attorneys fees) in connection with defending a Challenge. Company shall make payment within [*] after receiving an invoice from Columbia, which invoice may be sent after a final decision is rendered on the Challenge.
Company acknowledges and agrees that the provisions set forth in this Section 4(i) reasonably reflect the value derived from the Agreement by Company in the event of a Challenge. In addition, Company acknowledges and agrees that any payments made under this Section 4(i) shall be nonrefundable and non- recoverable for any reason whatsoever.
j. Equity Grant and Related Rights .
i. Upon the achievement of the Funding Milestone, Company shall issue to Columbia the number of shares of the Company that is equal to five percent (5%) of the outstanding common stock of the Company on a fully diluted basis, calculated based on the number of shares of
capital stock of the Company issued and outstanding on a fully diluted basis immediately after the closing of the Funding Milestone, including all common stock equivalents and all shares directly or indirectly allocated to any equity plan or pool (and including the shares to be issued to Columbia) (the Columbia Shares). Such shares shall be issued pursuant to a Stock Purchase Agreement acceptable to Columbia. As a condition precedent to the issuance of the Columbia Shares, Columbia must either (a) become a party to that certain Voting Agreement by and among the Company and the shareholders named therein (the Voting Agreement), as a Key Holder and a Stockholder and therefore be bound by and subject to all terms and provisions of the Voting Agreement applicable to a Key Holder and a Stockholder, or (b) enter into an agreement with the Company and the other shareholders party to the Voting Agreement that provides for rights and obligations substantially similar to those rights and obligations applicable to Key Holders and Stockholders in the Voting Agreement; provided that the Voting Agreement or other agreement described in clause (b) above shall include the provisions set forth in Exhibit C annexed hereto. Notwithstanding the foregoing, if the Funding Milestone is not attained within [*] following the Effective Date or if the Company is involved in any merger, consolidation, share exchange, other business combination, recapitalization, sale of all or substantially all of its assets, liquidation or dissolution prior to the attainment of the Funding Milestone, Company shall issue the Columbia Shares to Columbia upon the [*] of the Effective Date or upon such earlier date that any such transaction is consummated, and shall maintain the percentage of the Columbia Shares at five percent (5%) (calculated as described above) by the issuance of additional shares of Common Stock to Columbia at all times through the time that Company has received [*] in total gross cash financing proceeds from the sale of capital stock,
ii. In connection with the equity grant, Company shall grant to Columbia the right to designate a non-voting board observer (Board Observer) who may attend or otherwise participate in all meetings of the Board of Directors of the Company. Columbia will be required to enter into a mutually acceptable form confidentiality agreement prior to the Board Observers attending any meeting of the Board of Directors, and the Board of Directors may exclude the Board Observer from discussions of Company information and access to Company materials that the Board of Directors reasonably determines would present a conflict of interest to Columbia or are reasonably necessary to preserve the attorney-client privilege.
iii. If the Company proposes to sell any equity securities or securities that are convertible into equity securities of the Company (New Securities), then Columbia and/or its Assignee (as defined below) will have the right to purchase up to [*] of the New Securities on the same terms and conditions as are offered to the other purchasers in each such financing. Company shall provide [*] written notice in advance of the closing of each such financing, including reasonable detail regarding the terms and purchasers in the financing. If all New Securities offered to Columbia are not elected to be purchased or acquired as provided in the immediately preceding sentence, the Company may, during the [*] following the expiration of the [*] provided in the immediately preceding sentence, offer and sell the remaining unsubscribed portion of such New Securities to any purchaser at a price not less than, and upon terms no more favorable to the offeree than, those specified in the notice to Columbia. If the Company does not enter into an agreement for the sale of the New Securities within such [*], or if such agreement is not consummated within [*] of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to Columbia in accordance with this Section 4(j)(iii). As used herein, the term Assignee means (A) any entity to which the Universitys participation rights under this section have been assigned either by Columbia or another entity (solely as permitted pursuant to the assignment clause set forth in this Agreement), or (B) any entity that is controlled by Columbia, provided that any such Assignee is not a competitor of the Company (asreasonably determined by the Companys Board of Directors). A venture or investment fund shall not be deemed to be a competitor of the Company by reason of its ownership of equity of entities that compete with the Company.
iv. The right to purchase New Securities pursuant to this Section 4(j) shall not be applicable to (A) the Series A Preferred Stock of the Company issued pursuant to that certain Series A Preferred Stock Purchase Agreement, as amended from time to time, by and among the Company and the parties named therein, (B) Exempted Securities (as defined in the Companys Certificate of Incorporation), and (C) shares of common stock issued in the Companys first underwritten public offering of its common stock under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the IPO).
v. The covenants set forth in this Section 4(j) shall terminate and be of no further force or effect upon the first to occur of (A) that date immediately preceding the consummation of the IPO, (B) that date upon which the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, or (C) except as provided in Section 4.j.i., a Deemed Liquidation Event, as such term is defined in the Companys Certificate of Incorporation.
k. Lock-Up .
i. Agreement to Lock-Up . Columbia hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Companys IPO and ending on the date specified by the Company and the managing underwriter, or such other period of one hundred eighty (180) days and up to an additional thirty-four (34) days as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (A) the publication or other distribution of research reports; and (B) analyst recommendations and opinions, including, but not limited to, the restrictions contained in FINRA Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto) (such period, the Restricted Period): (I) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock held immediately prior to the effectiveness of the registration statement for the IPO or (II) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the capital stock, whether any such transaction described in clause (I) or (II) above is to be settled by delivery of capital stock or other securities, in cash or otherwise. The foregoing provisions of this Section 4(k)(i) shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Company and any Assignees that acquire equity of the Company if all officers, directors and holders of more than one percent (1%) of the outstanding capital stock (after giving effect to the conversion into common stock of all outstanding capital stock) enter and continue to be bound by into similar agreements. The underwriters in connection with the IPO are intended third party beneficiaries of this Section 4(k)(i) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. The Company further agrees to, and it will cause any Assignees that acquire equity of the Company to agree to, execute such agreements in customary form as may be reasonably requested by the underwriters in the IPO that are consistent with this Section 4(k)(i) or that are necessary to give further effect thereto.
ii. Stop Transfer Instructions . In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the shares of capital stock of the Company and any Assignees that acquire equity of the Company (and transferees and assignees thereof) until the end of the Restricted Period.
5. Reports and Payments.
a. Within [*] after the first business day of [*] of each License Year of this
Agreement, Company shall submit to Columbia a written report with respect to the preceding calendar quarter (the Payment Report) stating:
i. Gross and Net Sales of Products by the Sellers during such [*], together with detailed information sufficient to permit Columbia to verify the accuracy of reported Net Sales, including Product names, country where manufactured, country where sold, actual selling price and units sold;
ii. Net Sublicensing Revenue received by Company from its Sublicensees during such [*] together with the respective payment reports received by Company from any Sublicensees; and
iii. A calculation under Section 4 of the amounts due to Columbia, making reference to the applicable subsection thereof.
b. Simultaneously with the submission of each Payment Report, Company shall make payments to Columbia of the amounts due for the [*] covered by the Payment Report. Payment shall be by check payable to The Trustees of Columbia University in the City of New York and sent to the following address:
The Trustees of Columbia University in the City of New York
Columbia Technology Ventures
P.O. Box 1394
New York, NY 10008-1394
or to such other address as Columbia may specify by notice hereunder, or if requested by Columbia, by wire transfer of immediately available funds by Company to:
[*]
or to such other bank and account identified by notice to Company by Columbia. Company is required to send the [*] Payment Report whether or not royalty payments are due.
c. Within [*] after the date of termination or expiration of this Agreement, Company shall pay Columbia any and all amounts that are due pursuant to this Agreement as of the date of such termination or expiration, together with a Payment Report for such payment in accordance with Section 5(a) hereof, except that such Payment Report shall cover the period from the end of the last [*] prior to termination or expiration to the date of termination or expiration. Nothing in the foregoing shall be deemed to satisfy any of Companys other obligations under this Agreement upon termination or expiration.
d. Minimum royalty payments are payable in accordance with Section 4(b)(ii)(C).
e. With respect to revenues obtained by Company in foreign currency, Company shall make royalty payments to Columbia in the United States in United States Dollars. Royalty payments for transactions outside the United States shall first be determined in the currency of the country in which they are earned, and then converted to United States dollars using the buying rates of exchange quoted by The Wall Street Journal (or its successor) in New York, New York for the last business day of the [*] in which the royalties were earned. Any and all loss of exchange value, taxes, or other expenses incurred in the transfer or conversion of foreign currency into U.S. dollars, and any income, remittance, or other taxes on such royalties required to be withheld at the source shall be the exclusive responsibility of Company, and shall not be used to decrease the amount of royalties due to Columbia. Royalty statements shall show sales both in the local currency and US dollars, with the exchange rate used clearly stated.
f. Company shall maintain at its principal office usual books of account and records showing its actions under this Agreement, and sufficient to determine Companys compliance with its obligations hereunder. Upon reasonable notice to Company, but not more than [*], Columbia may have an independent certified public accountant or auditor (reasonably acceptable to Company) inspect such books and records during business hours at Companys principal offices for purposes of verifying the accuracy of the amounts paid under this Agreement. Prior to any such inspection, Company may require the accountant or auditor to sign Companys form non-disclosure agreement, and the accountant or auditor will be entitled to provide only the results of the audit to Columbia with a copy to Company. The review may cover a period of not more than [*] before the first day of the [*] in which the review is requested. In the event that such review shows that Company has underpaid royalties by [*], Company shall pay, within [*] after demand by Columbia, the costs and expenses of such review (including the fees charged by Columbias accountant or auditor involved in the review), in addition to amount of any underpayment and any interest thereon. Company agrees to cooperate fully with the accountant or auditor in connection with any such review. During the review, Company shall provide the accountant or auditor with accurate and complete information as necessary to conduct the inspection, including, without limitation, such information relating to sales, inventory, manufacturing, purchasing, transfer records, customer lists, invoices, purchase orders, sales orders, shipping documentation, third-party royalty reports, cost information, pricing policies, and agreements with third parties (including, and to the extent applicable, such information from the Sellers).
g. Notwithstanding anything to the contrary in this Agreement (including Section 16(b)), and without limiting any of Columbias rights and remedies hereunder, any payment required hereunder that is made late (including unpaid portions of amounts due) shall bear interest, [*], at the rate of [*]. Any interest charged or paid in excess of the maximum rate permitted by applicable New York State Law shall be deemed the result of a mistake and interest paid in excess of the maximum rate shall be credited or refunded (at the Companys option) to Company.
h. Company shall reimburse Columbia for any costs and expenses incurred in connection with collecting on any arrears of Company with respect to its payment and reimbursement obligations under this Agreement (such as Section 11(b) of this Agreement), including the costs of engaging any collection agency for such purpose.
6. Diligence.
a. Company shall use Commercially Reasonable Efforts to research, discover, develop and market Products for commercial sale and distribution in the Territory, and to such end, such efforts will include the following:
i. Company shall adhere to its executive summary/business plan/development plan, a current version of which is attached as Exhibit B , subject to reasonable adjustments in the ordinary course of business as determined in the discretion of Companys Board of Directors;
ii. [*] within [*] of the Effective Date;
iii. [*] within [*] of the Effective Date;
iv. Secure [*] in total gross cash financing proceeds from the sale of capital stock within [*] of the Effective Date (the Funding Milestone).
b. Notwithstanding any other provisions of this Agreement, failure to achieve any of
Companys diligence obligations under this Section 6 shall result in Columbia having the option of terminating all of the licenses granted under Section 2 in accordance with Section 16(c) of this Agreement, or converting any or all of such exclusive licenses to nonexclusive licenses with no right to sublicense, and no right by Company to initiate legal proceedings pursuant to Section 11; provided, however, that Columbia may not terminate this Agreement or convert the license to non-exclusive unless (i) Columbia has provided Company at least ninety (90) days prior written notice, and (ii) Company has failed to cure the breach within such ninety (90) day period. In addition, Columbia agrees to discuss in good faith any reasonable request for extension of the cure period by Company set forth above.
c. No less often than every [*] after the Effective Date of this Agreement, Company shall [*].
7. Confidentiality .
a. Confidential Information shall mean means all information disclosed by or on behalf of one party (in such capacity, Disclosing Party) to the other party (in such capacity the Disclosing Party) or Disclosing Partys Agents that is marked or identified as confidential or proprietary (or similar legend) or is of such a nature that would be readily recognized by a reasonable person to be proprietary or confidential to Disclosing Party; provided, however, that Confidential Information shall exclude any such information that the Receiving Party is able to demonstrate by written evidence: (i) was rightfully known to Receiving Party without restriction on use or disclosure before receipt from Disclosing Party; (ii) is or becomes generally available to the public through no fault of Receiving Party or its affiliates or any of their representatives; (iii) is obtained by Receiving Party from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality or non-use to Disclosing Party; or (iv) is independently developed by or for Receiving Party without reference to or use of any Confidential Information of Disclosing Party as evidenced by contemporaneous written records.
b. Receiving Party agrees that it shall: (1) protect the Confidential Information with the same degree of care as it normally uses to preserve and safeguard its own Confidential Information of like importance, but not less than a reasonable degree of care; (2) use Confidential Information solely for purposes of performing its obligations and exercising its rights under this Agreement; and (3), except as otherwise consented to in writing by Disclosing Party, disclose Confidential Information only to its and its affiliates respective employees, directors, officers, advisors, agents and representatives (collectively, Agents) who have a need to know the Confidential Information for purposes of performance of Receiving Partys obligations or exercising its rights under this Agreement undertaken an obligation of confidentiality substantially similar to that contained herein. Receiving Party shall be liable for any breach of its obligations under this Agreement by any of its Agents.
c. The restrictions set forth in this Section 7 shall not apply to limit disclosure of Confidential Information to the extent that Receiving Party is required to disclose such Confidential Information pursuant to any law, court order or other governmental agency; provided Receiving Party: (i) promptly notifies Disclosing Party in writing of the existence, terms and circumstances of such required disclosure; (ii) consults with Disclosing Party on the advisability of taking legally available steps to resist or narrow such disclosure; and (iii) cooperates with Disclosing Partys effort to seek a protective order or to otherwise limit disclosure.
d. Neither party may disclose the terms and conditions of this Agreement to any Third Party, except that either party may provide or otherwise disclose the terms of this Agreement in connection with any financing transaction or due diligence inquiry pursuant to the terms of a confidentiality agreement that is at least as protective as the terms of this Section 7 and subject to the right of Receiving Party to use disclosed information solely for purposes of evaluating the financing or other transaction.
e. Upon the expiration or termination of this Agreement, or at any other time as requested by the Disclosing Party, the Receiving Party will return to Disclosing Party or, at Disclosing Partys election, destroy, all Disclosing partys Confidential Information, including any copies thereof or derivative, summaries or abstracts derived therefrom.
8. Disclaimer of Warranty; Limitations of Liability.
COLUMBIA IS LICENSING THE PATENTS AND TECHNICAL INFORMATION ON AN AS IS BASIS. COLUMBIA MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED OF ANY KIND, AND HEREBY EXPRESSLY DISCLAIMS ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES OF ANY KIND AS TO THE PATENTS, TECHNICAL INFORMATION, PRODUCTS AND/OR ANYTHING DISCOVERED, DEVELOPED, MANUFACTURED, USED, SOLD, OFFERED FOR SALE, IMPORTED, EXPORTED, DISTRIBUTED, RENTED, LEASED OR OTHERWISE DISPOSED OF UNDER ANY LICENSE GRANTED HEREUNDER, INCLUDING BUT NOT LIMITED TO: ANY WARRANTIES OF MERCHANTABILITY, TITLE, FITNESS, ADEQUACY OR SUITABILITY FOR A PARTICULAR PURPOSE, USE OR RESULT; ANY WARRANTIES AS TO THE VALIDITY OF ANY PATENT; AND ANY WARRANTIES OF FREEDOM FROM INFRINGEMENT OF ANY DOMESTIC OR FOREIGN PATENTS, COPYRIGHTS, TRADE SECRETS OR OTHER PROPRIETARY RIGHTS OF ANY PARTY.
a. In no event shall Columbia, or its trustees, officers, faculty members, students, employees and agents, have any liability to Company, its Affiliates or any Third Party arising out of the use, operation or application of the Patents, Technical Information, Products, or anything discovered, developed, manufactured, used, sold, offered for sale, imported, exported, distributed, rented, leased or otherwise disposed of under any license granted hereunder by Company, its Affiliates, or any Third Party for any reason, including but not limited to, the unmerchantability, inadequacy or unsuitability of the Patents Technical Information, Products and/or anything discovered, developed, manufactured, used, sold, offered for sale, imported, exported, distributed, rented, leased or otherwise disposed of under any license granted hereunder for any particular purpose or to produce any particular result, or for any latent defects therein.
b. In no event will Columbia, or its trustees, officers, faculty members, students, employees and agents, be liable to the Company, its Affiliates or any Third Party, for any consequential, incidental, special or indirect damages (including, but not limited to, from any destruction to property or from any loss of use, revenue, profit, time or good will) based on activity arising out of or related to this Agreement, whether pursuant to a claim of breach of contract or any other claim of any type.
c. In no event shall Columbias liability to Company exceed the payments made to Columbia by Company under this Agreement.
d. The parties hereto acknowledge that the limitations and exclusions of liability and disclaimers of warranty set forth in this Agreement form an essential basis of the bargain between the parties.
9. Prohibition Against Use of Columbias Name.
Company will not use the name, insignia, or symbols of Columbia, its faculties or departments, or any variation or combination thereof, or the name of any trustee, faculty member, other employee, or student of Columbia for any purpose whatsoever without Columbias prior written consent.
10. Compliance with Governmental Obligations.
a. Notwithstanding any provision in this Agreement, Columbia disclaims any obligation or liability arising under the license provisions of this Agreement if Company or its Affiliates is charged in a governmental action for not complying with or fails to comply with governmental regulations in the course of taking steps to bring any Product to a point of practical application.
b. Company and its Affiliates shall comply upon reasonable notice from Columbia with all governmental requests directed to either Columbia or Company or its Affiliates and provide all information and assistance necessary to comply with the governmental requests.
c. Company and its Affiliates shall ensure that research, development, manufacturing and marketing under this Agreement complies with all government regulations in force and effect including, but not limited to, Federal, state, and municipal legislation.
11. Patent Prosecution and Maintenance; Enforcement.
a. Columbia, by counsel it selects to whom Company has no reasonable objection, in consultation with Company and any counsel appointed by the Company, will prepare, file, prosecute and maintain all Patents in Columbias name and in countries designated by the Company. Columbia shall instruct its patent counsel (1) to copy Company on all correspondence related to Patents (including copies of each patent application, office action, response to office action, request for terminal disclaimer, and request for reissue or reexamination of any patent or patent application) and (2) as requested by Company, to provide an update as to the current status of all Patents. Columbia shall confer with Company to develop a strategy for the prosecution and maintenance of the Patents in the Territory, and shall give due consideration to Companys comments and suggestions with respect to filing, prosecution, maintenance of the Patents in the Territory. Except as set forth above, Columbia shall not abandon (and/or fail to appeal a final rejection of) any claim of a Patent without Companys prior written consent, subject to the provisions of Section 11(b)(iii) and Section 11(b)(iv). The parties agree that consultation between the parties relating to the Patents under this Section 11(a) shall be pursuant to a common interest in the validity, enforceability and scope of the Patents. Each party shall treat such consultation, along with any information disclosed by each party in connection therewith (including any information concerning patent expenses), on a strictly confidential basis, and shall not disclose such consultation or information to any party without the other partys prior written consent. If Company initiates any Challenge, Columbias consultation obligation under this Section 11(a) shall automatically terminate; for the avoidance of doubt, any such termination shall not affect Companys confidentiality and nondisclosure obligations with respect to consultation or disclosure of information prior to such termination, and shall not affect any other provisions of this Agreement (including Companys reimbursement obligation under Section 11(b).
b. Patent Expenses .
i. Company will reimburse Columbia for all reasonable expenses Columbia has incurred prior to the Effective Date for patents and applications within the Territory, and will pay all reasonable expenses incurred in the future in so preparing, filing, prosecuting and maintaining the Patents. However, expenses incurred prior to Effective Date in connection with the Patents in the Territory that were not previously paid by Columbias licensee of such Patents outside the Territory are Past Patent Expenses, and Columbia, using reasonable efforts, estimates Past Patent Expenses as of [*] to be [*]. Past Patent Expenses shall be reimbursed by Company on the earliest of the following: (A) commencing on [*], and payable in [*] thereafter, (B) within [*] after the Company completes a financing or a series of related
financings in which it has sold and issued shares of its capital stock with aggregate gross cash proceeds to the Company of at least [*], (C) the first day of February following the first full calendar year in which the Company records gross revenues of at least [*], or (D) in the event of a Change of Control. For purposes of the foregoing, Change of Control means any transaction or event or multiple transactions or events (including, without limitation, a merger, other business combination, share exchange, spin-off, liquidation or reorganization) as a result of which all or substantially all of the Companys assets are sold, leased, licensed or otherwise transferred or a change of control shall occur or if there is an initial public offering of any securities of the Company.
ii. Patent Expenses incurred by Columbia after the Effective Date with respect to the filing, prosecution and maintenance of the Patents in the Territory, including without limitation, attorneys fees, the costs of any interference proceedings, oppositions, reexaminations, or any other ex parte or inter partes administrative proceeding before patent offices, taxes, annuities, issue fees, working fees, maintenance fees and renewal charges (collectively Future Patent Expenses) shall be reimbursed to Columbia by Company within [*] of receiving Columbias invoice.
iii. Upon failure of Company to pay any Past Patent Expenses or Future Patent Expenses as required by this Section 11(b), Columbia may, in its sole discretion, take either of the following actions: (A) abandon any said Patent(s) in its sole discretion, and in such event, Columbia will provide notice of abandonment to Company or (B) notify Company that Columbia will continue to prosecute such Patents at its expense, and in such event Company will have no further rights to such Patents under the Agreement.
iv. With respect to non-US and non-PCT Future Patent Expenses, Columbia will send to Company a brief description of anticipated actions by country or region (e.g., conversion to applications in specific countries or regionals such as the EPO), when the action is due, and the associated expense for such actions on a county or regional basis in advance of such action due dates (hereinafter a Patent Expense Estimate). Within the later of (A) [*] prior to the action due dates or (B) [*] after Companys receipt of the Patent Expense Estimate, Company shall ensure that Columbia receives payment of the reasonable Future Patent Expenses for the actions elected from the Patent Expense Estimate. Failure by Company to make the associated payment as described for a particular action will be considered an election not to secure the rights associated with the specific action, and Columbia may, in its sole discretion, abandon the Patents or in the event Columbia notifies Company that Columbia will continue to prosecute such Patents at its expense (Returned Patents), and Company will have no further rights to such Returned Patents under this Agreement, effective immediately upon Company receipt of Columbias notification to Company. Any over-payment will be applied to Future Patent Expenses. Upon Companys request, any over-payment not used for Future Patent Expenses within [*] will be returned to the company promptly. Any expenses in excess of the Patent Expense estimate will be invoiced to Company.
c. Patent Enforcement; Defense .
i. Enforcement Action .
A. In the event that Columbia or Company becomes aware of any actual or probable infringement of a patent within the Patents in the Field and Territory by a Third Party (Third Party Infringer), such Party shall promptly notify the other party in writing including evidence demonstrating prima facie infringement of specific claims of such Patent (Infringement Notice).
B. Company will have the first right, but not the obligation to enforce the Patents against a Third Party Infringer of the Patent in the Field of Use and Territory at Companys expense (an Enforcement Action). Companys right to initiate an Enforcement Action shall apply only to claims of Patents that are exclusively licensed to Company under this Agreement and only in the Field and
Territory which are exclusively licensed to Company under this Agreement. Company shall notify Columbia in writing of its intention to pursue an Enforcement Action not later than [*] after receipt of an Infringement Notice from Columbia or the delivery of an Infringement Notice to Columbia. In the event that Company does not pursue an Enforcement Action, Columbia shall have the right to initiate an Enforcement Action against the Third-Party Infringer at its own expense, unless Company has caused such infringement to cease. Company shall select counsel for any Company-initiated Enforcement Action that has substantial patent infringement litigation experience relating to pharmaceutical products, subject to Columbias approval, not to be unreasonably withheld or delayed. Company shall keep Columbia informed of the status of any Company-initiated Enforcement Action and shall consider any reasonable comments or suggestions made by Columbia in good faith. Columbia shall have the right to be represented by counsel of its own choice and at its own expense in any Company-initiated Enforcement Action, and to review and comment on papers to be filed during such action. Any proposed disposition or settlement of a Company-initiated Enforcement Action against any Third-Party Infringer shall be subject to Columbias prior written approval, which approval shall not be unreasonably withheld or delayed.
ii. Defense Action .
A. In the event that in the course of an Enforcement Action, the Third-Party Infringer initiates a proceeding seeking to invalidate, narrow or have claims declared unenforceable in the Field and Territory, including but not limited to declaratory judgement action in a United States District Court or inter partes review or interference proceedings in the United States Patent Office or similar proceedings in foreign jurisdictions (a Defense Action), the Party receiving notice of such action or proceeding shall promptly notify the other party in writing.
B. To the extent that Company has control over the Enforcement Action, Company shall diligently defend the Patent in the Defense Action using counsel of its choice, subject to Columbias approval, not to be unreasonably withheld or delayed. Columbia shall be permitted to join and participate in such Defense Action at its own expense to the extent legally permitted. If Columbia is not legally permitted to join such Defense Action, Company shall consult with Columbia and Columbia shall have the right to review and comment on papers to be filed during such Defense Action. All comments and suggestions made by Columbia shall be considered in good faith by Company. To the extent that Columbia has control over the Enforcement Action, Company shall be permitted to join and participate in such Defense Action at its own expense to the extent legally permitted. If Company is not legally permitted to join such Defense Action, Columbia shall consult with and consider in good faith the comments and suggestions of Company with regard to such proceedings. Any proposed disposition or settlement of a Defense Action against any Third-Party Infringer shall be subject to prior written approval of both Parties, which approval shall not be unreasonably withheld or delayed.
iii. Any recovery, whether by way of settlement or judgment, from a Third Party pursuant to a legal proceeding initiated in accordance with this Section 11(c) shall first be used to reimburse the party initiating such legal proceeding for its actual fees, costs and expenses incurred in connection with such proceeding and second to reimburse the other party for reasonable fees, costs and expenses actually incurred in connection with such proceeding, if any. Any remaining amounts from any such settlement or judgment shall be divided as follows: (A) [*], and (B) [*].
iv. In the event a party initiates or defends a legal proceeding concerning any Patent pursuant to this Section 11, the other party shall cooperate fully with and supply all assistance reasonably requested by the party initiating such proceeding, including without limitation, joining the proceeding as a party if requested at the requesting partys expense. Neither Party will make any admission or assert any position in any legal or administrative proceeding that is inconsistent with or adverse to any position asserted in an Enforcement Action or Defense Action, without prior written consent of the other
party.
v. Subject only to the rights granted to the Parties in this Section 11, the party that institutes any legal proceeding concerning any Patent pursuant to this Section 11 shall have sole control of that proceeding.
12. Indemnity and Insurance.
a. Indemnity .
i. Company will indemnify, defend, and hold harmless Columbia, its trustees, officers, faculty, employees, students and agents (Indemnities), from and against any and all actions, suits, claims, demands, prosecutions brought by a Third Party (each, a Claim), and indemnify the Indemnitees for any liabilities, costs, expenses, damages, deficiencies, losses or obligations (including attorneys fees) finally awarded or agreed to in settlement of any such Claim, to the extent any such Claim is based on, arises out of, or relates to this Agreement, including, without limitation, (i) the discovery, development, manufacture, packaging, use, sale, offering for sale, importation, exportation, distribution, rental or lease of Products, even if altered for use for a purpose not intended, (ii) the use of Patents or Technical Information by the Sellers or their customers, (iii) any representation made or warranty given by the Sellers with respect to Products, Patents or Technical Information, (iv) any infringement claims relating to Products, Patents or Technical Information, and (v) any asserted violation of the Export Laws (as defined in Section 15 hereof) by any of the Sellers. Company shall [*].
ii. In the event Columbia is seeking the benefit of the defense and indemnification obligations set forth in Section 12(a)(i), Columbia must notify Company in writing, promptly after receipt of actual notice of any Claim for which it seeks to recover; provided, however, any delay or failure of notice shall not relieve Company of its obligations hereunder except to the extent that Company is actually prejudiced by such delay or failure to notify. Company shall have sole control and authority with respect to the defense, litigation, compromise or settlement of such Claim, except that any settlement involves any admission of wrongdoing or inequitable conduct by Columbia or any material commitments, responsibilities or obligations on the part of Columbia (other than the payment of money that can be fully satisfied by Company) shall require the prior written consent of Columbia, which consent shall not be unreasonably withheld, conditioned or delayed. Company shall not be responsible for any settlement it does not approve in writing. Columbia shall provide reasonable information, cooperation and assistance as required by Company (at Companys expense). Columbia reserves the right to participate at its own cost in any proceedings with counsel of its own choosing, however, Columbia shall at all times be subject to Companys sole control and authority with respect to defending, litigating or settling the Claim.
b. Insurance .
i. Company shall maintain, at all times during the term of this Agreement commencing at least [*] prior to [*], commercial general liability insurance (including product liability and contractual liability insurance applicable to Companys indemnity obligations under Section 12(a)) with reputable and financially secure insurance carriers reasonably acceptable to Columbia to cover the activities of Company, Sublicensees, Designees, and their Affiliates, for minimum limits of [*] combined single limit for bodily injury and property damage per occurrence and in the aggregate. Such insurance shall include Columbia, its trustees, faculty, officers, employees and agents as additional insureds. Company shall furnish a certificate of insurance evidencing such coverage, with thirty days written notice to Columbia of cancellation or material change in coverage. The minimum amounts of insurance coverage required herein shall not be construed as creating any limitation on the Companys indemnity obligation under Section 12(a) of this Agreement.
ii. Companys insurance shall be primary coverage; any insurance Columbia may purchase shall be excess and noncontributory. The Companys insurance shall be written to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement.
iii. Company shall at all times comply with all statutory workers compensation and employers liability requirements covering its employees with respect to activities performed under this Agreement.
13. Marking . Prior to the issuance of patents falling within the definition of Patents, to the extent reasonably practical or required for the maintenance of Patent rights, Company shall mark all Patent Products made, sold, offered for sale, imported, or otherwise disposed of by Company under the license granted in this Agreement with the words Patent Pending, and following the issuance of one or more patents, with the numbers of such patents. The Company shall cause each of the Sellers to comply with the marking requirements of this Section 13.
14. Global Social Responsibility . Company and Columbia shall take into consideration the principle of Global Social Responsibility when executing this Agreement. Global Social Responsibility means facilitating the availability of Licensed Products in Developing Countries (i.e., The World Banks listing of Low Income Economies) at locally affordable prices to improve access to such Products in Developing Countries.
15. Export Control Laws.
a. Company agrees to comply with U.S. export laws and regulations pertaining to the export of technical data, services and commodities, including the International Traffic in Arms Regulations (22 C.F.R. § 120 et seq.), the Export Administration Regulations (15 C.F.R. § 730 et seq.), the regulations administered by the Treasury Departments Office of Foreign Assets Control (31 C.F.R. § 500, et seq.), and the Anti-Boycott Regulations (15 C.F.R. § 760). The parties shall cooperate with each other to facilitate compliance with these laws and regulations.
b. Company understands that sharing controlled technical data with non-U.S. persons is an export to that persons country of citizenship that is subject to U.S. export laws and regulations, even if the transfer occurs in the United States. Company shall obtain any necessary U.S. government license or other authorization required pursuant to the U.S. export control laws and regulations for the export or re-export of any commodity, service or technical data covered by this Agreement, including technical data acquired from Columbia pursuant to this Agreement and products created as a result of that data.
16. Breach and Cure.
a. In addition to applicable legal standards, Company shall be deemed to be in material breach of this Agreement for: (i) failure to pay fully and promptly amounts due pursuant to Section 4 and payable pursuant to Section 5; (ii) failure of Company to meet any of its obligations under Section 6 of this Agreement; (iii) failure to comply with governmental requests directed to Columbia or Company pursuant to Section 10(b); (iv) failure to reimburse Columbia for or pay fully and promptly the costs of prosecuting and maintaining Patents pursuant to Section 11; (v) failure to obtain and maintain insurance in the amount and of the type provided for in Section 12; and (vi) failure to comply with the Export Laws under Section 15.
b. Either party shall have the right to cure its material breach. The cure shall be effected within a reasonable period of time but in no event later than thirty (30) days after notice of any
breach given by the non-breaching party; provided, however, if cure cannot be reasonably effected within such thirty (30) day period and the breaching party is diligently pursuing cure, such cure period shall be extended to ninety (90) days following the breaching partys notice of the breach from the non-breaching party.
c. For any breach that is not cured as set forth in subsection (b) above, the non- breaching party shall have the right to termination this Agreement effective immediately upon written notice to the other party.
17. Term of Agreement; Effect of Termination.
a. This Agreement shall be effective as of the Effective Date and shall continue in full force and effect until the last to expire Royalty Term (the Term).
b. In addition, upon any termination of this Agreement pursuant to Section 16(c), (A) all know-how, technical information and data [*] during the term of this Agreement, and prior to its termination [*], to the extent such know-how, technical information and data [*], including [*], and (B) at Columbias expense and for a reasonable fee to be mutually agreed between the parties, Company will provide Columbia (and/or its future licensees) [*]. Company agrees upon request, to enter into good faith negotiations with Columbia or Columbias future licensee(s), for the purpose of [*] in a timely fashion and under commercially reasonable terms to be mutually agreed between the parties.
c. Company may terminate this Agreement for any reason or no reason upon ninety (90) days prior written notice to Columbia. The licenses granted under this Agreement may be terminated by Columbia or, at Columbias option, Columbia has the right to convert any or all of such exclusive licenses granted under this Agreement to nonexclusive licenses, with no right to sublicense, and no right by Company to initiate legal proceedings pursuant to Section 11: (i) upon thirty (30) days written notice to Company if Columbia elects to terminate in accordance with Section 6(b); (ii) upon written notice to Company for Companys material breach of the Agreement and Companys failure to cure such material breach in accordance with Section 16(b); (iii) in the event Company becomes judicially declared insolvent or is generally not paying its debts as such debts become due; and (iv) in the event Company ceases to conduct business as a going concern without a successor. Termination under (ii) (v) shall be effective upon date of notice sent pursuant to Section 18.
d. Upon any termination of this Agreement pursuant to Section 17(c), all sublicenses granted by the Company under it shall be assigned to Columbia, upon request and at Columbias discretion, provided that Columbias obligations under such sublicense shall be consistent with and not exceed Columbias obligations to Company under this Agreement and provided that such sublicense agrees in a writing sent to Columbia to assume all obligations of this Agreement for the benefit of Columbia, including the obligations to make all payments due under this Agreement, including but not limited to those specified in Section 4(b), 4(c), 4(d) and 11(b).
e. Sections 4(i)(ii), 5(c), 5(f), 5(g), 5(h), 7, 8, 9, 10, 12, 15, 17(b), 17(d), 17(e), 17(f), 17(g), 17(h), 18, 20, 22, 23, 24, 25, 26 and 27 will survive any termination or expiration of this Agreement.
f. Any termination of this Agreement shall not adversely affect any rights or obligations that may have accrued to either party prior to the date of termination, including without limitation, Companys obligation to pay all amounts due and payable under Sections 4, reporting and payment obligations under Section 5 and payment obligations under Section 11 hereof that accrued prior to the effective date of termination.
g. Upon any termination of this Agreement for any reason other than the expiration of this Agreement under Section 17(a) or Companys failure to cure a material breach of this Agreement under Section 17(c)(ii), the Sellers shall have the right, for [*] or such longer period as the parties may reasonably agree, to dispose of Products or substantially completed Products then on hand, and to complete orders for Products then on hand, and royalties shall be paid to Columbia with respect to such Products as though this Agreement had not terminated. If this Agreement expires under Section 17(a), then (A) the licenses granted by Columbia to Company under Section 2(a) shall be fully paid-up, perpetual and irrevocable and (B) the Company shall thereafter be free to use the Technical Information without any further obligation to Columbia.
h. Notwithstanding anything to the contrary in the Agreement, to the extent the manufacture of a Product is Covered By an issued patent within the definition of Patents and occurs prior to the expiration of such issued patent, the sale of that Product after the expiration date of the issued patent shall still constitute a royalty-bearing sale under Section 4.
18. Notices . Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and shall be considered given (i) when mailed by certified mail (return receipt requested), postage prepaid, or (ii) on the date of actual delivery by hand or overnight delivery, with receipt acknowledged,
if to Columbia, to: |
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Executive Director |
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Columbia Technology Ventures |
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Columbia University |
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80 Claremont Avenue, #4F, Mail Code 9606 |
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New York, NY 10027-5712 |
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copy to: |
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General Counsel |
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Columbia University |
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412 Low Memorial Library |
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535 West 116 th Street, Mail Code 4308 |
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New York, New York 10027 |
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if to the Company, to: |
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Applied Therapeutics, Inc. |
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340 Madison Avenue |
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19th Floor |
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New York, NY 10173 |
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Attn: Shoshana Shendelman |
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copy to: |
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McDermott Will & Emery |
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28 State Street |
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Boston, MA 02109 |
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Attn: Sarah T. Hogan |
or to such other address as a party may specify by notice hereunder.
19. Assignment . This Agreement and all rights and obligations hereunder may not be assigned by either party without the written consent of the other party. Notwithstanding the foregoing, upon written notice to Columbia, Company may assign this Agreement without consent to any successor to all or substantially all of its business to which this Agreement relates, whether by sale of stock or
assets, merger, consolidation or otherwise. Any attempt to assign without compliance with this provision shall be void.
20. Waiver and Election of Remedies . The failure of any party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party thereafter of the right to insist upon strict adherence to that term or any other term of this Agreement. All waivers must be in writing and signed by an authorized representative of the party against which such waiver is being sought. The pursuit by either party of any remedy to which it is entitled at any time or continuation of this Agreement despite a breach by the other shall not be deemed an election of remedies or waiver of the right to pursue any other remedies to which it may be entitled.
21. Binding on Successors . This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns to the extent assignment is permitted under this Agreement.
22. Independent Contractors . It is the express intention of the parties that the relationship of Columbia and the Company shall be that of independent contractors and shall not be that of agents, partners or joint venturers. Nothing in this Agreement is intended or shall be construed to permit or authorize either party to incur, or represent that it has the power to incur, any obligation or liability on behalf of the other party.
23. Entire Agreement; Amendment . This Agreement, together with the Exhibits, sets forth the entire agreement between the parties concerning the subject matter hereof and supersedes all previous agreements, written or oral, concerning such subject matter. This Agreement may be amended only by written agreement duly executed by the parties.
24. Severability . In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid, illegal or unenforceable, the validity of the remaining provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if this Agreement did not contain the particular provisions held to be unenforceable, unless such construction would materially alter the meaning of this Agreement.
25. No Third-Party Beneficiaries . Except as expressly set forth herein, the parties hereto agree that there are no third-party beneficiaries of any kind to this Agreement.
26. Governing Law . This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of New York as applicable to agreements made and wholly performed within the State of New York, and without reference to the conflict or choice of laws principles of any jurisdiction. Unless otherwise separately agreed in writing, the parties agree that any and all claims arising under or related to this Agreement shall be heard and determined only in either the United States District Court for the Southern District of New York or in the courts of the State of New York located in the City and County of New York, and the parties irrevocably agree to submit themselves to the exclusive and personal jurisdiction of those courts and irrevocably waive any and all rights any such party may now or hereafter have to object to such jurisdiction or the convenience of the forum.
27. Execution in Counterparts; Facsimile or Electronic Transmission . This Agreement may be executed in counterparts, and by facsimile or electronic transmission. This Agreement is not binding on the parties until it has been signed below on behalf of each party.
IN WITNESS WHEREOF, Columbia and the Company have caused this Agreement to be executed by their duly authorized representatives as of the day and year first written above.
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THE TRUSTEES OF COLUMBIA |
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UNIVERSITY IN THE CITY OF NEW YORK |
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By |
/s/ Orin Herskowitz |
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Name |
Orin Herskowitz |
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Executive Director, |
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Columbia Technology Ventures |
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TTS#_49512 |
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APPLIED THERAPEUTICS, INC. |
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By |
/s/ Shoshana Shendelman |
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Name |
Shoshana Shendelman |
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Chief Executive Officer |
EXHIBIT A
Licensed Patents
Columbia
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Country |
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Serial Number |
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Filing Date |
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Type |
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Filing
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Patent
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Issue
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[*] |
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[*] |
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[*] |
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[*] |
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[*] |
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[*] |
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EXHIBIT B
Executive Summary/Business Plan/Development Plan
[*] (7 pages omitted)
EXHIBIT C
Provisions of Voting or Other Agreement
Note: The provisions set forth below would amend the Voting Agreement. If Columbia, the Company and the other shareholders party to the Voting Agreement enter into another agreement pursuant to Section 4.j.i(b), the provisions would be appropriately revised, without changing the substance thereof, to refer to sections and definitions set forth in such agreement.
Section 3 of the Agreement would be amended to add the following at the end thereof:
[*]
Section 6.8 of the Voting Agreement would be amended to add the following:
[*]
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report dated March 8, 2019, in the Registration Statement (Form S-1) and related Prospectus of Applied Therapeutics, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
New York, New York
April 12, 2019