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As filed with the Securities and Exchange Commission on December 10, 2014.

Registration No. 333-196983

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

FORM S-1

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

 

 

ZOSANO PHARMA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   2834   45-4488360

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code No.)

 

(I.R.S. Employer

Identification No.)

34790 Ardentech Court

Fremont, California 94555

(510) 745-1200

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

 

 

Vikram Lamba

President and Chief Executive Officer

34790 Ardentech Court

Fremont, California 94555

(510) 745-1200

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

 

 

 

Copies to:

Robert W. Sweet, Jr., Esq.

Jeffrey L. Quillen, Esq.

Foley Hoag LLP

Seaport West

155 Seaport Boulevard

Boston, Massachusetts 02110

(617) 832-1000

 

Ivan K. Blumenthal, Esq.

Merav Gershtenman, Esq.

Mintz, Levin, Cohn, Ferris,

Glovsky and Popeo, P.C.

666 Third Avenue

New York, New York 10017

(212) 935-3000

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

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, as amended (the “Securities Act”) please check the following box.   ¨

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

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

If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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.   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 10, 2014

PROSPECTUS

                 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of the common stock of Zosano Pharma Corporation. No public market currently exists for our common stock. Our common stock has been approved for listing on the NASDAQ Global Market under the symbol “ZSAN.” We expect that the initial public offering price will be between $         and $         per share.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 12 of this prospectus.

 

 

 

     Per Share      Total  

Initial public offering price

   $                            $                        

Underwriting discounts and commissions(1)(2)

   $         $     

Proceeds to us (before expenses)

   $         $     

 

(1) We refer you to “ Underwriting ” beginning on page 157 of this prospectus for additional information regarding total underwriter compensation and a private placement fee payable to the representatives of the underwriters upon the completion of our concurrent private placement with Eli Lilly and Company as described in this prospectus.
(2) The underwriters will also be reimbursed for certain expenses incurred in this offering.

We have granted the underwriters a thirty-day option to purchase up to                  additional shares of our common stock on the same terms and conditions described herein, solely to cover over-allotments, if any.

Eli Lilly and Company, one of our collaborators, has agreed to purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. Eli Lilly and Company may elect to not purchase any shares that would cause Eli Lilly and Company to own in excess of 18% of our outstanding common stock after this offering and the concurrent private placement (which would result in Eli Lilly and Company investing less than $15 million). The sale of shares to Eli Lilly and Company will not be registered under the Securities Act of 1933, as amended.

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. The underwriters will receive the same underwriting discount on any shares purchased by these potential investors as they will on any other shares sold to the public in this offering.

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

The underwriters expect to deliver the shares against payment therefor on or about                     , 2014.

 

 

Joint Book-Running Managers

 

Ladenburg Thalmann   Roth Capital Partners

Prospectus dated                     , 2014.


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LOGO

ZP Patch Titanium drug coated array Adhesive 1 LOAD 2 PRESS 3 APPLY Zosano’s Transdermal Microprojection Delivery System - Drug Coated & Ready to Use ZOSANO PHARMA


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     12   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     45   

INDUSTRY AND MARKET DATA

     46   

USE OF PROCEEDS

     47   

DIVIDEND POLICY

     49   

CAPITALIZATION

     50   

DILUTION

     52   

SELECTED CONSOLIDATED FINANCIAL DATA

     55   

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

     57   

BUSINESS

     88   

MANAGEMENT

     124   

EXECUTIVE COMPENSATION

     131   

RELATED PERSON TRANSACTIONS

     140   

PRINCIPAL STOCKHOLDERS

     145   

DESCRIPTION OF CAPITAL STOCK

     148   

SHARES ELIGIBLE FOR FUTURE SALE

     151   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     153   

UNDERWRITING (CONFLICTS OF INTEREST)

     157   

NOTICE TO INVESTORS

     161   

LEGAL MATTERS

     163   

EXPERTS

     163   

WHERE YOU CAN FIND MORE INFORMATION

     163   

INDEX TO FINANCIAL STATEMENTS

     F-1   

You should rely only on the information contained in this prospectus and any related free writing prospectus that we may provide you in connection with this offering. We and the underwriters have not authorized anyone to provide you with information that is different. We and the underwriters are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where such offers and sales are permitted. Regardless of the time of delivery of this prospectus or any related free writing prospectus that we may provide you in connection with this offering or any sale of our common stock, the information in this prospectus is accurate only as of the date of this prospectus, and the information in any related free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

For investors outside the United States: neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus or any related free writing prospectus that we may provide you in connection with this offering in any jurisdiction where action for that purpose is required, other than 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 of the United States.


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PROSPECTUS SUMMARY

This summary provides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, including the information discussed under “Risk Factors” beginning on page 12 and our financial statements and notes thereto that appear elsewhere in this prospectus. We use the terms “Zosano,” “Company,” “we,” “us” and “our” in this prospectus to refer to Zosano Pharma Corporation and its subsidiaries.

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of existing drugs through the skin for the treatment of a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, benefits that we believe often are unavailable using oral formulations or injections. Our microneedle patch system has the potential to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on the delivery of established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

Our short-wear-time transdermal patch consists of an array of titanium microneedles that is coated with our proprietary formulation of an existing drug and attached to an adhesive patch. When the patch is applied with our hand-held applicator, the microneedles penetrate the skin to a depth of 200 microns or less, resulting in rapid dissolution and absorption of the drug coating through the capillary bed. We believe our system enables rapid and consistent delivery of the drug, with therapeutic effect typically occurring within 30 minutes or less, and easy, pain-free administration. We focus on developing specific formulations of approved drugs to be administered by our microneedle patch system, for indications in which rapid onset, ease of use and stability offer significant therapeutic and practical advantages. We target indications with patient populations that we believe will provide us with an attractive commercial opportunity. Our lead product candidates, and the indications they are expected to treat, are as follows:

 

    Daily ZP-PTH , for severe osteoporosis;

 

    ZP-Glucagon, for severe hypoglycemia; and

 

    ZP-Triptan, for migraine.

Daily ZP-PTH is our proprietary formulation of teriparatide, a synthetic form of parathyroid hormone, PTH 1-34, or PTH, an anabolic product which regulates serum calcium, to be administered daily for the treatment of severe osteoporosis in women. Osteoporosis is a disease, primarily affecting post-menopausal women, that is characterized by low bone mineral density and structural deterioration of bone tissue, which can lead to an increase in bone fractures. We believe the only anabolic product currently available in the United States is Eli Lilly and Company’s Forteo ® , which generates approximately $1.2 billion in annual revenues globally, with a relatively low patient penetration of approximately 6% of all severe osteoporosis patients.

Our Daily ZP-PTH product candidate is intended to provide a convenient, easy-to-use, room-temperature-stable alternative for osteoporosis patients. We completed a Phase 2 clinical trial of Daily ZP-PTH in the United States (in connection with which we submitted an investigational new drug application, or IND, to the United States Food and Drug Administration, or FDA), Mexico and Argentina in 2008. In 2009, we held End-of-Phase 2 meetings with the FDA to consider the proposed Phase 3 clinical trial and identify any additional information necessary to support a marketing application for the use of Daily ZP-PTH to treat osteoporosis in postmenopausal

 

 

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women. We also held similar meetings with European regulatory authorities in 2009. These meetings provided us with guidance for Phase 3 development of Daily ZP-PTH which we believe will help speed the regulatory approval process for Daily ZP-PTH. We plan to conduct a Phase 3 trial designed as a non-inferiority study compared to Forteo ® , and intend to seek regulatory approval of Daily ZP-PTH pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, which is a regulatory approval pathway that enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of a previously approved drug for which the applicant has no right of reference, or published literature, in support of its application.

In November 2014, we entered into a strategic partnership and license agreement with Eli Lilly and Company, or Lilly, to develop one or more ZP-PTH microneedle patch products, with the initial product candidate being Daily ZP-PTH. Under the terms of the license agreement, we have granted to Lilly an exclusive, worldwide license to commercialize ZP-PTH in all dosing frequencies. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval, for commercialization of Daily ZP-PTH. We are responsible, at our own expense, for developing Daily ZP-PTH, including clinical, regulatory and manufacturing scale-up activities. We will also manufacture and provide commercial supplies of Daily ZP-PTH to Lilly. In addition to the advantages we believe our microneedle patch system offers, the last of our issued patents covering key features of our microneedle patch system will not expire until 2027.

In November 2014, we entered into a stock purchase agreement with Lilly pursuant to which Lilly will purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. In addition, under the terms of the license agreement, Lilly will make non-refundable milestone payments to us totaling up to $300 million upon achievement of certain regulatory approvals of Daily ZP-PTH and up to $125 million upon achievement of certain sales milestones for Daily ZP-PTH. We are also eligible to receive royalties at a percentage up to the low teens on sales of Daily ZP-PTH in major markets, and will receive reimbursement of manufacturing costs. Lilly has the right to terminate the license agreement prior to regulatory approval of Daily-ZP PTH in the event we fail to achieve certain critical success factors, or CSFs, relating to patient preference for Daily ZP-PTH, development activities culminating in regulatory approval of Daily ZP-PTH in the United States or Japan and commercial readiness activities, or if we fail to cure a material breach of the agreement. Lilly may also terminate the agreement at will at any time after regulatory approval of Daily ZP-PTH in the United States or Japan.

ZP-Glucagon is our proprietary formulation of glucagon, a hormone that raises blood glucose levels, intended for the emergency treatment of life-threatening, severe hypoglycemia. Severe hypoglycemia is a complication of diabetes treatment, often caused by insulin overdose, characterized by a very low level of blood glucose that can lead to loss of consciousness, seizure, coma and death. Time is of the essence in treatment of patients with severe hypoglycemia in an emergency situation. The currently available products on the market are injectables that require reconstitution at the time of need.

In January 2014 we completed a Phase 1 trial in Australia designed to assess relative bioavailability with our microneedle patch system at various application sites on the body compared to a currently available form of glucagon administered by intramuscular injection. With each of the ZP-Glucagon treatments, we achieved a faster onset, a higher bioavailability and lower variability (which is the range of the data points from the trial showing the measure of the treatment’s effect in relation to the mean of the data points) during the first 30 minutes following application compared to the glucagon injection. Additionally, application of our microneedle patch with our easy-to-use applicator avoids the delay in treatment associated with reconstitution of the currently available injectable products. We believe these attributes will provide significant advantages in the emergency rescue of a potentially comatose patient.

We intend to conduct a Phase 2 trial in Australia to evaluate the performance of our ZP-Glucagon product candidate in type 1 diabetic patients at 0.5 milligram, or mg, and 1.0 mg doses, with induction of hypoglycemia, in

 

 

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comparison to comparable doses of glucagon administered by intramuscular injection. We expect to commence, or treat the first patient in, this Phase 2 trial in Australia in the first quarter of 2015 and also complete the trial in the first quarter of 2015.

ZP-Triptan is our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans used for the treatment of migraine, a debilitating neurological disease. Most triptans on the market have a long T MAX , or time after administration before maximum serum concentration is reached, and published data indicates a correlation between T MAX and onset and completeness of pain relief. ZP-Triptan has demonstrated a T MAX of nine minutes in preclinical studies and does not depend on gastrointestinal absorption. As a result, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical animal studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan demonstrated rapid onset and bioavailability comparable to intravenous delivery. In 2014, we continued further confirmatory development of ZP-Triptan with additional preclinical studies. We intend to commence a Phase 1 trial in the first half of 2015 to compare the pharmacokinetic and safety/tolerability profiles of escalated patch doses of zolmitriptan to those of one commercial subcutaneous injection of sumatriptan, a synthetic triptan used for the treatment of migraine, in healthy volunteers. Our Phase 2 trial, which we expect to commence in the second half of 2015, will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

Our collaboration with Novo Nordisk. In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, to be applied once weekly using our system for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products, with the initial product candidate being Novo Nordisk’s semaglutide using our microneedle patch system. We received a $1 million upfront payment from Novo Nordisk, and we are eligible to receive payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total $60 million for the first product and $55 million for each additional product. We are also eligible to receive royalties on sales of GLP-1 products in the low to mid single digits and will receive development support, as well as reimbursement of all development and manufacturing costs relating to the Novo Nordisk program. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Microneedle Patch System for Drug Delivery

Our microneedle patch painlessly delivers therapeutic compounds into the skin and provides rapid systemic drug delivery in a convenient, easy-to-use system that offers the following therapeutic and practical benefits, among others:

 

    rapid onset and high bioavailability

 

    room-temperature stability

 

    consistent delivery independent of the gastrointestinal tract

 

    convenience and ease of use

 

    short wear-time, typically 30 minutes or less, with near complete drug delivery (resulting in no drug overdose if the patient forgets to remove the patch); and

 

    avoidance of the biohazard disposal and safety risks associated with needle injections.

 

 

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Our microneedle patch system consists of a 3 to 6 cm 2 array of titanium microneedles approximately 200-350 microns long, coated with a hydrophilic formulation of the relevant drug, and attached to an adhesive patch. The patch is applied with a hand-held applicator that painlessly presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for rapid and consistent dissolution and absorption of the drug coating, yet short of the nerve endings in the skin. The typical patch wear time is 30 minutes or less, avoiding skin irritation. We believe our applicator has an intuitive, simple and patient-friendly design and is available in reusable form for chronic indications or in a disposable, single-use form for acute indications.

 

LOGO    LOGO

We believe our microneedle patch system has the potential to deliver a wide range of therapeutic compounds, including biologics and other large, complex molecules that have historically been difficult to deliver transdermally. Our patch is small and unobtrusive compared to existing transdermal products and our mechanical applicator is simple and easy to use, unlike some transdermal systems that involve cumbersome, complex and costly devices with external power sources.

We have tested our microneedle patch system in preclinical studies and clinical trials that demonstrated its technical feasibility with approximately 30 compounds, ranging from small molecules to proteins, including the following:

 

LOGO

 

 

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Over 30,000 of our patches have been applied to over 400 patients in seven Phase 1 clinical trials and one Phase 2 trial. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of indications beyond those on which we are currently focused, where fast onset, room-temperature stability and ease of use will fill a significant unmet need.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of premium-priced drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

Our Strategy

Our goal is to make transdermal drug delivery a standard of care for delivering drugs requiring fast onset. The key elements of our strategy are to:

 

    Pursue indications with high unmet medical need and greater probability of clinical, regulatory and commercial success with a competitive pricing model.

 

    Maintain our focus on effective execution of our clinical trials.

 

    Expand our manufacturing capabilities and reduce our cost of goods.

 

    Develop a targeted commercial infrastructure.

 

    Partner selectively to expand the utilization of our microneedle patch drug delivery platform.

Intellectual Property

As of October 31, 2014, we held exclusive licenses to or owned 22 United States patents and nine United States patent applications, as well as numerous foreign counterpart patents and patent applications (including two Patent Cooperation Treaty patent applications), covering key features of our microneedle patch system, such as formulation, coating, array design, patch anchoring, patch application, delivery, manufacturing and packaging. We believe that the remaining life of our patent portfolio may make our technology particularly attractive for third parties seeking to extend the lifecycle of profitable drugs nearing the expiration of their patent protection.

Risks Associated with our Business

Our ability to implement our business strategy is subject to numerous risks of which you should be aware before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” beginning on page 12 of this prospectus. You are encouraged to read that section in its entirety before making an investment decision. These risks include, but are not limited to, the following:

 

    We have a history of losses. We expect to continue to incur losses over the next several years and may never achieve or maintain profitability.

 

    We have recognized only limited revenues and will need to raise additional capital to operate our business, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates.

 

   

Our loan facility with Hercules Technology Growth Capital and our secured note payable to our largest stockholder, an affiliate of BioMed Realty Trust, or BMR, each impose restrictions on our business, and if we default on our obligations, Hercules or BMR’s affiliate would have a right to foreclose on substantially all of our assets, including our intellectual property and proceeds of this offering and of the concurrent private placement with Lilly. We intend to use a portion of the proceeds of this offering

 

 

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to make required payments of interest and principal as they become due under the loan facility with Hercules and the secured note payable to BMR’s affiliate.

 

    The development and commercialization of our proposed products are subject to many risks. If we do not successfully develop and commercialize our proposed products, our business will be adversely affected.

 

    The commercialization of large dose products using our microneedle patch system may be dependent on the development of different size patches and/or different designs for our patch applicator. If we are not successful in implementing these developments in the time frames we expect, the commercialization of products that would benefit from such developments may be delayed and, as a result, our results of operations may be adversely affected.

 

    Clinical trials are very expensive, time-consuming and difficult to design and implement.

 

    We use our own customized equipment to coat and package our microneedle patch system, making us vulnerable to production and supply problems that could negatively impact our sales.

 

    We have no experience selling, marketing or distributing products and have limited internal capability to do so, and we have limited experience manufacturing our proposed products.

 

    If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.

 

    Our failure to obtain and maintain patent protection for our technology and our products could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

 

    We may not successfully manage our growth.

Concurrent Private Placement

Lilly has agreed to purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. Lilly may elect to not purchase any shares that would cause Lilly to own in excess of 18% of our outstanding common stock after this offering and the concurrent private placement (which would result in Lilly investing less than $15 million). The sale of shares to Lilly in the concurrent private placement will not be registered under the Securities Act of 1933, as amended. We have agreed to pay the representatives of the underwriters a private placement fee in an amount equal to 3.5% of the gross proceeds of the concurrent private placement.

Corporate Information

We were incorporated under the laws of the State of Delaware as ZP Holdings, Inc. in January 2012, and changed our name to Zosano Pharma Corporation in June 2014. Our business was spun out of ALZA Corporation, a subsidiary of Johnson & Johnson, in October 2006. We were originally incorporated under the name The Macroflux Corporation, and changed our name to Zosano Pharma, Inc. in 2007 following the spin-off from Johnson & Johnson. In April 2012, in a transaction to recapitalize the business, a wholly-owned subsidiary of ZP Holdings was merged with and into Zosano Pharma, Inc., whereby Zosano Pharma, Inc. was the surviving entity and became a wholly-owned subsidiary of ZP Holdings. In June 2014, Zosano Pharma, Inc. changed its name to ZP Opco, Inc. Our principal executive offices are located at 34790 Ardentech Court, Fremont, California 94555. Our telephone number is (510) 745-1200. Our website address is www.zosanopharma.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

 

 

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This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate that we or their respective owners will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any such companies.

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” disclosure;

 

    not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

    not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    not being required to hold a non-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. 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 allows an emerging growth company to delay the adoption of certain 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 new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common stock offered by us

                 shares

 

Common stock to be sold in the concurrent private placement to Eli Lilly and Company

             shares (assuming an initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus).

 

Common stock to be outstanding after this offering and the concurrent private placement

         shares (         shares in the event the underwriters elect to exercise in full their over-allotment option to purchase additional shares from us).

 

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 over-allotment option, based on the initial public offering price of $         per share, which is 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. We will also receive net proceeds of up to $14.5 million from the sale of common stock to Lilly in the concurrent private placement, after payment by us of the private placement fee due to the representatives of the underwriters. We plan to use the net proceeds from this offering and the concurrent private placement to prepare for a Phase 3 clinical trial of our Daily ZP-PTH product candidate, conduct Phase 2 and Phase 3 clinical trials of our ZP-Glucagon product candidate and conduct preclinical studies and Phase 1 and Phase 2 clinical trials of our ZP-Triptan product candidate. We intend to use remaining amounts to fund research and development for ZP-Triptan and our preclinical pipeline, to make required payments of interest and principal as they become due under our loan facility with Hercules Technology Growth Capital and our secured note payable to our largest stockholder, an affiliate of BioMed Realty Trust, expand and enhance our manufacturing capabilities, and for working capital and other general corporate purposes. See “Use of Proceeds” on page 47 for additional information.

 

Risk factors

You should read the “Risk Factors” section beginning on page 12 and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

NASDAQ Global Market symbol

“ZSAN”

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to

 

 

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sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. Any shares purchased by these potential investors will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”

The number of shares of our common stock to be outstanding after this offering and the concurrent private placement set forth above is based on 5,140,359 shares of our common stock outstanding as of October 31, 2014, and includes an additional                  shares of our common stock that will be issued upon the automatic conversion of our convertible promissory notes outstanding at October 31, 2014, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus. By their terms, if the closing of this offering occurs on or before March 31, 2015 and we raise gross proceeds of at least $25 million, the principal and all unpaid and accrued interest on each note will automatically convert into our common stock at a conversion price equal to 85% of our initial public offering price.

The number of shares of common stock to be outstanding after this offering and the concurrent private placement set forth above excludes:

 

    31,674 shares of common stock issuable upon the exercise of a warrant outstanding as of October 31, 2014 at an exercise price of $8.84 per share;

 

    526,890 shares of common stock issuable upon the exercise of stock options outstanding under our 2012 Stock Incentive Plan as of October 31, 2014, at a weighted average exercise price of $1.58 per share;

 

    24,328 shares of common stock available for future issuance under our 2012 Stock Incentive Plan as of October 31, 2014; and

 

    an additional 1,400,000 shares of our common stock that will be made available for future issuance under our 2014 Equity and Incentive Plan adopted in connection with the closing of this offering.

Except as otherwise noted, all information in this prospectus:

 

    gives effect to a 1-for-4 reverse split of our common stock effected on July 11, 2014;

 

    assumes no exercise of outstanding options or the warrant described above;

 

    assumes the issuance and sale of                  shares of common stock (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus) to Lilly in the concurrent private placement;

 

    assumes no exercise by the underwriters of their over-allotment option; and

 

    gives effect to the amendment and restatement of our certificate of incorporation and bylaws upon the closing of this offering.

Conflicts of Interest

Theodore D. Roth, the President and an associated person of Roth Capital Partners, LLC, or Roth, one of the book-running managers and representatives of the underwriters in this offering, is also a director of BMR. Under the rules of the Financial Regulatory Authority, Inc., a conflict of interest is deemed to exist with respect to Roth because Mr. Roth is deemed to “control” BMR (as a director of BMR) and BMR is deemed to “control” us (as an affiliate of a beneficial owner of in excess of 10% of our outstanding capital stock). A portion of the net proceeds of this offering will be used to make required payments of interest and principal as they become due under our note payable to our largest stockholder, which is an affiliate of BMR. See “Use of Proceeds.”

 

 

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Summary Financial Data

The following summary financial data should be read together with our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. Our summary statements of operations data for the nine months ended September 30, 2014 and 2013 and the selected balance sheet data as of September 30, 2014 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our summary statements of operations data for the years ended December 31, 2013 and 2012 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected for any future period. The summary financial data in this section are not intended to replace our audited and unaudited consolidated financial statements and the related notes.

The pro forma balance sheet data as of September 30, 2014 gives effect to the automatic conversion to                  shares of common stock of the principal and all unpaid and accrued interest on each convertible promissory note outstanding at September 30, 2014 at a price equal to 85% of the assumed initial public offering price, upon the closing of this offering, resulting in our liability for such notes being reclassified to additional paid-in capital. The pro forma as adjusted balance sheet data as of September 30, 2014 gives effect to (1) the pro forma adjustments described above and (2) our receipt of estimated net proceeds of $         million from this offering, based on the 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, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and our receipt of net proceeds of up to $14.5 million from the sale of shares of common stock to Lilly in the concurrent private placement, after payment by us of the private placement fee due to the representatives of the underwriters, as if each had occurred as of September 30, 2014. The pro forma as adjusted summary financial data are not necessarily indicative of what our financial position would have been if this offering had been completed as of the date indicated, nor are these data necessarily indicative of our financial position for any future date or period.

 

     Nine Months
Ended September 30,
    Year Ended
December 31,
 
     2014     2013     2013     2012  
    

(unaudited)

             
    

(in thousands except per share data)

 

Statements of Operations Data:

        

Revenue:

        

License fees revenue

   $ 1,819      $ 3,688      $ 4,250      $ 9,250   

Collaborative development support services

     662        —          —          2,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,481        3,688        4,250        11,624   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Cost of license fees revenue

     100        —          —          —     

Research and development

     8,230        4,760        7,637        5,399   

General and administrative

     3,208        2,692        4,582        3,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,538        7,452        12,219        8,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (9,057     (3,764     (7,969     3,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

        

Interest expense, net

     (1,261     (526     (760     (663

Other expense

     (143     (20     —          —     

Warrant revaluation income

     —          —          —          71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in gain (loss) of joint venture, gain on termination of joint venture, and gain on debt forgiveness

     (10,461     (4,310     (8,729     2,556   

Equity in gain (loss) of joint venture

     —          45        (366     (738

Gain on termination of joint venture

     —          —          3,487        —     

Gain on debt forgiveness

     497        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (9,964     (4,265   $ (5,608   $ 1,818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share—basic

   $ (1.95   $ (0.84   $ (1.10   $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share—diluted

   $ (1.95   $ (0.84   $ (1.10   $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding—basic

     5,121        5,107        5,107        3,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding—diluted

     5,121        5,107        5,107        3,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share-basic and diluted (unaudited) (1)

   $          $       
  

 

 

     

 

 

   

Weighted-average pro forma shares used in computing pro forma net loss per common share—basic and diluted (unaudited) (1)

        
  

 

 

     

 

 

   

 

 

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     As of September 30, 2014
     Actual     Pro Forma (2)    Pro Forma
As Adjusted (2)
     (unaudited; in thousands)

Balance Sheet Data:

       

Cash and cash equivalents

   $ 2,303        

Working capital (deficit)

   $ (7,853     

Total assets

   $ 15,165        

Long-term debt

   $ 14,354        

Accumulated deficit

   $ (134,187     

Total stockholders’ equity (deficit)

   $ (9,222     

 

(1) Pro forma weighted-average shares outstanding and net loss per common share for the nine months ended September 30, 2014 reflect the conversion of the principal and all unpaid and accrued interest on each convertible promissory note outstanding at September 30, 2014 into shares of common stock at a conversion price equal to 85% of the assumed initial public offering price, as if the conversion had occurred at the beginning of the period. Does not give effect to the issuance of shares from this proposed initial public offering or the concurrent private placement or to the potential effect of dilutive securities, because the impact of such issuance would be anti-dilutive. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.

 

(2) A $1.00 increase (decrease) in the 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, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, and the number of shares we issue and sell to Lilly in the concurrent private placement remain the same, after deducting estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, after deducting estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risks and uncertainties, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results, financial condition and prospects and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our audited consolidated financial statements and the related notes thereto.

RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have a history of losses. We expect to continue to incur losses over the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. For the year ended December 31, 2013 we had net losses of $5.6 million, and for the nine months ended September 30, 2014 we had net losses of $10.0 million. As of September 30, 2014, we had an accumulated deficit of $134.2 million. We expect to continue to incur additional significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we continue the development of our lead product candidates, Daily ZP-PTH, ZP-Glucagon and ZP-Triptan. These expenditures will be incurred for development, clinical trials, regulatory compliance, infrastructure, manufacturing and additional employees. Even if we succeed in developing, obtaining regulatory approval for and commercializing one or more of our lead product candidates, because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict that we will ever be able to manufacture, distribute and sell any of our products profitably, and we may never generate revenue that is significant enough to achieve or maintain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

We have generated only limited revenues and will need to raise additional capital to operate our business, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or lead product candidates.

Since inception, we have generated no revenues from product sales. For the year ended December 31, 2013, we had total revenue of $4.3 million, and for the nine months ended September 30, 2014, we had total revenue of $2.5 million. Substantially all of our revenue to date has resulted from payments by collaboration partners. We are not approved to make and have not made any commercial sales of products. We expect that our product development activities will require additional significant operating and capital expenditures resulting in negative cash flow for the foreseeable future. Further, after completing this offering and the concurrent private placement with Eli Lilly and Company, or Lilly, one of our collaborators, we do not have any committed external source of funds. The net proceeds from this offering and the concurrent private placement and our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake or to fund completion of clinical development of any of our product candidates. Accordingly, unless and until we generate revenues and become profitable, we will need to raise additional capital to continue to operate our business, including after the consummation of this offering and the concurrent private placement.

We expect to finance our cash needs through a combination of equity offerings, debt financing and license and collaboration agreements. 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. However, adequate and additional funding may not be available to us on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends on our common stock.

 

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If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our research programs or drug candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings or other arrangements with third parties when needed, we may be required to delay, limit, reduce or terminate our development or future commercialization efforts or partner with third parties to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our loan facility with Hercules Technology Growth Capital, or Hercules, and our secured note payable to our largest stockholder, an affiliate of BioMed Realty Trust, or BMR, each impose restrictions on our business, and if we default on our obligations, Hercules or BMR would have a right to foreclose on substantially all of our assets, including our intellectual property and proceeds of this offering and the concurrent private placement with Lilly.

In June 2014, we entered into a senior term loan facility with Hercules, under which Hercules made a $4 million loan to us that matures in June 2017 and bears interest at a per annum rate equal to the greater of (i) 12.05% and (ii) 12.05% plus the “prime rate” as reported in The Wall Street Journal minus 5.25%. In connection with our reorganization in April 2012, we issued a secured promissory note to BMR in the original principal amount of approximately $8.6 million. The BMR note is subordinated to the Hercules loan, due in April 2016 (but is not permitted to be repaid while the Hercules loan is outstanding) and bears interest at the same rate as the Hercules loan during the period that the Hercules loan remains outstanding, and otherwise at the annual rate of 8%. We also agreed to covenants in connection with the Hercules loan and the BMR note that may limit our ability to take some actions without the consent of Hercules or BMR, as applicable. In particular, without Hercules’ or BMR’s consent under the terms of loan facility or the secured note, as applicable, we are restricted in our ability to:

 

    incur indebtedness;

 

    create liens on our property;

 

    make payments on any subordinated debt, including the BMR note while the Hercules loan remains outstanding;

 

    make investments in or loans to others;

 

    acquire assets other than in the ordinary course;

 

    dispose of the collateral that secures the Hercules loan and the BMR note;

 

    transfer or sell any assets;

 

    engage in any transaction that would constitute a change of control; and

 

    change our corporate name, legal form or jurisdiction.

Our indebtedness to Hercules and to BMR may limit our ability to finance future operations or capital needs or to engage in, expand or pursue our business activities. It may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be desirable or possible.

We intend to use a portion of the proceeds from this offering to make required payments of interest and principal as they become due under the loan facility with Hercules and the note payable to BMR. We have pledged substantially all of our assets, including our intellectual property, to secure our obligations to Hercules under the loan facility and to BMR under the promissory note. If we default on our obligations prior to repaying this indebtedness, and are unable to obtain a waiver for such default, Hercules or BMR would have a right to accelerate our payments under the loan facility or the note, as applicable, and possibly foreclose on the collateral, which would potentially include our intellectual property and proceeds of this offering and the concurrent private

 

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placement with Lilly. Any such action on the part of Hercules or BMR would significantly harm our business and our ability to operate.

We have limited operating history upon which to base an investment decision.

Although our business was formed in 2006, we have had limited operations since that time. We do not currently have the ability to perform the sales, marketing and manufacturing functions necessary for the production and sale of our products on a commercial scale. Our most advanced product candidate is our Daily ZP-PTH, which will be required to undergo at least one significant additional clinical trial before it can be commercialized, if at all. The successful commercialization of any of our product candidates will require us to perform a variety of functions, including:

 

    continuing to conduct clinical development of our lead product candidates;

 

    obtaining required regulatory approvals;

 

    formulating and manufacturing products; and

 

    conducting sales and marketing activities.

Our operations continue to be focused on organizing and staffing our company, acquiring, developing and securing our proprietary technology and undertaking preclinical and clinical trials of our products. In addition, our previous strategic partnership with Asahi Kasei Pharma Corporation, or Asahi, which terminated in January 2014, has accounted for substantially all of our revenues to date. As a result, investors have a limited operating history on which to evaluate the merits of an investment in our common stock.

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. We will need to transition at some point from a company with a research and development focus to a company capable of undertaking commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.

The report of our independent registered public accounting firm on our 2013 audited consolidated financial statements contains an explanatory paragraph regarding our ability to continue as a going concern.

Our recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern without additional debt or equity financing. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our audited consolidated financial statements for 2013 with respect to this uncertainty. Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and make it more difficult for us to obtain financing. If we are unable to obtain sufficient capital in this offering and the concurrent private placement, our business, financial condition and results of operations will be materially and adversely affected and we will need to obtain alternative financing or significantly modify our operational plans to continue as a going concern. Further, if we successfully complete and receive the net proceeds from this offering and the concurrent private placement, given our planned expenditures for the next several years, including without limitation, expenditures in connection with our planned clinical trials of our lead product candidates, our independent registered public accounting firm may conclude, in connection with the preparation of our financial statements for 2014 or any subsequent period that there continues to be substantial doubt regarding our ability to continue as a going concern.

We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.

 

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RISKS RELATED TO THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES

The development and commercialization of our product candidates is subject to many risks. If we do not successfully develop and commercialize our product candidates, our business will be adversely affected.

We are focusing our development efforts on three lead product candidates, Daily ZP-PTH, ZP-Glucagon, and ZP-Triptan. The development and commercialization of each of these product candidates is subject to many risks including:

 

    we may be unable to obtain additional funding to develop our product candidates;

 

    we may experience delays in regulatory review and approval of product candidates in clinical development;

 

    the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

 

    the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;

 

    the FDA may not find the data from preclinical studies and clinical trials sufficient to demonstrate that clinical and other benefits outweigh its safety risks;

 

    the FDA may disagree with our interpretation of data from our preclinical studies and clinical trials or may require that we conduct additional studies or trials;

 

    the FDA may not accept data generated at our clinical trial sites;

 

    we may be unable to obtain and maintain regulatory approval of our product candidates in the United States and foreign jurisdictions;

 

    potential side effects of our product candidates could delay or prevent commercialization, limit the indications for any approved drug, require the establishment of a risk evaluation and mitigation strategy, or REMS, or cause an approved drug to be taken off the market;

 

    the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-party manufacturers;

 

    the FDA may change its approval policies or adopt new regulations;

 

    we may need to depend on third-party manufacturers, or CMOs, to supply or manufacture our products;

 

    we depend on clinical research organizations, or CROs, to conduct our clinical trials;

 

    we may experience delays in the commencement of, enrollment of patients in and timing of our clinical trials;

 

    we may not be able to demonstrate that any of our product candidates are safe and effective as a treatment for their respective indications to the satisfaction of the United States Food and Drug Administration, or FDA, or other similar regulatory bodies;

 

    we may be unable to establish or maintain collaborations, licensing or other arrangements;

 

    the market may not accept our product candidates;

 

    we may be unable to establish and maintain an effective sales and marketing infrastructure, either through the creation of a commercial infrastructure or through strategic collaborations;

 

    we may experience competition from existing products or new products that may emerge; and

 

    we and our licensors may be unable to successfully obtain, maintain, defend and enforce intellectual property rights important to protect our products.

If any of these risks materializes, we could experience significant delays or an inability to successfully commercialize our drug candidates, which would have a material adverse effect on our business, financial condition and results of operations.

 

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We will not be able to sell our products if we do not obtain required United States or foreign regulatory approvals.

We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates, including Daily ZP-PTH, ZP-Glucagon, ZP-Triptan or any product candidate we acquire or develop in the future. We will need FDA approval to commercialize our product candidates in the United States and approvals from the FDA-equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we expect that we will have to submit to the FDA a new drug application, or NDA, demonstrating that the product candidate is safe for humans and effective for its intended indication and indicated use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during its regulatory review. Delays in obtaining regulatory approvals may:

 

    delay commercialization of, and our ability to derive product revenues from, our products;

 

    impose costly procedures on us; and

 

    diminish any competitive advantages that we may otherwise enjoy.

We may never obtain regulatory clearance for any of our product candidates. Failure to obtain approval of any of our product candidates will severely undermine our business by leaving us without a saleable product, and therefore without any source of revenues, unless other products can be developed. There is no guarantee that we will ever be able to develop or acquire another product.

In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize any drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates for sale outside the United States.

Clinical trials are very expensive, time-consuming and difficult to design and implement.

Human clinical trials are very expensive, time-consuming and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. We estimate that clinical trials of Daily ZP-PTH will take at least three years to complete and that completion of preclinical and clinical trials of ZP-Glucagon and ZP-Triptan will each take two or more years to complete. Furthermore, failure of any product candidate can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:

 

    changes in government regulation, administrative action or changes in FDA policy with respect to clinical trials that change the requirements for approval;

 

    unforeseen safety issues;

 

    determination of dosing issues;

 

    lack of effectiveness during clinical trials;

 

    slower than expected rates of patient recruitment and enrollment;

 

    inability to monitor patients adequately during or after treatment; and

 

    inability or unwillingness of medical investigators to follow our clinical protocols.

 

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In addition, we, the FDA, or other regulatory authorities and ethics committees with jurisdiction over our studies may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA or other authorities find deficiencies in our regulatory submissions or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for existing or future clinical trials. Any such unexpected expenses or delays in our clinical trials could increase our need for additional capital, which may not be available on favorable terms or at all.

If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these clinical trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

    be delayed in obtaining marketing approval for our drug candidates;

 

    not obtain marketing approval at all;

 

    obtain approval for indications or patient populations that are not as broad as intended or desired;

 

    obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

    be subject to additional post-marketing testing requirements; or

 

    have the drug removed from the market after obtaining marketing approval.

Our development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring drugs to market before we do, and thereby impair our ability to successfully commercialize our product candidates.

As an organization, we have only conducted one Phase 2 clinical trial and have never conducted a Phase 3 clinical trial or submitted an NDA, and may be unable to do so for any product candidates we are developing, including our three leading product candidates, Daily ZP-PTH, ZP-Glucagon or ZP-Triptan.

We will need to successfully complete additional Phase 2 and/or Phase 3 clinical trials and submit to the FDA for approval one or more NDAs in order to obtain FDA approval to market each of our product candidates. The conduct of later-stage clinical trials and the submission of a successful NDA is a complicated process. As an organization, we have conducted only one Phase 2 clinical trial in 2008, have not conducted a Phase 3 clinical trial before, have limited experience in preparing and submitting regulatory filings, and have not previously submitted an NDA for any product candidate. We also have had limited interactions with the FDA, and have not discussed our clinical trial designs or implementation with the FDA for our ZP-Glucagon and ZP-Triptan product candidates. Consequently, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to NDA submission and approval of Daily ZP-PTH or any other product candidate we are developing. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of products that we develop. Failure to commence or complete, or delays in, our planned clinical trials, would prevent us from or delay us in commercializing Daily ZP-PTH or any other product candidate we are developing.

The results of our clinical trials may not support our product claims.

Even if our clinical trials are completed as planned, we cannot be certain that the results will support our product claims. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior

 

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clinical trials and preclinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate revenues. In addition, our clinical trials to date have involved small patient populations. Because of the small sample sizes, the results of these clinical trials may not be indicative of future results.

Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.

Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical or preclinical trials. In addition, data obtained from trials are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early 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. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later 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. While members of our management team have experience in designing clinical trials, our company has limited experience in designing clinical trials and we may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. For example, if the results of our Daily ZP-PTH trial do not achieve the primary efficacy endpoints or demonstrate expected safety, the prospects for approval of Daily ZP-PTH would be materially and adversely affected. If Daily ZP-PTH or our other product candidates are found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for them and our business would be harmed.

We are conducting, and may in the future conduct, clinical trials for product candidates in sites around the world, and government regulators, including the FDA in the United States, may choose to not accept data from trials conducted in such locations.

We have conducted, and may in the future choose to conduct, one or more of our clinical trials outside the United States. For example, our Phase 2 clinical trial for Daily ZP-PTH was conducted in Mexico and Argentina in addition to the United States, and our Phase 1 clinical trial for ZP-Glucagon was conducted in Australia.

There is no guarantee that data from these clinical trials will be accepted by regulators approving our product candidates for commercial sale. In the case of the United States, although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles. The study population must also adequately represent the United States population, and the data must be applicable to the United States population and United States medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to label the product in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable U.S. laws and regulations. There can be no assurance the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from our clinical trials, it would likely result in the need for additional trials, which would be costly and time-consuming and delay or permanently halt our development of ZP-Glucagon or any future product candidates. Similar regulations and risks apply to other jurisdictions as well.

 

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In addition, the conduct of clinical trials outside the United States could have a significant impact on us. Risks inherent in conducting international clinical trials include:

 

    foreign regulatory requirements that could restrict or limit our ability to conduct our clinical trials;

 

    administrative burdens of conducting clinical trials under multiple foreign regulatory schema;

 

    foreign exchange fluctuations; and

 

    diminished protection of intellectual property in some countries.

Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.

The manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for our product candidates will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, current good manufacturing practices, or cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The regulatory approvals for our product candidates may be subject to limitations on the indicated uses for which the products may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product candidate. The FDA closely regulates the post-approval marketing and promotion of drugs and drug delivery devices to ensure they are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and, if we do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing.

The FDA has the authority to require a REMS as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria or requiring patient testing, monitoring and/or enrollment in a registry. The FDA currently requires a REMS for Forteo ® and will likely require a post-approval REMS for Daily ZP-PTH.

With respect to sales and marketing activities by us or any future partner, advertising and promotional materials must comply with FDA rules in addition to other applicable federal, state and local laws in the United States and similar legal requirements in other countries. In the United States, the distribution of product samples to physicians must comply with the requirements of the U.S. Prescription Drug Marketing Act. Application holders must obtain FDA approval for product and manufacturing changes, depending on the nature of the change. We may also be subject, directly or indirectly through our customers and partners, to various fraud and abuse laws, including, without limitation, the U.S. Anti-Kickback Statute, U.S. False Claims Act, and similar state laws, which impact, among other things, our proposed sales, marketing, and scientific/educational grant programs. If we participate in the U.S. Medicaid Drug Rebate Program, the Federal Supply Schedule of the U.S. Department of Veterans Affairs, or other government drug programs, we will be subject to complex laws and regulations regarding reporting and payment obligations. All of these activities are also potentially subject to U.S. federal and state consumer protection and unfair competition laws. Similar requirements exist in many of these areas in other countries.

In addition, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription 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. If we receive marketing approval for our products, physicians may nevertheless legally prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability and

 

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government fines. 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 sanctions, including revocation of its marketing approval. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed or curtailed.

In addition, later discovery of previously unknown problems with our product candidates, manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

    restrictions on such product candidate, or manufacturing processes;

 

    restrictions on the labeling or marketing of a product;

 

    restrictions on product distribution or use;

 

    requirements to conduct post-marketing clinical trials;

 

    warning or untitled letters;

 

    withdrawal of the products from the market;

 

    refusal to approve pending applications or supplements to approved applications that we submit;

 

    recall of products;

 

    fines, restitution or disgorgement of profits or revenue;

 

    suspension or withdrawal of marketing approvals;

 

    refusal to permit the import or export of our products;

 

    product seizure; or

 

    injunctions or the imposition of civil or criminal penalties.

The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue. Adverse regulatory action, whether pre- or post-approval, can also potentially lead to product liability claims and increase our product liability exposure.

We or our partners may choose not to continue developing or commercialize a product or product candidate at any time during development or after approval, which would reduce or eliminate our potential return on investment for that product or product candidate.

We currently do not have any products approved for sale. We have three product candidates in early stages of research and development. In addition, we have recently entered into strategic partnership and license agreements with Lilly to commercialize Daily ZP-PTH and with Novo Nordisk A/S, or Novo Nordisk, to commercialize Novo Nordisk’s proprietary GLP-1, in each case using our microneedle patch system.

At any time, we or our partners may decide to discontinue the development of a marketed product or product candidate or not to continue commercializing a marketed product or a product candidate for a variety of reasons, including the appearance of new technologies that make our product obsolete, the position of our partner in the market, competition from a competing product, or changes in or failure to comply with applicable regulatory requirements. For example, from 2011 to 2013, we were a party to a strategic partnership and exclusive license agreement with Asahi to commercialize Asahi’s Teribone TM product using our microneedle patch system. In January 2014, this relationship with Asahi was terminated. If we or our partners terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have lost the opportunity to allocate those resources to potentially more productive uses. If one of our partners terminates a

 

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development program or ceases to market an approved or commercial product, we will not receive any future milestone payments or royalties relating to that program or product under our partnership agreement with that party.

We are dependent on the successful development of our three leading product candidates.

We are dependent on the successful development of our three leading product candidates, Daily ZP-PTH, ZP-Glucagon and ZP-Triptan. We cannot assure you that we will be able to complete the clinical trials required for each product candidate in a timely manner, or at all, and ultimately obtain regulatory approval for any of these product candidates. If we are unable to complete clinical trials of and obtain regulatory approval for our product candidates, our business will be significantly affected.

The commercialization of large dose products using our microneedle patch system may be dependent on the development of different size patches and/or different designs for our patch applicator. If we are not successful in implementing these developments in the time frames we expect, the commercialization of products that would benefit from such developments may be delayed and, as a result, our results of operations may be adversely affected.

Our microneedle patch system can be used to deliver numerous medications for a wide variety of indications. Our ability to successfully commercialize any given drug product using our microneedle patch system may be dependent on large scale development of different patch sizes or different designs for our patch applicator. Delays in the development of different size patches and/or different designs for our patch applicator, may adversely affect our business, financial condition and results of operations.

Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates.

Our long-term growth will be limited unless we successfully develop a pipeline of additional product candidates. We do not have internal new drug discovery capabilities, and our primary focus is on developing improved transdermal drug delivery systems by reformulating drugs previously approved by the FDA using our proprietary technologies.

If we are unable to expand our product candidate pipeline and obtain regulatory approval for our product candidates on the timelines we anticipate, we will not be able to execute our business strategy effectively and our ability to substantially grow our revenues will be limited, which would harm our long-term business, results of operations, financial condition and prospects.

We may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we have decided to focus on developing product candidates that we identified for treatment of severe osteoporosis, severe hypoglycemia and migraine. 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 commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial product candidates or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. 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 cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

If serious adverse or inappropriate side effects are identified during the clinical trials of our product candidates, we may need to abandon our development of some of these candidates.

All of our product candidates are still in preclinical or clinical development. Our products may have undesirable side effects, or have characteristics that are unexpected.

 

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If Daily ZP-PTH or any of our other product candidates cause serious adverse events or undesirable side effects:

 

    regulatory authorities may impose a clinical hold which could result in substantial delays and adversely impact our ability to continue development of the product;

 

    regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;

 

    we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

 

    we may be required to implement a risk minimization action plan, which could result in substantial cost increases and have a negative impact on our ability to commercialize the product;

 

    we may be required to limit the patients who can receive the product;

 

    we may be subject to limitations on how we promote the product;

 

    sales of the product may decrease significantly;

 

    regulatory authorities may require us to take our approved product off the market;

 

    we may be subject to litigation or product liability claims; and

 

    our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

We manufacture our products internally and may encounter manufacturing failures that could impede or delay supply for our clinical trials or our product candidates.

Any failure in our internal manufacturing operations could cause us to be unable to meet the demand for product candidates for our clinical trials and delay the development or regulatory approval of our product candidates. Our internal manufacturing operations may encounter difficulties involving, among other things, production yields, regulatory compliance, quality control and quality assurance, and shortages of qualified personnel. Regulatory approval of our product candidates could be impeded, delayed, limited or denied if the FDA does not maintain the approval of our manufacturing processes and facilities.

In addition, once approved, we plan to manufacture our products for commercial sale internally. We have no experience producing our microneedle patch system in commercial quantities, which would require additional manufacturing equipment and space. Upon commercialization, there will be a need for additional infrastructure at our Fremont manufacturing facility and there will be additional regulatory requirements for the aseptic manufacturing required by the FDA for commercialization.

Proceeds from this offering and the concurrent private placement in part will be used to develop and expand our internal manufacturing capabilities. Difficulties could result in commercial supply shortfalls of our products, delay in the commercial launch of any of our product candidates, if approved, delay in our preclinical studies, clinical trials and regulatory submissions, or the recall or withdrawal of our products from the market.

 

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Even if we receive regulatory approval for any product candidate, we still may not be able to successfully commercialize it and the revenue that we generate from its sales, if any, may be limited.

If approved for marketing, the commercial success of our products will depend upon their acceptance by the medical community, including physicians, patients and health care payors. The degree of market acceptance of any product candidate will depend on a number of factors, including:

 

    demonstration of clinical safety and efficacy of our products generally;

 

    relative convenience and ease of administration;

 

    prevalence and severity of any adverse effects;

 

    willingness of physicians to prescribe our product and of the target patient population to try new therapies and routes of administration;

 

    efficacy and safety of our products compared to competing products;

 

    introduction of any new products, including generics, that may in the future become available to treat indications for which our products may be approved;

 

    new procedures or methods of treatment that may reduce the incidences of any of the indications in which our products may show utility;

 

    pricing and cost-effectiveness;

 

    effectiveness of our or any future collaborators’ sales and marketing strategies;

 

    limitations or warnings contained in FDA-approved labeling; and

 

    our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors.

If any of our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

Even if we obtain regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize our product candidates successfully. For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render our product candidates not commercially viable. For example, regulatory authorities may approve our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our product candidates, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve our product candidates with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication. Further, the FDA may place conditions on approvals including potential requirements or risk management plans and the requirement for a REMS to assure the safe use of the drug or a black-box warning (which is a warning required by the FDA that appears on the package insert for or in literature describing certain prescription drugs, signifying that medical studies indicate that the drug carries a significant risk of serious adverse effects). If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. A black-box warning will limit how we are able to market and advertise our product. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of our product candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following the

 

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initial marketing of the product. Any of the foregoing scenarios could materially harm the commercial success of our product candidates.

Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

Our future profitability will depend, in part, on our ability to commercialize our product candidates in foreign markets for which we intend to rely on collaborations with third parties. If we commercialize our products in foreign markets, we would be subject to additional risks and uncertainties, including:

 

    our customers’ ability to obtain reimbursement for our product candidates in foreign markets;

 

    our inability to directly control commercial activities because we are relying on third parties;

 

    the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

 

    different medical practices and customs in foreign countries affecting acceptance in the marketplace;

 

    import or export licensing requirements;

 

    longer accounts receivable collection times;

 

    longer lead times for shipping;

 

    language barriers for technical training;

 

    reduced protection of intellectual property rights in some foreign countries;

 

    foreign currency exchange rate fluctuations; and

 

    interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.

Foreign sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.

RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES

If we are not able to establish collaborations, we may have to alter our development plans.

Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. Lilly will be responsible for commercialization of our Daily ZP-PTH product candidate, if approved, and we may decide to collaborate with third parties for the development and potential commercialization of one or more of our other product candidates.

We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may also be restricted under collaboration agreements from entering into agreements on certain terms with other potential collaborators. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of a particular product candidate, reduce or delay its development or one or more of our other development programs, delay its potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.

 

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We use customized equipment to coat and package our microneedle patch system, making us vulnerable to production and supply problems that could negatively impact our sales.

We presently use customized equipment for the coating and packaging of our microneedle patch system. Because of the customized nature of our equipment, and the fact that we rely on third parties to manufacture our equipment, if the equipment malfunctions and we do not have adequate inventory of spare parts or qualified personnel to repair the equipment, we may encounter delays in the manufacture of our microneedle patch system and may not have sufficient inventory to meet our customers’ demands, which could adversely affect our business, financial condition and results of operations.

We may form strategic partnerships and collaborations in the future, and we may not realize the benefits of such alliances.

We may form strategic partnerships, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our existing business. These relationships may require us to incur non-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex.

The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty, including:

 

    a collaboration partner may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, manufacturing issues, a change in business strategy, a change of control or other reasons;

 

    a collaboration partner may shift its priorities and resources away from our product candidates due to a change in business strategies, or a merger, acquisition, sale or downsizing;

 

    a collaboration partner may not devote sufficient resources towards, or cease development in, therapeutic areas which are the subject of our strategic collaboration;

 

    a collaboration partner may change the success criteria for a product candidate thereby delaying or ceasing development of such candidate;

 

    a collaboration partner could develop a product that competes, either directly or indirectly, with our product candidate;

 

    a significant delay in initiation of certain development activities by a collaboration partner will also delay payment of milestones tied to such activities, thereby impacting our ability to fund our own activities;

 

    a collaboration partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of a product;

 

    a collaboration partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand requirements;

 

    a dispute may arise between us and a collaboration partner concerning the research, development or commercialization of a product candidate resulting in a delay in milestones, royalty payments or termination of an alliance and possibly resulting in costly litigation or arbitration which may divert management attention and resources;

 

    a collaboration partner may use our products or technology in such a way as to invite litigation from a third party; and

 

    a collaboration partner may exercise a contractual right to terminate a strategic alliance.

 

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For example, under our strategic partnership and license agreement with Novo Nordisk, we and Novo Nordisk are currently conducting a feasibility study to evaluate the feasibility of using our microneedle patch system for the delivery of Novo Nordisk’s proprietary GLP-1. Following the completion of this feasibility study, Novo Nordisk will decide, in its sole discretion, whether to continue or terminate the license agreement. If Novo Nordisk elects to not continue the license agreement, then we will not be eligible to receive any milestone or royalty payments from Novo Nordisk under the agreement. Similarly, under our strategic partnership and license agreement with Lilly, Lilly may terminate the agreement prior to regulatory approval of Daily-ZP PTH in the United States or Japan if we fail to achieve certain critical success factors, or CSFs, relating to patient preference for Daily ZP-PTH, development activities culminating in regulatory approval of Daily ZP-PTH in the United States or Japan and commercial readiness activities. If we fail to achieve a CSF and Lilly exercises its right to terminate the license agreement, then we will not be eligible to receive any milestone or royalty payments from Lilly under the agreement. Lilly may also terminate the agreement at will at any time after regulatory approval of Daily ZP-PTH in the United States or Japan. If Lilly terminates the agreement after regulatory approval of Daily ZP-PTH in the United States or Japan, then we will no longer be eligible to receive any future milestone or royalty payments from Lilly under the agreement.

We rely on third party manufacturers for various components of our microneedle patch system, and our business could be harmed if those third parties fail to provide us with sufficient quantities of those components at acceptable quality levels and prices.

We rely on third party manufacturers for various components of our microneedle patch system, including active pharmaceutical ingredients, or API, raw materials used in manufacturing, and capital equipment. Reliance on third party manufacturers entails additional risks, including reliance on the third party for regulatory compliance and quality assurance. In addition, third party manufacturers may not be able to comply with cGMP, or similar regulatory requirements outside the United States. Our failure, or the failure of our third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates or any other product candidates or products that we may develop.

Any failure or refusal to supply the components for our product candidates that we may develop could delay, prevent or impair our clinical development or commercialization efforts. If our contract manufacturers were to fail to fill our purchase orders, the development or commercialization of the affected products or product candidates could be delayed, which could have an adverse effect on our business. Any change in our manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.

We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We rely on a third-party contract research organization, or CRO, to conduct our clinical trials. In addition, we rely on other third parties, such as clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical trials. While we have agreements governing their activities, we will have limited influence over their actual performance and we will control only certain aspects of their activities. Further, agreements with such third parties might terminate for a variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements, that would delay our product development activities.

Our reliance on these third parties for research and development activities will reduce our control over these activities, but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these GCPs through periodic inspections of trial sponsors, principal investigators

 

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and clinical trial sites. If we or our CRO fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA may determine that our clinical trials did not comply with GCPs. In addition, our clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a product candidate. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, our clinical trials may be delayed or we may be required to repeat such clinical trials, which would delay the regulatory approval process.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or if the quality of the clinical data they obtain is compromised due to the failure to conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our drug candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our drug candidates.

RISKS RELATED TO MARKETING AND SALE OF OUR PRODUCTS

We have no experience selling, marketing or distributing products and have limited internal capability to do so.

We currently have no sales, marketing or distribution capabilities. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our proposed products. Although we intend to develop a targeted commercial infrastructure to market and distribute our proprietary products that we have not exclusively licensed to others, such as our Daily ZP-PTH product candidate, our future success may depend, in part, on our ability to enter into and maintain collaborative relationships to provide such capabilities, on the collaborators’ strategic interest in the product candidates under development and on such collaborators’ ability to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the sales and marketing of any approved products. However, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that our collaborators will have effective sales forces. To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our proposed products, significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with the needed technical expertise. There can also be no assurance that we will be able to establish or maintain relationships with third-party collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful. In addition, there can also be no assurance that we will be able to market and sell our products in the United States or overseas.

We have limited experience manufacturing our proposed products.

We have limited experience manufacturing our product candidates. If we are unable to establish a new manufacturing facility or expand existing manufacturing facilities, we may be unable to produce commercial materials or meet demand, if any should develop, for our products. Any such failure could delay or prevent our development of any product candidates and would have a material adverse effect on our business, financial condition and results of operations.

If our product candidates do not obtain sufficient market share against competitive products, we may not achieve substantial product revenues and our business will suffer.

The markets for our product candidates are characterized by intense competition and rapid technological advances. All of our product candidates will, if approved, compete with a number of existing and future drug delivery systems and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

 

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We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater financial and other resources than we do, as well as significantly greater experience in:

 

    developing drugs;

 

    undertaking preclinical testing and human clinical trials;

 

    obtaining FDA and other regulatory approvals of drugs;

 

    formulating and manufacturing drugs; and

 

    launching, marketing and selling drugs.

Products developed or under development by competitors may render our product candidates or technologies obsolete or non-competitive.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our product candidates will have to compete with existing therapies, new formulations of existing drugs and new therapies that may be developed in the future. We face competition from pharmaceutical, biotechnology and medical device companies, including transdermal delivery companies, in the United States and abroad. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations, and therefore, we may not be able to hire or retain qualified personnel to run all facets of our business.

Our ability to generate product revenues will be diminished if we are unable to obtain third party coverage and adequate levels of reimbursement for any approved product.

Our ability to commercialize any product candidate for which we receive regulatory approval, alone or with collaborators, will depend in part on the extent to which coverage and reimbursement for the product will be available from:

 

    government and health administration authorities;

 

    private health maintenance organizations and health insurers; and

 

    other healthcare payers.

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if one of our product candidates is approved by the FDA, insurance coverage may not be available, and reimbursement levels may be inadequate, to cover such drug. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for one of our product candidates, once approved, market acceptance of such product could be reduced.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability and may have to limit development of a product candidate or commercialization of an approved product.

The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against

 

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us by participants enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

    withdrawal of clinical trial participants;

 

    termination of clinical trial sites or entire trial programs;

 

    costs of related litigation;

 

    substantial monetary awards to patients or other claimants;

 

    decreased demand for an approved product and loss of revenue;

 

    impairment of our business reputation;

 

    diversion of management and scientific resources from our business operations; and

 

    the inability to commercialize an approved product.

Insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could cause our stock price to decline and could adversely affect our results of operations and business.

We may be exposed to liability claims associated with the use of hazardous materials and chemicals.

Our research and development activities may involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures for using, storing, handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products may require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.

Business disruptions could seriously harm our future revenues, results of operations and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we fail to comply with our obligations to our licensor in our intellectual property license, we could lose license rights that are important to our business.

We are a party to an Intellectual Property License Agreement dated October 5, 2006, as amended, with ALZA Corporation and we may enter into additional license agreements in the future. Our existing license agreement imposes, and we expect that any future license agreements will impose, various diligence, product payment, royalty,

 

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insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.

Our failure to obtain and maintain patent protection for our technology and our products could permit our competitors to develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our commercial success is significantly dependent on intellectual property related to our product portfolio. We are either the licensee or assignee of numerous issued and pending patent applications that cover various aspects of our assets, including, most importantly, our microneedle patch system and our products.

Our success depends in large part on our and our licensor’s ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

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 and our licensor’s patent rights are highly uncertain. Our and our licensor’s pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensor were the first to make the inventions claimed in our owned and licensed patents or pending patent applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, the first to file a patent application is entitled to the patent. We may become involved in opposition or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such proceeding could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. 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 owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

 

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The costs and other requirements associated with prosecution of pending patent applications and maintenance of issued patents are material to us. Bearing these costs and complying with these requirements are essential to procurement and maintenance of patents integral to our proposed product offerings.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or patent applications will come due for payment periodically throughout the lifecycle of patent applications and issued patents. In order to help ensure that we comply with any required fee payment, documentary and/or procedural requirements as they might relate to any patents for which we are an assignee or co-assignee, we employ legal help and related professionals as needed to comply with those requirements. Failure to meet a required fee payment, document production or procedural requirement can result in the abandonment of a pending patent application or the lapse of an issued patent. In some instances the defect can be cured through late compliance but there are situations where the failure to meet the required deadline cannot be cured. Such an occurrence could compromise the intellectual property protection around a preclinical or clinical candidate and possibly weaken or eliminate our ability to protect our eventual market share for that product.

Our business will be harmed if we do not successfully protect the confidentiality of our trade secrets.

In addition to our patented technology and products, we rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to them, such as our corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. In addition, any of these parties may breach the agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for 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. 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 from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

We could be prevented from selling products and could be forced to pay damages and defend against litigation, if we infringe the rights of third parties.

We conduct freedom-to-operate studies to guide our early-stage research and development away from areas where we are likely to encounter obstacles in the form of third party intellectual property conflicts, and to assess the advisability of licensing third party intellectual property or taking other appropriate steps to address any freedom-to-operate or development issues. However, with respect to third party intellectual property, it is impossible to establish with certainty that any of our product candidates will be free of claims by third party intellectual property holders or whether we will require licenses from such third parties. Even with modern databases and on-line search engines, literature searches are imperfect and may fail to identify relevant patents and published applications.

If our products, methods, processes or other technologies infringe the proprietary rights of other parties, we could incur substantial costs and may have to:

 

    obtain licenses, which may not be available on commercially reasonable terms, if at all;

 

    abandon an infringing product;

 

    redesign our products or processes to avoid infringement;

 

    stop using the subject matter claimed in the patents held by others;

 

    pay damages; or

 

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    defend litigation or administrative proceedings which may be costly whether we win or lose and which could result in a substantial diversion of our financial and management resources.

We may pursue Section 505(b)(2) regulatory approval filings with the FDA for our product candidates where applicable. Such filings involve significant costs, and we may also encounter difficulties or delays in obtaining regulatory approval for our product candidates under Section 505(b)(2).

We may pursue regulatory approval of certain of our product candidates pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or the FDCA. A Section 505(b)(2) application is a type of NDA that enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of a previously approved drug for which the applicant has no right of reference, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Such applications involve significant costs, including filing fees.

To the extent that a Section 505(b)(2) NDA relies on clinical trials conducted for a previously approved drug product or the FDA’s prior findings of safety and effectiveness for a previously approved drug product, the Section 505(b)(2) applicant must submit patent certifications in its Section 505(b)(2) application with respect to any patents for the previously approved product on which the applicant’s application relies and that are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Specifically, the applicant must certify for each listed patent that, in relevant part, (1) the required patent information has not been filed by the original applicant; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is not sought until after patent expiration; or (4) the listed patent is invalid, unenforceable or will not be infringed by the proposed new product. A certification that the new product will not infringe the previously approved product’s listed patent or that such patent is invalid or unenforceable is known as a Paragraph IV certification. If the applicant does not challenge one or more listed patents through a Paragraph IV certification, the FDA will not approve the Section 505(b)(2) NDA application until all the listed patents claiming the referenced product have expired.

If the Section 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the owner of the referenced NDA for the previously approved product and relevant patent holders within 20 days after the Section 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement suit against the Section 505(b)(2) applicant. Under the FDCA, the filing of a patent infringement lawsuit within 45 days of receipt of the notification regarding a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA until the earliest to occur of 30 months beginning on the date the patent holder receives notice, expiration of the patent, settlement of the lawsuit, or until a court deems the patent unenforceable, invalid or not infringed.

If we rely in our Section 505(b)(2) regulatory filings on clinical trials conducted, or the FDA’s prior findings of safety and effectiveness, for a previously approved drug product that involves patents referenced in the Orange Book, then we will need to make the patent certifications or the Paragraph IV certification described above. If we make a Paragraph IV certification and the holder of the previously approved product that we referenced in our application initiates patent litigation within the time periods described above, then any FDA approval of our Section 505(b)(2) application would be delayed until the earlier of 30 months, resolution of the lawsuit, or the other events described above. Accordingly, our anticipated dates of commercial introduction of our product candidates would be delayed. In addition, we would incur the expenses, which could be material, involved with any such patent litigation. As a result, we may invest a significant amount of time and expense in the development of our product only to be subject to significant delay and patent litigation before our product may be commercialized, if at all.

In addition, even if we submit a Section 505(b)(2) application that relies on clinical trials conducted for a previously approved product where there are no patents referenced in the Orange Book for such other product with respect to which we have to provide certifications, we are subject to the risk that the FDA could disagree

 

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with our reliance on the particular previously approved product, conclude that such previously approved product is not an acceptable reference product, and require us instead to rely as a reference product on another previously approved product that involves patents referenced in the Orange Book, requiring us to make the certifications described above and subjecting us to additional delay, expense and the other risks described above.

We may become involved in costly and time-consuming lawsuits with uncertain outcomes to protect or enforce our patents.

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or 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 proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. 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. In addition, our licensors may have rights to file and prosecute such claims and we may be reliant on them to do so.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Some of our employees 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 do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s 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.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

There is a great deal of litigation concerning intellectual property in our industry, and we could become involved in litigation. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims 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, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. 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 substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business, financial condition, results of operations and ability to compete in the marketplace.

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

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the

 

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Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.

The USPTO is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not become effective until March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.

Intellectual property rights do not necessarily address all potential threats to any competitive advantage we may have.

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

 

    Others may be able to make compounds that are the same as or similar to our product candidates, which are aimed initially at the generic market and are not covered by the claims of the patents that we own or have exclusively licensed.

 

    We or any of our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.

 

    Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

    It is possible that our pending patent applications will not lead to issued patents.

 

    Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

    Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

RISKS RELATED TO LEGISLATION AND ADMINISTRATIVE ACTIONS

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings .

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

   

the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or

 

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recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

    the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal government program, or making a false statement or record material to payment of a false claim or avoiding, decreasing or concealing an obligation to pay money to the federal government;

 

    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

    federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals;

 

    the federal transparency requirements under the Patient Protection and Affordable Care Act, or the ACA, requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

    analogous state laws and regulations such as state anti-kickback and false claims laws and analogous non-U.S. fraud and abuse laws and regulations, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

State and non-U.S. laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. 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, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.

The implementation of the reporting and disclosure obligations of the Physician Payments Sunshine Act/Open Payments provisions of the Patient Protection and Affordable Care Act could adversely affect our business.

An ACA provision, generally referred to as the Physician Payments Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for applicable drug and device manufacturers

 

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of covered products and those entities under common ownership that provide assistance and support to the applicable manufacturers, with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and certain investment/ownership interests held by physicians in the reporting entity. On February 1, 2013, Centers for Medicare & Medicaid Services, or CMS, released the final rule to implement the Physician Payments Sunshine Act.

The final rule implementing the Physician Payments Sunshine Act is complex, ambiguous, and broad in scope. When and if our product candidates become approved, we will within a defined time period become subject to the reporting and disclosure provisions of the Physician Payments Sunshine Act. Accordingly, we will be required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. The Physician Payments Sunshine Act preempts similar state reporting laws, although we may also be required to continue to report under certain provisions of such state laws. While we expect to have substantially compliant programs and controls in place to comply with the Physician Payments Sunshine Act requirements, our compliance with the new final rule will impose additional costs on us. Additionally, failure to comply with the Physician Payment Sunshine Act may subject the Company to civil monetary penalties.

Healthcare reform may have a material adverse effect on our industry and our results of operations.

From time to time, legislation is implemented to reign in rising healthcare expenditures. In March 2010, President Obama signed into law the ACA, as amended by the Health Care and Education Reconciliation Act. The ACA includes a number of provisions affecting the pharmaceutical industry, including annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics and increases in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program. In addition, among other things, the ACA also establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research. Congress has also proposed a number of legislative initiatives, including possible repeal of the ACA. At this time, it remains unclear whether there will be any changes made to certain provisions of the ACA or its entirety. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. Most recently, on August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which may result in such changes as aggregate reductions to Medicare payments to providers of up to two percent per fiscal year, starting in 2013. The full impact on our business of the ACA and the Budget Control Act is uncertain. We cannot predict whether other legislative changes will be adopted, if any, or how such changes would affect the pharmaceutical industry generally.

If any of our products becomes subject to a product recall it could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design, manufacture or labeling. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the product would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a product is found. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, we could be required to report those actions as recalls. A recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

 

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Governments outside the United States may impose strict price controls, which may adversely affect our revenue, if any.

In some countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain coverage and reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other available therapies. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.

RISKS RELATED TO EMPLOYEE MATTERS, OUR OPERATIONS AND MANAGING GROWTH

We may not successfully manage our growth.

Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on administrative, operational and financial resources. To manage this growth, we may be required to expand our facilities, augment our operational, financial and management systems and hire and train additional qualified personnel. Our inability to manage this growth could have a material adverse effect on our business, financial condition and results of operations.

Our business and operations would suffer in the event of computer system failures or security breaches.

Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development and manufacturing programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and development of our product candidates could be delayed.

Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of individually identifiable information, including, without limitation, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a code of business conduct and ethics effective as of the date of this prospectus, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent improper activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions, including civil, criminal or administrative.

 

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We may enter into or seek to enter into business partnerships, combinations and/or acquisitions which may be difficult to integrate, disrupt our business, divert management attention or dilute stockholder value.

We may enter into business partnerships, combinations and/or acquisitions. We have limited experience in making acquisitions, which are typically accompanied by a number of risks, including:

 

    the difficulty of integrating the operations and personnel of the acquired companies;

 

    the potential disruption of our ongoing business and distraction of management;

 

    potential unknown liabilities and expenses;

 

    the failure to achieve the expected benefits of the combination or acquisition;

 

    the maintenance of acceptable standards, controls, procedures and policies; and

 

    the impairment of relationships with employees as a result of any integration of new management and other personnel.

If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our business strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, we could use substantial portions of our available cash as all or a portion of the purchase price, or we could issue additional securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.

We rely on key executive officers and their knowledge of our business and technical expertise would be difficult to replace.

We are highly dependent on our chief executive officer, our chief scientific officer and our chief financial officer. We do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.

We will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

There is no public market for our common stock and an active trading market for our common stock may not develop and you may not be able to resell your shares of our common stock at or above the initial offering price, if at all.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock was determined through negotiations with the underwriters and may not be indicative of the price at which our common stock will trade upon the completion of this offering. Although our common stock has been approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop or is not sustained, it may be difficult for you to sell shares you purchased in this offering at an attractive price, if at all.

 

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The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price may be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

 

    announcements relating to development, regulatory approvals or commercialization of our product candidates or those of competitors;

 

    results of clinical trials of our products or those of our competitors;

 

    announcements by us or our competitors of significant strategic partnerships or collaborations or terminations of such arrangements;

 

    actual or anticipated variations in our operating results;

 

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

 

    conditions or trends in our industry;

 

    changes in laws or other regulatory actions affecting us or our industry;

 

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

 

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

 

    capital commitments;

 

    investors’ general perception of our company and our business;

 

    disputes concerning our intellectual property or other proprietary rights;

 

    recruitment or departure of key personnel; and

 

    sales of our common stock, including sales by our directors and officers or specific stockholders.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies whose shares trade in the stock market. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.

If equity 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 equity research analysts publish about us and our business. 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 stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

 

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

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma as adjusted net tangible book value per share after this offering and the concurrent private placement with Lilly. Based on an assumed initial public offering price of $         per share, which is the midpoint of the price range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, 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 concurrent private placement and the assumed initial public offering price.

In addition, as of October 31, 2014, we had outstanding stock options to purchase an aggregate of 526,890 shares of common stock at a weighted average exercise price of $1.58 per share and an outstanding warrant to purchase 31,674 shares of our common stock at an exercise price of $8.84 per share. To the extent these outstanding options or warrant are exercised, there may be further dilution to investors in this offering.

A significant portion of our total outstanding shares are restricted from immediate resale, but may be sold into the market in the near future. Such sales, or the perception that such sales may occur, could negatively impact the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or if the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

Upon the completion of this offering and the concurrent private placement with Lilly, the                 shares sold in this offering will be freely tradable to the extent purchased by nonaffiliates and the remaining outstanding shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock-up agreements between some of our stockholders and the underwriters. The representative of the underwriters may release these stockholders from their lock-up agreements with the underwriters at any time, which would allow for earlier sales of shares in the public market.

In addition, following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately 2.5 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates.

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.

Upon the completion of this offering and the concurrent private placement with Lilly, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in the aggregate, beneficially own approximately     % of our outstanding common stock, assuming that certain of our existing investors purchase all $5 million of the shares they have indicated an interest in purchasing in this offering, and giving effect to Lilly’s purchase of                  shares in the concurrent private placement and to the conversion of our outstanding convertible promissory notes. Of the foregoing beneficial owners, Lilly will beneficially own     % of our common stock. Additionally, funds controlled by one investor, New Enterprise Associates, or NEA, will beneficially own approximately     % of our common stock, and funds controlled by a second investor, BMR, will beneficially own approximately     % of our common stock. As a result, NEA and BMR, acting together, with or

 

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without Lilly, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets or other significant corporate transactions.

Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

We are an “emerging growth company,” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company” 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 emerging growth companies, including:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” disclosure;

 

    not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

    not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    not being required to hold a non-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.

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 stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) 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 or (2) 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, emerging growth companies 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 new or revised accounting standards as other public companies that are not emerging growth companies.

We have identified a material weakness in our internal control over financial reporting, and if we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

Our management has determined that as of December 31, 2013, we had a material weakness in our internal control over financial reporting, due to the fact that we did not have the appropriate resources with the

 

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appropriate level of experience and technical expertise to provide oversight over the timely preparation and review of schedules necessary for the preparation of our financial statements and to make certain accounting judgments regarding accounting principles generally accepted in the United States, or U.S. GAAP. This material weakness had not been remediated as of September 30, 2014.

We are taking steps to remediate the material weakness described above; however, we cannot assure you that we will be successful in such remediation, or that we or our independent registered public accounting firm will not identify additional material weaknesses or significant deficiencies in our internal control over financial reporting in the future. If we fail to remediate the material weakness described above, or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company or until we are no longer a non-accelerated filer, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, whichever is later, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, certain provisions of the Sarbanes-Oxley Act and the rules and regulations of The NASDAQ Global Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, 2015, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs, which we estimate will be approximately $300,000 to $400,000 annually, to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to assess our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

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

Our disclosure controls and procedures may not be effective to ensure that we make all required disclosures.

Upon consummation of this offering, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.

 

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We will have broad discretion in the use of proceeds from this offering and the concurrent private placement with Lilly and may invest or spend the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.

We will have broad discretion over the use of proceeds from this offering and the concurrent private placement with Lilly. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We expect to use the net proceeds to us from this offering to conduct clinical trials of Daily ZP-PTH and ZP-Glucagon, to fund the research and development of our preclinical pipeline, including ZP-Triptan, to make required payments of interest and principal as they become due under our loan facility with Hercules and our note payable to BMR, expand our manufacturing capability, and for working capital and general corporate purposes. Our failure to apply the net proceeds from this offering and the concurrent private placement effectively could compromise our ability to pursue our business strategy and we might not be able to yield a significant return, if any, on our investment of these net proceeds. In addition, the net proceeds from this offering may not be sufficient for our anticipated uses, and we may need additional resources to progress our product candidates to the stage we expect. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains and you may never receive a return on your investment.

You should not rely on an investment in our common stock to provide dividend income. We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our existing and 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.

We will incur increased costs and demands upon management as a result of being a public company.

As a public company, we will incur significant additional legal, accounting and other costs. These additional costs, which we estimate will be approximately $1 million annually, will decrease our net income or increase our consolidated net loss. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and The NASDAQ Stock Market, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We will need to invest significant resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention from revenue-generating activities to compliance activities. If we do not comply with new laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

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

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions in Delaware law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

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Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

    providing for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board;

 

    authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

    limiting the liability of, and providing indemnification to, our directors;

 

    limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

    requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

    controlling the procedures for the conduct and scheduling of board and stockholder meetings;

 

    limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office; and

 

    providing that directors may be removed by stockholders only for cause.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2013, we had $133.1 million of federal and $129.6 million of state net operating loss carryforwards available to offset future taxable income. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Code has previously occurred or will occur as a result of this offering. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “plan,” “potential” “predict,” “project” or the negative of those terms or similar words. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. You should read these statements carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information. These forward-looking statements include, among other things, statements about:

 

    the anticipated timing, costs and conduct of our planned preclinical studies and clinical trials, as applicable, for our Daily ZP-PTH, ZP-Glucagon and ZP-Triptan lead product candidates;

 

    our expectations regarding the clinical effectiveness of our product candidates;

 

    our commercialization, marketing and manufacturing capabilities and strategy;

 

    our intellectual property position;

 

    our competitive position;

 

    our expectations related to the use of proceeds from this offering and the concurrent private placement with Lilly; and

 

    our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

The sections in this prospectus titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other Items and sections in this prospectus, discuss some of the factors that could contribute to these differences.

You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including independent industry publications and market surveys by third parties privately commissioned by us that we believe to be reliable. In presenting this information, we have also made assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for our product candidates. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. See “Cautionary Note Regarding Forward-Looking Statements.”

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $         per share, which is 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. We will also receive net proceeds of up to $14.5 million from our issuance and sale of shares of our common stock to Lilly in the concurrent private placement, after payment by us of the private placement fee due to the representatives of the underwriters.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, and the number of shares we sell to Lilly in the concurrent private placement remain the same, after deducting estimated underwriting discounts, commissions and the private placement fee.

Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting estimated underwriting discounts, commissions and the private placement fee.

We expect to use the net proceeds from this offering and the concurrent private placement, together with cash and cash equivalents on hand, to conduct planned clinical trials for our lead product candidates, fund research and development of our preclinical pipeline, service our debt obligations, expand and enhance our manufacturing capabilities and for working capital and general corporate purposes. Specifically, we intend to apply the net proceeds of this offering and the concurrent private placement as follows:

 

    approximately $7 million to complete our planned clinical development of our ZP-Glucagon product candidate;

 

    approximately $4 million to prepare for our planned Phase 3 clinical trial of our Daily ZP-PTH product candidate;

 

    approximately $4 million to complete a Phase 1 clinical trial and a Phase 2 clinical trial of our ZP-Triptan product candidate;

 

    approximately $3 million to expand and enhance our manufacturing capabilities by purchasing new equipment, enlarging our manufacturing facilities and refining our manufacturing processes and systems;

 

    approximately $3 million to make required payments of interest and principal as they become due under our term loan facility with Hercules Technology Growth Capital (which bears interest per annum at a floating rate equal to the greater of (i) 12.05% and (ii) 12.05% plus the “prime rate” as reported in The Wall Street Journal minus 5.25%, and which matures in June 2017) and under our secured note payable to our largest stockholder, an affiliate of BioMed Realty Trust (which bears interest at the same rate as the Hercules loan while the Hercules loan is outstanding and otherwise at 8% per annum, and which matures in April 2016 but is not permitted to be repaid while the Hercules loan is outstanding); and

 

    the remainder for working capital and general corporate purposes.

Our expected use of net proceeds from this offering and the concurrent private placement represents our current intentions based upon our present plans and business condition. We cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering and the concurrent private

 

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placement or the amounts that we will actually spend on the uses set forth above. Many variables are inherent in the development of our lead product candidates at this time, such as the timing and results of preclinical animal studies and clinical trials and the timing of regulatory submissions and evolving regulatory requirements. The amount and timing of our actual expenditures will depend upon such variables and we cannot currently predict the stage of development we expect the net proceeds of this offering to achieve for our clinical trials and product candidates.

As a result, we will have broad discretion over the use of the net proceeds from this offering and the concurrent private placement, and investors will be relying on our judgment regarding the application of the net proceeds of this offering and the concurrent private placement. In addition, we might decide to postpone or not pursue certain clinical trials or preclinical activities if the net proceeds from this offering and the concurrent private placement and the other sources of cash are less than expected.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any future financing instruments, provisions of applicable law and other factors the board deems relevant. See “Risk Factors—Risks related to this offering and ownership of our common stock—We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on the appreciation in the price of our common stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2014 on:

 

    An actual basis;

 

    A pro forma basis giving effect to the automatic conversion of the principal and all unpaid and accrued interest on each convertible promissory note outstanding at September 30, 2014 into an aggregate of                  shares of common stock at a price equal to 85% of the assumed initial public offering price, upon the closing of this offering, resulting in the liability for such notes being reclassified to additional paid-in capital, each upon the closing of this offering; and

 

    A pro forma as adjusted basis, giving additional effect to the sale of                  shares of our common stock offered in this offering, assuming an initial public offering price of $         per share, which is 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, the sale of             shares of our common stock to Lilly in the concurrent private placement (based on the assumed initial public offering price of $         per share), after payment by us of the private placement fee due to the representatives of the underwriters, and the filing and effectiveness of a restated certificate of incorporation upon the closing of this offering.

The pro forma information below is illustrative only and our capitalization following the closing of this offering and the concurrent private placement will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the following table in conjunction with our financial statements and related notes, “ Selected Consolidated Financial Data ” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” appearing elsewhere in this prospectus.

 

     As of September 30, 2014
     Actual     Pro Forma    Pro Forma as
Adjusted
     (in thousands, except par value)

Cash and cash equivalents

   $ 2,303        

Short-term investment

     343        
  

 

 

   

 

  

 

Convertible promissory notes payable, current

   $ 5,909        

Freestanding warrant liability

     114        

Secured promissory note

     3,896        

Related party secured note payable

     10,458        

Stockholders’ equity (deficit):

       

Common stock, $0.0001 par value; 30,000 shares authorized, actual and pro forma; 100,000 shares authorized, pro forma as adjusted; 5,140 shares,             shares, and             shares issued and outstanding, actual, pro forma, and pro forma as adjusted, respectively.

     1        

Additional paid-in capital

     124,964        

Accumulated deficit

     (134,187     
  

 

 

   

 

  

 

Total stockholders’ equity (deficit)

     (9,222     
  

 

 

   

 

  

 

Total capitalization

   $ 11,155        
  

 

 

   

 

  

 

A $1.00 increase (decrease) in the 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, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, and the net proceeds of the concurrent private placement remain the same, after deducting

 

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estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us, and giving effect to the terms of the notes which provide that the principal and all unpaid and accrued interest on each note automatically converts into our common stock at a conversion price equal to 85% of our initial public offering price if the closing of this offering occurs on or before March 31, 2015. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ equity (deficit) and total capitalization by $         million, assuming the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and the net proceeds of the concurrent private placement remain the same, after deducting estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us.

The table above does not include the following potentially dilutive shares of common stock outstanding:

 

    527,619 shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $1.58 per share as of September 30, 2014;

 

    24,328 shares of our common stock reserved for future issuance under our 2012 stock incentive plan as of September 30, 2014; and

 

    31,674 shares of our common stock issuable upon the exercise of a warrant outstanding as of September 30, 2014 at an exercise price of $8.84 per share.

 

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DILUTION

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

Our historical net tangible book value (deficit) as of September 30, 2014 was $(9.2 million), or $(1.79) per share of common stock. Our pro forma historical net tangible book value (deficit) as of September 30, 2014 was $        , or $         per share of common stock. Our pro forma net tangible book value (deficit) per share set forth below represents our total assets, excluding intangible assets, less our total liabilities, divided by the number of shares of our common stock outstanding on September 30, 2014, after giving effect to the sale of             shares of our common stock to Lilly in the concurrent private placement (after deducting the private placement fee payable by us) and the conversion of our convertible promissory notes outstanding at September 30, 2014 into                  shares of common stock, resulting in the liability for such notes being reclassified to additional paid-in capital, upon the closing of this offering. For purposes of this calculation, we use a purchase price per share in the concurrent private placement equal to the assumed initial public offering price set forth in the next paragraph and a conversion price for the principal and all unpaid and accrued interest on each convertible promissory note equal to 85% of such assumed initial public offering price.

After giving effect to the sale of                  shares of common stock in this offering at 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, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of September 30, 2014 would have been $         million, or $         per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share and an immediate dilution of $         per share to new investors participating in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price

     $            

Historical net tangible book value (deficit) per share as of September 30, 2014

   $ (1.79  

Increase attributable to concurrent private placement and conversion of convertible promissory notes

    
  

 

 

   

Pro forma net tangible book value (deficit) per share as of September 30, 2014

   $              

Pro forma increase in net tangible book value per share attributable to investors participating in this offering

   $              
  

 

 

   

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

     $            
    

 

 

 

Pro forma as adjusted dilution per share to investors participating in this offering

     $            
    

 

 

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value (deficit) will increase to $         per share, representing an immediate increase in pro forma as adjusted net tangible book value (deficit) to existing stockholders of $         per share and an immediate dilution of $         per share to new investors.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase (decrease) the pro forma as adjusted net tangible book value (deficit) by $         million, the pro forma as adjusted net tangible book value (deficit) per share by $         per share (giving effect to the changes in the number of shares of common stock issuable in the concurrent private placement and the conversion price at which our convertible promissory notes would convert to common stock) and the dilution in pro forma net tangible book value (deficit) per share to investors in this offering by $         per share, assuming that the number

 

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of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us.

A one million share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value (deficit) by $         million, increase the pro forma as adjusted net tangible book value (deficit) per share by approximately $         and decrease the dilution per share to investors participating in this offering by approximately $        , assuming the assumed initial public offering price of $         per share remains the same, after deducting the estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us. A one million share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value (deficit) by $         million, decrease the pro forma as adjusted net tangible book value (deficit) per share by approximately $         and increase the dilution per share to investors participating in this offering by approximately $        , assuming the assumed initial public offering price of $         per share remains the same, after deducting the estimated underwriting discounts, commissions and the private placement fee and estimated offering expenses payable by us.

If any shares are issued upon exercise of outstanding options or warrants, you will experience further dilution.

The number of shares of our common stock reflected in the discussion and the table above is based on 5,139,630 shares of our common stock outstanding as of September 30, 2014, includes an additional                 shares of our common stock that will be sold to Lilly in the concurrent private placement, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an additional              shares of our common stock that will be issued upon the automatic conversion of our convertible promissory notes outstanding as of September 30, 2014, assuming an initial public offering price of $         per share and giving effect to the terms of the notes which provide that the principal and all unpaid and accrued interest on each note automatically converts into our common stock at a conversion price equal to 85% of our initial public offering price if the closing occurs on or before March 31, 2015, and excludes:

 

    527,619 shares of common stock issuable upon the exercise of stock options outstanding under our 2012 Stock Incentive Plan as of September 30, 2014, at a weighted average exercise price of $1.58 per share;

 

    24,328 shares of common stock available for future issuance under our 2012 Stock Incentive Plan as of September 30, 2014;

 

    an additional 1,400,000 shares of our common stock that will be made available for future issuance under our 2014 Equity and Incentive Plan adopted in connection with the closing of this offering; and

 

    31,674 shares of common stock issuable upon exercise of a warrant outstanding as of September 30, 2014 at an exercise price of $8.84 per share.

The following table summarizes, on the pro forma as adjusted basis described above as of September 30, 2014, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders (including the shares purchased by Lilly in the concurrent private placement) and by new investors purchasing shares of common stock in this offering at the 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, before the deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased       Total Consideration       Average
Price
Per Share
 
        
        Number          %          Amount          %      

Existing stockholders

                   $                                         $            

New investors

             $            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $                              100.0  
  

 

  

 

 

   

 

 

    

 

 

   

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) total consideration paid by new investors by $         million and increase (decrease) the percent of total consideration paid by new investors by     %, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering.

If the underwriters’ overallotment option is exercised in full, the number of shares held by new investors will increase to                 , or     % of the total number of shares of common stock outstanding after this offering, and the percentage of shares held by existing stockholders will decrease to     % of the total shares outstanding after this offering.

The number of shares purchased from us by existing stockholders is based on 5,139,630 shares of our common stock outstanding as of September 30, 2014, includes an additional                 shares of our common stock that will be sold to Lilly in the concurrent private placement, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and an additional                  shares of our common stock that will be issued upon the automatic conversion of our convertible promissory notes outstanding as of September 30, 2014, assuming an initial public offering price of $         per share, and excludes:

 

    527,619 shares of common stock issuable upon the exercise of stock options outstanding under our 2012 Stock Incentive Plan as of September 30, 2014, at a weighted average exercise price of $1.58 per share;

 

    24,328 shares of common stock available for future issuance under our 2012 Stock Incentive Plan as of September 30, 2014;

 

    an additional 1,400,000 shares of our common stock that will be made available for future issuance under our 2014 Equity and Incentive Plan adopted in connection with the closing of this offering; and

 

    31,674 shares of common stock issuable upon exercise of a warrant outstanding as of September 30, 2014 at an exercise price of $8.84 per share.

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these potential investors in the number of shares purchased by existing stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes our selected consolidated financial data for the periods and as of the dates indicated. Our selected statements of operations data for each of the years ended December 31, 2013 and 2012, and our selected balance sheet data as of December 31, 2013, have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our selected statements of operations data for the nine months ended September 30, 2014 and 2013, and our selected balance sheet data as of September 30, 2014, have been derived from our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position as of September 30, 2014 and the results of our operations for the nine months ended September 30, 2014 and 2013. Our selected financial data should be read together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our financial statements and their related notes, which are included elsewhere in this prospectus. Our historical results are not indicative of the results that may be expected in the future.

 

     Nine Months
Ended September 30,
    Year ended
December 31,
 
     2014     2013         2013             2012      
     (unaudited)              
    

(in thousands, except per share amounts)

 

Statements of Operations Data:

        

License fees revenue

   $ 1,819      $ 3,688      $ 4,250      $ 9,250   

Collaborative development support services

     662        —          —          2,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,481        3,688        4,250        11,624   

Operating expenses:

        

Cost of license fees revenue

     100        —          —          —     

Research and development

     8,230        4,760        7,637        5,399   

General and administrative

     3,208        2,692        4,582        3,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,538        7,452        12,219        8,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (9,057     (3,764     (7,969     3,148   

Other income (expense):

        

Interest expense, net

     (1,261     (526     (760     (663

Other expense

     (143     (20     —          —     

Warrant revaluation income

     —          —          —          71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in loss of joint venture, gain on termination of joint venture, and gain on debt forgiveness

     (10,461     (4,310     (8,729     2,556   

Equity in gain (loss) of joint venture

     —          45        (366     (738

Gain on termination of joint venture

     —          —          3,487        —     

Gain on debt forgiveness

    
497
  
    —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (9,964     (4,265   $ (5,608   $ 1,818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share – basic

   $ (1.95   $ (0.84   $ (1.10   $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share – diluted

   $ (1.95   $ (0.84   $ (1.10   $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net income (loss) per common share – basic

     5,121        5,107        5,107        3,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net income (loss) per share – diluted

     5,121        5,107        5,107        3,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share – basic and diluted  (1)

   $          $       
  

 

 

     

 

 

   

Weighted-average shares used in computing pro forma net loss per common share – basic and diluted  (1)

        
  

 

 

     

 

 

   

 

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     As of
September 30,
2014
    As of December 31,  
       2013     2012  
     (unaudited)              
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 2,303      $ 5,913      $ 4,973   

Working capital (deficit)

   $ (7,853     (1,368     1,925   

Total assets

   $ 15,165        22,084        19,628   

Long-term debt

   $ 14,354        9,711        9,026   

Accumulated deficit

   $ (134,187     (124,223     (118,615

Total stockholders’ equity (deficit)

   $ (9,222     477        6,020   

Total liabilities and stockholders’ equity

   $ 15,165        22,084        19,628   

 

(1) Pro forma weighted-average shares outstanding and net loss per common share, basic and diluted, for the year ended December 31, 2013 and the nine months ended September 30, 2014 reflect the conversion of our convertible promissory notes outstanding at such dates into shares of common stock, as if the conversion had occurred at the beginning of the respective period. Does not give effect to the issuance of shares from this offering or the concurrent private placement or the potential effect of outstanding dilutive securities where the impact of such issuance would be anti-dilutive. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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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 the section entitled “Selected Financial Data” and our financial statements and 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. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those described below. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of existing drugs through the skin for the treatment of a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, benefits that we believe often are unavailable using oral formulations or injections. Our microneedle patch system has the potential to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on the delivery of established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

In October 2006, our business, originally named The Macroflux Corporation, was spun out of ALZA Corporation, a subsidiary of Johnson & Johnson. Since inception, we have devoted substantially all of our resources to the development and commercialization of our microneedle patch system. Our lead product candidates are Daily ZP-PTH, for the treatment of severe osteoporosis, ZP-Glucagon, for the treatment of severe hypoglycemia and ZP-Triptan, for the treatment of migraine. These lead product candidates are generic drugs specifically formulated to be administered by our microneedle patch system, and are proposed treatments for indications in which we believe rapid onset, ease of use and stability offer particularly important therapeutic and practical advantages, and have patient populations that we believe will provide us with an attractive commercial opportunity.

We are actively engaged in research and preclinical and clinical development for these lead product candidates. Of these product candidates, the most advanced is our Daily ZP-PTH, for which we have completed a Phase 2 clinical trial in the United States, Mexico and Argentina in 2008. For ZP-Glucagon, we have completed a Phase 1 clinical trial designed to assess relative bioavailability (which is the degree and rate at which an administered dose of unchanged drug is absorbed into the body and reaches the blood) with our microneedle patch system compared to a currently available form of glucagon administered by intramuscular injection. We intend to commence a Phase 2 clinical trial to evaluate the performance of ZP-Glucagon in the first quarter of 2015 and also complete the trial in the first quarter of 2015. In the fourth quarter of 2013, we completed a preclinical animal study of ZP-Triptan, our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans used for the treatment of migraine. In 2014, we continued further confirmatory development of ZP-Triptan with additional preclinical studies. We intend to commence a Phase 1 trial in the first half of 2015 to evaluate the pharmacokinetic and safety/tolerability profiles of escalated patch doses of zolmitriptan in healthy volunteers.

We have no product sales to date, and we will not have product sales unless and until we receive approval from the United States Food and Drug Administration, or FDA, or equivalent foreign regulatory bodies, to market and sell one or more of our product candidates. Accordingly, our success depends not only on the development, but also on our ability to finance the development, of these products. We will require substantial additional funding to complete development and seek regulatory approval for these products. Additionally, we

 

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currently have no sales, marketing or distribution capabilities and thus our ability to market our products in the future will depend in part on our ability to develop such capabilities either alone or with collaboration partners.

In addition to developing our lead product candidates, we are actively seeking opportunities to collaborate with biopharmaceutical companies to explore other therapeutic uses for our microneedle patch system. During 2011, 2012 and 2013, we were a party to a strategic partnership and license agreement with Asahi Kasei Pharma Corporation, or Asahi, to develop and commercialize our microneedle patch system for delivery of Asahi’s Teribone™ product for the treatment of severe osteoporosis in Japan, China, Taiwan and South Korea. This partnership and related license agreement ended in January 2014 and as a result, we have recaptured global commercialization rights on our microneedle patch system for the delivery of parathyroid hormone. In November 2014, we entered into a strategic partnership and license agreement with Eli Lilly and Company, or Lilly, to develop one or more ZP-PTH microneedle patch products, with the initial product candidate being Daily ZP-PTH. Under the terms of the license agreement, we have granted to Lilly an exclusive, worldwide license to commercialize ZP-PTH in all dosing frequencies. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval, for commercialization of Daily ZP-PTH. We are responsible, at our own expense, for developing Daily ZP-PTH, including clinical, regulatory and manufacturing scale-up activities. We will also manufacture and provide commercial supplies of Daily ZP-PTH to Lilly. In January 2014, we entered into an agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a new transdermal formulation of semaglutide, an investigational proprietary human GLP-1 (Glucagon-Like Peptide-1) analogue, to be administered once a week using our microneedle patch system for the treatment of type 2 diabetes.

For the immediate future, our efforts and resources will be focused primarily on developing our lead product candidates and our preclinical pipeline, building manufacturing infrastructure, raising capital and recruiting key personnel.

Key Developments Important to Understanding Our Financial Statements

The audited consolidated financial statements, unaudited interim condensed consolidated financial statements and the following discussion include the consolidated accounts of Zosano Pharma Corporation and subsidiaries, and our 100% interest in ZP Group LLC, the entity we operated as a joint venture with Asahi until its termination in December 2013. All intercompany balances and transactions have been eliminated in consolidation in our audited consolidated financial statements and our unaudited interim condensed consolidated financial statements.

2012 recapitalization

Since inception in 2006, we have been financed primarily by the sale of preferred stock and debt to private investors. In January 2012, Zosano Pharma Corporation was formed (under the name ZP Holdings, Inc.). In April 2012, in a transaction to recapitalize the business, a wholly-owned subsidiary of Zosano Pharma Corporation was merged with and into ZP Opco, Inc. (then named Zosano Pharma, Inc.), whereby ZP Opco, Inc. was the surviving entity and became a wholly-owned subsidiary of Zosano Pharma Corporation. As part of this reorganization, Zosano Pharma Corporation issued shares of its common stock to the stockholders and optionholders of ZP Opco, Inc. in exchange for the cancellation of all outstanding common and preferred stock and all outstanding stock options of ZP Opco, Inc. Also, in connection with this reorganization, all outstanding debt and related accrued interest of ZP Opco, Inc. held by investors was cancelled, and all outstanding warrants to purchase capital stock were terminated. The recapitalization included a stock purchase and loan restructuring agreement with two entities affiliated with BioMed Realty Trust, or BMR, under which we issued shares of our common stock to these two BMR affiliates and a secured promissory note to one of these BMR affiliates, as more fully described under the caption “ Restructuring of lease agreement with BMR ” below. BMR, through its affiliated entities, is the landlord for our Fremont, California subsidiary and one of our stockholders and creditors.

Restructuring of lease agreement with BMR

Our operations are conducted in a 55,000 square foot facility in Fremont, California, where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In

 

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April 2012, we amended the lease agreement with BMR to reduce future rent obligations to amounts ranging from approximately $600,000 to $891,000 per year over a new lease term of seven years. In addition, ZP Group LLC, the entity operating our previous joint venture with Asahi, signed the new lease as a sub-tenant. In consideration of these amendments, BMR waived all outstanding principal, accrued interest and unpaid rent as of April 2012. We issued a new four-year non-callable secured promissory note to BMR with an original principal amount of $8.6 million bearing interest at the rate of 8% per annum, compounded annually. All principal and interest will become due and payable to BMR in April 2016. The note, which we refer to herein as the BMR secured promissory note, is secured by substantially all of our assets, including intellectual property. In June 2014, we amended the BMR secured promissory note to increase the interest rate during the period that the Hercules loan remains outstanding to match the interest rate of the Hercules loan, as described under the caption “ Hercules loan ” below, and to provide that any failure by us to pay any amount under the BMR secured promissory note during the period from the maturity date of the BMR secured promissory note through the date that the Hercules loan is repaid in full will not constitute a default under the BMR secured promissory note. In addition to the note, we issued shares of our common stock to two entities affiliated with BMR in connection with the lease restructuring. As a result, BMR affiliates hold approximately 39.6% of our outstanding shares as of October 31, 2014. In exchange for BMR’s agreement to subordinate the BMR secured promissory note to the Hercules loan, we issued 31,250 shares of our common stock to the BMR affiliate that is the holder of the BMR secured promissory note.

Asahi license and collaboration agreement

In February 2011, we entered into a strategic partnership and license agreement with Asahi whereby we granted to Asahi an exclusive license to use our microneedle patch system for the treatment and prevention of osteoporosis in Japan, China, Taiwan and South Korea. As consideration for the license, Asahi paid us an upfront license fee of $7.5 million and agreed to pay contingent payments, based upon the achievement of certain contractually specified milestones, and additional cash royalty payments on sales of future products to be commercialized by Asahi using our microneedle patch system. As of December 31, 2013, Asahi had paid us a total of $16.5 million in additional milestone payments. As part of the collaboration, Asahi also agreed to reimburse us for costs to develop and commercialize our microneedle patch system for delivery of Asahi’s Teribone™ product. Under the license agreement, we were responsible for all product development, including manufacturing of the clinical trial material in support of development activities and clinical trials planned to be conducted by Asahi in Japan.

In April 2012, we reached agreement with Asahi to amend the license agreement and transfer the manufacturing responsibilities from us to ZP Group LLC, a new entity created to grant increased management control to Asahi and its affiliates. ZP Group LLC was a joint venture of AKP USA, Inc., or AKPUS, an affiliate of Asahi, and us, with each holding 50% of the equity interests. We contributed fixed assets to ZP Group LLC necessary for production of clinical trial material. In addition, all of our manufacturing and engineering personnel and some other employees terminated their employment with us and became employees of ZP Group LLC. ZP Group LLC then served as a contract manufacturing organization to both Asahi and us.

As part of the agreement to form ZP Group LLC, the original license agreement with Asahi was amended to eliminate the product milestones and to reduce the future royalties payable to us on sales of products governed by the agreement. In addition, AKPUS provided ZP Group LLC with a line of credit for working capital needs, and we had the right to receive quarterly cash distributions from ZP Group LLC based on depreciation and utilization of the equipment assets contributed by us to the joint venture.

In connection with our collaboration, Asahi conducted Phase 1 clinical trials in Japan using our microneedle patch system to deliver a patch formulation of Asahi’s Teribone™ product. One of Asahi’s requirements for the Phase 1 clinical trials was that the patch formulation of Teribone™ delivered using our microneedle patch system demonstrate bioavailability equal to or greater than the existing Teribone™ injection. In the most recent Phase 1 clinical trial conducted by Asahi, which ended in the second half of 2013, our microneedle patch system did not demonstrate bioavailability of the coated drug formulation at or above these levels. These results brought into question the need for further studies to demonstrate the correlation, or lack thereof, between the bioavailability of Teribone™ and its efficacy, as measured by the increase in bone mineral density, or BMD. Despite our belief,

 

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based in part on our previous 2008 Phase 2 clinical trial involving our daily dose of ZP-PTH, that there is no direct correlation between bioavailability of PTH and BMD, we came to an agreement with Asahi not to pursue further development of this program.

In December 2013, we entered into a termination agreement with Asahi to terminate our joint venture, which effectively caused ZP Group LLC to cease all operations. As a result, certain employees of ZP Group LLC were hired by us. In connection with the termination, Asahi agreed to pay us $2.4 million as a termination payment, an additional $3.5 million for the settlement of employee-related termination costs, including salaries and benefits, severance payments, and other termination-related fees and expenses, and reimbursement for certain out-of-pocket expenses and non-cancelable purchase commitments of ZP Group LLC. At December 31, 2013, we recorded accounts receivable from joint venture of $3.4 million related to these agreements. In January 2014, also in connection with the termination agreement, our strategic partnership and license agreement was terminated, which included a termination of the exclusive license to Asahi to use our microneedle patch system for the treatment and prevention of osteoporosis in Japan, China, Taiwan and South Korea.

Bridge financing

In September 2013, we raised approximately $3 million through the sale of convertible promissory notes to current investors, including affiliates of BMR, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P., and ProQuest Management LLC. In February 2014, we sold an additional $2.5 million of the same series of convertible promissory notes to affiliates of BMR and New Enterprise Associates 12, Limited Partnership, and in December 2014, we sold an additional $1.3 million of convertible promissory notes to New Enterprise Associates 12, Limited Partnership and an affiliate of BMR. The convertible promissory notes, which we refer to herein as the convertible bridge notes, are unsecured, subordinated notes which mature on September 9, 2014 (in the case of the September 2013 and February 2014 convertible bridge notes) and on June 1, 2017 (in the case of the December 2014 convertible bridge notes) and accrue simple interest at the rate of 8% per annum. In June 2014, we amended the September 2013 and February 2014 convertible bridge notes to provide that any failure by us to pay any amount under the convertible bridge notes during the period from maturity of the convertible bridge notes through the date that the Hercules loan is repaid in full will not constitute a default under the convertible bridge notes, and the December 2014 convertible bridge notes provide for the same. Upon the closing of a qualified financing, which is defined in the convertible bridge notes as an equity financing on or prior to March 31, 2015 in which we raise at least $25 million, the principal and all unpaid and accrued interest on each convertible bridge note will automatically convert into the equity security sold in the qualified financing, at price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing. In December 2014, we amended the September 2013 and February 2014 convertible bridge notes to extend the date by which a qualified financing must occur in order for the convertible bridge notes to convert into equity securities to March 31, 2015. The principal and all unpaid and accrued interest on each convertible bridge note will automatically convert into our common stock at a price equal to 85% of the initial public offering price, upon the closing of this offering if the closing occurs on or before March 31, 2015. Our selected consolidated financial data on page 55 reflects the impact, on a pro forma basis, of the conversion of these notes outstanding at December 31, 2013 and at September 30, 2014 on our net loss per common share, given certain assumptions described therein.

Acquisition of Eco Planet Corp.

In October 2013, we entered into a Stock Purchase Agreement with Eco Planet Corp. (currently named Zosano, Inc.), a Delaware corporation with common stock quoted for trading on OTC Markets, pursuant to which Zosano, Inc. issued and sold to ZP Holdings, for an aggregate cash purchase price of $365,000, newly issued shares of common stock equal to 99.9% of the issued and outstanding common stock of Zosano, Inc. as of immediately following the transaction. In connection with our acquisition of Zosano, Inc., we planned to raise new capital through the sale of additional common stock or other securities to institutional investors in a private placement, or the PIPE financing. We had anticipated that in connection with the PIPE financing we would enter into a registration rights agreement pursuant to which the public company would agree to file a registration

 

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statement with the SEC to register for resale the securities it planned to issue in the PIPE financing. As of December 31, 2013, we decided not to undertake the PIPE financing as planned and we are actively pursuing the sale of Zosano, Inc.

Collaboration with Novo Nordisk

In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a new transdermal presentation of semaglutide, an investigational proprietary human GLP-1 (Glucagon-Like Peptide-1) analogue, to be administered once a week using our microneedle patch system for the treatment of Type 2 diabetes. Initially, we will collaborate with Novo Nordisk on nonclinical experiments to verify delivery of semaglutide using our microneedle patch system.

Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize Novo Nordisk’s proprietary GLP-1 analogues using our microneedle patch system. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement. We received an upfront payment of $1 million from Novo Nordisk upon entering into the strategic partnership and license agreement.

The agreement also provides for potential milestone payments upon achieving certain nonclinical, clinical, regulatory and sales milestones of $60 million for the first product and $55 million for each additional product. Novo Nordisk has also agreed to pay us royalties on sales of products in the low to mid single digits and we will receive development support, as well as reimbursement of all development and manufacturing costs relating to the Novo Nordisk program.

Hercules loan

In June 2014, we entered into a $4 million term loan facility with Hercules Technology Growth Capital. The $4 million loan, which we refer to as the Hercules loan, is a senior secured loan that bears interest at a per annum rate equal to the greater of (i) 12.05% and (ii) 12.05% plus the “prime rate” as reported in The Wall Street Journal minus 5.25%. The interest rate floats, and will be determined in accordance with the preceding sentence based on changes to the prime rate as reported in The Wall Street Journal. We are required to pay interest on the outstanding principal balance of the Hercules loan on a monthly basis, beginning July 1, 2014. Repayment of the $4 million principal amount of the Hercules loan is amortized over a 30-month period in equal monthly installments of principal and interest, beginning on January 1, 2015, with all outstanding amounts (including a $100,000 end of term charge) due and payable on June 1, 2017. We are permitted to prepay the full outstanding principal balance of the Hercules loan and all unpaid accrued interest thereon, together with the $100,000 end of term charge plus a prepayment charge equal to 1% of the principal balance repaid, after June 3, 2015, upon seven business days’ prior notice to Hercules. The Hercules loan is secured by a senior security interest in substantially all of our assets. Under the terms of the loan facility, we agreed not to incur, be liable for or prepay any other indebtedness, with limited exceptions.

The BMR secured promissory note and the convertible bridge notes are subordinated in right of payment to the Hercules loan, and BMR’s security interest in substantially all of our assets under the BMR secured promissory note is subordinate to Hercules’ security interest under the Hercules loan. Under the terms of the loan facility, we agreed to give Hercules prior written notice of any amount we propose to pay in respect of the BMR secured promissory note, even if the subordination with Hercules and BMR allows for the payment. Any such payment will give Hercules the right to accelerate any or all of the Hercules loan. In exchange for BMR’s agreement to subordinate the BMR secured promissory note to the Hercules loan, we issued 31,250 shares of our common stock to the BMR affiliate that is the holder of the BMR secured promissory note.

Collaboration with Eli Lilly and Company

In November 2014, we entered into a strategic partnership and license agreement with Lilly to develop one or more ZP-PTH microneedle patch products, with the initial product candidate being Daily ZP-PTH. Under the

 

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terms of the license agreement, we have granted to Lilly an exclusive, worldwide license to commercialize ZP-PTH. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval of our Daily ZP-PTH product candidate, for commercialization of Daily ZP-PTH. We are responsible, at our own expense, for developing Daily ZP-PTH, including clinical, regulatory and manufacturing scale-up activities. We will also manufacture and provide commercial supplies of Daily ZP-PTH to Lilly. Under the terms of the license agreement, Lilly will make non-refundable milestone payments to us totaling up to $300 million upon achievement of certain regulatory approvals of Daily ZP-PTH and up to $125 million upon achievement of certain sales milestones for Daily ZP-PTH. We are also eligible to receive royalties at a percentage up to the low teens on sales of Daily ZP-PTH in major markets, and will receive reimbursement of manufacturing costs.

In November 2014, we entered into a stock purchase agreement with Lilly pursuant to which Lilly will purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. Lilly may elect to not purchase any shares that would cause Lilly to own in excess of 18% of our outstanding common stock after this offering and the concurrent private placement (which would result in Lilly investing less than $15 million).

As a result of entering into our license agreement with Lilly, we have reprioritized our research and product development activities to focus on Daily ZP-PTH as our lead product candidate, rather than on our ZP-PTH product for weekly administration, or Weekly ZP-PTH, on which our research and development activities were focused prior to November 2014.

Financial Operations Overview

Summary

Our revenue to date has been generated primarily from license and development revenue and termination fees under our collaboration and license agreement with Asahi, which was terminated in January 2014. We have not generated any commercial product revenue. As of September 30, 2014, we had an accumulated deficit of approximately $134.2 million. We have incurred significant losses and expect to incur significant and increasing losses in the foreseeable future as we advance our product candidates into later stages of development and, if approved, commercialization. We cannot assure you that we will receive additional collaboration revenue in the future, whether pursuant to our agreement with Lilly, our agreement with Novo Nordisk or any other partnership that we might pursue.

We expect our research and development expenses and manufacturing expenses to increase as we continue to advance our product candidates through clinical and manufacturing development. Because of the numerous risks and uncertainties associated with our technology and drug development, we are unable to predict the timing or amount of expenses incurred or when, or if, we will be able to achieve profitability.

After this offering, additional capital will be required to undertake our planned research and manufacturing development activities and to meet our operating requirements through 2015 and beyond. We intend to raise such capital through the issuance of additional equity through public or private offerings, borrowings of debt, and strategic alliances with partner companies. However, if such financing is not available at adequate levels or on acceptable terms, we could be required to significantly reduce our operating expenses and delay or reduce the scope of or eliminate some of our development programs, enter into a collaboration or other similar arrangement with respect to commercialization rights to ZP-Glucagon or ZP-Triptan, out-license intellectual property rights to our transdermal delivery technology and sell unsecured assets, or a combination of the above, which may have a material adverse effect on our business, results of operations, financial condition and/or our ability to fund our scheduled obligations on a timely basis or at all.

Revenue

Our revenue to date has been generated primarily from non-refundable license fee payments and reimbursements for research and development expenses under our collaboration and license agreements with

 

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Asahi and Novo Nordisk. In addition to upfront license payments, we also received from Asahi other contingent payments upon the occurrence of certain contractually defined events. As of September 30, 2014, we had received a non-refundable upfront license fee payment of $1.0 million from Novo Nordisk under the strategic partnership and license agreement, which was recorded as deferred revenue and will be recognized over the performance period as determined by us. In addition, reimbursements from Novo Nordisk for development support services and out-of-pocket expenses in connection with the strategic partnership will be recognized as service revenue when service is rendered and cost of material is incurred. During the nine months ended September 30, 2014, we recognized approximately $694,000 of license fees revenue and approximately $662,000 of collaborative development support services revenue from Novo Nordisk. As of December 31, 2013, we had received an aggregate of $16.5 million under the license agreement with Asahi. Reimbursements for research and development expenses under our prior license agreement with Asahi for research and development and out-of-pocket expenses were based on expenses actually incurred and these payments were recognized as revenue on a time and material basis and recorded as service revenue in the consolidated statement of operations.

Cost of license fees revenue

We are a party to an intellectual property license agreement dated October 5, 2006, as amended, with ALZA Corporation, or ALZA, where we licensed certain patents and patent applications from ALZA on an exclusive basis worldwide. Under the terms of the license agreement with ALZA, we are obligated to pay ALZA royalties on sales by us of products that would otherwise infringe one of the licensed patents or that is developed by us based on certain ALZA know-how or inventions, and to pay ALZA royalties on sales by our sublicensees of such products. We are also obligated to pay ALZA a percentage of non-royalty revenue, defined as upfront payments, milestone payments and all other considerations (other than royalties), that we receive from our sublicensees on third party products where no generic equivalent is available to the public. The license agreement will terminate upon the expiration of our obligations to make the royalty and other payments described above. We may terminate the agreement at any time upon prior written notice to ALZA.

Pursuant to the intellectual property license agreement with ALZA, we are therefore obligated to make the respective payments to ALZA for each milestone received under our agreements with Lilly and Novo Nordisk beginning with the upfront payment we received upon execution of the Novo Nordisk agreement. The payment of $100,000 from Novo Nordisk is charged to expense in our condensed consolidated statement of operations for the nine months ended September 30, 2014.

Research and development expenses

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

Research and development expenses consist of:

 

    employee-related expenses, which include salaries, benefits and stock-based compensation;

 

    fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations, or CROs, in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

    expenses related to the purchase of active pharmaceutical ingredients and raw materials for the production of our transdermal microneedle patch system, including fees paid to contract manufacturing organizations, or CMOs;

 

    fees paid to conduct nonclinical studies, drug formulation, and cost of consumables for used in nonclinical and clinical trials;

 

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    other consulting fees paid to third parties; and

 

    allocation of certain shared costs, such as facilities-related costs and IT support services.

We expect our research and development expenses to substantially increase as we begin to plan and initiate Phase 3 development of our Daily ZP-PTH product candidate, a Phase 2 trial to investigate the safety and efficacy of our ZP-Glucagon product candidate (expected to commence in the first quarter of 2015), and Phase 1 and Phase 2 trials of our ZP-Triptan product candidate (expected to commence in the first half of 2015 and the second half of 2015, respectively), and to enhance our manufacturing facilities in preparation of commercial launch.

We began tracking our external costs by project in 2006, and implemented a timesheet tracking system for personnel-related costs in the first quarter of 2011. The following table summarizes our research and development expenses incurred during the nine months ended September 30, 2014 and 2013, during the years ended December 31, 2013 and 2012, and from our inception to September 30, 2014:

 

    Nine Months
Ended September 30,
    Year Ended
December 31,
    From Inception
in October 2006

to
September 30, 2014
 
       
        2014             2013         2013     2012    
    (in thousands)  

Product candidate:

         

ZP-PTH (1)

  $ 528      $ 756      $ 1,757      $ —        $ 38,663   

ZP-Glucagon (2)

    959        1,667        2,886        139        3,985   

ZP-Triptan (3)

    865        33        142        —          1,007   

Collaborative development support (4)

    392        —          —          1,882        2,274   

Other research projects (5)

    1,245        926        972        1,881        9,286   

Unallocated research and development expenses  (6)

    4,241        1,379        1,879        1,497        63,087   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total research and development expenses

  $ 8,230      $ 4,761      $ 7,636      $ 5,399      $ 118,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We completed a Phase 2 clinical trial of Daily ZP-PTH in 2008. Our research and development involving PTH was primarily focused on our Weekly ZP-PTH program during 2013 and 2014.
(2) Spending to date on ZP-Glucagon reflects spending since project initiation in the third quarter of 2012.
(3) We initiated our ZP-Triptan project in September 2013.
(4) Collaborative development support includes services provided to Asahi in 2011 and 2012 and to Novo Nordisk in 2014 in connection with our collaboration and license agreements with Asahi and Novo Nordisk, respectively.
(5) Our other research projects include our research and development efforts on compounds other than our lead product candidates and projects in connection with potential partnership and collaboration development.
(6) Unallocated costs include research and development expenses not allocated to a specific program or product candidate, and personnel-related costs prior to the implementation of our timesheet tracking system in 2011.

The project-specific expenses summarized in the table above include costs directly attributable to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and indirect costs to our product candidates on a project-specific basis, and we include these costs in the project-specific expenses. We expect our research and development expenses to increase in the future. The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time consuming. We consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and clinical program may be affected by a variety of factors including but not limited to: the quality of the product candidate, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Furthermore, we have entered into collaborations with major biopharmaceutical companies (Lilly and Novo Nordisk, and previously, Asahi) to participate in the development and commercialization of our microneedle patch system, and we may enter into additional collaborations in the future. In situations in which third parties have control over the clinical

 

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development of a product candidate, the estimated completion dates are largely under the control of such third parties and not under our control. Additionally our collaborative partner may only be interested in applying our technology in the development and advancement of their own product candidates, as we have previously experienced. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance, human resources management and other administrative personnel, legal and accounting fees, business insurance, allocation of facilities-related costs, costs of maintaining our intellectual property portfolio and other corporate expenses. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administration and professional services.

Interest expense, net

Interest expense, net of interest income, consists primarily of interest costs related to our short-term and long-term borrowings. Interest expense for 2012 consists of interest paid to Silicon Valley Bank for the debt facility we paid off in connection with our recapitalization in April 2012 and accrued interest on the BMR secured promissory note. For 2013, interest expense reflects accrued interest on both the convertible bridge notes issued in September 2013 and the BMR secured promissory note as well as interest on the line of credit. For the nine months ended September 30, 2014, interest expense reflects accrued interest on the convertible bridge notes issued in September 2013 and February 2014, accrued interest on the BMR secured promissory note, and accrued interest related to the Hercules loan.

Other expense

Other expense consists of certain miscellaneous expenses that are not included in the categories described above. For the nine months ended September 30, 2014, other expense consisted primarily of expense related to the fair value of 31,250 shares of common stock that were issued to BMR in June 2014 as an inducement for the subordination of debt in connection with the Hercules loan.

Warrant revaluation income

Warrant revaluation income in 2012 resulted from the re-measurement of our preferred stock warrant liability associated with the warrants to purchase preferred stock issued to lenders under our debt facilities and certain of the former preferred stockholders of ZP Opco, Inc. prior to the 2012 reorganization. We recorded changes to the estimated fair value of the preferred stock warrants as income or loss at each balance sheet date until they were exercised, expired or converted into shares of our common stock. All outstanding warrants were retired in connection with our 2012 recapitalization.

Equity in loss of joint venture

Equity in loss of joint venture reflects our share of ZP Group LLC’s net loss for the applicable reporting period. Through December 20, 2013, we owned a 50% equity interest in ZP Group LLC. Under the terms of ZP Group LLC’s operating agreement, we recorded our share of ZP Group LLC’s net loss after reimbursement of depreciation expense on our contributed capital equipment.

 

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Gain on termination of joint venture

We recorded a one-time gain in 2013 in connection with the termination of the joint venture in ZP Group LLC. The gain primarily consists of a notice period termination payment and excess personnel termination reimbursement from Asahi, partially offset by the net deficit of our investment in ZP Group LLC.

Gain on debt forgiveness

Our termination agreement with Asahi for the termination of joint venture provides for the cancellation of ZP Group LLC’s revolving line of credit facility with Asahi, and the discharge, release and forgiveness of all outstanding principal and interest under such line of credit as of March 14, 2014. Accordingly, we recorded a gain on debt forgiveness of approximately $497,000 in the first quarter of 2014.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on 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. Actual results could differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are those that are most critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue recognition

To date, we have generated revenue from collaboration and license agreements for the development of our technology for proposed indications utilizing our microneedle patch system. Collaboration and license agreements may include non-refundable upfront payments, partial or complete reimbursement of research and development costs, contingent payments based on the occurrence of specified events under our collaboration arrangements and royalties on sales of product candidates if they are successfully approved and commercialized.

Our performance obligations under the collaborations may include the transfer or license of intellectual property rights, provision of research and development services and related materials, and participation on development and/or commercialization committees with the collaboration partners. We make judgments that affect the periods over which we recognize revenue. We periodically review our estimated periods of performance based on the progress under each arrangement and account for the impact of any changes in estimated periods of performance on a prospective basis.

We adopted an accounting standard that provides guidance on revenue recognition using the milestone method. Payments that are contingent upon achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on our partner’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to this guidance. Accordingly, we have not recorded any milestone revenue on our consolidated financial statements as the contingent payments received did not meet the definition of milestone revenue.

Amounts related to research and development services are recognized as the related services or activities are performed, in accordance with the contract terms. Payments to us are typically based on the number of full-time

 

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equivalent personnel assigned to the collaboration project and the related research and development expenditures incurred.

Accrued research and development and manufacturing expenses

As part of the process of preparing financial statements, we are required to estimate and accrue expenses, the largest of which are research and development expenses. This process involves:

 

    communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost;

 

    estimating and accruing expenses in our financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and

 

    periodically confirming the accuracy of our estimates with selected service providers and making adjustments, if necessary.

Examples of estimated research and development and manufacturing expenses that we accrue include:

 

    fees paid to CROs and other service providers in connection with nonclinical studies and clinical trials;

 

    fees paid to investigative sites in connection with clinical trials;

 

    fees paid to CMOs in connection with the production of nonclinical study and clinical trial materials; and

 

    professional service fees for consulting and related services.

We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with research institutions and CROs that conduct and manage nonclinical and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Payments under these contracts often depend on factors such as the successful enrollment of patients and the completion of certain clinical trial milestones. Our service providers invoice us in arrears for services performed. In accruing clinical costs, we estimate the time period over which patient enrollment will be completed and the progress of patient enrollment through completion in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the number of patients enrolled or the costs of patient enrollment, our actual expenses could differ from our estimates.

To date, we have not experienced significant changes in our estimates of accrued clinical trial expenses after a reporting period. However, due to the nature of the estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.

Stock-based compensation

We account for our stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation . ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service/vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based awards and stock price volatility.

We account for stock-based compensation to non-employees in accordance with the recognition provisions of ASC 505-50, Equity-Based Payments to Non-Employees , using a fair value approach. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.

 

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We account for stock-based compensation to employees of ZP Group LLC, our prior joint venture with Asahi, in accordance with ASC 323-10-25 and ASC 323-10-35, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee , using a fair value approach. Under the guidance, a reporting entity should recognize stock-based compensation expense at fair value under ASC 718 if it grants awards in the reporting entity’s stock to employees of the investee, in this case ZP Group LLC, if other investors do not make proportionate awards and the reporting entity’s ownership interest does not increase by a proportionate amount. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time. As a result of the termination of our joint venture with Asahi and the resultant termination of all ZP Group LLC employees, all outstanding unvested stock options granted to employees of ZP Group LLC as of December 20, 2013 were canceled. Vested stock options granted to employees of ZP Group LLC are subject to the exercise provisions under our 2012 Stock Incentive Plan. In February 2014, the board of directors extended the exercise period on the vested stock options by 60 days to allow for more time to exercise, if elected by the former employees of ZP Group LLC.

We estimate the fair value of our stock options and awards and the related compensation expense using the Black-Scholes option valuation model. This option valuation model requires the input of subjective assumptions including: (1) estimated period of time outstanding, or expected term, of the options granted, (2) volatility, (3) risk-free interest rate and (4) expected dividend yield. Because stock-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. We have estimated expected forfeitures of stock options based on our historical employment turnover rate and expected turnover in developing a future forfeiture rate. If our actual forfeiture rate varies from our estimates, additional adjustments to compensation expense may be required in future periods. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if facts change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Information pertaining to the Black-Scholes valuation assumptions used for stock options granted to employees and to employees of our previous joint venture, ZP Group LLC, during 2014, 2013 and 2012 is as follows:

 

     Nine Months Ended
September 30,
    Year Ended December 31,  
For valuation of employees and joint venture employees grants :        2014             2013             2013             2012      

Assumptions:

        

Expected volatility

     89.00     89.00     89.00     89.00

Expected term in years

     6.08        6.08        6.08        6.08   

Risk-free interest rate

     2.02%-2.12     1.74     1.74     0.97

Expected dividend yield

     0.00     0.00     0.00     0.00

Information pertaining to the Black-Scholes valuation of common stock options granted to non-employees during 2014, 2013 and 2012 is as follows:

 

     Nine Months Ended
September 30,
    Year Ended December 31,  
For valuation of non-employee grants:        2014             2013             2013             2012      

Assumptions:

        

Expected volatility

     89.00     89.00     89.00     89.00

Expected term in years

     10.00        10.00        10.00        10.00   

Risk-free interest rate

     2.66%-2.89     3.01     3.01     1.78

Expected dividend yield

     0.00     0.00     0.00     0.00

 

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The dividend yield is based upon the assumption that we will not declare a dividend over the life of the options. We have been unable to use historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. We have therefore utilized the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of our stock options considered to have “plain vanilla” characteristics. The risk-free interest rate is based on the U.S. Treasury strip rate on the date of the grant. We compute volatility under the “guideline public company method” by utilizing the average of a peer group comprised of publicly-traded companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded stock price. The peer group was determined based upon companies considered to be direct competition or having been presented by independent parties as a “comparable” company based upon market sector. In determining a comparable, we have excluded “large-cap” entities. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in the statement of operations for the years ended December 31, 2012 and 2013 does not record tax-related effects on stock-based compensation given our historical and anticipated operating losses and offsetting changes in its valuation allowance that fully reserves against potential deferred tax assets.

 

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Stock option grants during 2012, 2013 and 2014

The following summarizes all stock options and restricted stock awards granted during the years ended December 31, 2012 and 2013:

 

Type of Grant

 

Grant Date

 

Reason For Grant

  Shares
Underlying
Grants
    Exercise
Price of
Shares
    Fair Value
Per Common
Share at
Grant Date
    Grant Date
Fair Value
Per Award
Share
    Total Stock-
Based
Compensation
Expense
 
                  (in $)     (in $)     (in $)     ($ in thousands)  

Stock options

  June 15, 2012   Awards to founder     70,753        1.40        1.40        1.03        73   

Stock options

  July 1, 2012   Awards to founding CEO     141,506        1.54 (1)       1.40        1.01        143   

Stock options

  July 25, 2012   Awards to employees     42,071        1.40        1.40        1.03        43   

Stock options

  July 25, 2012   Awards to non-employee advisor and consultant     2,418        1.40        1.40             (2)            (2)  

Stock options

  July 25, 2012   Awards to employees of joint venture     30,103        1.40        1.40             (3)            (3)  

Stock options

  December 11, 2012   Awards to employees     22,916        1.40        1.40        1.03        24   

Restricted stock

  December 11, 2012   Awards to officer employees     12,500        —          1.40        1.40        18   

Stock options

  December 11, 2012   Awards to employees of joint venture     2,750        1.40        1.40             (3)            (3)  

Stock options

  December 11, 2012   Awards to non-employee advisor and consultant     2,418        1.40        1.40             (2)            (2)  
     

 

 

         

Total number of shares granted in 2012

    327,435           
     

 

 

         

Stock options

  February 15, 2013   Awards to employees     18,858        1.40        1.40        0.97        18   

Stock options

  February 15, 2013   Awards to employees of joint venture     10,569        1.40        1.40             (3)            (3)  

Stock options

  April 19, 2013   Awards to a director     28,301        1.40        1.40        0.97        27   

Stock options

  May 24, 2013   Awards to employees     55,112        1.40        1.40        0.97        53   

Stock options

  June 19, 2013   Awards to employees     7,500        1.40        1.40        0.97        7   

Stock options

  June 19, 2013   Awards to employees of joint venture     1,000        1.40        1.40             (3)            (3)  

Stock options

  July 12, 2013   Awards to employees     79,603        1.40        1.40        0.97        77   

Stock options

  July 12, 2013   Awards to employees of joint venture     500        1.40        1.40             (3)            (3)  

Stock options

  July 12, 2013   Awards to non-employee advisor and consultant     2,500        1.40        1.40             (2)            (2)  
     

 

 

         

Total number of shares granted in 2013

    203,943           
     

 

 

         

 

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The following summarizes all stock options and restricted stock awards granted subsequent to December 31, 2013 through September 30, 2014:

 

Type of Grant

 

Grant Date

  

Reason For Grant

  Shares
Underlying
Grants
    Exercise
Price of
Shares
    Fair Value
Per
Common
Share at
Grant Date
    Grant Date
Fair Value
Per Award
Share
    Total Stock-
Based
Compensation
Expense
 
                   (in $)     (in $)     (in $)     ($ in thousands)  

Stock options

  April 15, 2014    Awards to employees     57,625        1.28        1.28        0.95        55   

Stock options

  April 30, 2014    Awards to employees     44,858        1.28        1.28        0.95        43   

Stock options

  July 10, 2014    Award to director     28,301        4.52        4.52        3.36        95   
      

 

 

         

Total number of shares granted in 2014

    130,784           
      

 

 

         

 

(1) Incentive stock option granted to a 10% stockholder. Pursuant to Section 422 of the Internal Revenue Code, incentive stock options granted to 10% stockholders must have an exercise price no less than 110% of fair value.
(2) We account for stock options issued to non-employees in accordance with the recognition provisions of ASC 505-50, Equity-Based Payments to Non-Employees , using a fair value approach. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.
(3) We account for stock options granted to employees of our previous joint venture, ZP Group LLC, in accordance with the recognition provisions of ASC 323-10-25 and ASC 323-10-35, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee, using a fair value approach. The fair value of these options is subject to re-measurement over the vesting period at each reporting date based upon the valuation of our common stock at that time.

Exercise price and fair value of common stock

All options have been granted at exercise prices determined by our board of directors to be not less than the fair value of the underlying common shares on the date of grant. The fair value of the shares of common stock that underlie the stock options we have granted has historically been estimated by our board of directors based upon information available to it at the time of grant, as further discussed below.

We recorded total non-cash stock-based compensation expense of approximately $65,000 and $63,000 for the years ended December 31, 2013 and 2012, respectively. We recorded total non-cash stock-based compensation expense of approximately $122,000 and $55,000 for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014, we had approximately $357,000 of total unrecognized employee stock-based compensation expense, net of estimated forfeitures, related to stock option grants. We expect the amount of our share-based compensation expense for stock options granted to employees and non-employees to increase in future periods due to increases in headcount and, potentially, to increases in the value of our common stock.

Significant factors used in determining the fair value of our common stock

The fair value of the shares of common stock that underlie the stock options we have granted has historically been determined by our board of directors based upon information available to it at the time of grant. Our board of directors, with the assistance of management, developed these valuations using significant judgment and taking into account numerous factors, including progress in our research and development programs, status of clinical trials and preclinical studies relating to our product candidates, operation and financial performance, the lack of liquidity of our capital stock, the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, general and industry specific economic outlook, and independent third-party valuations of our common stock performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . As we have been a private enterprise, a discount for lack of

 

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marketability has been applied to derive the final fair value of our common stock for use in stock option grants. The board has generally considered the most persuasive evidence of fair value to be the prices at which our securities were exchanged in actual arms’ length transactions.

In determining a fair value for our common stock after the April 2012 reorganization, on two separate occasions we engaged an independent third party valuation firm to assess our enterprise value. In each report prepared by the valuation firm, two valuation approaches were considered to determine the enterprise value of our business: the income approach and the market approach.

The income approach estimates the fair enterprise value of a company based on the present value of the company’s future estimated cash flows and the residual value of the company beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in the company achieving these estimated cash flows and taking into account the risk-free rate for the use of funds and the expected rate of inflation over the applicable period. The discount rate used in our third-party valuations was based on rates of return available for alternative investments of similar type and quality.

There are different acceptable methods of applying the market approach. The valuations considered by our board of directors all employ the “guideline public company analysis,” whereby estimates for the fair enterprise value of a company are calculated by applying market multiples of comparable publicly traded companies, in our case in the biotechnology and pharmaceutical industries. The market multiples are based on key metrics implied by the enterprise values of our comparable publicly-traded peers.

The equity values determined by these valuation approaches were then weighted to determine the aggregate equity value of our business. The resulting equity values were then allocated to the common stock using the option pricing method, or OPM. The OPM treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference. The common stock is modeled to be a call option with a claim on the business at an exercise price equal to the remaining value immediately after any senior security is liquidated. The OPM uses the Black-Scholes option-pricing model to value the call option. The OPM is appropriate to use when, as in our case, the range of possible future outcomes is so difficult to predict that lattice or scenario modeling would be highly speculative.

Valuation performed as of May 31, 2012

In conducting our valuation as of May 31, 2012, the board took into consideration the following company-specific events:

 

    The board believed the April 2012 reorganization, in which all of our previously authorized Series A, B, and C preferred stock were converted into common stock at a price that was acceptable to each series of preferred stockholders, would constitute an exchange at arms’ length.

 

    Also in connection with the April 2012 reorganization, all convertible unsecured promissory notes originally issued prior to the reorganization were converted into common and all outstanding warrants were terminated. These facts further led the board to believe that the fair value determined in connection with the organization represented a fair value exchange in an arms’ length transaction.

 

    There had been no significant clinical, manufacturing and regulatory milestones during 2012 and 2013 until December 2013 when our joint venture with Asahi was terminated.

Further, management engaged a third-party valuation firm to perform a valuation of our common stock. The valuation firm applied both the market approach and the income approach to arrive at an estimated enterprise valuation of our equity. The guideline public company analysis performed for the market approach resulted in a fair value indication for our company of $10 million on a minority, marketable basis. The discounted cash flow analysis performed for the income approach resulted in a fair value indication for our company of $10.4 million

 

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on a minority, marketable basis. The market approach and income approach were then equally weighted at 50% to arrive at an estimate enterprise value of our equity. The final step employed by the valuation firm involved allocating our estimated enterprise equity to the common stock using the OPM, to arrive at the estimate of fair value per share of common stock of our company. The OPM assumptions were as follows: a time to liquidity event of 3 years, a risk-free rate of 0.35%, dividend yield of 0%, and volatility of 85% over the time to a liquidity event, which was calculated based on the volatility of the common stock of our comparable publicly-traded peers. The valuation firm then applied a marketability discount of approximately 28%, based on the Finnerty Model, which assumes that the marketability discount on a privately-held security could be approximated by the value of an “average-strike” put option. Based on this analysis, the valuation firm determined the fair value of our common stock to be $1.40 per share as of May 31, 2012.

Based on the company-specific factors discussed above, as supported by the third-party valuation specialists’ report, the board determined that $1.40 per share was not less than the fair value per share of our common stock as of May 31, 2012. At the time of each of the stock awards granted on each date subsequent to May 31, 2012 and through July 12, 2013, the board of directors determined that there had been no significant clinical, manufacturing or regulatory milestones attained that would warrant an increase in the estimate of fair value.

Valuation performed as of December 31, 2013

The Board considered the following factors in estimating the fair value of our common stock as of December 31, 2013:

 

    The collaboration with Asahi is no longer a source of revenue for us.

 

    In the fourth quarter of 2013, encouraged by our findings that higher dosage of PTH can be delivered by our microneedle patch system, we commenced a Phase 1 clinical trial to evaluate the pharmacokinetics, safety and tolerability in healthy post-menopausal women of a single application of one or two Weekly ZP-PTH transdermal patches.

 

    Also in the fourth quarter of 2013, we initiated a Phase 1 clinical trial to evaluate the pharmacokinetics and safety in healthy individual for the application of ZP-Glucagon transdermal patches.

 

    Further, beginning in the second quarter of 2013 and particularly in the third and fourth quarters of 2013, the volume of initial public offerings by biotechnology companies accelerated significantly. More importantly, for the first time, these included offerings by companies in the early stages of development. As a result of these developments, we believed that investors would have interest in our clinical stage, transdermal drug delivery technology.

We also engaged a third-party valuation firm to evaluate the fair value of our common stock as of December 31, 2013, prepared on a minority, non-marketable interest basis. In conducting its valuation, the valuation firm applied both the market approach and the income approach to arrive at an estimated enterprise valuation of our equity. The guideline public company analysis performed for the market approach resulted in a fair value indication for our company of $16.4 million on a minority, marketable basis. The discounted cash flow analysis performed for the income approach resulted in a fair value indication for our company of $9.3 million on a minority, marketable basis. The valuation firm did not give any weight to the market approach and instead used the more conservative value produced by the income approach to estimate enterprise value of our equity. The final step employed by the valuation firm involved allocating our estimated enterprise equity to the common stock using the OPM, to arrive at the estimate of fair value per share of common stock of our company. The OPM assumptions were as follows: a time to liquidity event of 1.8 years, a risk-free rate of 0.31%, dividend yield of 0%, and volatility of 90% over the time to a liquidity event, which was calculated based on the volatility of the common stock of our comparable publicly-traded peers. The valuation firm then applied a marketability discount of approximately 25%, based on the Finnerty Model. Based on this analysis, the valuation firm determined the fair value of our common stock to be $1.28 per share as of December 31, 2013.

 

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Based on the above factors as supported by the third-party valuation specialists’ report, the board determined that the fair value of our common stock was not greater than $1.28 per share as of December 31, 2013. The board also considered that this valuation provided further support for its prior determination that the fair value of our common stock at the time of grant of all previous awards during 2012 and 2013 was not greater than $1.40 per share.

The valuations described above were made solely for the purposes of valuing the common stock underlying our stock option grants for financial reporting purposes and involved significant judgments and estimates, including assumptions regarding our future performance and the success of our pre-clinical studies and planned clinical trials. If we had made different assumptions, our stock-based compensation expense could have been different. The valuation methodologies we have historically used in estimating the fair value of our common stock are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot predict or offer any assurance with regard to the future value of our common stock. Accordingly, investors are cautioned not to place undue reliance on the valuation methodologies we describe above as an indicator of our future stock prices. Before investing in our common stock, you should carefully read this entire prospectus and consider, among other things, the matters described under “Risk Factors.”

Developments subsequent to the December 31, 2013 valuation

We believe that the increase in the estimated fair value of our common stock from $1.40 per share as of December 31, 2013 to $4.52 per share on July 10, 2014, when we most recently granted a stock-based award, is due to the following principal factors:

 

    In January 2014, we completed Phase 1 clinical trials of Weekly ZP-PTH, which was then our lead product candidate, and of our ZP-Glucagon product candidate, with encouraging results.

 

    In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S to develop a new transdermal presentation of semaglutide for treatment of diabetes, and we received an upfront payment of $1 million from Novo Nordisk.

 

    In February 2014, we secured additional bridge financing in the form of $2.5 million of convertible promissory notes issued to affiliates of BMR and New Enterprise Associates 12, Limited Partnership.

 

    In June 2014, we obtained a $4 million term loan facility with Hercules Technology Growth Capital.

In connection with our option award on July 10, 2014, we also engaged a third-party valuation firm to evaluate the fair value of our common stock as of June 30, 2014, prepared on a minority, non-marketable interest basis. In conducting its valuation, the valuation firm considered both the market approach and the income approach to arrive at an estimated enterprise valuation of our equity. The analysis performed for the market approach resulted in a fair value indication for our company of $20.0 million on a minority, marketable basis. The discounted cash flow analysis performed for the income approach resulted in a fair value indication for our company of $32.1 million on a minority, marketable basis. The valuation firm did not give any weight to the market approach and instead used the higher value produced by the income approach to estimate enterprise value of our equity. The final step employed by the valuation firm involved allocating our estimated enterprise equity to the common stock using the OPM, to arrive at the estimate of fair value per share of common stock of our company. The OPM assumptions were as follows: a time to liquidity event of 0.5 years, a risk-free rate of 0.06%, dividend yield of 0%, and volatility of 90% over the time to a liquidity event, which was calculated based on the volatility of the common stock of our comparable publicly-traded peers. The valuation firm then applied a marketability discount of approximately 22%, based on the Finnerty Model. Based on this analysis, the valuation firm determined the fair value of our common stock to be $4.52 per share as of June 30, 2014.

 

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Initial public offering price

In              2014, in consultation with the underwriters, we estimated that the initial public offering price for the shares of common stock offered by this prospectus would be between $         and $         per share. Among the factors that were considered in making the estimate of our initial public offering price were the following:

 

    an analysis of the typical valuation ranges seen in recent initial public offerings for companies in our industry;

 

    the general condition of the securities markets and the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies;

 

    an assumption that there would be a receptive public trading market for pre-commercial drug delivery companies such as us; and

 

    an assumption that there would be sufficient demand for our common stock to support an offering of the size contemplated by this prospectus.

The estimated initial public offering price reflects a significant increase over the estimated valuation as of June 30, 2014 at $4.52 per share. Investors should be aware of this difference and recognize that the estimated initial public offering price is in excess of our prior valuations. We believe the difference may be due to the following factors:

 

    The fact that in November 2014, we entered into a strategic partnership and license agreement with Lilly to develop one or more ZP-PTH microneedle patch products, and Lilly agreed to purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering.

 

    The fact that whereas the estimated initial public offering price necessarily assumes that this offering has occurred and a public market for our common stock has been created, the valuation of our common stock as of June 30, 2014 assumed a time to liquidity of 0.5 years and a marketability discount of 22%.

 

    The fact that capital market conditions have continued to support offerings by biotech companies in the early stages of development, leading us to believe that investors would have interest in our clinical stage, transdermal drug delivery technology.

 

    We also believe that investors in the public markets may apply more qualitative and subjective valuation criteria to our product candidates and business than the quantitative valuation methods we have previously applied, although there can be no assurance that this is the case. Further, the estimated initial public offering price range was not derived using a quantitative determination of fair value, but rather was determined by negotiation between us and the underwriters. In particular, our estimates of the fair value of our common stock as of December 31, 2013 and June 30, 2014 were not considered by us or the underwriters as a factor in estimating the initial public offering price.

Income taxes

We are subject to income tax under the U.S. federal jurisdiction and the State of California. We file U.S. federal income tax returns and California state income tax returns. To date, we have not been audited by the Internal Revenue Service or any state income tax authority.

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

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As of December 31, 2013, we had net deferred tax assets of $56.5 million. The deferred tax assets primarily consisted of federal and state tax net operating losses and research and development tax credit carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets. As of December 31, 2013, we had federal net operating loss carryforwards of approximately $133.1 million and state net operating loss carryforwards of approximately $129.6 million. If not utilized, the federal net operating loss carryforwards will begin to expire in 2026 and state net operating loss carryforwards will begin to expire in 2016. Utilization of net operating loss carryforward may also be subject to an annual limitation due to the ownership change limitations. These annual limitations may result in the expiration of the net operating loss carryforwards before utilization. We have not performed an analysis under Internal Revenue Code Section 382 to determine whether our net operating loss carryforwards will be subject to annual limitation.

As of December 31, 2013, we had federal and state research and development credit carryforwards of approximately $3.4 million and $3.4 million, respectively. If not utilized, the federal tax credits will begin to expire in 2026 and state tax credits currently do not expire.

JOBS Act

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain 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, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including those that will relieve us of responsibility for (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) 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 $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control

 

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over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements due to error or fraud may occur and not be detected on a timely basis.

Our management has determined that as of December 31, 2013, we had a material weakness in our internal control over financial reporting, due to the fact that we did not have the appropriate resources with the appropriate level of experience and technical expertise to provide oversight over the timely preparation and review of schedules necessary for the preparation of our financial statements and to make certain U.S. GAAP accounting judgments. This material weakness had not been remediated as of September 30, 2014.

In order to remediate this material weakness, we have taken, or are taking, the following actions:

 

    during the second quarter of 2014, we recruited and hired additional accounting staff with technical expertise to ensure the proper application of U.S. GAAP, including a new chief financial officer, and expect to continue to expand our finance and accounting staff and to enhance our financial reporting systems;

 

    we are implementing revised policies and procedures and enhancing our review of complex collaboration transactions to ensure consistent application of U.S. GAAP and enhanced internal control over financial reporting; and

 

    we are increasing the level of preparation and review of our financial statements, and in connection therewith, we are implementing additional control procedures as part of our quarter and year-end close processes as well as adding resources in connection with our review of key financial estimates, including fixed assets control procedures, share-based compensation expense, and indebtedness.

Notwithstanding the existence of this material weakness, our management has concluded that the consolidated financial statements included elsewhere in this prospectus present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with U.S. GAAP.

If we fail to fully remediate this material weakness or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company or until we are no longer a non-accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, whichever is later, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Results of Operations

Comparison of the nine months ended September 30, 2014 and 2013

Revenue

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount         %      
     (in thousands)               

Revenue:

          

License fees revenue

   $ 1,819       $ 3,688       $ (1,869     (51 %) 

Collaborative development support services

     662         —           662        N/A   
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 2,481       $ 3,688       $ (1,207     (33 %) 
  

 

 

    

 

 

    

 

 

   

 

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We have not made any commercial product sales. We have generated revenue from collaboration and license agreements for the development and commercialization of our transdermal microneedle patch technology. Total revenue decreased $1.2 million, or 33%, for the nine months ended September 30, 2014 as compared to the same period in 2013. The decrease in revenue was primarily due to approximately $2.6 million of contract revenue we earned from our license and collaboration with Asahi in 2013 that did not recur in 2014 as a result of the termination of our license and collaboration agreement with Asahi, partially offset by approximately $694,000 of license fee revenue earned from our collaboration with Novo Nordisk beginning in 2014 and approximately $662,000 of related development support service revenue.

Cost of license fees revenue

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)                

Cost of license fees revenue

   $ 100       $ —         $ 100         N/A   

Cost of license fees revenue represents our payment obligations under our intellectual property license agreement with ALZA. Cost of license fees revenue increased $100,000 for the nine months ended September 30, 2014 as compared to the same period in 2013 due to the increased royalty attributable to our receipt of a $1.0 million license fee from Novo Nordisk upon execution of a license agreement with Novo Nordisk during the first nine months of 2014.

Research and development expenses

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)                

Research and development

   $ 8,230       $ 4,760       $ 3,470         73

Research and development expenses increased $3.5 million, or 73%, for the nine months ended September 30, 2014 as compared to the same period in 2013. Of this increase, approximately $2.9 million was due to an increase in equipment depreciation expense following the return of equipment to us and the rehiring of key personnel with critical manufacturing know-how upon the termination of our joint venture with Asahi in ZP Group LLC, approximately $832,000 was due to the non-clinical study in preparation for our ZP-Triptan Phase 1 clinical trial to be commenced in the first half of 2015, approximately $392,000 related to servicing our collaboration and license agreement with Novo Nordisk, and approximately $319,000 related to other research projects, partially offset by an approximately $936,000 reduction in spending on our former Weekly ZP-PTH lead product candidate and our ZP-Glucagon product candidate follow the completion of our Phase 1 clinical trials.

General and administrative expenses

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)         

General and administrative

   $ 3,208       $ 2,692       $ 516         19

General and administrative expenses increased $516,000, or 19%, for the nine months ended September 30, 2014 as compared to the same period in 2013. The increase in general and administrative expenses was primarily due to approximately $309,000 in costs related to executive hiring and severance, an approximately $296,000 increase in facility related expenses as a result of the termination of our facility sharing arrangement in the joint

 

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venture with Asahi in ZP Group LLC, and an approximately $165,000 increase in general and administrative expenses, partially offset by a reduction in market research spending of approximately $274,000.

Interest expense, net

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)         

Interest expense, net

   $ 1,261       $ 526       $ 735         140

Interest expense, net, increased $735,000, or 140%, for the nine months ended September 30, 2014 as compared to the same period in 2013. The increase was primarily due to the incremental interest expense incurred in connection with our bridge financings in September 2013 and February 2014, as well as interest on the Hercules loan entered into in June 2014.

Other expense

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)         

Other expense

   $ 143       $ 20       $ 123         615

Other expense increased $123,000 for the nine months ended September 30, 2014 as compared to the same period in 2013. The increase was primarily related to the fair value of the 31,250 shares of common stock that were issued to an affiliate of BMR in June 2014 as an inducement for its subordination of debt in connection with the Hercules loan, including the change in fair value as remeasured at each financial reporting period.

Equity in gain of joint venture

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount         %      
     (in thousands)        

Equity in gain of joint venture

   $ —         $ 45       $ (45     (100 %) 

Equity in gain of joint venture reflects our share of ZP Group LLC’s net gain for the applicable reporting period. Equity in gain of joint venture decreased $45,000, or 100%, for the nine months ended September 30, 2014 as compared to the same period in 2013. This decrease was due to the termination of our joint venture investment in ZP Group LLC in December 2013.

Gain on debt forgiveness

 

     Nine Months Ended
September 30,
     Change  
         2014              2013          Amount          %      
     (in thousands)         

Gain on debt forgiveness

   $ 497       $ —         $ 497         N/A   

Pursuant to the provisions of our joint venture termination agreement with Asahi, we recorded a $497,000 one-time gain on debt forgiveness during the nine months ended September 30, 2014, resulting from the cancellation of ZP Group LLC’s revolving line of credit with Asahi.

 

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Comparison of the years ended December 31, 2012 and 2013

Revenue

 

     Year Ended December 31,      Change  
         2013              2012          Amount     %  
     (in thousands)        

Revenue:

          

License fees revenue

   $ 4,250       $ 9,250      $ (5,000     (54 %) 

Collaborative development support services

     —           2,374        (2,374     (100 %) 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 4,250       $ 11,624      $ (7,374     (63 %) 
  

 

 

    

 

 

    

 

 

   

We have not made any commercial product sales. We have generated revenue from collaboration and license agreements for the development and commercialization of our technology. Total revenue decreased $7.4 million, or 63%, for the year ended December 31, 2013 as compared to the same period in 2012. The decrease in revenue was primarily due to an approximately $7.2 million of payments we received from our license and collaboration with Asahi in 2012 that was not received in 2013. Specifically, we received $5.0 million in license fees from Asahi in 2012 and approximately $2.2 million of collaborative development support services revenue in 2012, which were not received in 2013, in part as a result of the transfer of our manufacturing obligations under our license agreement with Asahi to ZP Group LLC upon forming our joint venture in April 2012.

Research and development expenses

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

Research and development expenses

   $ 7,637       $ 5,399       $ 2,238        41

Research and development expenses increased $2.2 million, or 41%, for the year ended December 31, 2013 as compared to the same period in 2012. Of this increase, approximately $2.7 million was attributable to research and development expenses related to the completion of our final formulation and the initiation of a Phase 1 clinical trial of ZP-Glucagon and approximately $1.8 million was due to the initiation of a Phase 1 clinical trial involving our former Weekly ZP-PTH lead product candidate during the second half of 2013. These increases were partially offset by an approximately $1.9 million reduction in research and development and manufacturing spending in support of our collaboration and license agreement with Asahi during the first quarter of 2012 due to the formation of our joint venture entity (ZP Group LLC) with Asahi which assumed the responsibility for servicing the collaboration, and an approximately $908,000 reduction in other research and development projects.

General and administrative expenses

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

General and administrative expenses

   $ 4,582       $ 3,077       $ 1,505         49

General and administrative expenses increased $1.5 million, or 49%, for the year ended 2013 as compared to the same period in 2012. The increase in general and administrative expenses was primarily due to $520,000 increase in personnel cost related to the addition of key executive management personnel, a $758,000 increase in legal fees in connection with our bridge financing and the acquisition of our short-term investment in Zosano, Inc. and related consulting and accounting fees.

 

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Interest expense, net

 

     Year Ended December 31,      Change  
         2013              2012          Amount      %  
     (in thousands)         

Interest expense, net

   $ 760       $ 663       $ 97        15

Interest expense, net, increased $97,000, or 15%, for the year ended December 31, 2013 as compared to the same period in 2012. The increase was primarily due to the full-year effect of accrued interest on our BMR secured promissory note and the interest expense incurred in connection with our bridge notes issued in September 2013.

Warrant revaluation income

 

     Year Ended December 31,      Change  
         2013              2012          Amount     %  
     (in thousands)        

Warrant revaluation income

   $ —         $ 71       $ (71     (100 )% 

Warrant revaluation income resulted from the re-measurement of our preferred stock warrant liability associated with the warrants to purchase preferred stock issued to lenders under our debt facilities and certain of our former preferred stockholders prior to our 2012 recapitalization. In 2012, we recorded income of $71,000 reflecting a decrease in fair value of the underlying security based upon the fair value re-measured on the date of the warrant retirement. After our recapitalization in 2012, these warrants are no longer outstanding.

Equity in loss of joint venture and gain on termination of joint venture

 

     Year Ended December 31,     Change  
         2013             2012         Amount     %  
     (in thousands)        

Equity in loss of joint venture

   $ (366   $ (738   $ (372     (50 )% 

Gain on termination of joint venture

     3,487        —          3,487        N/A   

Equity in loss of joint venture reflects our share of ZP Group LLC’s net loss for the applicable reporting period. Equity in loss of joint venture decreased $372,000, or 50%, for the year ended December 31, 2013 as compared to the same period in 2012, primarily due to the manufacturing services revenue generated by the joint venture through ZP Group LLC’s contract manufacturing arrangement with us.

Our strategic partnership with Asahi through the joint venture investment in ZP Group LLC was terminated in December 2013. As a result, we recorded a one-time gain on termination of the joint venture of $3.5 million, which represents payments from Asahi for a notice period termination fee of $2.4 million and a non-refundable excess of approximately $1.0 million in reimbursement for the cost of terminating personnel in connection with the wind down of ZP Group LLC.

Liquidity and Capital Resources

Since our inception in October 2006, we have funded our operations primarily through private placements of our preferred stock, secured and unsecured borrowings from private investors, bank credit facilities, and licensing and service revenue from our license and collaboration agreements. We have incurred recurring operating losses and negative cash flows from operating activities since inception, and as of September 30, 2014, had an accumulated deficit of $134.2 million. We expect to incur additional losses in the future to conduct research and development on our product candidates and to conduct pre-commercialization manufacturing activities.

 

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Our primary uses of cash are to fund operating expenses, which have historically been primarily related to research and development and manufacturing activities. From inception through September 30, 2014, we have raised an aggregate of approximately $120 million to finance our business through the sale of preferred stock and $30.3 million from the issuance of debt to private investors. As of September 30, 2014 and December 31, 2013 and 2012, our principal sources of liquidity were our cash and cash equivalents, which totaled $2.3 million, $5.9 million and $5.0 million, respectively.

Our recurring operating losses from operations and our need for additional sources of capital to fund our ongoing operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2013 with respect to this uncertainty. We have no current source of revenue to sustain our present activities other than our license and collaborative agreements with Novo Nordisk and Lilly, and we do not expect to generate substantial revenue for the foreseeable future. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations and there can be no assurance that additional financing will be available to us or that such financing will be available on terms favorable to us, if at all. We intend to raise additional capital through public or private offerings of our equity securities, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements, or a combination of such.

There can be no assurance that we will be able to raise sufficient financing to fund our operations. To the extent that we raise additional capital through the sale of our equity or equity-linked securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Debt financing may not be available to us, and, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Certain of our existing investors have provided us with unsecured bridge financing through the issuance of our convertible bridge notes. Upon the closing of a qualified financing, which is defined under the terms of the convertible bridge notes as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing. We sold these notes in three tranches, in September 2013, February 2014 and December 2014, and raised an aggregate of $6.9 million to sustain our operations. In June 2014, we entered into a $4 million secured term loan facility with Hercules Technology Growth Capital to sustain our operations. The Hercules loan is secured by a senior security interest in substantially all of our assets. The convertible bridge notes are subordinated in right of payment to the Hercules loan.

We estimate that the net proceeds from our issuance and sale of shares of our common stock in this offering will be approximately $             million, assuming an initial public offering price of $             per share, which is 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. We will also receive net proceeds of up to $14.5 million from our issuance and sale of shares of our common stock to Lilly in the concurrent private placement, after payment by us of the private placement fee due to the representatives of the underwriters. If this offering and the concurrent private placement are successful, we anticipate that these estimated net proceeds, along with our existing cash and cash equivalents of $2.3 million as of September 30, 2014, should be sufficient to meet our anticipated cash requirements for at least the next twelve months. Our

 

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forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors, including the factors discussed in “Risk Factors.” See “Cautionary Note regarding Forward-Looking Statements.”

Summary of cash flows

The following table shows a summary of our cash flows for the nine months ended September 30, 2014 and 2013, and for the years ended December 31, 2013 and 2012:

 

     Nine Months Ended September 30,     Year Ended December 31,  
         2014             2013             2013             2012      
     (unaudited)              
    

(in thousands)

 

Cash generated from (used in):

        

Operating activities

   $ (9,001   $ (4,424   $ (3,724   $ 501   

Investing activities

     (1,031     707        1,139        1,984   

Financing activities

     6,422        3,034        3,525        (1,112
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash (used) generated

   $ (3,610   $ (683   $ 940      $ 1,373   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Cash Flow: Net cash used in operating activities was $9.0 million during the nine months ended September 30, 2014, as compared to $4.4 million for the same period in 2013. Net cash used during the first nine months of 2014 was primarily the result of clinical and non-clinical costs, personnel costs related to the rehiring of key personnel with critical manufacturing know-how upon the termination of our joint venture with Asahi in ZP Group LLC and executive hiring, professional fees and administrative expenses incurred in the course of our continuing operations. Net cash used during the first nine months of 2013 was primarily due to operating expenses of approximately $6.4 million, partially offset by the receipt of a $2.0 million license fee payment from Asahi in connection with our collaboration and license agreement.

Net cash used in operating activities was $3.7 million in 2013, as compared to net cash generated from operating activities of $501,000 for the same period in 2012. Net cash used in 2013 was primarily the result of personnel-related costs, clinical trial costs, professional fees and administrative expenses, partially offset by the receipt of the $2.4 million termination notice payment and excess termination expense reimbursement from Asahi in connection with the termination of our joint venture. Net cash generated in 2012 was primarily the result of the receipt of $5.0 million license fees and in collaboration funding from Asahi, partially offset by net cash used in normal operating activities such as personnel cost, outside services, professional and administrative fees. We expect that our net cash used in operating activities will increase significantly in each of the next several years in order to support our operations and complete the development and commercialization of our product candidates.

Investing Cash Flow: Net cash used in investing activities was $1.0 million during the nine months ended September 30, 2014, as compared to net cash generated from investing activities of $707,000 for the same period in 2013. Net cash used in investing activities during the first nine months of 2014 included the purchase of manufacturing equipment to support the clinical trial material production of our transdermal microneedle patch for our former Weekly ZP-PTH lead product candidate and for our ZP-Glucagon and ZP-Triptan product candidates. During the first nine months of 2013, cash generated from investing activities was primarily due to a $1.2 million cash distribution received for the depreciation of our contributed equipment capital to ZP Group LLC, partially offset by a $506,000 purchase of manufacturing equipment.

Net cash generated from investing activities was $1.1 million and $2.0 million in 2013 and 2012, respectively. Net cash generated from investing activities included a cash distribution of $2.4 million and $1.5 million for 2013 and 2012, respectively, from ZP Group LLC for the reimbursement of depreciation charges associated with the equipment we contributed to ZP Group LLC during the formation of our joint venture with Asahi. In 2013, cash generated from investing activities was partially offset by the purchase of property and

 

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equipment for $897,000 and cost of acquiring equity invested in Zosano, Inc., for $365,000. We expect that we will continue to make investments in property, equipment and leasehold improvements as we expand our operations in the future.

Financing Cash Flow : Net cash generated from financing activities was $6.4 million during the nine months ended September 30, 2014, as compared to $3.0 million for the same period in 2013. Net cash generated from financing activities during the first nine months of 2014 was provided through $3.9 million of net proceeds from our debt financing with Hercules and $2.5 million from the issuance of bridge notes to certain of our existing investors. Net cash generated from financing activities during the first nine months of 2013 was provided through $3.0 million of net proceeds from the issuance of bridge notes to certain of our existing investors.

Net cash generated from financing activities in 2013 was provided through $3.0 million from the issuance of our bridge notes and $491,000 from reimbursements received from ZP Group LLC, funded through the revolving line of credit facility provided by AKPUS to ZP Group LLC. Net cash used in financing activities in 2012 was related to the payment of certain prior equipment financing in connection with the recapitalization.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2014:

 

     Payments Due by Period  
     Total      Less than
One Year
     1-3 Years      3-5 Years      More than
5 Years
 
     (in thousands)  

Contractual Obligations

              

Short and long-term debt obligations (including interest)  (1)

   $ 23,392       $ 7,538       $ 15,854      $ —         $ —     

Operating lease obligations (2)

     2,998         766         1,258         974         —     

Purchase commitments (3)

     85         85         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 26,475       $ 8,389       $ 17,112       $ 974      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Short and long-term debt obligations

Bridge financing—related parties convertible promissory notes

In September 2013, we entered into a note purchase agreement with certain of our stockholders pursuant to which we issued convertible bridge notes, raising an aggregate amount of approximately $3.0 million in debt financing. These convertible bridge notes bear simple interest of 8% per annum, with all unpaid principal and accrued interest due and payable on the earlier of: (i) September 9, 2014; (ii) an event of default, as defined in the notes; or (iii) the date that is 30 days following the closing of a first firm commitment underwritten initial public offering pursuant to a registration statement filed under the 1933 Securities Act. We may accelerate and prepay any portion of the outstanding principal and/or interest at any time upon written consent of the noteholders representing not less than 60% of the principal amount then outstanding.

Upon the closing of a qualified financing, which is defined under the terms of the notes as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing.

In February 2014, we sold $2.5 million of additional notes of the same series to certain of the purchasers of the 2013 convertible bridge notes. In June 2014, we amended the 2013 and the 2014 convertible bridge notes to provide that any failure by us to pay any amount under the convertible bridge notes during the period from maturity of the convertible bridge notes through the date that the Hercules loan is repaid in full will not constitute a default under the convertible bridge notes.

 

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In December 2014, we entered into a note purchase agreement with certain of the purchasers of the February 2014 convertible bridge notes pursuant to which we issued convertible bridge notes, raising an aggregate amount of approximately $1.3 million in debt financing. These convertible bridge notes bear simple interest of 8% per annum, with all unpaid principal and accrued interest due and payable on the earlier of: (i) June 1, 2017; (ii) an event of default, as defined in the notes; or (iii) the date that is 30 days following the closing of a first firm commitment underwritten initial public offering pursuant to a registration statement filed under the 1933 Securities Act, unless the note is converted into equity securities in connection with this offering. We may accelerate and prepay any portion of the outstanding principal and/or interest at any time upon written consent of the noteholders representing not less than 60% of the principal amount then outstanding.

Upon the closing of a qualified financing, as defined above, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing.

Secured financing with BMR

In connection with our recapitalization in April 2012, we renegotiated a new lease agreement with BMR to include reduced rent obligations for our facility in Fremont, California. In connection with the rent reduction, we issued a new secured promissory note to an affiliate of BMR and all previously accrued interest, unpaid rent, future rent obligations and other fees due to BMR were either rolled into the note or eliminated. The note payable to BMR is a 4-year non-callable promissory note, bearing interest at the rate of 8% per annum, compound annually, and has an original principal amount of approximately $8.6 million as of April 2012. This note is secured by a security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual properties. All principal and interest are due and payable to BMR on the earliest of (i) April 26, 2016, (ii) the closing of a sale of our company or business, as defined in the note, or (iii) the date that any distribution is made to our stockholders, as defined in the note. We may prepay the note, in whole or in part, at any time without prepayment penalty or premium. Further, we are required to prepay the note immediately prior to, or in connection with, a sale or partial sale of our company, defined as a transaction in which we are acquired or in which we exclusively license or sell all or substantially all of our assets. In any similar transaction that does not qualify as a sale but results in our cash balance being at least $5.0 million in excess of our cash requirements for the 12 months following the closing of such transaction, we are required to prepay an amount equal to half of the excess cash balance over $5.0 million. In June 2014, we amended the BMR note to increase the interest rate during the period that the Hercules loan remains outstanding to match the interest rate of the Hercules loan, and to provide that any failure by us to pay any amount under the BMR note during the period from the maturity date of the BMR note through the date that the Hercules loan is repaid in full will not constitute a default under the BMR note. In exchange for BMR’s agreement to subordinate the BMR secured promissory note to the Hercules loan, we issued 31,250 shares of our common stock to the BMR affiliate that is the holder of the BMR secured promissory note. We intend to use a portion of the proceeds from this offering to make required payments of interest and principal as they become due under the BMR note, as further explained in the section titled “Use of Proceeds.”

The BMR secured promissory note and the related security agreement contain customary conditions related to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of collateralized assets, undergo a change of jurisdiction or relocation of our business, incur debt or incur liens, subject to certain exceptions. The agreements also require us to comply with certain basic affirmative covenants, such as maintenance of financial records, insurance and prompt payment of taxes.

Line of credit with AKP USA, Inc.

In April 2013, ZP Group LLC obtained a $25 million credit facility under a revolving line of credit arrangement with AKP USA, Inc., or AKPUS, an affiliate of Asahi. The facility bore an interest rate of 1.15% per year, and ZP Group LLC was obligated to pay interest on the principal outstanding on the last day of each month until any outstanding principal was paid in full.

 

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Our joint venture with Asahi was terminated in December 2013. Pursuant to the termination agreement, the entire outstanding principal and unpaid and accrued interest shall was discharged, released and forgiven by AKPUS on March 14, 2014.

Secured financing with Hercules

In June 2014, we entered into a loan and security agreement with Hercules Technology Growth Capital for a $4 million term loan facility. The $4 million loan is a senior secured loan that bears interest at a per annum rate equal to the greater of (i) 12.05% and (ii) 12.05% plus the “prime rate” as reported in The Wall Street Journal minus 5.25%. The interest rate floats, and will be determined in accordance with the preceding sentence based on changes to the prime rate as reported in The Wall Street Journal. We are required to pay interest on the outstanding principal balance of the Hercules loan on a monthly basis, beginning July 1, 2014. Repayment of the $4 million principal amount of the Hercules loan is amortized over a 30-month period in equal monthly installments of principal and interest, beginning on January 1, 2015, with all outstanding amounts (including a $100,000 end of term charge) due and payable on June 1, 2017. We are permitted to prepay the full outstanding principal balance of the Hercules loan and all unpaid accrued interest thereon, together with the $100,000 end of term charge plus a prepayment charge equal to 1% of the principal balance repaid, after June 3, 2015, upon seven business days’ prior notice to Hercules. The Hercules loan is secured by a senior security interest in substantially all of our assets. Under the terms of the loan facility, we agreed not to incur, be liable for or prepay any other indebtedness, with limited exceptions.

The BMR secured promissory note and the convertible bridge notes are subordinated in right of payment to the Hercules loan, and BMR’s security interest in substantially all of our assets under the BMR secured promissory note is subordinate to Hercules’ security interest under the Hercules loan. Under the terms of the loan facility, we agreed to give Hercules prior written notice of any amount we propose to pay in respect of the BMR secured promissory note, even if the subordination with Hercules and BMR allows for the payment. Any such payment will give Hercules the right to accelerate any or all of the Hercules loan. In exchange for BMR’s agreement to subordinate the BMR secured promissory note to the Hercules loan, we issued 31,250 shares of our common stock to the BMR affiliate that is the holder of the BMR secured promissory note. We intend to use a portion of the proceeds from this offering to make required payments of interest and principal as they become due under the Hercules loan, as further explained in the section entitled “Use of Proceeds.”

The loan and security agreement with Hercules contains customary conditions related to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of collateralized assets, undergo a change of control, incur debt or incur liens, subject to certain exceptions. The loan and security agreement also requires us to comply with certain basic affirmative covenants, such as maintenance of financial records, insurance and prompt payment of taxes.

 

(2) Operating leases

We have an operating lease with an affiliate of BMR, which through its affiliates is our largest stockholder, for a 55,000 square foot facility in Fremont, California where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In April 2012, we amended the lease agreement to reduce future rent obligations with a new lease term of seven years. As a result of the lease renegotiation, we issued a secured promissory note in consideration for previously accrued interest, unpaid rent, future rent obligations and other fees due to the landlord resulting in prepaid rent which is being expensed on a straight-line basis over the term of the lease. As of September 30, 2014, the prepaid rent of approximately $5.2 million is offset against the deferred rent liability of approximately $5.4 million resulting in a net deferred rent liability of approximately $166,000.

In addition to the operating lease for our facility, we have other non-cancelable operating leases with various vendors for our copiers and water system.

 

(3) Purchase commitments

Our material non-cancelable purchase commitment with an equipment manufacturer is related to the custom manufacturing of certain coating machinery for the production of our transdermal microneedle patches.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks principally relate to interest rates. We had cash and cash equivalents of $2.3 million as of September 30, 2014, and $5.9 million and $5.0 million as of December 31, 2013 and 2012, respectively, which consist of bank deposits and money market funds. Any interest-bearing instruments carry a degree of risk; however, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

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 Pronouncements

In July 2013, Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We are currently assessing the impact of this ASU on our financial statements.

In February 2013, the FASB issued guidance which addresses the presentation of amounts reclassified from accumulated other comprehensive income. This guidance does not change current financial reporting requirements, instead an entity is required to cross-reference to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

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BUSINESS

Overview

We are a clinical stage specialty pharmaceutical company that has developed a proprietary transdermal microneedle patch system to deliver our proprietary formulations of existing drugs through the skin for the treatment of a variety of indications. Our microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, benefits that we believe often are unavailable using oral formulations or injections. Our microneedle patch system has the potential to deliver numerous medications for a wide variety of indications in commercially attractive markets. By focusing our development efforts on the delivery of established molecules with known safety and efficacy and premium pricing, we plan to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

Our short-wear-time transdermal patch consists of an array of titanium microneedles that is coated with our proprietary formulation of an existing drug and attached to an adhesive patch. When the patch is applied with our hand-held applicator, the microneedles painlessly penetrate the skin to a depth of 200 microns or less, resulting in rapid dissolution and absorption of the drug coating through the capillary bed. We believe our system enables rapid and consistent delivery of the drug, with therapeutic effect typically occurring within 30 minutes or less, and easy, pain-free administration. We focus on developing specific formulations of approved drugs to be administered by our microneedle patch system, for indications in which rapid onset, ease of use and stability offer significant therapeutic and practical advantages. We target indications with patient populations that we believe will provide us with an attractive commercial opportunity. Our lead product candidates, and the indications they are expected to treat, are as follows:

 

    Daily ZP-PTH , for severe osteoporosis;

 

    ZP-Glucagon, for severe hypoglycemia; and

 

    ZP-Triptan, for migraine.

Daily ZP-PTH is our proprietary formulation of teriparatide, a synthetic form of parathyroid hormone, PTH 1-34, or PTH, which regulates serum calcium, to be administered daily for the treatment of severe osteoporosis in women.

Osteoporosis is a disease primarily affecting post-menopausal women that is characterized by low bone mineral and structural deterioration of bone tissue, which can lead to an increase in bone fractures. According to the World Health Organization, or WHO, and the International Osteoporosis Foundation, or IOF, a patient has severe osteoporosis when he or she has a T-score £ -2.5 (meaning that the patient has a bone mineral density, or BMD, that is two and a one-half standard deviations below the mean BMD of an ethnically matched thirty-year old man or woman, as applicable), plus one or more fragility fractures. According to the National Osteoporosis Foundation, or NOF, approximately 700,000 adults in the United States suffer from severe osteoporosis.

We believe that anti-resorptive agents, which are typically administered orally and are one of the two main types of osteoporosis drugs currently available in the United States, have significant disadvantages. Bisphosphonates, the current standard of care and a type of anti-resorptive agent, have been associated with infrequent but serious adverse events. We also believe that the other main type of osteoporosis drug currently available in the United States, an anabolic agent administered by injection, often times provides patients with a less than optimal treatment administration experience. The only anabolic agent approved in the United States for the treatment of severe osteoporosis is Eli Lilly and Company’s Forteo ® . Forteo ® is administered by injection daily, has a two-year lifetime limitation on use and is unstable at room temperature and must be refrigerated. Market research suggests that the daily injections required with the current formulation of Forteo ® leads to low compliance rates among patients. We commissioned a market survey in 2010, which estimates that in 2010 only 6% of the treated patients with severe osteoporosis in the United States received prescriptions for Forteo ® . Nevertheless, worldwide sales of Forteo ® in 2013 exceeded $1.2 billion.

 

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Our Daily ZP-PTH product candidate is intended to provide a convenient, easy-to-use, room-temperature-stable alternative for osteoporosis patients. We completed a Phase 2 trial of Daily ZP-PTH in the United States, Mexico and Argentina in 2008. In 2009, we held End-of-Phase 2 meetings with the United States Food and Drug Administration, or FDA, to consider the proposed Phase 3 clinical trial and identify any additional information necessary to support a marketing application for the use of Daily ZP-PTH to treat osteoporosis in postmenopausal women. We also held similar meetings with European regulatory authorities in 2009. These meetings provided us with guidance for Phase 3 development of Daily ZP-PTH which we believe will help speed the regulatory approval process for Daily ZP-PTH. We plan to conduct a Phase 3 trial designed as a non-inferiority study compared to Forteo ® , and intend to seek regulatory approval of Daily ZP-PTH pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or the FDCA, which is a regulatory approval pathway that enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of a previously approved drug for which the applicant has no right of reference, or published literature, in support of its application.

In November 2014, we entered into a strategic partnership and license agreement with Eli Lilly and Company, or Lilly, to develop one or more ZP-PTH microneedle patch products, with the initial product candidate being Daily ZP-PTH. Under the terms of the license agreement, we have granted to Lilly an exclusive, worldwide license to commercialize ZP-PTH in all dosing frequencies. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval, for commercialization of Daily ZP-PTH. We are responsible, at our own expense, for developing Daily ZP-PTH, including clinical, regulatory and manufacturing scale-up activities. We will also manufacture and provide commercial supplies of Daily ZP-PTH to Lilly. In addition to the advantages we believe our microneedle patch system offers, the last of our issued patents covering key features of our microneedle patch system will not expire until 2027.

In November 2014, we entered into a stock purchase agreement with Lilly pursuant to which Lilly will purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. In addition, under the terms of the license agreement, Lilly will make non-refundable milestone payments to us totaling up to $300 million upon achievement of certain regulatory approvals of Daily ZP-PTH and up to $125 million upon achievement of certain sales milestones for Daily ZP-PTH. We are also eligible to receive royalties at a percentage up to the low teens on sales of Daily ZP-PTH in major markets, and will receive reimbursement of manufacturing costs. Lilly has the right to terminate the license agreement prior to regulatory approval of Daily ZP-PTH in the event we fail to achieve certain critical success factors, or CSFs, relating to patient preference for Daily ZP-PTH, development activities culminating in regulatory approval of Daily ZP-PTH in the United States or Japan and commercial readiness activities, or if we fail to cure a material breach of the agreement. Lilly may also terminate the agreement at will at any time after regulatory approval of Daily ZP-PTH in the United States or Japan.

We believe there is a significant opportunity for our Daily ZP-PTH product candidate, given what we believe to be its relatively low risk profile:

 

    Our planned Phase 3 clinical trial of Daily ZP-PTH is a larger and longer version of our previously completed Phase 2 clinical trial. The Phase 3 trial is expected to be a one-year study with 1,200 patients with spine BMD as the primary endpoint, while the Phase 2 trial was a six-month study with 165 patients with spine BMD as the primary endpoint.

 

    We have completed End-of-Phase 2 meetings and Type C meetings with the FDA and have conducted similar meetings with European regulatory authorities, and intend to seek regulatory approval of Daily ZP-PTH pursuant to Section 505(b)(2) of the FDCA.

 

   

Under the terms of our licensing agreement with Lilly, Lilly will be responsible for commercialization of our Daily ZP-PTH product candidate. Given that Lilly markets the only currently approved anabolic agent in the United States for the treatment of osteoporosis and has an experienced sales force that for

 

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over a decade has focused on prescribing physicians, we believe that Lilly is well suited for commercialization of a new anabolic agent such as Daily ZP-PTH.

We also believe there is an opportunity for product differentiation with Daily ZP-PTH:

 

    Dry formulation . Our dry formulation provides enhanced convenience, portability and ease of use, potentially facilitating more effective treatment and improved patient compliance.

 

    Room temperature stability . Our internal studies of Daily ZP-PTH demonstrated Daily ZP-PTH’s ability to be room temperature stable, obviating the need for refrigeration and allowing for a potentially improved patient experience with administration.

Our Phase 2 trial of Daily ZP-PTH included 13 clinical sites in three countries—the United States (in connection with which we submitted an investigational new drug application, or IND, to the FDA), Mexico and Argentina, and was a six-month, outpatient, randomized, placebo-controlled, positive control study with daily self-administration. The study tested a total of 165 postmenopausal women in five groups (three groups with 20 µg, 30 µg, and 40 µg doses of Daily ZP-PTH patches, respectively, one group with a Forteo ® injection and one placebo group), with 33 patients per group. The primary endpoint was spine BMD and the secondary endpoint was hip BMD. The study demonstrated a rapid increase in serum concentration of PTH, quickly followed by a rapid decrease. We believe that this pulsatile pattern, which occurred with all Daily ZP-PTH patch doses, is important for efficacy of an anabolic agent. The study results also demonstrated dose proportionality and high bioavailability (which is the degree and rate at which an administered dose of unchanged drug is absorbed into the body and reaches the blood), with no serious adverse events. The Daily ZP-PTH patch doses illustrated comparable spine BMD and hip BMD compared to the Forteo ® injection. The study also demonstrated comparable safety and adverse event profile of Daily ZP-PTH patch doses compared to the Forteo ® injection. Because these results warranted further development of our Daily ZP-PTH product candidate, we held an End-of-Phase 2 meeting and Type C meetings with the FDA and similar meetings with several European regulatory agencies.

These meetings provided us with guidance for Phase 3 development of Daily ZP-PTH, and we plan to begin Phase 3 clinical development with a trial designed as a non-inferiority study compared to Forteo ® in accordance with the development plan under our license agreement with Lilly. We also intend to seek regulatory approval of Daily ZP-PTH pursuant to Section 505(b)(2) of the FDCA, and scale up manufacturing activities.

Before we entered into our license agreement with Lilly, our lead product candidate was Weekly ZP-PTH, a proprietary formulation of PTH to be administered using our microneedle patch system on a weekly, rather than a daily, basis, for the treatment of severe osteoporosis in women. In January 2014, we completed a Phase 1 clinical trial in Australia to evaluate the pharmacokinetics, safety and tolerability of Weekly ZP-PTH patches in a range of doses. The study results demonstrated a rapid increase in serum concentration of PTH, quickly followed by a rapid decrease. We believe that this pulsatile pattern, which occurred with all patch doses, is important for efficacy of an anabolic agent. The study results also demonstrated dose proportionality and high bioavailability (which is the degree and rate at which an administered dose of unchanged drug is absorbed into the body and reaches the blood), with no serious adverse events. We held a pre-IND meeting with the FDA, a meeting required for the filing of an IND, in July 2014 to discuss the clinical trial design for our planned Phase 2 and Phase 3 trials of Weekly ZP-PTH. As our Phase 1 clinical trial was conducted in Australia, the trial was conducted in compliance with applicable Australian regulations, and we were not required to file any IND in connection with the Phase 1 trial. Our license agreement with Lilly permits, but does not require, us to pursue development of Weekly ZP-PTH at our own expense. Under the agreement, Lilly has exclusive, worldwide rights to commercialize Weekly ZP-PTH, but no royalty or other financial terms governing such commercialization are specified in the agreement. If Lilly chooses to commercialize Weekly ZP-PTH, then we will negotiate the financial terms with Lilly at that time.

ZP-Glucagon is our proprietary formulation of glucagon, a hormone that raises blood glucose levels, intended for the emergency treatment of life-threatening severe hypoglycemia.

 

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Severe hypoglycemia is a complication of diabetes treatment, often caused by insulin overdose, characterized by a very low level of blood glucose that can lead to loss of consciousness, seizure, coma and death. Timely treatment is critical, and may need to be administered to an incapacitated patient in a life-threatening situation by a third party who lacks medical training. Based on a market survey of the hypoglycemia market commissioned by us in 2013, which we refer to as our 2013 hypoglycemia market survey, there are 21 million diagnosed diabetes patients in the United States, of whom 26% are insulin-dependent. Insulin-dependent patients have on average 1.2 severe hypoglycemic events per year.

The current standard of care in a severe hypoglycemic event is administration of glucagon by injection or infusion. The two glucagon products currently marketed in the United States are Lilly’s Glucagon Emergency Kit and Novo Nordisk’s GlucaGen ® , which together accounted for $120 million in sales in United States in 2012. These products, which are both injectables, have unstable formulations and require a time-consuming, multi-step reconstitution process prior to injection.

Our ZP-Glucagon solution is intuitive and ready-to-use

We believe that ZP-Glucagon delivered using our microneedle patch system will offer patients and caregivers the benefit of a simple, easy-to-use device with rapid onset, room temperature stability and enhanced portability, benefits that we believe will encourage patients to carry our product as a glucagon rescue kit.

 

LOGO    LOGO

We expect our finished product to be a single-use, disposable, pre-loaded microneedle patch system. We have designed our product to be intuitive and to be administered with a simple “press-and-apply” action without requiring any cumbersome reconstitution. We intend to introduce a Generation 1 product based on our existing 3 cm 2 patch and the reusable applicator (although this applicator is expected to only be used one time). We expect our Generation 2 product to be an integrated patch and applicator system on a 6 cm 2 patch with a single-use applicator. While we have developed prototypes for both the 6 cm 2 patch and the single-use applicator, we have yet to conduct clinical trials using these versions of our products.

We believe that our stable formulation of ZP-Glucagon, which we have demonstrated is stable for at least six months, will enable us to market ZP-Glucagon as a ready-to-use product. Additionally, in our clinical trials, ZP-Glucagon has shown faster onset of action as compared to intramuscular injection. We believe that rapid injection, fast onset, high bioavailability and low variability will make ZP-Glucagon well suited for use in an emergency rescue situation to bring a patient out of severe hypoglycemia.

Demonstrated high stability of our ZP-Glucagon formulation enables the ready-to-use feature of our product and is a significant source of differentiation compared to current marketed products

In the treatment of severe hypoglycemia, we believe that the practical advantages afforded by the room-temperature stability of our microneedle patch system may be as important as the therapeutic benefits of rapid

 

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onset. We have therefore undertaken and completed multiple preclinical, clinical and stability studies designed to select the appropriate formulation to take into further human clinical development.

We have performed stability studies on four formulations of Glucagon. Because the purity of an unstable compound typically deteriorates over time, our goal in these studies was to maintain a high purity level. In our most recent stability studies with those formulations that we plan to use in our future clinical trials (Formulation C and Formulation D), the formulations demonstrated purity levels in excess of 99% after six months at 40°C, or in excess of 100°F, a temperature significantly higher than room temperature, and consistent with the ambient temperatures that might be encountered in a warm climate by a patient carrying the product in a pocket or purse.

 

LOGO

In January 2014, we completed a Phase 1 trial of ZP-Glucagon designed to assess relative bioavailability with our microneedle patch system at various application sites compared to a currently available form of glucagon administered by intramuscular injection. As our Phase 1 clinical trial was conducted in Australia, the trial was conducted in compliance with applicable Australian regulations, and we were not required to file any IND in connection with the Phase 1 trial. With each of the ZP-Glucagon treatments, we achieved a faster onset, a higher bioavailability and lower variability (which is the range of the data points from the trial showing the measure of the treatment’s effect in relation to the mean of the data points) during the first 30 minutes following application compared to the glucagon injection. Additionally, application of our microneedle patch with our easy-to-use applicator avoids the delay in treatment associated with reconstitution of the currently available injectable products. We believe these attributes will provide significant advantages in the emergency rescue of a potentially comatose patient.

We intend to conduct a Phase 2 trial in Australia to evaluate the performance of our ZP-Glucagon product candidate in type 1 diabetic patients at 0.5 milligram, or mg, and 1.0 mg doses, with induction of hypoglycemia, in comparison to comparable doses of glucagon administered by intramuscular injection. We expect to commence, or treat the first patient in, this Phase 2 trial in the first quarter of 2015 and also complete the trial in the first quarter of 2015.

ZP-Triptan is our proprietary formulation of zolmitriptan, one of a class of serotonin receptor agonists known as triptans, used for the treatment of migraine.

 

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Migraine is a debilitating neurological disease that affects approximately 29 million adults in the United States according to a 2014 study by Global Data Pharma Point, or GlobalData. Symptoms of migraine include moderate to severe headache pain, nausea and vomiting, and abnormal sensitivity to light and sound. According to the Migraine Research Foundation, most patients who suffer from migraine experience attacks once or twice per month, and 14 million people, or about 4% of the U.S. population, experience chronic daily headache in which attacks occur at least 15 days per month.

According to GlobalData, sales of prescriptions for medications indicated for migraine in the United States were approximately $1.9 billion in 2012. Of this amount, $1.1 billion was for triptans, administered orally or by several alternative delivery systems, including nasal sprays, iontophoresis-based transdermal devices (which are devices that deliver medicine through the skin by a low electrical current) and subcutaneous injection. We believe that each of the currently available methods of administering triptans has significant disadvantages. Some migraine patients fail to respond consistently to oral triptans, and oral treatments may be ineffectual for patients who are suffering from the nausea or gastric stasis that can be associated with migraine. Oral, nasal and iontophoretic triptan products are also characterized by relatively slow onset of action. Nasal sprays may be unpleasant in taste, and use of injectables can cause discomfort. Because ZP-Triptan has demonstrated a T MAX of nine minutes in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical hairless guinea pig studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan demonstrated rapid onset and bioavailability comparable to intravenous delivery. In 2014, we continued further confirmatory development of ZP-Triptan with additional preclinical studies. We intend to commence Phase 1 and Phase 2 clinical trials in the first half of 2015 and the second half of 2015, respectively, using an active injectable comparator to assess the relative speed of onset of ZP-Triptan compared to an injectable. The Phase 1 trial will be designed to compare the pharmacokinetic and safety/tolerability profiles of ascending patch doses of zolmitriptan and one subcutaneous injection of commercial sumatriptan, a synthetic triptan used for the treatment of migraine, in healthy volunteers. Our Phase 2 trial will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

Our collaboration with Novo Nordisk. In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, to be applied once weekly using our system for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products, with the initial product candidate being Novo Nordisk’s semaglutide using our microneedle patch system. We received an upfront payment of $1 million upon entering into the agreement. We are eligible to receive payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total $60 million for the first product and $55 million for each additional product. We are also eligible to receive royalties on sales of products in the low to mid single digits and will receive development support, as well as reimbursement of all development and manufacturing costs relating to the Novo Nordisk program. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement. The term of the strategic partnership and license agreement will expire upon the expiration of all of Novo Nordisk’s milestone and royalty payment obligations under the agreement with respect to licensed products. Additionally, Novo Nordisk may terminate the agreement at any time for convenience upon prior written notice to us or within a certain time period following completion of a feasibility study currently being conducted by the parties, and either party may terminate the agreement upon failure of the other party to cure a material breach of the agreement.

Transdermal drug delivery

According to Research and Markets, the global value of the market for systemic transdermal drug delivery products in which we expect to participate was approximately $25 billion in 2013 and is expected to grow to

 

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approximately $40 billion by 2018. We believe this growth is driven by the increasing availability of transdermal systems for important therapeutic applications and changing disease demographics. We believe that our microneedle patch system has the potential to offer significant practical and therapeutic advantages, compared not only to conventional drug delivery methods such as oral formulations and injections but also to currently available transdermal delivery systems, that will enable us to compete effectively in this market.

Benefits of our microneedle patch drug delivery platform

Our microneedle patch painlessly delivers therapeutic compounds into the skin and provides rapid systemic drug delivery in a convenient, easy-to-use system that offers the following therapeutic and practical benefits, among others:

 

    rapid onset and high bioavailability;

 

    room-temperature stability;

 

    consistent delivery independent of the gastrointestinal tract;

 

    convenience and ease of use;

 

    short wear-time, typically thirty minutes or less, with near complete drug delivery (resulting in no drug overdose if the patient forgets to remove the patch); and

 

    avoidance of the biohazard disposal and safety risks associated with needle injections.

Our microneedle patch system consists of a 3 to 6 cm 2 array of titanium microneedles approximately 200-350 microns long, coated with a hydrophilic formulation of the relevant drug, and attached to an adhesive patch. The maximum amount of active drug that can be coated on a patch’s microneedle array depends on the active molecule of the drug formulation, the weight of the excipients in the drug formulation, and the coatable surface area of the microneedle array. For example, we use patches with 2 cm 2 , 3 cm 2 and 6 cm 2 microneedle arrays, and, based on our testing, we believe that the maximum amount of zolmitriptan that can be coated on a patch with a 3 cm 2 microneedle array is approximately 2 mg. The patch is applied with a hand-held applicator that painlessly presses the microneedles into the skin to a uniform depth in each application, close to the capillary bed, allowing for rapid and consistent dissolution and absorption of the drug coating, yet short of the nerve endings in the skin. The typical patch wear time is thirty minutes or less, avoiding skin irritation. We believe our applicator has an intuitive, simple and patient-friendly design and is available in reusable form for chronic indications or in a disposable, single-use form for acute indications.

 

LOGO    LOGO

We believe our microneedle patch system has the potential to deliver a wide range of therapeutic compounds, including biologics and other large, complex molecules that have historically been difficult to deliver transdermally. Our microneedle technology and short-wear patch avoid the skin irritation and sensitization caused by skin-permeating ingredients that are necessary in some existing patch technologies, as well as the adhesion failures experienced when patches requiring extended wear times are worn by the patient, for example when swimming, bathing or during other normal daily activities. Our patch is small and unobtrusive

 

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compared to existing transdermal products, and our mechanical applicator is simple and easy to use, unlike some transdermal systems that involve cumbersome, complex and costly devices with external power sources.

Our drug formulations are dry, hydrophilic formulations and the final packaging contains a desiccant and is purged with nitrogen to remove any traces of moisture and oxygen. These features help provide extended product stability and longer shelf life at room temperature than conventional liquid formulations. We have demonstrated a 36-month shelf life at room temperature for our Daily ZP-PTH product candidate and an initial six-month shelf life at up to 40 degrees Celsius for our ZP-Glucagon product candidate. Our dry formulations and room temperature stability obviate the need for refrigeration, eliminate the need for time-consuming reconstitution prior to use, and provide enhanced convenience, portability and ease of use, potentially facilitating more effective treatment and patient compliance.

The stability of a drug formulation is determined by whether the formulation is able to maintain its physical and chemical properties over time under specified environmental storage conditions. In our internal studies, our Daily ZP-PTH formulation coated on the patch and stored at room temperature in its sealed, nitrogen-filled package retained over 98% of its purity for 12 months and over 97% of its purity after 36 months. By contrast, Forteo ® retained less than 87% of its purity after 12 months when stored at room temperature, and less than 95% of its purity after 12 months when under refrigeration (2-8 °C). The following table illustrates the results of our internal stability studies of our Daily ZP-PTH product candidate and Forteo ® .

LOGO

Our internal development programs involve generic molecules with demonstrated safety and efficacy and a low clinical and regulatory risk relative to new chemical entities, or NCEs. We believe that these programs will have a shorter development time and lower cost to commercialization than typical NCEs. In selecting our development candidates we consider the therapeutic advantage of rapid onset, the size of the market, the level of competition and the potential selling price.

Our research and development group has expertise in two areas critical to our success: developing drug formulations that can be delivered using our microneedle patch system and optimizing the system to deliver those drugs.

 

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We operate a current good manufacturing practices, or cGMP, manufacturing facility in Fremont, California, and we believe we have sufficient manufacturing and test capabilities to produce the microneedle patch system for our contemplated preclinical and Phase 1, Phase 2 and pivotal trials for our products.

Our development pipeline

We have tested our microneedle patch system in preclinical and clinical proof of concept studies that demonstrated its technical feasibility with approximately thirty compounds, ranging from small molecules to proteins, including the following:

 

LOGO

Over 30,000 of our patches have been applied to over 400 patients in seven Phase 1 clinical trials and one Phase 2 trial. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a number of other indications beyond those on which we are currently focused, where fast onset, room-temperature stability, and ease of use will fill a significant unmet need.

After our lead product candidates, the compounds that we have assigned the highest priority for further investigation for use with our microneedle patch system include:

 

    epinephrine, for treatment of anaphylactic shock; and

 

    granisetron, for the treatment of chemo-induced nausea and vomiting.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of generic drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

 

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Our strategy

Our goal is to make transdermal drug delivery a standard of care for delivering drugs requiring fast onset. The key elements of our strategy are to:

 

    Pursue indications with high unmet medical need and greater probability of clinical, regulatory and commercial success. We focus on indications in which rapid onset, ease of use and stability offer particularly important therapeutic and practical advantages that address unmet needs, that have patient populations large enough to provide us with an attractive commercial opportunity, and where there is currently limited competition and premium pricing. We believe we will be able to compete effectively and profitably in these markets by offering an efficacious and lower cost alternative to existing treatments. We also believe that by continuing to focus on indications that can be treated with generic molecules with known safety and efficacy, for which we can develop our own proprietary formulations, we will be able to reduce our clinical and regulatory risk and development costs and accelerate our time to commercialization.

 

    Maintain our focus on effective execution of our clinical trials. We believe that timely and efficient execution of our clinical development plans has been critical to our success to date. We have developed significant experience in the design and conduct of clinical trials and have established strong relationships with clinical teams, contract research organizations, or CROs, and key specialists and opinion leaders in our field that we believe have enabled us to rapidly and cost effectively advance our product candidates and reduce our regulatory risk early in the development process. We intend to continue to maintain, as a primary focus of our efforts, excellence in execution of our clinical development plan.

 

    Expand our manufacturing capabilities and reduce cost of goods . We intend to devote significant resources to expand the capacity and throughput of our manufacturing operations, and to reduce our manufacturing costs. We believe this will be important to support the late-stage development, launch and commercial production of our product candidates, to establish and maintain high gross margins and to make other indications more economically viable.

 

    Develop a targeted commercial infrastructure. We believe that the markets on which we have initially focused, and intend to focus in the future, are ones in which there are relatively concentrated prescriber bases that can be served by a small, targeted sales force dedicated to each product. Our goal is to develop a cost-effective commercial infrastructure that will enable us to retain and maximize the commercial opportunity presented by our proprietary products.

 

    Partner selectively to expand the utilization of our microneedle patch drug delivery platform. We have retained all commercial rights to our lead product candidates other than Daily ZP-PTH. We believe that our microneedle patch system can be used to deliver treatments for a wide variety of indications in addition to those on which we have initially focused. We believe that the potential for third parties to offer their own proprietary drugs in a more effective or easier to use form, as well as to significantly extend the product life cycle of a profitable drug with limited remaining patent protection, will be attractive to potential collaborators. We intend to continue to selectively collaborate with third parties with respect to delivery of their proprietary drugs, as we have done in our collaborations with Lilly and Novo Nordisk. We may also collaborate with third parties to pursue clinical and commercial development of our own products in geographies outside the United States where it may be more cost effective to do so.

 

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Our product candidates

The expected development timeline for our product candidates is summarized below:

 

LOGO

The information provided in the table above is a forward-looking statement and is only intended to describe our expectations for the development time frame of our product candidates as of the date of this prospectus, assuming consummation of this offering and based on our expected use of the net proceeds of this offering, as described in “Use of Proceeds” on page 47. It is possible that we will not achieve the progress that we expect with respect to the clinical trials of our product candidates because the actual costs and timing of conducting clinical trials are difficult to predict and are subject to substantial risks and delays. In addition, the expected net proceeds of this offering will not be sufficient for us to complete the development of all of the product candidates described above and we will need to raise substantial additional capital to complete the development of any product candidate, other than ZP-Glucagon. See “Risk Factors” and “Cautionary Note regarding Forward-Looking Statements.”

Our osteoporosis opportunity—Daily ZP-PTH collaboration with Eli Lilly and Company

Our product candidate Daily ZP-PTH is our proprietary formulation of PTH, to be administered daily for the treatment of severe osteoporosis. We believe that the main types of osteoporosis drugs currently available in the United States either have shortcomings in efficacy and safety or often times provide patients with a less than optimal treatment administration experience. Our Daily ZP-PTH product candidate is intended to provide a convenient, easy-to-use, room-temperature-stable alternative for osteoporosis patients. We completed a Phase 2 trial of Daily ZP-PTH in the United States (in connection with which we submitted an IND to the FDA), Mexico and Argentina in 2008, and we held End-of-Phase 2 meetings with the FDA and similar meetings with European regulatory authorities in 2009. In November 2014, we entered into a strategic partnership and license agreement with Lilly to develop one or more ZP-PTH microneedle patch products, with the initial product candidate being Daily ZP-PTH. We plan to begin Phase 3 clinical development of Daily ZP-PTH with a trial designed as a non-inferiority study compared to Forteo ® , and intend to seek regulatory approval of Daily ZP-PTH pursuant to Section 505(b)(2) of the FDCA. In addition to the advantages we believe our microneedle patch system offers, the last of our issued patents covering key features of our microneedle patch system will not expire until 2027.

Under the terms of the license agreement with Lilly, we have granted to Lilly an exclusive, worldwide license to commercialize ZP-PTH administered through our microneedle patch system at any dosing frequency. The initial focus of our development efforts under the agreement will be on the development of Daily ZP-PTH. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval, for commercialization of Daily ZP-PTH. We are responsible, at our own expense, for developing Daily ZP-PTH, including clinical, regulatory and manufacturing scale-up activities. We will also manufacture and provide

 

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commercial supplies of Daily ZP-PTH to Lilly. Lilly will make non-refundable milestone payments to us totaling up to $300 million upon achievement of certain regulatory approvals of Daily ZP-PTH and up to $125 million upon achievement of certain sales milestones for Daily ZP-PTH. We are also eligible to receive royalties at a percentage up to the low teens on sales of Daily ZP-PTH in major markets, and will receive reimbursement of manufacturing costs.

The license agreement permits, but does not require, us to pursue development of Weekly ZP-PTH at our own expense. Lilly has exclusive, worldwide rights under the agreement to commercialize Weekly ZP-PTH, but no royalty or other financial terms governing such commercialization are specified in the agreement. If Lilly chooses to commercialize Weekly ZP-PTH, then we will negotiate the financial terms with Lilly at that time. We also entered into a stock purchase agreement with Lilly in November 2014 pursuant to which Lilly will purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price.

The term of the license agreement with Lilly will expire on a country-by-country basis upon the expiration of all of Lilly’s royalty payment obligations. Additionally, Lilly may terminate the agreement prior to regulatory approval of Daily ZP-PTH in the United States or Japan if we fail to achieve certain critical success factors, or CSFs, relating to patient preference for Daily ZP-PTH, development activities culminating in regulatory approval of Daily ZP-PTH in the United States or Japan and commercial readiness activities, or at will at any time after regulatory approval of Daily ZP-PTH in the United States or Japan. We may terminate the agreement at any time prior to regulatory approval of Daily ZP-PTH in the United States or Japan if we determine that a CSF is commercially or scientifically unreasonable and we discontinue development of Daily ZP-PTH. Either party may terminate the agreement upon failure of the other party to cure a material breach of the agreement.

Osteoporosis market is large and attractive

Osteoporosis is a disease characterized by low bone mass and structural deterioration of bone tissue, which can lead to an increase in bone fractures. It mainly affects adults age 50 and older. The NOF estimates that approximately nine million adults in the United States have osteoporosis and more than 43 million have low bone mass, placing them at increased risk for osteoporosis and broken bones. Assuming osteoporosis and low bone mass prevalence remain unchanged, the NOF projects that by 2020, 10.7 million adults will have osteoporosis and 58.2 million will have low bone mass. In addition, the NOF has estimated that osteoporosis is responsible for more than two million bone fractures in the United States per year resulting in an estimated $19 billion in costs. As the United States population age 50 and older increases, the NOF projects that the incidence of osteoporosis will also increase. The NOF expects that the number of bone fractures due to osteoporosis will rise to three million by 2025 resulting in an estimated $25.3 billion in costs. A patient has severe osteoporosis when he or she has a T-score £ -2.5 plus one or more fragility fractures. Approximately 700,000 adults in the United States suffer from severe osteoporosis.

Significant unmet needs with existing treatments

There are two main types of osteoporosis drugs currently available in the United States, anti-resorptive agents and anabolic agents. Anti-resorptive agents act to prevent bone loss by inhibiting the breakdown of bone, whereas anabolic agents stimulate bone formation to build new, high-quality bone. Both types of drug are typically prescribed by specialists, including gynecologists, endocrinologists, rheumatologists, orthopedists and geriatricians.

We believe that existing anti-resorptive therapies have shortcomings in efficacy, tolerability and convenience. In part due to these limitations, anabolic agents are generally used as an alternative to anti-resorptive agents. For example, bisphosphonates, the current standard of care and a type of anti-resorptive agent, do not stimulate new bone growth, and have been associated with infrequent but serious adverse events, such as osteonecrosis of the jaw (which is a bone disease where the jaw bone begins to weaken and die), atrial fibrillation and anomalous bone fractures, especially of long bones, resulting from “frozen bone” (which is a condition that shuts down the body’s

 

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natural process of bone breakdown and regeneration). We believe that this limitation on their efficacy and safety concerns related to these serious adverse events which may limit their duration of use, has created demand for bone anabolic agents as an alternative to anti-resorptive agents.

Forteo ® is a market leader with $1.2 billion in global revenue and is a valuable collaboration partner for us

We believe that our collaboration with Lilly for ZP-PTH will provide an opportunity for accelerated market penetration given the strong presence of Lilly’s Forteo ® in the osteoporosis market. There may be potential for synergies with the branding, patient support and physician education already in place for Forteo ® . In addition, we believe that the exclusive nature of our license agreement with Lilly, under which Lilly has agreed that it will not seek to develop or commercialize a transdermal patch technology for the treatment of osteoporosis other than with us pursuant to our agreement, will provide us with significant competitive advantages.

Completed clinical development of Daily ZP-PTH to date

Phase 2 trial with Daily ZP-PTH treatment showed a pulsatile delivery leading to a high BMD gain versus Forteo ®

In 2008, we completed a Phase 2 trial of Daily ZP-PTH. The objective of the study was to determine the safety and efficacy of our microneedle patch system compared to a placebo patch and a subcutaneous teriparatide 20 µg injection in post-menopausal women with osteoporosis. The design consisted of a six-month, randomized, placebo-controlled, positive control, multi-dose daily administration study with 165 patients enrolled. The study contained five arms: three arms of Daily ZP-PTH (20 µg, 30 µg, 40 µg) and a placebo patch, all self-administered daily with a 30-minute wear time, and a teriparatide 20 µg injection administered daily. Our Phase 2 trial demonstrated that at six months, the Daily ZP-PTH patch at 40 µg increased lumbar spine bone mineral density by a mean of 4.97%, compared to a loss of bone mineral density of a mean of 0.33% with a placebo, and increased hip bone mineral density by a mean of 1.33%, compared to an increase of a mean of 0.09% with teriparatide 20 µg injection and a loss of a mean of 0.63% with placebo (see tables below). In the tables immediately below, the 95% confidence interval, or CI, means a range of values for a variable of the measure of treatment effect, constructed so that this range has a specified probability of including the true value of the variable. P-value, or p, means the level of marginal significance within a statistical hypothesis test, representing the probability of the occurrence of a given event.

 

LOGO

 

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The Daily ZP-PTH Phase 2 trial demonstrated the fast-on, fast-off pharmacokinetic profile we believe is critical for strong anabolic effect, which we believe contributed to the increases in lumbar spine and hip bone mass density illustrated above. The pharmacokinetic profile for all patch doses showed a faster time to peak concentration and a shorter apparent half-life than the subcutaneous teriparatide 20 µg injection.

 

LOGO

In terms of safety, the mean serum calcium for all Daily ZP-PTH doses increased moderately, but remained within the normal range. None of the patients discontinued the trial due to hypercalcemia (which is an elevated level of calcium in the blood) or hypercalciuria (which is an elevated level of calcium in the urine), potentially dangerous conditions with cardiovascular risk. During the six months of therapy, there was no clinically significant, or outside the range of normal, hypercalcemia observed and there were no clinically significant changes in liver functions, renal functions, blood counts or electrocardiograms. Also, no antibodies against PTH were detected nor any skin infection observed in any of the Daily ZP-PTH treatment groups.

In summary, the Daily ZP-PTH Phase 2 trial demonstrated that transdermal delivery of PTH using our microneedle patch system increased bone density over six months, and demonstrated:

 

    a faster T MAX , a higher C MAX and a shorter half-life (critical to the efficacy of an anabolic) observed with the patch versus Forteo. ® T MAX is a measure of the time after administration of a drug when it reaches the highest serum concentration. C MAX is a measure of the peak serum concentration achieved after the drug has been administered; and

 

    comparable efficacy compared to Forteo ® as measured by both six-month spine BMD and six-month hip BMD, even with lower bioavailability versus Forteo ® .

 

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We have demonstrated 36-month stability of our Daily ZP-PTH formulation at room temperature

The stability of a drug formulation is determined by whether the formulation is able to maintain its physical and chemical properties over time under specified environmental storage conditions. In our internal studies, our Daily ZP-PTH formulation coated on the patch and stored at room temperature in its sealed, nitrogen-filled package retained over 98% of its purity for 12 months and over 97% of its purity after 36 months. By contrast, Forteo ® retained less than 87% of its purity after 12 months when stored at room temperature, and less than 95% of its purity after 12 months when under refrigeration (2-8°C). The following table illustrates the results of our internal stability studies of our Daily ZP-PTH product candidate and Forteo ® .

LOGO

Planned clinical development of Daily ZP-PTH

We expect to conduct our Phase 3 Daily ZP-PTH clinical trial after having additional meetings with the FDA and regulatory authorities in Japan to discuss and seek renewed consensus on our development plan for Daily ZP-PTH.

The Phase 3 trial is expected to be a 12-month, randomized, double-blind, double-dummy, multi-center global study comparing the safety and efficacy of Daily ZP-PTH to Forteo ® for the treatment of postmenopausal osteoporosis, with a six-month safety extension. The trial will have three arms, with approximately 400 patients per arm (Daily ZP-PTH 30 µg, Daily ZP-PTH 40 µg and Forteo ® ).

Study o bjectives . The objectives of this trial are to demonstrate non-inferior lumbar spine BMD changes over one year with Daily ZP-PTH 30 µg and Daily ZP-PTH 40 µg doses compared to Forteo ® , to assess hip BMD changes over 12 months, to assess the effect of Daily ZP-PTH on biochemical markers of bone turnover, and to assess the safety of Daily ZP-PTH 30 µg and 40 µg doses, relative to that of Forteo ® .

Primary e fficacy e ndpoint . The primary efficacy endpoint will be the percent change in lumbar spine BMD (L1-L4) over 12 months.

Secondary e fficacy e ndpoints . The secondary efficacy endpoints will be the percent change in total hip BMD over 12 months, percentage of responders in terms of lumbar spine BMD gains, percent change in femoral neck BMD, and percent change in one-third radius BMD, all measured after twelve months of treatment.

 

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Safety endpoints . The safety endpoints will be maximal change in serum calcium within the first 10 hours of an administration (evaluated in a subgroup) and incidence of adverse events.

Study d esign . The study is randomized, double-blind, double-dummy, active-controlled parallel group one-year multi-center study, with a six-month safety extension. The planned 1200 eligible patients will be randomized equally to receive one of the following for one year:

 

    One patch of Daily ZP-PTH 30 µg dose and one placebo injection;

 

    One patch of Daily ZP-PTH 40 µg dose and one placebo injection; and

 

    Daily administration of Forteo ® (20 µg) subcutaneous injection and one placebo patch.

Study p owering . The study will be powered to illustrate a non-inferiority margin of 1.5% of active comparator to Forteo ® .

Blinding . Patients in the control group will receive sucrose-coated patches that are identical in gross appearance to the Daily ZP-PTH patches. Patients in the test (investigational treatment) group will receive a pen identical or similar to the Forteo ® pen for daily injections. The active and placebo pens will have identical labels. If the pens are not identical, patients will be instructed in its use by a designated person at each site who is not involved in any of the study assessments.

Our hypoglycemia opportunity—ZP-Glucagon

Our product candidate ZP-Glucagon is our proprietary formulation of glucagon, for the emergency rescue of patients suffering from life-threatening, severe hypoglycemia. We believe that ZP-Glucagon delivered using our microneedle patch system will offer patients and caregivers a simple device providing rapid onset and enhanced ease of use, as well as extended room temperature stability, compared with the two glucagon products currently marketed in the United States

In January 2014 we completed a Phase 1 trial that demonstrated faster onset, a higher bioavailability and lower variability with ZP-Glucagon treatments compared to glucagon injection. The Phase 1 trial was conducted in Australia and, as such, was not subject to an IND and was conducted in compliance with applicable Australian regulations. We intend to commence a Phase 2 trial in Australia to evaluate the performance of ZP-Glucagon in type 1 diabetic patients at 0.5 mg and 1.0 mg doses, with induction of hypoglycemia, in comparison to comparable doses of glucagon administered by intramuscular injection. We expect to commence this Phase 2 trial in the first quarter of 2015 and also complete the trial in the first quarter of 2015.

Severe hypoglycemia market is attractive and underserved

Severe hypoglycemia is a life-threatening potential complication of diabetes treatment. It is characterized by very low level of blood sugar, often resulting from insulin overdose, which can cause loss of consciousness, seizure, coma and death. Timely treatment is critical. Severe hypoglycemia is treated by restoring blood glucose to normal levels by administering a glucagon injection or infusion. The treatment is typically provided by a third party, caregiver or a bystander, as the patient is unable to self-administer the injection. Despite the risks involved with hypoglycemia, many insulin-dependent patients do not carry glucagon rescue kits.

There are 21 million diagnosed diabetes patients in the United States, of whom 26% are insulin-dependent. Insulin-dependent patients have on average 1.2 severe hypoglycemic events per year. There are currently two glucagon products marketed in the United States, Glucagon Emergency Kit by Lilly and GlucaGen ® by Novo Nordisk. Based on our 2013 hypoglycemia survey, we estimate that in 2012, sales of these products exceeded $120 million in the United States with units sold at an average wholesale price of $188 per unit, and that the injectable glucagon market is growing at approximately 15% year-over-year, largely driven by ongoing price increases.

 

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Sales of glucagon are driven by a combination of new glucagon prescriptions and refills of expired prescriptions after the end of the shelf life. Prescriptions for glucagon are most commonly written by diabetes specialists, including adult and pediatric endocrinologists. Pediatric use and use by the elderly in long-term care facilities comprise approximately 45% of the total prescriptions sold. Both of these segments need an intuitive and easy-to-use system for administration of glucagon.

We believe that ZP-Glucagon also has the potential to address the needs of type 2 insulin-dependent diabetics. There are approximately 2.9 million patients in this segment who, because they become insulin- dependent later in their adult life, do not have the same level of training or education on insulin dosing as type 1 diabetics. We believe that a user-friendly device such as our microneedle patch system for administration of ZP-Glucagon will be an attractive offering for this market segment.

Existing treatments require reconstitution and injection, limiting their usefulness in an emergency rescue situation

There are currently two products marketed in the United States for severe hypoglycemia, Glucagon Emergency Kit by Lilly and GlucaGen ® by Novo Nordisk. Due to its chemical constitution, the glucagon molecule is inherently unstable, and both commercially available products require a multi-step reconstitution process prior to use. Reconstitution and injection are typically administered by a third party who may lack medical training. To our knowledge, all competitors marketing or developing products for severe hypoglycemia offer injectable products.

Clinical development of ZP-Glucagon

Glucagon is indicated for use in emergency rescue of severely hypoglycemic patients with a recommended dose of 1 mg for adults and 0.5 mg for children under 44 pounds. We have conducted preclinical studies and clinical trials with a 0.5 mg dose using our existing 3 cm 2 patch and the reusable applicator.

Our ZP-Glucagon development program consists of studies designed to systematically reduce the development risk as the studies are completed. Our Phase 1 trial was conducted in Australia and, as such, was not subject to an IND and was conducted in compliance with applicable Australian regulations. A Phase 2 trial, also to be conducted in Australia, will be followed by a Phase 3 trial. The Phase 3 trial will be designed as a non-inferiority study compared to commercial glucagon administered by intramuscular injection, with submission in accordance with the 505(b)2 regulatory guidelines. After approval of our Generation 1 product, we will subsequently conduct a bridging study (which is a supplemental clinical trial designed to confirm that the pharmacokinetics of our Generation 2 product is not inferior to the pharmacokinetics of our Generation 1 product) for launch of our Generation 2 product with a 6cm 2 patch and a single-use applicator.

The endpoints in a glucagon trial are the responder rate and the time to normalization of glucose levels. Both endpoints are objective and measurable within a very short period of time after administration of glucagon.

Completed Phase 1 trial of ZP-Glucagon illustrated fast onset, high bioavailabilty and low variability across multiple application sites

Our first Phase 1 trial was completed in January 2014. It was designed to assess relative bioavailability with our microneedle patch system on a 3cm 2 patch compared to GlucaGen ® which is administered by intramuscular injection. We compared subjects across multiple application sites with two formulations (formulation C and formulation D) in a single-center, open-label, randomized five-way crossover study using 0.5 mg on both the ZP-Glucagon patch and GlucaGen ® . The study included 20 healthy volunteer subjects.

We achieved a faster onset and a higher bioavailability with each of the ZP-Glucagon treatments vs. the Glucagon intramuscular injection. The pharmacokinetic and pharmacodynamic data is shown in the graphs

 

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below. The table below the two graphs shows the data points in the first of the two graphs, and the CV, or coefficient of variation, which represents the variability of the specified data points.

 

LOGO

 

Treatment    AUC  last    AUC  30min   

AUC  30min

(% > IM)

   max (min)    max (pg/mL)

Glucagon IM

Upper arm

  

1558±685

CV 44%

  

1106±553

CV 50%

        11.8±4.4    2333±1256

Patch C

Upper arm

  

1921±551

CV 29%

  

1724±492

CV 29%

   56%    6.9±2.4    5438±1754

Patch C

Forearm

  

1669± 473

CV 28%

  

1441±395

CV 27%

   30%    8.1±3.9    4136±1393

Patch C

Abdomen

  

1988±769

CV 39%

  

1664±596

CV 36%

   50%    8.4±3.4    4785±1791

Patch D

Abdomen

  

1440±667

CV 46%

  

1270±580

CV 46%

   15%    8.5±2.9    3918±2021

Note: AUC measured in ng*hr/mL

Planned clinical development of ZP-Glucagon

Planned Phase 2 trial

We expect to commence our Phase 2 clinical trial in the first quarter of 2015. Based on the higher bioavailability results from our Phase 1 trial, it is possible that we could have a therapeutic patch dose with a coated amount less than 1 mg. Therefore, in our Phase 2 trial, we are testing both a single patch dose of 0.5 mg and two patches of 0.5 mg (total dose of 1.0 mg) compared to 0.5 mg and 1.0 mg of intramuscular injection.

This study is expected to investigate the safety and efficacy of ZP-Glucagon in the treatment of insulin-induced hypoglycemia in diabetic patients (as opposed to healthy volunteers used in our Phase 1 trial). We expect this study to (i) inform our target dose for the pivotal Phase 3 trial and (ii) give us guidance to adequately power the pivotal study.

This trial is expected to be a four-way crossover study with 18 diabetic patients, each of whom would be administered the following four doses:

 

    One patch of ZP-Glucagon 0.5 mg applied on the upper arm;

 

    Two patches of ZP-Glucagon 0.5 mg applied on the upper arm;

 

    Intramuscular injections of 1.0 mg commercial glucagon; and

 

    Intramuscular injections of 0.5 mg commercial glucagon.

The primary endpoints in this study are expected to be as follows:

 

    Time to increase in blood glucose concentration from baseline by 50 mg/dl;

 

    Blood glucose concentration change from baseline 15 minutes after treatment administration;

 

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    Maximal change from baseline in blood glucose concentration; and

 

    Incidence of adverse events.

Planned pivotal Phase 3 trial

We plan on conducting a single, open-label, crossover non-inferiority pivotal study for our Generation 1 ZP-Glucagon product with GlucaGen ® as the active comparator, in approximately 100 diabetic patients in approximately 25 centers. This pivotal study will be a larger version of our Phase 2 trial.

The objectives of the study will be:

 

    To demonstrate non-inferiority of ZP-Glucagon to normalize blood glucose in subjects with type-1 or type-2 diabetes mellitus after prior induction of hypoglycemia, compared to the intramuscular injection of glucagon at a dose of 1.0 mg; and

 

    To characterize the safety profile of ZP-Glucagon for the emergency treatment of severe hypoglycemia in subjects with diabetes.

The endpoints in the pivotal study will be:

 

    Time to increase in blood glucose concentration from baseline by 50 mg/dl, measured from treatment administration;

 

    Blood glucose concentration change from baseline 15 minutes after treatment administration;

 

    Maximal change from baseline in blood glucose concentrations;

 

    Time to increase in blood glucose concentration from baseline by 50 mg/dl, as measured from begin of the treatment procedure; and

 

    Incidence of vomiting.

Based on smaller trial sizes, easy enrollment and short time to results, we expect to complete all human trials and develop the Generation 1 ZP-Glucagon within approximately two years from the start of the clinical program. We expect to complete our planned Phase 3 clinical trial by the end of 2015.

We intend to complete a bridging study in order to launch the Generation 2 ZP-Glucagon product with a 6 cm 2 patch and a single use applicator after approval of the Generation 1 product.

Our migraine opportunity—ZP-Triptan

Our product candidate ZP-Triptan is our proprietary formulation of zolmitriptan, used for the treatment of migraine. Because ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

In the fourth quarter of 2013, we completed preclinical hairless guinea pig studies that compared the pharmacokinetic profile of ZP-Triptan to that of zolmitriptan administered intravenously. In these preclinical studies, ZP-Triptan achieved rapid onset and bioavailability that compared favorably with intravenous delivery. In 2014, we continued further confirmatory development of ZP-Triptan with additional preclinical studies. We intend to commence a Phase 1 trial in the first half of 2015 to compare the pharmacokinetic and safety/tolerability profiles of escalated patch doses of zolmitriptan to those of one subcutaneous injection of commercial sumatriptan in healthy volunteers. Our Phase 2 trial will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults.

 

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Migraine is a large and attractive market

According to the Migraine Research Foundation, migraine affects 36 million men, women and children in the United States. Symptoms of migraine include moderate to severe headache pain, nausea and vomiting, photophobia (abnormal sensitivity to light), and phonophobia (abnormal sensitivity to sound). Most migraines last between four and 24 hours, but some last as long as three days. According to published studies, 63% of migraine patients experience between one and four migraines per month.

Existing treatments—triptans, which comprise significant proportion of total migraine, have significant disadvantages

According to a 2014 study by GlobalData, sales of prescriptions for medications indicated for migraine in the United States were approximately $1.9 billion in 2012. Of this amount, $1.1 billion was for triptans.

We believe that each of the currently available methods of administering triptans, including oral, nasal spray, subcutaneous injection and iontophorectic transdermal patch, has significant disadvantages. Some migraine patients fail to respond consistently to oral triptans, and oral treatments may be ineffectual for patients who are suffering from the nausea or gastric stasis that can be associated with migraine. Oral, nasal and iontophoretic patch triptan products are also characterized by relatively slow onset of action. Nasal sprays may be unpleasant in taste, and use of injectables can cause discomfort. Because ZP-Triptan has demonstrated fast onset in preclinical studies, does not depend on gastrointestinal absorption, and provides easy, painless administration, we believe it could provide an attractive alternative to currently marketed triptan products for the treatment of migraine.

Our ZP-Triptan solution offers fast onset

According to a 2005 article by published in Headache, clinical trials have demonstrated that at least 30% of migraine patients fail to respond consistently to oral triptans. Based on data from multiple published third party clinical trials, including those described in a 2005 article by published in Headache, a peer-reviewed medical journal, we believe patients’ failure to respond consistently results from a variety of causes, including a slower onset of action (typically ranging between one and three hours) and low and inconsistent absorption of oral medication because of reduced gastric motility in migraine patients.

In published studies, migraine sufferers often cite faster onset of pain relief as a key therapeutic attribute they would like from their migraine medication.

The following table compares the time to maximum drug concentration in blood, or Tmax, and pain relief of oral forms, including melts and tablets, and nasal forms of marketed triptans to sumatriptan injection. The data are derived from Prescribing Information for the different formulations of these marketed triptans:

 

LOGO

 

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Products Included:

(1) Nasal: Imitrex (sumatriptan), Zomig (zolmitriptan) Oral—Melt: Zomig-ZMT (zolmitriptan) Maxalt-MLT (rizatriptan)
(2) Oral—Tablets: Imitrex (sumatriptan), Treximet (sumatriptan/naproxen sodium), Zomig (zolmitriptan) Maxalt (rizatriptan), Amerge (naratriptan), Axert (almotriptan), Frova (frovatriptan), Relpax (eletriptan)
(3) Subcutaneous: Sumavel DosePro (sumatriptan injection), Imitrex (sumatriptan injection)
(4) T max achieved in preclinical testing
(5) Average T max represents overall average of the midpoint of the range for all products.
(6) Average relief at 2 hours represents overall average of the midpoint of the range for all products. Range reflects headache relief data obtained in placebo controlled clinical trials, which include different doses of the same triptan.

In migraine, T max closely correlates to speed of onset of pain relief, and has also been shown to be correlated with completeness of pain relief and pain freedom over time. Relief at two hours is the standard endpoint used in migraine studies and represents the percentage of patients reporting a reduction of migraine symptoms from a classification of severe or moderate to mild or none within two hours after taking the medication.

Sumatriptan injection forms have shown improved efficacy profiles over oral and nasal forms which may be attributable to a shorter T max . Nasal forms, while claimed by some to be fast-acting, have drug absorption profiles similar to oral forms because a large portion of the administered dose may be swallowed prior to absorption. Given that T max closely correlates to speed of onset of pain relief and pain freedom over time, and because of our preclinical results, we believe that ZP-Triptan may provide differentiated treatment from oral and nasal triptan products, which all have much slower onset of action.

Migraines may also be associated with nausea and/or vomiting. Twenty-nine percent of patients reported vomiting as a symptom of migraine attacks, according to the American Migraine Study II, and epidemiological studies in migraine reveal that the vast majority of patients (more than 90%) have experienced nausea during a migraine attack and more than 50% have nausea with the majority of attacks, according to an article published in Drugs in 2003 (Volume 63, Issue 21). Depending on the type of migraine episode, a treatment may be more or less effective. For example, oral treatments may be of little value in a patient who is vomiting or who is experiencing migraine-associated gastric stasis. There is also clinical evidence that oral agents may be less effective when taken at a later stage of a migraine attack, rather than at an earlier stage. Consequently, rapid onset migraine and waking with a migraine attack may reduce the benefits to patients of oral triptans, because both represent fully-developed attacks.

Our ZP-Triptan solution offers ease-of-use

Because ZP-Triptan has demonstrated a T max of nine minutes in preclinical studies, and does not depend on gastrointestinal absorption, we believe it has the potential for superior efficacy compared to currently marketed oral triptans. Our single-use disposable device is ready to apply after opening the packaging, is intuitive, simple and painless to use, and poses no needle stick risk.

Other potential competitive products in the migraine space are sumatriptan products using alternative delivery systems, notably Zecuity™, marketed by Teva (which acquired Zecuity™’s developer, NuPathe), and Sumavel DosePro™, marketed by Endo International plc (which acquired Sumavel DosePro™ from Zogenix). We believe that our microneedle patch system offers significant advantages over these systems, including faster onset compared to Zecuity™ and ease of use compared to Sumavel DosePro™.

 

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LOGO   LOGO   LOGO

Our ZP-Triptan solution offers high bioavailability

ZP-Triptan, being delivered through the bloodstream, does not depend for its effectiveness on absorption through the gastrointestinal tract, and we believe will possess significant advantages over oral delivery of triptans. Moreover, we believe ZP-Triptan will also possess advantages over nasal spray delivery, which can be unpleasant in taste.

Our preclinical studies demonstrated fast onset and high bioavailability

In the fourth quarter of 2013, we conducted preclinical studies with a hairless guinea pig animal model. The hairless guinea pig model is a standard animal model that we have used for various development products because the skin is very similar to human skin.

The objective of the study was to compare the pharmacokinetic profile of our ZP-Triptan to the pharmacokinetic profile of intravenous injection of zolmitriptan. In a representative study we utilized 3 cm 2 patches and 800 µg per patch. As represented in the graph below, ZP-Triptan achieved a time to maximum serum concentration of nine minutes and 100% bioavailability compared to intravenous injection of zolmitriptan, on a dose-normalized basis.

 

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LOGO

In 2014, we continued further confirmatory development of ZP-Triptan with additional preclinical studies. Based on our preclinical results, we plan to commence a Phase 1 clinical trial of ZP-Triptan in the first half of 2015.

Planned clinical development of ZP-Triptan

Clinical development strategy for ZP-Triptan

Our ZP-Triptan clinical development strategy is predicated on leveraging our easy-to-use, integrated, single-use disposable system and the fast onset of action demonstrated in our preclinical studies. We intend to conduct our Phase 1 and Phase 2 trials using an active injectable comparator to assess the relative speed of onset compared to an injectable. The margin of superiority, if significant, will determine whether our Phase 3 trial involves an active comparator or placebo.

Planned Phase 1 trial of ZP-Triptan

Our planned Phase 1 trial will be conducted in Australia and designed to compare the pharmacokinetic and safety / tolerability profiles of multiple patches of zolmitriptan, one patch of sumatriptan and one subcutaneous injection of sumatriptan in healthy volunteers. Each subject will receive the sumatriptan treatments in a randomized sequence, followed by the zolmitriptan patch treatments in ascending order, if tolerated. The results of the ZP-Triptan Phase 1 trial will guide the dose selection for the ZP Triptan Phase 2 trial.

 

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Planned Phase 2 trial of ZP-Triptan

Our Phase 2 trial will be designed to assess the safety and efficacy of ZP-Triptan patches in the acute treatment of migraine in adults. This study is expected to be a randomized, controlled double-blind, parallel-group study with 200 migraine patients each of whom would be administered a ZP-Triptan patch coated with zolmitriptan, placebo patch and a subcutaneous injection of sumatriptan. We expect to conduct our planned Phase 2 trial of ZP-Triptan after completion of our planned Phase 1 trial of ZP-Triptan, and we expect to conduct our planned Phase 3 trial of ZP-Triptan after completion of the Phase 2 trial.

Type 2 diabetes; our collaboration with Novo Nordisk

In January 2014, we entered into a strategic partnership and license agreement with Novo Nordisk A/S, or Novo Nordisk, to develop a microneedle patch product to administer semaglutide, Novo Nordisk’s investigational proprietary human glucagon-like peptide-1 analogue, or GLP-1, for the treatment of type 2 diabetes. Under the terms of the agreement, we have granted Novo Nordisk a worldwide, exclusive license to develop and commercialize GLP-1 products with the initial product candidate being Novo Nordisk’s semaglutide administered weekly using our microneedle patch system. We received an upfront payment of $1 million upon entering into the agreement. We are eligible to receive payments upon achieving certain preclinical, clinical, regulatory and sales milestones which could total $60 million for the first product, and $55 million for each additional product. We are also eligible to receive royalties on sales of products in the low to mid single digits and will receive development support, as well as reimbursement of all development and manufacturing costs relating to the Novo Nordisk program. Novo Nordisk will, pending successful outcomes of nonclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Further pipeline opportunities

We have tested our microneedle patch system in preclinical and clinical proof of concept studies that demonstrated its technical feasibility with approximately thirty compounds, ranging from small molecules to proteins. Over 30,000 of our patches have been applied to over 400 patients in seven Phase 1 clinical trials and one Phase 2 trial. Based on this research, we believe that our microneedle patch system can be used to deliver treatments for a wide variety of indications beyond those on which are currently focused, in which our fast onset, room-temperature stability, and ease of use will fill a significant unmet need.

The other compounds that we have assigned the highest priority for further investigation for use with our microneedle patch system include:

 

    epinephrine, for treatment of anaphylactic shock; and

 

    granisetron, for the treatment of chemo-induced nausea and vomiting.

We intend, independently or through strategic collaborations with others, to explore these and other potential applications of our microneedle patch system. We anticipate that our internal development programs will focus on delivery of generic drugs, and that we will collaborate with third parties with respect to delivery of their proprietary drugs.

Competition

Competition for our lead product candidates

The development and commercialization of new products to treat severe osteoporosis, severe hypoglycemia and migraine is highly competitive, and there will be considerable competition from major pharmaceutical, biotechnology and specialty pharmaceutical companies. Many of our competitors have substantially greater financial, technical and other resources than we do. In addition, many of these companies have longer operating histories and more experience than us in preclinical and clinical development, manufacturing, regulatory and global commercialization.

 

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Companies marketing or developing products that treat severe osteoporosis that may compete with our Daily ZP-PTH product candidate include Amgen, Inc., Lilly and Radius Health, Inc. The following table lists products that we believe may or will compete in the United States against Daily ZP-PTH, should Daily ZP-PTH receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Amgen

   Romosozumab  (1)    Injection (monthly)

Lilly

   Forteo ®    Injection in thigh or abdomen (daily)

Lilly

   Blosozumab  (1)    Injection (twice monthly)

Radius

   BA058 (1)    Transdermal patch or injection (daily)

 

(1) Currently undergoing clinical testing.

Companies marketing products that treat severe hypoglycemia that may compete with our ZP-Glucagon product candidate include Novo Nordisk and Lilly. The following table sets forth selected products that we believe would potentially compete against ZP-Glucagon, should this product receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Novo Nordisk

   GlucaGen ®    Injection

Lilly

   Glucagon Emergency Kit    Injection

Biodel

      Stable liquid formulation delivered via pen injector (1)

Xeris

   G-Pen and G-Pen Mini  (1)    Stable liquid formulation delivered via pen injector

AMG Medical

      Glucagon powder delivered intranasally  (1)

 

(1) Currently undergoing clinical testing.

Companies marketing products that treat migraine that may compete with our ZP-Triptan product candidate include Teva, Zogenix, GlaxoSmithKline, AstraZeneca and Allergan. The following table sets forth selected products that we believe would potentially compete against ZP-Triptan, should this product receive approval for sale:

 

Manufacturer

   Product   

Method of Treatment

Teva

   Zecuity    sumatriptan patch

Zogenix

   Sumavel DosePro    sumatriptan injection

GlaxoSmithKline

   Imitrex Nasal Spray    sumatriptan nasal spray

AstraZeneca

   Zomig Nasal Spray    zolmitriptan nasal spray

Allergan

   Levadex    dihydroergotamine inhaler

Competition in drug delivery platforms

In addition to competition from major pharmaceutical, biotechnology and specialty pharmaceutical companies that develop and market products that compete against those that we develop, we face additional competition from companies that may develop and license drug delivery platforms similar to ours (including transdermal microneedle patches), and from alternative formulations and methods of delivery of the drugs on which we have focused, including oral formulations, nasal sprays, transdermal patches, intramuscular and subcutaneous injection and infusion. Such companies include, but are not limited to, 3M Company, Corium International, Inc. and Pantec Biosolutions AG.

Research and Development

As of October 31, 2014 , our research and development organization consisted of 11 people, located in our headquarters in Fremont, California. Our research and development staff is supervised by our founder and Chief Scientific Officer and has broad knowledge and skills in a range of disciplines applicable to formulation of drugs and the design and manufacture of our microneedle patch system.

 

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The goals of our research and development efforts are to identify and develop drugs that can be delivered using our microneedle patch system and optimize the system to deliver those drugs.

Manufacturing

We have adequate manufacturing capabilities and capacity to produce our microneedle patch system for preclinical and Phase 1, Phase 2 and pivotal trials of our products. We follow current good manufacturing practices, or cGMP, in our Fremont, California manufacturing facility. We purchase various components or intermediates of our microneedle patch system from third-party vendors, including the metal foil and formed micro-arrays, active pharmaceutical ingredients and formulation, inner ring, adhesive backing, ring and backing assembly, outer ring and primary and secondary packing components. All of these components and intermediaries are available from multiple sources. We also outsource the manufacture of our applicators.

Manufacturing Process

The manufacturing process for our microneedle patch system consists of two primary operations: (1) the formation of the microneedle array, involving etching of titanium foil and subsequent hydro-forming; and (2) application of the drug formulation to the microneedle array.

Once a microneedle array is completed, we attach it to an inner ring housing the adhesive backing layer, which we purchase from a third party manufacturer. This is performed at our facility using a semi-automatic assembly process.

We apply the drug formulation to the microneedle array by a contact process whereby the titanium needles are dipped in a liquid drug formulation until the specified amount of drug is applied to the microneedle array. We then attach an outer ring to the assembly using a mechanical press fit on the same equipment used for coating the microneedle array. The outer ring is made from a polymer material, which is readily available from multiple suppliers. We then insert the patch assembly into the primary packaging, which is purged with nitrogen for longer shelf life.

We perform substantially all product testing in-house.

We intend to devote significant resources to expanding the capacity and throughput of our manufacturing operations, and to reducing our manufacturing costs. We believe this will be critical to support the late-stage development, launch and commercial production of our product candidates.

Commercialization

We do not have a sales, marketing or drug distribution infrastructure. We generally expect to retain commercial rights in the United States for our current product candidates other than Daily ZP-PTH, all of which are still in preclinical or clinical development. Outside the United States, we expect to enter into distribution and other marketing arrangements with third parties for any of our drug candidates other than Daily ZP-PTH that obtain marketing approval. Lilly will be responsible, pending successful clinical trial outcomes and regulatory approval, for commercialization of Daily ZP-PTH.

We focus on indications that have patient populations large enough to provide us with an attractive commercial opportunity, and where there is currently limited competition and premium pricing. We believe we will be able to compete effectively and profitably in these markets by offering a more effective and lower cost alternative. We also believe that the markets on which we have initially focused, and intend to focus in the future, are ones in which there are relatively concentrated prescriber bases that can be served by a small, targeted sales force dedicated to each product. We intend to develop a small, cost-effective commercial infrastructure that will enable us to retain and maximize the commercial opportunity.

 

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Subject to receiving marketing approvals, we expect to commence commercialization activities by building a focused sales and marketing organization in the United States to sell our drugs other than Daily ZP-PTH. We believe that such an organization will be able to target the community of physicians who are the key specialists in treating the patient populations for which our drug candidates are being developed. Outside the United States, we expect to enter into distribution and other marketing arrangements with third parties for any of our drug candidates that obtain marketing approval other than Daily ZP-PTH.

We also plan to build a marketing and sales management organization to create and implement marketing strategies for any drugs that we market through our own sales organization and to oversee and support our sales force. The responsibilities of the marketing organization would include developing educational initiatives with respect to approved drugs and establishing relationships with thought leaders in relevant fields of medicine.

Intellectual Property

We regard our technology as proprietary. Our strategy is to rely on a combination of patent, trade secret and trademark laws in the United States and other jurisdictions, and to rely on license and confidentiality agreements to further protect our proprietary technology and brand. The laws of some countries in which our products are licensed may not protect our intellectual property rights to the same extent as the laws of the United States.

As of October 31, 2014, we held exclusive licenses to or owned 22 United States patents and nine United States patent applications, as well as numerous foreign counterpart patents and patent applications (including two Patent Cooperation Treaty patent applications), covering key features of our microneedle patch system, such as formulation, coating, array design, patch anchoring, patch application, delivery, manufacturing and packaging.

We license all of these patents and patent applications, other than the four patent applications described below, from ALZA Corporation, or ALZA, on an exclusive basis for all countries. These patents and patent applications are foundational and apply generally to each of our lead product candidates and their related applicators. Under the terms of the license agreement with ALZA, we are responsible for all development and development costs related to our transdermal microneedle patch system. We are also responsible for commercializing our transdermal microneedle patch system, including preparing and paying for all related regulatory filings. We are obligated to pay ALZA royalties in the low to mid single digits on sales by us of products that would otherwise infringe one of the licensed patents or that is developed by us based on certain ALZA know-how or inventions, and to pay ALZA amounts equal to the greater of royalties in the low to mid single digits on sales by our sublicensees of such products or a percentage in the mid-teens to low twenties of royalties received by us on sales by our sublicensees of such products. We are also obligated to pay ALZA a percentage of non-royalty revenue that we receive from our sublicensees based on sales of such products. The license agreement will terminate upon the expiration of our obligations to make the royalty and other payments described above to ALZA. Additionally, we may terminate the agreement at any time for convenience upon prior written notice to ALZA, and either party may terminate the agreement upon a material breach of the agreement by the other party.

We have filed two United States patent applications and two Patent Cooperation Treaty patent applications covering our single-use applicator and formulation of ZP-Glucagon.

 

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The patents and patent applications we own or hold under license as of October 31, 2014 are as follows:

 

Patent*

 

United States

Patent Number

(Expiration Date)

 

Europe

Patent Number

(Expiration Date)

 

Japan

Patent Number

(Expiration Date)

 

China

Patent Number

(Expiration Date)

 

Korea

Patent Number

(Expiration Date)

Glucagon

Formulation

 

US 14/466,461***;

PCT/US14/52326***;

       
PTH Formulation  

US 7,556,821 (18-Mar-2025);

US 8,361,022 (18-Mar-2025);

US 8,633,159 (15-Feb-2027);

US 2008/0039775**;

US 2010/0119568** ;

 

EP 1 744 683**;

EP 2 001 453**;

 

JP 5007427 (18-Mar-2025);

JP 5309203 (18-Mar-2025);

   

Transdermal

Formulation

Coating/PK/PD

 

US 7,537,795 (31-May-2023);

US 7,579,013 (29-Jun-2024);

US 7,963,935 (23-May-2027);

US 8,663,155 (24-Jun-2023);

US 2010/0221305**;

US 2014/0260096**;

 

EP 1 333 880 (26-Oct-2021);

EP 1 392 389 (20-Apr-2022);

EP 1 638 523 (29-Jun-2024);

 

JP 4659336 (26-Oct-2021);

JP 5388415 (21-Oct-2024);

JP 5456234 (29-Jun-2024);

 

CN 100548228 (21-Oct-2024);

CN 1842320 (29-Jun-2024);

CN 100566669 (18-Mar-2025);

CN 1239212 (26-Oct-2021);

CN 100349632 (20-Apr-2022);

CN 100421653 (6-Sep-2021);

  KR 100812097 (26-Oct-2021);

Micro Projection

Design and

Anchoring to

Skin

 

US 6,050,988 (9-Dec-2018);

US 6,083,196 (9-Dec-2018);

US 6,322,808 (9-Dec-2018);

US 7,184,826 (17-Jun-2017);

 

EP 1 037 686 (9-Dec-2018);

EP 1 037 687 (9-Dec-2018);

 

JP 4012252 (17-Jun-2017);

JP 4061022 (9-Dec-2018);

 

CN 1170603 (9-Dec-2018);

CN 1161164 (9-Dec-2018);

 

Patch Retainer

Ring and

Delivery Control

 

US 6,855,131 (26-Oct-2021);

US 8,753,318 (10-Apr-2026);

US 6,953,589 (9-Dec-2018);

US 14/306,854***;

 

EP 1 239 917 (7-Dec-2020);

EP 1 341 452 (12-Dec-2021);

EP 1 035 889 (9-Dec-2018);

 

JP 4104975 (12-Oct-2021);

JP 4312407 (7-Dec-2020);

  CN 100402106 (7-Dec-2020);  
Patch Applicator  

US 7,087,035 (12-Mar-2022);

US 7,097,631 (27-Jan-2025);

US 7,131,960 (13-Apr-2022);

US 7,419,481 (13-Mar-2022);

US 7,798,987 (13-Sep-2025);

US 14/447,309***;

US 2007/0027427**;

US 2006/0095061**;

PCT/US14/48932***;

 

EP 1 239 916 (7-Dec-2020);

EP 1 341 442 (12-Oct-2021);

EP 1 341 453 (12-Oct-2021);

EP 1 680 154 (21-Oct-2024);

 

JP 4198985 (12-Oct-2021);

JP 4659332 (12-Oct-2021);

JP 4682144 (21-Oct-2024);

JP 2008-534152**;

 

CN 1250171 (12-Oct-2021);

CN 100571643 (21-Oct-2024);

CN 100391404 (12-Oct-2021);

  KR 1008185450000 (12-Oct-2021);
Manufacturing and Packaging Methods  

US 6,855,372 (10-Nov-2022);

US 7,435,299 (18-Jan-2025);

US 8,632,801 (31-May-2023);

  EP 1 981 547**;  

JP 5438872 (1-Jun-2026);

JP 2009-522288**;

  CN 101189031**;  

 

* Patents are for the benefit of all formulations
** Publication Number (pending)
*** Application Number (pending)

 

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The last of our issued patents will expire in 2027. We believe that the long life of our patent portfolio may make collaborating with us particularly attractive for third parties seeking to extend the lifecycle of profitable drugs nearing the expiration of their patent protection.

We rely on trade secrets to protect substantial portions of our technology. We generally seek to protect these trade secrets by entering into non-disclosure agreements and other contractual provisions with our employees and customers, and have restricted access to our manufacturing facilities and other technology.

Government regulation and product approval

United States—FDA Process

The research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our products are subject to extensive regulation by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply with the applicable United States requirements may subject us to administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution. We expect Daily ZP-PTH and ZP-Glucagon will each be subject to review by the FDA as a drug/device combination product under NDA standards. Medical products containing a combination of new drugs, biological products or medical devices are regulated as “combination products” in the United States. A combination product generally is defined as a product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic or device. In order to facilitate pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the pre-market review and regulation of the overall product based upon a determination by the FDA of the primary mode of action of the combination product. The determination whether a product is a combination product or two separate products is made by the FDA on a case-by-case basis. We held discussions with the FDA in 2008 with respect to our Daily ZP-PTH product candidate, but we have not initiated any discussions with the FDA with respect to our ZP-Glucagon or ZP-Triptan product candidates.

Drug Approval Process

None of our product candidates may be marketed in the United States until the product has received FDA approval. The steps to be completed before a drug may be marketed in the United States include:

 

    preclinical laboratory tests, animal studies, and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations;

 

    submission to the FDA of an investigational new drug application, or IND, for human clinical testing, which must become effective before human clinical trials may begin and must be updated annually;

 

    adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication to the FDA’s satisfaction;

 

    submission to the FDA of an NDA;

 

    satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with cGMP regulations; and

 

    FDA review and approval of the NDA.

Preclinical tests include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies. The conduct of the preclinical tests and formulation of the compounds for testing must comply

 

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with federal regulations and requirements. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective thirty days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. We submitted an IND to the FDA in connection with our Phase 2 trial of Daily ZP-PTH in 2008, but we have not submitted an IND to the FDA for ZP-Glucagon or ZP-Triptan and we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND.

Clinical trials necessary for product approval are typically conducted in three sequential Phases, but the Phases may overlap. The study protocol and informed consent information for study subjects in clinical trials must also be approved by an Institutional Review Board, or IRB, for each institution where the trials will be conducted, and each IRB must monitor the study until completion. Study subjects must sign an informed consent form before participating in a clinical trial. Clinical testing also must satisfy extensive good clinical practice, or GCP, regulations and regulations for informed consent and privacy of individually identifiable information. Phase 1 usually involves the initial introduction of the investigational drug into people to evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics and pharmacologic actions, and, if possible, to gain an early indication of its effectiveness. Phase 1 trials are usually conducted in healthy individuals. However, Phase 1b trials may be conducted in healthy volunteers or in patients diagnosed with the disease or condition for which the study drug is intended, who demonstrate some biomarker, surrogate, or possibly clinical outcome that could be considered for “proof of concept.” Proof of concept in a Phase 1b trial typically confirms the hypothesis that the current prediction of biomarker, or outcome benefit is compatible with the mechanism of action. Phase 2 usually involves trials in a limited patient population to (i) evaluate dosage tolerance and appropriate dosage, (ii) identify possible adverse effects and safety risks, and (iii) evaluate preliminarily the efficacy of the drug for specific indications. Several different doses of the drug may be looked at in Phase 2 to see which dose has the desired effects. Patients are monitored for side effects and for any improvement in their illness, symptoms, or both. Phase 3 trials usually further evaluate clinical efficacy and test further for safety by using the drug in its final form in an expanded patient population. A Phase 3 trial usually compares how well the study drug works compared with an inactive placebo and/or another approved medication. One group of patients may receive the new drug being tested, while another group of patients may receive the comparator drug (already-approved drug for the disease being studied), or placebo. There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specified period of time, if at all. Furthermore, we or the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Assuming successful completion of the required clinical testing, the results of the preclinical studies and of the clinical trials, together with other detailed information, including information on the manufacture and composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. Section 505(b)(1) and Section 505(b)(2) of the FDCA are the provisions governing the type of NDAs that may be submitted under the FDCA. Section 505(b)(1) is the traditional pathway for new chemical entities when no other new drug containing the same active pharmaceutical ingredient or active moiety, which is the molecule or ion responsible for the action of the drug substance, has been approved by the FDA. As an alternate pathway to FDA approval for new or improved formulations of previously approved products, a company may file a Section 505(b)(2) NDA. Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The testing and approval process

 

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requires substantial time, effort and financial resources. The FDA reviews any NDA submitted to ensure that it is sufficiently complete for substantive review before the FDA accepts the NDA for filing. The FDA may request additional information rather than accept the NDA for filing. Even if the NDA is filed, companies cannot be sure that any approval will be granted on a timely basis, if at all. The FDA may also refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the advisory committee, but it typically follows such recommendations.

The FDA may require that certain contraindications, warnings or precautions be included in the product labeling, or may condition the approval of an NDA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-marketing testing or clinical trials and surveillance programs to monitor the safety of approved products that have been commercialized. Further, the FDA may place conditions on approvals including the requirement for a REMS to assure the safe use of the drug. If the FDA requires a REMS, the sponsor of the NDA must submit a proposed REMS; the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals maybe withdrawn for non-compliance with regulatory standards or if problems occur following the initial marketing of the product.

The FDA has various programs, including fast track, priority review and accelerated approval that are intended to expedite or simplify the process for reviewing drugs and/or provide for approval on the basis of surrogate endpoints. Generally, drugs that may be eligible for one or more of these programs are those intended to treat serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that provide meaningful benefit over existing treatments. A company cannot be sure that any of its drugs will qualify for any of these programs, or if a drug does qualify, that the review time will be reduced.

Before approving an NDA, the FDA usually will inspect the facility or the facilities at which the drug is manufactured and will not approve the product unless the manufacturing is in compliance with cGMP regulations. If the NDA and the manufacturing facilities are deemed acceptable by the FDA, it may issue an approval letter, or in some cases, an approvable letter followed by an approval letter. Both letters usually contain a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA may require post-marketing testing and surveillance to monitor the drug’s safety or efficacy, or impose other conditions. Approval may also be contingent on approved risk evaluation and mitigation strategies, or REMS, that limits the labeling, distribution or promotion of a drug product. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market.

After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes or making certain additional labeling claims, are subject to further FDA review and approval. Before a company can market products for additional indications, it must obtain additional approvals from the FDA. Obtaining approval for a new indication generally requires that additional clinical trials be conducted. A company cannot be sure that any additional approval for new indications for any product candidate will be approved on a timely basis, or at all.

Post-Approval Requirements

Often times, even after a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical trials. If such post-approval conditions are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved NDA are required to (i) report certain adverse reactions to the FDA, (ii) comply with certain requirements

 

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concerning advertising and promotional labeling for their products, and (iii) continue to have quality control and manufacturing procedures conform to cGMP regulations after approval. The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing facilities. This latter effort includes assessment of ongoing compliance with cGMP regulations. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. We have used and intend to continue to use third-party manufacturers to produce APIs for our products in clinical and commercial quantities, and future FDA inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product after approval may result in restrictions on a product, including withdrawal of the product from the market.

Hatch-Waxman Act

As part of the Drug Price Competition and Patent Term Restoration Act of 1984, Section 505(b)(2) of the FDCA was enacted, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Amendments permit the applicant to rely upon certain preclinical or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, which is referred to as the Reference Listed Drug, the applicant is required to certify to the FDA concerning any listed patents in the FDA’s Orange Book publication that relate to the Reference Listed Drug. Specifically, the applicant must certify for all listed patents one of the following certifications: (i) the required patent information has not been filed by the original applicant; (ii) the listed patent already has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the manufacture, use or sale of the new product.

If a Paragraph I or II certification is filed, the FDA may make approval of the application effective immediately upon completion of its review. If a Paragraph III certification is filed, the approval may be made effective on the patent expiration date specified in the application, although a tentative approval may be issued before that time. If an application contains a Paragraph IV certification, a series of events will be triggered, the outcome of which will determine the effective date of approval of the 505(b)(2) application. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the Referenced Listed Drug has expired.

A certification that the new product will not infringe the Reference Listed Drug’s listed patents or that such patents are invalid is called a Paragraph IV certification. If the applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders for the Reference Listed Drug once the applicant’s NDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a legal challenge to the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of their receipt of a Paragraph IV certification automatically prevents the FDA from approving the Section 505(b)(2) NDA by imposing a 30 month automatic statutory injunction. The court may shorten or lengthen the 30 month stay period in a pending patent case if either party fails to reasonably cooperate in expediting the case. The 30 month stay terminates if a court issues a final order determining that the patent is invalid unenforceable or not infringed. Thus, the Section 505(b)(2) applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay and patent litigation before its products may be commercialized. Alternatively, if the listed patent holder does not file a patent infringement lawsuit within the required 45-day period, the applicant’s NDA will not be subject to the 30-month stay.

 

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The Hatch-Waxman Act provides five years of data exclusivity for new chemical entities which prevents the FDA from accepting ANDAs and 505(b)(2) applications containing the protected active ingredient. The Hatch-Waxman Act also provides three years of exclusivity for applications containing the results of new clinical investigations (other than bioavailability studies) essential to the FDA’s approval of new uses of approved products such as new indications, delivery mechanisms, dosage forms, strengths, or conditions of use.

European Union—EMA Process

In the European Union, or the EU, medicinal products are authorized following a similar demanding process as that required in the United States. Applications are based on the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, or ICH, Common Technical Document and must include a detailed plan for pediatric approval, if such approval is sought. Medicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures.

Centralized Procedure

Under the centralized procedure, after the European Medicines Agency, or EMA, issues an opinion, the European Commission issues a single marketing authorization valid across the European Union, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human medicines that are derived from biotechnology processes, such as genetic engineering, contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and officially designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health.

National Authorization Procedures

There are also two other possible routes to authorize medicinal products in several countries, which are available for products that fall outside the scope of the centralized procedure:

Decentralized Procedure

Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one European Union country of a medicinal product that has not yet been authorized in any European Union country and that does not fall within the mandatory scope of the centralized procedure.

Mutual Recognition Procedure

In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national procedures of that country. Thereafter, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.

In light of the fact that there is no policy at the EU level governing pricing and reimbursement, the EU Member States each have developed their own, often varying, approaches. In many EU Member States, pricing negotiations must take place between the holder of the marketing authorization and the competent national authorities before the product is sold in their market with the holder of the marketing authorization required to provide evidence demonstrating the pharmaco-economic superiority of its product in comparison with directly and indirectly competing products. We have not initiated any discussions with EMA with respect to seeking regulatory approval of either Daily ZP-PTH or ZP-Glucagon, but we held scientific advisory meetings in 2009 with regulatory authorities in the United Kingdom, Sweden, Denmark and Germany regarding our Daily ZP-PTH product candidate.

 

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Good Manufacturing Practices

Like the FDA, the EMA, the competent authorities of the EU Member States and other regulatory agencies regulate and inspect equipment, facilities and processes used in the manufacturing of pharmaceutical and biologic products prior to approving a product. If, after receiving clearance from regulatory agencies, a company makes a material change in manufacturing equipment, location, or process, additional regulatory review and approval may be required. Once we or our partners commercialize products, we will be required to comply with cGMP, and product-specific regulations enforced by, the European Commission, the EMA and the competent authorities of EU Member States following product approval. Also like the FDA, the EMA, the competent authorities of the EU Member States and other regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. If, as a result of these inspections, it is determined that our or our partners’ equipment, facilities or processes do not comply with applicable regulations and conditions of product approval, regulatory agencies may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations or the withdrawal of our product from the market.

Other International Markets—Drug Approval Process

In some international markets (e.g., China or Japan), although data generated in United States or EU trials may be submitted in support of a marketing authorization application, additional clinical trials conducted in the host territory, or studying people of the ethnicity of the host territory, may be required prior to the filing or approval of marketing applications within the country.

Pricing and Reimbursement

In the United States and internationally, sales of products that we market in the future, and our ability to generate revenues on such sales, are dependent, in significant part, on the availability and level of reimbursement from third-party payors such as state and federal governments, managed care providers and private insurance plans. Private insurers, such as health maintenance organizations and managed care providers, have implemented cost-cutting and reimbursement initiatives and likely will continue to do so in the future. These include establishing formularies that govern the drugs and biologics that will be offered and also the out-of-pocket obligations of member patients for such products. In addition, particularly in the United States and increasingly in other countries, we are required to provide discounts and pay rebates to state and federal governments and agencies in connection with purchases of our products that are reimbursed by such entities. We have consciously selected compounds for development that offer therapeutic benefit based on fast onset of action and receive a high reimbursement per unit for the currently marketed injectable form. We intend to commercialize our products at prices competitive to those of the currently marketed injectables, thereby securing support of the payors.

There is no legislation at the EU level governing the pricing and reimbursement of medicinal products in the EU. As a result, the competent authorities of each of the EU Member States have adopted individual strategies regulating the pricing and reimbursement of medicinal products in their territory. These strategies often vary widely in nature, scope and application. However, a major element that they have in common is an increased move towards reduction in the reimbursement price of medicinal products, a reduction in the number and type of products selected for reimbursement and an increased preference for generic products over innovative products. These efforts have mostly been executed through these countries’ existing price-control methodologies. The government of the United Kingdom, while continuing for now to utilize its established Pharmaceutical Pricing Reimbursement Scheme approach, has announced its intentions to phasing in, by 2014, a new value-based pricing approach, at least for new product introductions. Under this approach, in a complete departure from established methodologies, reimbursement levels of each drug will be explicitly based on an assessment of value, looking at the benefits for the patient, unmet need, therapeutic innovation, and benefit to society as a whole. It is increasingly common in many EU Member States for Marketing Authorization Holders to be required to demonstrate the pharmaco-economic superiority of their products as compared to products already subject to assessment and reimbursement in specific countries. In order for drugs to be evaluated positively under such

 

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criteria, pharmaceutical companies may need to re-examine, and consider altering, a number of traditional functions relating to the selection, study, and management of drugs, whether currently marketed, under development, or being evaluated as candidates for research and/or development. All such cost containment efforts by the payors in US and overseas are likely to support our competitive pricing model.

Sales and Marketing

The FDA regulates all advertising and promotion activities for products under its jurisdiction both prior to and after approval. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Physicians may prescribe legally available drugs for uses that are not described in the drug’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties, and often reflect a physician’s belief that the off-label use is the best treatment for the patients. The FDA does not regulate the behavior of physicians in their choice of treatments, but FDA regulations do impose stringent restrictions on manufacturers’ communications regarding off-label uses. Failure to comply with applicable FDA requirements may subject a company to adverse publicity, enforcement action by the FDA, corrective advertising, consent decrees and the full range of civil and criminal penalties available to the FDA.

We may also be subject to various federal and state laws pertaining to healthcare “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations and very few court decisions addressing industry practices, it is possible that our practices might be challenged under anti-kickback or similar laws. Moreover, recent healthcare reform legislation has strengthened these laws. For example, the recently enacted Patient Protection and Affordable Care Act, or the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes, so that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the ACA permits the government to assert that a claim that includes items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment, to third-party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and civil sanctions, including fines and civil monetary penalties, the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid) and corporate integrity agreements, which impose, among other things, rigorous operational and monitoring requirements on companies. Similar sanctions and penalties also can be imposed upon executive officers and employees, including criminal sanctions against executive officers under the so-called “responsible corporate officer” doctrine, even in situations where the executive officer did not intend to violate the law and was unaware of any wrongdoing.

Given the significant penalties and fines that can be imposed on companies and individuals if convicted, allegations of such violations often result in settlements even if the company or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and civil monetary penalties, and corporate integrity agreements. If the government were to allege or convict us or our executive officers of violating these laws, our business could be harmed. In addition, private individuals have the ability to bring similar actions. Our activities could be subject to challenge for the reasons discussed above and due to the

 

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broad scope of these laws and the increasing attention being given to them by law enforcement authorities. Further, there are an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state authorities.

Similar rigid restrictions are imposed on the promotion and marketing of medicinal products in the EU and other countries. Laws (including those governing promotion, marketing and anti-kickback provisions), industry regulations and professional codes of conduct often are strictly enforced. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution partners can have implications for us.

Other Governmental Regulations and Environmental Matters

We will be subject to a variety of financial disclosure and securities trading regulations as a public company in the United States, including laws relating to the oversight activities of the SEC and, if any of our capital stock becomes listed on the NASDAQ Global Market or another exchange, we will be subject to the regulations of the NASDAQ Global Market or another exchange, respectively. In addition, the Financial Accounting Standards Board, or the FASB, the SEC and other bodies that will have jurisdiction over the form and content of our accounts, our financial statements and other public disclosure are constantly discussing and interpreting proposals and existing pronouncements designed to ensure that companies best display relevant and transparent information relating to their respective businesses.

If we establish international operations, we will be subject to compliance with the Foreign Corrupt Practices Act, or the FCPA, which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We also may be implicated under the FCPA for activities by our partners, collaborators, CROs, vendors or other agents.

Our present and future business has been and will continue to be subject to various other laws and regulations. Various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances used in connection with our research work are or may be applicable to our activities. Certain agreements entered into by us involving exclusive license rights or acquisitions may be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted. The extent of government regulation, which might result from future legislation or administrative action, cannot accurately be predicted.

Employees

As of October 31, 2014, we had 31 full-time employees, and make extensive use of third party contractors, consultants, and advisors to perform many of our present activities. We expect to increase the number of our employees as we increase our operations.

Properties

Our principal executive offices are located at 34790 Ardentech Court, Fremont, California 94555, and are leased under a seven year property rental agreement that commenced in 2012. We do not own any real property. We believe our present facilities are sufficient for our current and planned near-term operations.

Legal Proceedings

We are not currently involved in any material legal proceedings.

 

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MANAGEMENT

Executive Officers, Directors and Key Employees

Our executive officers, directors and key employees, their current positions and their ages as of October 31, 2014 are set forth below:

 

Name

   Age     

Position(s)

Bruce D. Steel (1) (2) (3)

     48       Chairman of Board of Directors

M. James Barrett (1) (2) (3)

     71       Director

Troy Wilson (3)(4)(5)

     46       Director

Kleanthis G. Xanthopoulos (2) (3) (4)

     56       Director

Vikram Lamba

     48       President, Chief Executive Officer and Director

Peter E. Daddona

     69       Chief Scientific Officer, EVP R&D and Director

Nandan Oza

     52       Chief Operating Officer

Winnie W. Tso

     53       Chief Financial Officer

 

(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee, effective on the date of this prospectus.
(4) Member of the audit committee, effective on the date of this prospectus.
(5) Member of the compensation committee, effective on the date of this prospectus.

Business Experience

The following is a brief description of the education and business experience of our current directors and executive officers:

Bruce D. Steel has served as a member of our board of directors since April 2012. Mr. Steel is currently the Managing Director of BioMed Ventures, the strategic investment arm of BioMed Realty Trust. Previously, Mr. Steel served as the Chief Executive Officer of Rincon Pharmaceuticals, Inc. and, between 2008 and 2010, as the Chief Business Officer of Anaphore, Inc. Mr. Steel received his Bachelor of Arts from Dartmouth College and his M.B.A. from the Marshall School of Business at the University of Southern California. Mr. Steel also holds the designation of Chartered Financial Analyst. We believe that Mr. Steel’s deep knowledge of the life-sciences industry as well as his executive level experience at various companies qualify him to serve as a member of our board of directors.

M. James Barrett has served as a member of our board of directors since April 2012. Dr. Barrett served as a director of ZP Opco, Inc. (then named Zosano Pharma, Inc.) from October 2006 until April 2012, when ZP Opco was recapitalized and became a wholly owned subsidiary of Zosano Pharma Corporation. Dr. Barrett is a General Partner with New Enterprise Associates, or NEA, where he has served in that role since 2001. Dr. Barrett specializes in biotechnology and works with members of NEA’s healthcare investment group on medical devices, healthcare information systems and healthcare services companies. In addition to our board of directors, Dr. Barrett currently serves as a member of the board of directors of the following public companies: Amicus Therapeutics, Inc., Clovis Oncology, Inc., GlycoMimetics, Inc. and Supernus Pharmaceuticals, Inc. He also serves on the board of directors for Blend Biosciences, Inc., Cardioxyl Pharmaceuticals, Inc., Galera Therapeutics, Inc., Loxo Oncology, Inc., PhaseBio Pharmaceuticals, Inc., Psyadon Pharmaceuticals, Roka Bioscience, Inc. and Senseonics, Inc. Dr. Barrett formerly served on various other boards of directors, including at Targacept, Inc., CoGenesys, Inc. (acquired by Teva Pharmaceutical Industries, Inc.), Iomai Corporation (acquired by Intercell AG), MedImmune, LLC (acquired by AstraZeneca), Pharmion Corporation (acquired by Celgene Corporation), and Inhibitex, Inc. (acquired by Bristol-Myers Squibb). Prior to joining NEA, Dr. Barrett served as Founder, Chairman and Chief Executive Officer of Senseonics, Inc. from 1997 to 2001, where he remains Chairman. Before that, Dr. Barrett led three NEA-funded companies, serving as Chairman and Chief

 

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Executive Officer of Genetic Therapy, Inc., President and Chief Executive Officer of Life Technologies, and President and Chief Executive Officer of Bethesda Research Labs. Prior to that, Dr. Barrett worked in various divisions of SmithKline. Dr. Barrett received a Ph.D. in Biochemistry from the University of Tennessee, his M.B.A. from the University of Santa Clara, and a B.S. in Chemistry from Boston College. We believe that Dr. Barrett’s extensive experience serving on boards of directors of both public and private companies in the healthcare sector and his deep industry experience qualify him to serve as a member of our board of directors.

Troy Wilson has served as a member of our board of directors since June 2014. Dr. Wilson has been President and Chief Executive Officer and a member of the board of managers of Avidity NanoMedicines LLC, a private biopharmaceutical company, since November 2012 and the President and Chief Executive Officer and a member of the board of managers of Wellspring Biosciences LLC, a private biopharmaceutical company, since July 2012 and May 2012, respectively. He has been a Director of Puma Biotechnology, Inc., a public company, since October 2013. He has also been a member of the board of managers of Araxes Pharma LLC, a private biopharmaceutical company, since May 2012. Previously, Dr. Wilson served as President and Chief Executive Officer and a member of the board of directors of Intellikine, Inc., a private biopharmaceutical company, from April 2007 to January 2012 and from August 2007 to January 2012, respectively. He holds a J.D. from New York University and graduated with a Ph.D. in bioorganic chemistry and a B.A. in biophysics from the University of California, Berkeley. We believe that Dr. Wilson’s senior executive experience managing, leading and developing various biopharmaceutical companies and his extensive industry knowledge and board-level experience in the biopharmaceutical industry qualify him to serve as a member of our board of directors.

Kleanthis G. Xanthopoulos has served as a member of our board of directors since April 2013. Dr. Xanthopoulos is the President and Chief Executive Officer and a member of the board of directors of Regulus Therapeutics Inc., having joined Regulus in 2007. Dr. Xanthopoulos is also currently chairman of the board of directors of Apricus Biosciences, Inc., a public company, a member of the board of directors of Biotechnology Industry Organization (BIO) and Senté Inc., and is a member of the executive board of BIOCOM, Southern California’s life science industry association. Prior to joining Regulus, Dr. Xanthopoulos was a managing director of Enterprise Partners Venture Capital. Dr. Xanthopoulos co-founded and served as President and Chief Executive Officer of Anadys Pharmaceuticals from its inception in 2000 to 2006, and remained a Director until its acquisition by Roche in 2011. Dr. Xanthopoulos was Vice President at Aurora Biosciences, which was acquired by Vertex Pharmaceuticals, from 1997 to 2000. Dr. Xanthopoulos participated in The Human Genome Project as a Section Head of the National Human Genome Research Institute from 1995 to 1997. Previously, Dr. Xanthopoulos was an Associate Professor at the Karolinska Institute, in Stockholm, Sweden, after completing a Postdoctoral Research Fellowship at The Rockefeller University, New York. An Onassis Foundation scholar, Dr. Xanthopoulos received his B.Sc. in Biology with honors from Aristotle University of Thessaloniki, Greece, and received both his M.Sc. in Microbiology and Ph.D. in Molecular Biology from the University of Stockholm, Sweden. We believe that Dr. Xanthopoulous’s senior executive experience managing and developing a major biotechnology company and his extensive industry knowledge and leadership experience in the biotechnology industry qualify him to serve as a member of our board of directors.

Vikram Lamba has served as our President and Chief Executive Officer, and as a member of our board of directors, since the inception of Zosano Pharma Corporation (then named ZP Holdings, Inc.) in January 2012. Before that, Mr. Lamba served as Chief Financial Officer and Chief Business Officer of Predictive Biosciences, Inc. from July 2008 until he joined Zosano Pharma in 2011. Prior to that, Mr. Lamba served as Vice President of Corporate Development at Advanced Medical Optics, Inc., where he was responsible for many significant merger and acquisition transactions and strategic alliances. Mr. Lamba served as Vice President for Finance and Chief Financial Officer of GeneOhm Sciences, Inc. and has over 16 years of global experience in various positions with Burmah Castrol PLC and Bayer AG. During his eight years with Bayer in Canada, Germany and the U.S., Mr. Lamba held positions in areas of general management, mergers and acquisitions and finance. Mr. Lamba received an M.B.A. from the Asian Institute of Management and was an exchange student at The Wharton School of the University of Pennsylvania. We believe that Mr. Lamba’s extensive industry knowledge and his experience in corporate management qualify him to serve as a member of our board of directors.

 

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Peter E. Daddona has served as our Chief Scientific Officer, and as a member of our board of directors, since the inception of Zosano Pharma Corporation (then named ZP Holdings, Inc.) in January 2012. Dr. Daddona has also served as Chief Scientific Officer of Zosano Pharma since July 31, 2006. Dr. Daddona founded Zosano Pharma in 2006 as a spin-off of Johnson & Johnson, prior to which he served as Vice President, Scientific Leader and Board member of The Macroflux ® Internal Venture at Johnson & Johnson. Previously, Dr. Daddona was Vice President of Macroflux ® Technology Development and Biological Sciences and served on the Strategic Product Portfolio Review Committee at ALZA Corporation in Mountain View, California, and held an appointment as Consulting Associate Professor of Dermatology at Stanford University. Before joining ALZA, Dr. Daddona served as Vice President, Immunobiology Research at Centocor, where he focused on preclinical development of therapeutic monoclonal antibodies. Prior to joining Centocor, Dr. Daddona served as Associate Professor of Biological Chemistry and Internal Medicine at the University of Michigan. Dr. Daddona earned his Ph.D. from the University of Connecticut and completed post-doctoral training at Duke University. We believe that Dr. Daddona’s long history with our company and his extensive experience in pharmaceutical drug development qualify him to serve as a member of our board of directors.

Nandan Oza has served as our Chief Operations Officer since May 2013. Prior to joining us, Mr. Oza was the Vice President of Chemistry, Manufacturing and Controls of Talon Therapeutics from August 2010 to May 2013. From February 2009 to August 2010, Mr. Oza served as the Founder and Principal of Ally CMC Consulting and grew the firm to have over twenty clients, including start-ups and mid-sized companies. Between February 2007 and February 2009, he was the Vice President of Manufacturing and Supply Chain Operations at Jazz Pharmaceuticals in Palo Alto, California, where he had complete management responsibility for Jazz’s manufacturing operations.

Winnie W. Tso has served as our Chief Financial Officer since April 2014. From January 2014 to April 2014, Ms. Tso served as a consultant to us. Prior to joining us in January 2014, Ms. Tso served as Vice President, Finance and Corporate Controller of SciClone Pharmaceuticals, a publicly-traded specialty biopharmaceutical company, in 2013. Prior to that, Ms. Tso served in various Vice President and Principal Accounting Officer positions from 2009 to 2013, including at Velti plc where Ms. Tso helped lead Velti’s U.S. public offering raising in excess of $150 million in equity financing. Prior to Velti, Ms. Tso held senior finance positions at several publicly-traded biopharmaceutical companies, including ARYx Therapeutics, Titan Pharmaceuticals and Genelabs Technologies, where she was responsible for building the finance and accounting infrastructures and implementing systems of internal controls. Ms. Tso is a Certified Management Accountant, a Certified Financial Manager, a Certified Public Accountant licensed in the State of California and a member of the American Institute of Certified Public Accountants. Ms. Tso received her B.S. degree in Business Administration from the Haas School of Business at the University of California, Berkeley.

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

Board Composition

Our board of directors currently consists of six members, all of whom were elected as directors pursuant to a stockholders agreement that we have entered into with certain holders of our common stock. The stockholders agreement will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors and officers hold office until their successors have been elected and qualified, or until their earlier death, resignation or removal.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering provide that the authorized number of directors may be changed only by resolution of the board of directors. Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 66  2 3 % of the votes that all our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our board of

 

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directors, including a vacancy resulting from an enlargement of our board of directors, may be filled either by vote of a majority of our directors then in office even though less than a quorum or by a stockholder vote pursuant to a resolution approved by the board of directors.

Under our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering, our board of directors will be divided into three classes, class I, class II and class III, with members of each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:

 

    the class I directors will be Vikram Lamba and Peter E. Daddona, and their initial term will expire at the annual meeting of stockholders to be held in 2015;

 

    the class II directors will be M. James Barrett and Bruce D. Steel, and their initial term will expire at the annual meeting of stockholders to be held in 2016; and

 

    the class III directors will be Troy Wilson and Kleanthis G. Xanthopoulos, and their initial term will expire at the annual meeting of stockholders to be held in 2017.

Upon the expiration of the term of a class of directors, directors in that class will be eligible to be nominated for re-election for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through an established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

One of the key functions of our board of directors is informed oversight of our risk management process. The board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure and our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements. Our nominating and corporate governance committee will monitor the effectiveness of our corporate governance practices, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Director Independence

Our common stock has been approved for listing on The NASDAQ Global Market. Under the rules of The NASDAQ Stock Market, independent directors must comprise a majority of a listed company’s board of directors within 12 months of the completion of an initial public offering. In addition, the rules of The NASDAQ Stock Market require that (i) on the date of the completion of the offering, at least one member of each of a listed company’s audit, compensation and nominating and corporate governance committees be independent, (ii) within 90 days of the date of the completion of the offering, a majority of the members of such committees be independent and (iii) within one year of the date of the completion of the offering, all the members of such committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the rules of The NASDAQ Stock Market, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

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In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or (2) be an affiliated person of the listed company or any of its subsidiaries.

Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of Troy Wilson and Kleanthis Xanthopoulos is an “independent director” as defined under Rule 5605(a)(2) of the NASDAQ Listing Rules. In making this determination, our board of directors considered the relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining the independence of such directors, including the beneficial ownership of our capital stock by each non-employee director. We are actively seeking to identify additional well-qualified individuals to serve as independent directors with the goal of adding one of such additional independent director within 90 days of the effective date of this prospectus, and a second within one year from such date. We intend to comply with the other independence requirements for committees within the time periods specified above.

Board Committees

Our board of directors has established an audit committee and a compensation committee. We have also established a nominating and corporate governance committee, effective as of the date of this prospectus. Each of these committees, which are the only standing committees of our board of directors, will operate under a charter that has been approved by our board of directors.

Audit Committee. The current members of our audit committee are Dr. Barrett and Mr. Steel. Effective as of the date of this prospectus, our audit committee will consist of Dr. Barrett, Mr. Steel, Dr. Wilson and Dr. Xanthopoulos. Our board of directors has determined that each of Dr. Wilson and Dr. Xanthopoulos satisfies The NASDAQ Stock Market independence standards and the independence standards of Rule 10A-3(b)(1) of the Exchange Act. We intend to add at least one additional independent director to our audit committee. Each of the members of our audit committee meets the requirements for financial literacy under applicable rules and regulations of the SEC and The NASDAQ Stock Market. The board of directors has also determined that Mr. Steel qualifies as an “audit committee financial expert,” as defined by applicable rules of The NASDAQ Stock Market and the SEC. The audit committee assists our board of directors in its oversight of:

 

    the integrity of our financial statements;

 

    our compliance with legal and regulatory requirements;

 

    the qualifications and independence of our independent registered public accounting firm; and

 

    the performance of our independent registered public accounting firm.

The audit committee has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The audit committee establishes and implements policies and procedures for the pre-approval of all audit services and all permissible non-audit services provided by our independent registered public accounting firm and reviews and approves any related party transactions entered into by us.

Compensation Committee . The current members of our compensation committee are Dr. Barrett, Mr. Steel and Dr. Xanthopoulos. Effective as of the date of this prospectus, our compensation committee will consist of Dr. Barrett, Mr. Steel, Dr. Wilson and Dr. Xanthopoulos, of whom each of Dr. Wilson and Dr. Xanthopoulos is an independent director. We intend to add at least one additional independent director to our compensation committee. The compensation committee:

 

    approves the compensation and benefits of our executive officers;

 

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    reviews and makes recommendations to the board of directors regarding benefit plans and programs for employee compensation; and

 

    administers our equity compensation plans.

Nominating and Corporate Governance Committee . Effective as of the date of this prospectus, the members of our nominating and corporate governance committee will be Dr. Barrett, Mr. Steel, Dr. Wilson and Dr. Xanthopoulos, of whom each of Dr. Wilson and Dr. Xanthopoulos is an independent director. We intend to add at least one additional independent director to our nominating and corporate governance committee. The nominating and corporate governance committee will:

 

    identify individuals qualified to become board members;

 

    recommend to the board of directors nominations of persons to be elected to the board; and

 

    advise the board regarding appropriate corporate governance policies and assists the board in achieving them.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor has any of them ever been an officer or employee of our company.

Code of Business Conduct and Ethics

We have adopted a written code of business conduct and ethics that applies to our directors, executive officers and employees, effective as of the date of this prospectus. Following this offering, a copy of the code will be posted on the Corporate Governance section of our website, which is located at www.zosanopharma.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website.

Director Compensation

Prior to this offering, we did not have a formal policy regarding compensation of our non-employee directors, and none of our non-employee directors other than Dr. Xanthopoulos received any compensation for service on our board of directors in 2013. In March 2013, we agreed to pay Dr. Xanthopoulos an annual cash fee of $25,000, payable monthly in arrears. In April 2013, we granted Dr. Xanthopoulos an option to purchase 28,301 shares of our common stock at an exercise price of $1.40 per share. The option provides for vesting in equal monthly installments over a period of four years, and becomes fully vested upon a change of control. In July 2013, Dr. Xanthopoulos transferred this option to a family trust for no consideration. We did not grant stock options to any of our other non-employee directors during 2013. We do not pay any compensation to our President and Chief Executive Officer or our Chief Scientific Officer in connection with their service on our board of directors.

Following the closing of this offering, our non-employee directors will receive compensation as follows:

 

    an annual cash fee of $25,000, and non-statutory stock options to purchase shares of our common stock (at a per share exercise price equal to fair market value on the date of grant) vesting in equal monthly installments over a period of four years, with full acceleration of vesting upon a change of control.

The cash fees described above will be paid in monthly installments, in arrears. Non-employee directors are also reimbursed upon request for travel and other out-of-pocket expenses incurred in connection with their attendance at meetings of the board and of committees on which they serve.

 

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The following table sets forth information regarding compensation awarded to, earned by or paid to each of our non-employee directors during 2013. See “Executive Compensation” for a discussion of the compensation of Mr. Lamba and Dr. Daddona.

 

     Fees Earned or
Paid in Cash
     Option Awards  (1) (2)      Total  

Bruce D. Steel

   $ —         $ —         $ —     

M. James Barrett

     —           —           —     

Kleanthis G. Xanthopoulos

     16,667         27,415         44,082   

 

(1) Represents the aggregate grant date fair value of option awards granted in fiscal year 2013 in accordance with ASC Topic 505-50. The assumptions we use in calculating these amounts are discussed in note 10 to notes to financial statements appearing elsewhere in this prospectus.
(2) Represents a non-statutory option to purchase 28,301 shares of common stock granted in April 2013, which was transferred by Dr. Xanthopoulos to a family trust in July 2013.

 

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding compensation earned by our President and Chief Executive Officer and our two most highly compensated executive officers other than our President and Chief Executive Officer who served as executive officers as of December 31, 2013. We refer to these individuals as our named executive officers.

 

     Year      Salary      Bonus (1)      Total  

Vikram Lamba

     2013       $ 412,000       $ 185,400       $ 597,400   

Chief Executive Officer

           

Peter Daddona

     2013         334,750         120,510         455,260   

Chief Scientific Officer

           

Thorsten von Stein

     2013         398,000         —           398,000   

Chief Medical Officer (2)

           

 

(1) Represents cash bonus amounts awarded in respect of 2013, payment of which is contingent upon the completion of this offering. Bonus amounts were determined pursuant to applicable employment agreements and based on achievement of individual and company performance goals and other factors deemed relevant by our compensation committee and board of directors.
(2) Pursuant to an amendment to our consulting agreement with Dr. von Stein, effective March 17, 2014, Dr. von Stein is engaged by us as Medical Consultant and no longer serves as our Chief Medical Officer.

Narrative Disclosure to Summary Compensation Table

We review compensation annually for all of our employees, including our executives. 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. We do not target a specific competitive position or a specific mix of compensation among base salary, bonus or long-term incentives.

Our board of directors has historically determined our executives’ compensation. Our compensation committee typically has reviewed and discussed management’s proposed compensation with the President and Chief Executive Officer for all executives other than our President and Chief Executive Officer. Based on those discussions and its discretion, the compensation committee then has recommended the compensation for each executive officer. Our board of directors, without members of management present, has discussed the compensation committee’s recommendations and ultimately approved the compensation of our executive officers. Effective upon the closing of this offering, our compensation committee will approve the compensation and benefits of our executive officers.

We have formal employment agreements with Vikram Lamba, our President and Chief Executive Officer, and Peter Daddona, our Chief Scientific Officer, and we have a formal consulting agreement with Thorsten von Stein, who was our Chief Medical Officer until March 17, 2014. Mr. Lamba’s employment agreement provides for an initial annual base salary of $400,000, subject to increase from time to time, and we currently pay Mr. Lamba an annual base salary of $412,000. Mr. Lamba’s employment agreement provides for a target annual bonus of 40% of his annual base salary, with a bonus opportunity between 0% and 80% of annual base salary, to be determined by the board of directors in its discretion based on individual and company performance against goals established annually by the compensation committee, as well as the company’s then prevailing cash position. Dr. Daddona’s employment agreement provides for an initial annual base salary of $325,000, subject to increase from time to time, and we currently pay Dr. Daddona an annual base salary of $334,745. Dr. Daddona’s

 

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employment agreement provides for a target annual bonus of 30% of his annual base salary, with a bonus opportunity between 0% and 60% of annual base salary, to be determined by the board of directors in its discretion based on individual and company performance against goals established annually by the compensation committee, as well as the company’s then prevailing cash position. Each of Vikram Lamba and Dr. Daddona is an employee-at-will, and is entitled to certain severance benefits if he is terminated without cause or resigns for good reason, as defined in his agreement. Dr. von Stein’s consulting agreement provided for a consulting fee of $500 per hour, up to a maximum daily amount of $2,800, for fiscal year 2013, and we currently pay Dr. von Stein a consulting fee of $550 per hour, up to a maximum of $4,400 per day. Dr. von Stein’s consulting agreement can be terminated on 60 days’ prior written notice.

Outstanding Equity Awards at Year-End

The following table sets forth information regarding outstanding stock options held by our named executive officers as of December 31, 2013.

 

     Option Awards  

Name

   Number of
Securities
Underlying
Unexercised
Options (#)
exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
unexercisable
     Option
Exercise Price
($)
     Option
Expiration
Date
     Option Grant
Date
 

Vikram Lamba

     53,064 (1)       88,442       $ 1.54         7/1/2017         7/1/2012   

Peter Daddona

     26,532 (1)       44,221       $ 1.40         6/15/2022         6/15/2012   

Thorsten von Stein

     856 (2)       1,562       $ 1.40         7/25/2022         7/25/2012   
     604 (2)       1,813       $ 1.40         12/11/2022         12/11/2012   

 

(1) This option becomes exercisable for 25% of the underlying shares on the first anniversary of the grant date, and thereafter becomes exercisable for the remaining underlying shares in equal monthly installments over three years, resulting in the option being exercisable for 100% of the underlying shares on the fourth anniversary of the grant date; provided that if the holder is terminated without cause or resigns for good reason (as these terms are defined in the holder’s employment agreement), then the option will become exercisable for an additional 18.75% of the total underlying shares; provided further that if the option holder is terminated without cause or resigns for good reason within one year after a change in control (as defined in the holder’s employment agreement), then the option will become exercisable for 100% of the underlying shares.
(2) This option becomes exercisable for 25% of the underlying shares on the first anniversary of the grant date, and thereafter becomes exercisable for the remaining underlying shares in equal monthly installments over three years, resulting in the option being exercisable for 100% of the underlying shares on the fourth anniversary of the grant date; provided that if the holder is terminated without cause (as defined in our 2012 Stock Incentive Plan), then the option will become exercisable for 100% of the underlying shares.

Severance and Change in Control Arrangements

Pursuant to the terms of Mr. Lamba’s employment agreement, if we terminate Mr. Lamba’s employment without cause or Mr. Lamba resigns for good reason, as these terms are defined in the employment agreement, then Mr. Lamba is entitled to receive certain severance payments, including nine months’ salary, pro rata bonus payment in respect of those nine months, and acceleration of vesting of a portion of his outstanding stock option. Also, upon a change in control, as defined in the employment agreement, all shares of Mr. Lamba’s founder’s stock will be released from our repurchase option described below, and if within a year after a change of control Mr. Lamba’s employment is terminated without cause or Mr. Lamba resigns for good reason, then Mr. Lamba’s stock option will vest in full. In January 2012, in connection with the incorporation of Zosano Pharma Corporation (then named ZP Holdings, Inc.), we issued and sold to Mr. Lamba 625,000 shares of our common stock as founder’s stock pursuant to a Restricted Stock Purchase Agreement dated as of January 26, 2012

 

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between us and Mr. Lamba. Following the April 2012 reorganization, we entered into a Stock Repurchase Option Agreement dated as of May 15, 2012 with Mr. Lamba which provides us an option to repurchase certain shares of Mr. Lamba’s founder’s stock upon certain terminations of Mr. Lamba’s employment with us, and also provides for the release of the shares from this repurchase option upon a change of control as described above.

Pursuant to the terms of Dr. Daddona’s employment agreement, if we terminate Dr. Daddona’s employment without cause or Dr. Daddona resigns for good reason, as these terms are defined in the employment agreement, then Dr. Daddona is entitled to receive certain severance payments, including nine months’ salary, pro rata bonus payment in respect of those nine months, and acceleration of vesting of a portion of his outstanding stock option. Also, upon a change in control, as defined in the employment agreement, all unvested shares of Dr. Daddona’s founder’s stock will be released from our repurchase option described below, and if within a year after a change of control Dr. Daddona’s employment is terminated without cause or Dr. Daddona resigns for good reason, then Dr. Daddona’s stock option will vest in full. In January 2012, in connection with the incorporation of Zosano Pharma Corporation (then named ZP Holdings, Inc.), we issued and sold to Dr. Daddona 312,500 shares of our common stock as founder’s stock pursuant to a Restricted Stock Purchase Agreement dated as of January 26, 2012 between us and Dr. Daddona. Following the April 2012 reorganization, we entered into a Stock Repurchase Option Agreement dated as of May 15, 2012 with Dr. Daddona which provides us an option to repurchase certain shares of Dr. Daddona’s founder’s stock upon certain terminations of Dr. Daddona’s employment with us, and also provides for the release of the shares from this repurchase option upon a change of control as described above.

Pursuant to the terms of our non-statutory stock option agreements with Dr. von Stein, if Dr. von Stein’s services are terminated without cause, as defined in our 2012 Stock Incentive Plan, then Dr. von Stein’s outstanding stock options will vest in full.

Stock Incentive and Equity Compensation Plans

We believe that equity-based awards are important vehicles by which to align the interest of our employees with the financial interests of our stockholders, and we historically have awarded stock options broadly to our employees, including our named executive officers. The material terms and conditions of our stock incentive and equity compensation plans are described below.

We have the following equity incentive plans: (i) 2012 Stock Incentive Plan; and (ii) 2014 Equity and Incentive Plan. Following the closing of this offering, our 2014 Equity and Incentive Plan will be the only effective equity compensation plan pursuant to which we will make new awards.

2012 Stock Incentive Plan

Our 2012 Stock Incentive Plan provides for the grant of equity-based awards, denominated in shares of our common stock, including incentive stock options, non-statutory stock options and restricted stock awards. We will not make any new awards under the 2012 Stock Incentive Plan following the completion of this offering. The material features of our 2012 Stock Incentive Plan are summarized below. The complete text of our 2012 Stock Incentive Plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

General . The maximum number of shares of common stock which may be issued under our 2012 Stock Incentive Plan is 566,027. Any shares subject to an award granted under our 2012 Stock Incentive Plan to any person are counted against this limit.

Purposes . The purpose of our 2012 Stock Incentive Plan is to encourage and enable our officers and employees and other persons providing services to us and our subsidiaries to acquire a proprietary interest in our business. We believe that by providing such persons with a direct stake in our welfare will assure a closer identification of their interests with our interests and the interests of our shareholders, thereby stimulating their efforts on our behalf and strengthening their desire to remain with us.

 

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Administration . Our 2012 Stock Incentive Plan has been administered by our board of directors, and, following the closing of this offering, will be administered by the compensation committee of our board of directors. Subject to the terms of our 2012 Stock Incentive Plan, the board of directors may determine the types of awards and the terms and conditions of such awards, interpret provisions of our 2012 Stock Incentive Plan and select participants to receive awards.

Source of shares . The shares of common stock issued or to be issued under our 2012 Stock Incentive Plan consist of authorized but unissued shares and shares that we have reacquired. Shares of common stock underlying any awards issued under the 2012 Stock Incentive Plan that are forfeited, cancelled, reacquired by us or otherwise terminated (other than by exercise) will be added back to the shares of common stock with respect to which awards may be granted under the 2012 Stock Incentive Plan.

Eligibility . Awards may be granted under the 2012 Stock Incentive Plan to our and our subsidiaries’ respective officers, directors, employees, and to consultants and advisors to and us and/or our subsidiaries.

Amendment or termination of our stock incentive plan . Our board of directors may terminate or amend the 2012 Stock Incentive Plan at any time. No amendment or termination may adversely impair the rights of grantees with respect to outstanding awards without the affected participant’s consent to such amendment. In addition, an amendment will be contingent on approval of our stockholders to the extent required by law. Unless terminated earlier, our 2012 Stock Incentive Plan will terminate in April 2022, but will continue to govern unexpired awards.

Options . Our 2012 Stock Incentive Plan permits the granting of options to purchase shares of common stock intended to qualify as “incentive stock options” under the Internal Revenue Code, and options that do not qualify as incentive stock options, which are referred to as non-statutory stock options. We may grant non-statutory stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees.

The exercise price of each incentive stock option and non-statutory stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any 10% stockholder, the exercise price may not be less than 110% of the fair market value of shares of our common stock on the date of grant. The term of each option may not exceed 10 years from the date of grant, except that the term of any incentive stock option granted to any 10% stockholder may not exceed five years from the date of grant. At the time of grant of the award, our board of directors determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by the board of directors.

In general, an optionee may pay the exercise price of an option by cash or check or, if so provided in the applicable option agreement and with the written consent of the board of directors, by tendering shares of our common stock having a fair market value equal to the aggregate exercise price of the options being exercised, by a personal recourse note issued by the optionee in a principal amount equal to the aggregate exercise price of the options being exercised, by a “cashless exercise” through a broker supported by irrevocable instructions to the broker to deliver sufficient funds to pay the applicable exercise price, by reducing the number of shares otherwise issuable to the optionee upon exercise of the option by a number of shares having a fair market value equal to the aggregate exercise price of the options being exercised, or by any combination of these methods of payment.

Incentive stock options granted under our 2012 Stock Incentive Plan may not be transferred or assigned other than by will or under applicable laws of descent and distribution. Our board of directors may determine the extent to which a non-statutory option shall be transferable.

Restricted stock awards . Restricted stock awards entitle the recipient to acquire, for a purchase price determined by the board of directors, shares of common stock subject to such restrictions and conditions as the

 

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board of directors may determine at the time of grant, including continued employment and/or achievement of pre-established performance goals and objectives.

Adjustments upon changes in capitalization . We will make appropriate and proportionate adjustments in outstanding awards and the number of shares available for issuance under the 2012 Stock Incentive Plan to reflect recapitalizations, reclassifications, stock dividends, stock splits, reverse stock splits and other similar events.

Effect of a change in control . Upon the occurrence of a “change in control transaction” (as defined in the 2012 Stock Incentive Plan), unless otherwise provided in any stock option agreement or restricted stock agreement, our board of directors (or the board of directors of any corporation assuming the obligations of our company), may, in its discretion, take any one or more of the following actions as to some or all outstanding stock options or restricted stock awards:

 

    provide that such stock options will be assumed, or equivalent stock options substituted, by the acquiring or succeeding corporation (or an affiliate thereof);

 

    upon written notice to the optionees, provide that all unexercised stock options will terminate immediately prior to the consummation of the change in control transaction unless exercised by the optionee to the extent otherwise then exercisable within a specified period following the date of such notice;

 

    upon written notice to the grantees, provide that all unvested shares of restricted stock will be repurchased at cost;

 

    make or provide for a cash payment to the optionees equal to the difference between (x) the fair market value of the per share consideration (whether cash, securities or other property or any combination thereof) the holder of a share of our common stock will receive upon consummation of the change in control transaction times the number of shares of common stock subject to outstanding vested stock options (to the extent then exercisable at prices not equal to or in excess of such per share consideration) and (y) the aggregate exercise price of such outstanding vested stock options, in exchange for the termination of such stock options; or

 

    provide that all or any outstanding stock options will become exercisable and all or any outstanding restricted stock awards will vest in part or in full immediately prior to the change in control transaction.

To the extent that any stock options are exercisable at a price equal to or in excess of the per share consideration in the change in control transaction, our board of directors may provide that such stock options will terminate immediately upon the consummation of the change in control transaction without any payment being made to the holders of such stock options.

2014 Equity and Incentive Plan

Our board of directors has adopted, and our stockholders have approved, our 2014 Equity and Incentive Plan. A total of 1,400,000 shares of our common stock will initially be reserved for issuance under our 2014 Equity and Incentive Plan, subject to automatic annual increases as set forth in the plan. The 2014 Equity and Incentive Plan provides for the issuance of (i) cash awards and (ii) equity-based awards, denominated in shares of our common stock, including incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance share awards and dividend equivalent rights.

Purpose . The purpose of our 2014 Equity and Incentive Plan is to (i) provide long-term incentives and rewards to those employees, officers, directors and other key persons (including consultants) of the company and its subsidiaries who are in a position to contribute to the long-term success and growth of the company and its

 

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subsidiaries, (ii) to assist the company and its subsidiaries in attracting and retaining persons with the requisite experience and ability, and (iii) to more closely align the interests of such employees, officers, directors and other key persons with the interests of the company’s stockholders.

Administration . Our 2014 Equity and Incentive Plan will be administered by the compensation committee of our board of directors. The compensation committee is generally granted broad authority to administer the plan, including the power to determine and modify the terms and conditions, not otherwise inconsistent with the terms of the plan, of any award. All decisions and interpretations of the compensation committee shall be binding on all persons subject to the plan including the company and plan grantees.

Sources of shares . The shares of common stock to be issued under the 2014 Equity and Incentive Plan consist of authorized but unissued shares and shares that we have reacquired. Shares of common stock underlying any award issued under the 2014 Equity and Incentive Plan that are forfeited, canceled, satisfied without issuance of stock, otherwise terminated or, for shares of stock issued pursuant to any unvested full value award, reacquired by the company shall be added back to the shares of common stock with respect to which awards may be granted under the plan.

Eligibility . Incentive stock options may only be granted to our employees. All other awards may be granted to our employees, officers, directors and key persons (including consultants and prospective employees).

Amendment or termination of our 2014 Equity and Incentive Plan . Subject to requirements of law or any stock exchange or similar rules which would require a vote of our stockholders, our board of directors may, at any time, amend or discontinue the plan and the compensation committee may, at any time, amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding award without the holder’s consent.

Options . Our 2014 Equity and Incentive Plan permits the granting of options to purchase common stock that are intended to qualify as “incentive stock options” under the Code, and options that do not qualify as incentive stock options, which are referred to as non-statutory stock options. We may grant non-qualified stock options to our employees, directors, officers, consultants or advisors in the discretion of our board of directors. Incentive stock options will only be granted to our employees. The exercise price of each incentive stock option may not be less than 100% of the fair market value of shares of our common stock on the date of grant. If we grant incentive stock options to any person holding 10% or more of the outstanding voting stock of the company, the exercise price may not be less than 110% of the fair value of shares of our common stock on the date of grant. The exercise price of any non-qualified stock option will be determined by our board of directors and may not be less than the fair value of shares of our common stock.

The term of each option may not exceed 10 years from the date of grant, and no option shall be transferable by the optionee other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the compensation committee, in its sole discretion, may provide in the award agreement regarding a given option, or may agree in writing with respect to an outstanding option, that the optionee may transfer their non-statutory stock options to members of their immediate family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the company to be bound by all of the terms and conditions of this plan and the applicable option.

In general, an optionee may pay the exercise price of an option by cash or, if so provided in the applicable option agreement, by tendering shares of our common stock, by a “cashless exercise” through a broker supported by an irrevocable instruction to such broker to deliver sufficient funds to pay the applicable exercise price, by reducing the number of shares otherwise issuable to the optionee upon exercise of the option by a number of shares having a fair market value equal to the aggregate exercise price of the options being exercised or by any other method permitted by the compensation committee.

 

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Stock appreciation rights . Pursuant to the 2014 Equity and Incentive Plan, we may grant stock appreciation rights, or an award entitling the recipient to receive cash or shares of our common stock having a value on the date of exercise calculated as follows: (i) the exercise price of a share of common stock on the grant date is less the fair market value of the common stock on the date of exercise and (ii) multiplied by the number of shares of stock with respect to which the stock appreciation right shall have been exercised. The exercise price of a stock appreciation right shall not be less than 100% of the fair market value of our common stock on the date of grant, and the terms and conditions of the stock appreciation rights shall be determined from time to time by the compensation committee.

Restricted stock awards . Pursuant to the 2014 Equity and Incentive Plan, we may grant restricted stock awards entitling the recipient to acquire, at such a price as determined by the compensation committee, shares of common stock subject to such restrictions and conditions as the compensation committee may determine at the time of grant. Conditions may be based on continuing employment or achievement of pre-established performance goals and objectives. A holder of a restricted stock award may exercise voting rights upon (i) execution of a written instrument setting forth the award and (ii) payment of any applicable purchase.

Restricted stock units . Pursuant to the 2014 Equity and Incentive Plan, we may grant restricted stock units which entitle the holder, upon vesting of the right, to a number of shares of common stock as determined in the award agreement. The compensation committee shall determine the restrictions and conditions applicable to each restricted stock unit at the time of grant, and a holder of a restricted stock unit shall only have exercisable rights as a stockholder upon settlement of restricted stock units. Unless otherwise provided in the award agreement, a holder’s rights in all restricted stock units that have not vested shall automatically terminate immediately following the holder’s termination of employment with the company for any reason.

Unrestricted stock awards. Pursuant to the 2014 Equity and Incentive Plan, we may grant unrestricted awards of shares of common stock free of any restrictions under the plan. The right to receive shares of unrestricted stock awards on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution.

Performance share awards . Pursuant to the 2014 Equity and Incentive Plan, we may grant performance share awards entitling the recipient to acquire shares of common stock upon the attainment of specified performance goals; provided, however, that the compensation committee, in its discretion, may provide either at the time of grant or at the time of settlement that a performance share award will be settled in cash. The period during which performance is to be measured for performance share awards shall not be less than one year, and such performance share awards, and all rights with respect to such awards, may not be sold, assigned, transferred, pledged or otherwise encumbered.

Dividend equivalent rights. Pursuant to the 2014 Equity and Incentive Plan, we may grant dividend equivalent rights entitling the recipient to receive credits based on cash dividends that would be paid on the shares of stock specified in the dividend equivalent right (or other award to which it relates). Dividend equivalent rights may be settled in cash or shares of stock or a combination thereof, in a single installment or installments. A dividend equivalent right granted as a component of another award may provide that such dividend equivalent right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such dividend equivalent right shall expire or be forfeited or annulled under the same conditions as such other award.

Cash awards. The compensation committee, in its discretion, may provide for cash payments to be made under the 2014 Equity and Incentive Plan. Such cash awards may be made subject to such terms, conditions and restrictions as the compensation committee considers necessary or advisable.

Effect of a change in control . If we experience a “change in control,” as defined in the 2014 Equity and Incentive Plan, the compensation committee may in its discretion, at the time an award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating

 

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to the exercise or payment of the award; (ii) provide for termination of any awards not exercised prior to the occurrence of a change in control; provided that the holder of any such award is given written notice of such prospective action by the administrator at least ten calendar days prior to the effective date of the change in control; (iii) provide for payment to the holder of the award of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the award had the award been exercised or paid upon the change in control in exchange for cancellation of the award; (iv) adjust the terms of the award in a manner determined by the compensation committee to reflect the change in control; (v) cause the award to be assumed, or new rights substituted therefor, by another entity; or (vi) make such other provision as the compensation committee may consider equitable to the holders of awards and in our best interests.

401(k) Retirement Plan

We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Code. In general, all of our employees, upon meeting certain requirements, are eligible to participate in the 401(k) plan. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit and have the amount of the reduction contributed to the 401(k) plan. Employee contributions are held and invested by the plan’s trustee. The 401(k) plan also permits the Company to make discretionary matching contributions. The Company did not make any matching contribution for the years ended December 31, 2013 and 2012.

Limitation of Liability and Indemnification

Our amended and restated certificate of incorporation includes provisions that will limit or eliminate the personal liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:

 

    any breach of the director’s duty of loyalty to us or our stockholders;

 

    any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

    any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

 

    any transaction from which the director derived an improper personal benefit.

These limitations do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission. If Delaware law is amended to authorize the further elimination or limiting of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended.

As permitted by Delaware law, our certificate of incorporation and bylaws that will be effective as of the closing date of this offering will also provide that:

 

    we will indemnify our directors and officers to the fullest extent permitted by law;

 

    we may indemnify our other employees and other agents to the same extent that we indemnify our officers and directors, unless otherwise determined by our board of directors; and

 

    we will advance expenses to our directors and officers in connection with legal proceedings in connection with a legal proceeding to the fullest extent permitted by law.

The indemnification provisions contained in our certificate of incorporation that will be effective as of the closing date of this offering are not exclusive.

 

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We believe that these provisions are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we understand that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

In addition, we have entered into indemnification agreements with each of our directors and maintain standard policies of insurance under which coverage is provided to our directors and officers against losses arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law.

 

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RELATED PERSON TRANSACTIONS

The following is a description of transactions since January 1, 2011 and any currently proposed transactions to which we have been or will be a party, and in which the amounts involved exceeded or will exceed $120,000 (except as otherwise indicated) and any of our directors, executive officers or beneficial owners of more than 5% of our voting securities, or any of their respective affiliates or immediate family members, had or will have a direct or indirect material interest, which have not already been described in the “ Executive Compensation ” section of this report. 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 would be paid or received, as applicable, from unrelated third parties.

Issuance of Founder’s Shares

In January 2012, in connection with our incorporation, we issued and sold to Vikram Lamba, our President and Chief Executive Officer and a director, 625,000 shares of our common stock as founder’s stock for an aggregate purchase price of $250 pursuant to a restricted stock purchase agreement between us and Mr. Lamba, and we issued and sold to Peter Daddona, our Chief Scientific Officer and a director, 312,500 shares of our common stock as founder’s stock for an aggregate purchase price of $125 pursuant to a restricted stock purchase agreement between us and Dr. Daddona. Following the April 2012 recapitalization, we entered into a stock repurchase option agreement with Mr. Lamba pursuant to which we have an option to repurchase certain shares of Mr. Lamba’s founder’s stock in the event of Mr. Lamba’s termination without cause or resignation for good reason (as these terms are defined in Mr. Lamba’s employment agreement). Of the 625,000 shares, 1/3 of the shares were released from the repurchase option on May 15, 2012 and the remainder are released in equal monthly installments over three years beginning on January 26, 2012, provided that an additional 2/9 of the total shares are released from the repurchase option upon Mr. Lamba’s death or termination due to disability and all shares are released from the repurchase option upon a qualified sale (as defined in the stock repurchase option agreement) involving the Company. Following the April 2012 recapitalization, we also entered into a stock repurchase option agreement with Dr. Daddona pursuant to which we have an option to repurchase certain shares of Dr. Daddona’s founder’s stock in the event of Dr. Daddona’s termination without cause or resignation for good reason (as these terms are defined in Dr. Daddona’s employment agreement). Of the 312,500 shares, 1/3 of the shares were released from the repurchase option on May 15, 2012 and the remainder are released in equal annual installments over three years beginning on January 26, 2012, provided that all shares are released from the repurchase option upon a qualified sale (as defined in the stock repurchase option agreement) involving the Company.

Secured Loan and Real Property Lease with BMR

In April 2012, in connection with our April 2012 recapitalization, described in further detail in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Developments Important to Understanding Our Financial Statements—2012 recapitalization” section of this prospectus, we issued 1,236,769 shares of our common stock and a four year non-callable secured promissory note in the original principal amount of $8,556,533 to BioMed Realty Holdings, Inc., or BMR Holdings, and 107,545 shares of our common stock to BioMed Realty, L.P., each of which is an affiliate of our landlord, BMR-34790 Ardentech Court LP. As a result, BMR Holdings and BioMed Realty, L.P. together held approximately 23.8% of our voting securities following the recapitalization. We issued these securities to BMR Holdings and BioMed Realty, L.P. in exchange for reduction of future rent payments pursuant to an amendment to our lease agreement with BMR-34790 Ardentech Court LP, cancellation of an unsecured convertible promissory note issued to BMR in July 2011 and cancellation of a stock purchase warrant issued to BMR Holdings in July 2011.

The BMR secured promissory note bears interest at the annual rate of 8%, compounded annually, and all principal and interest are due and payable on the earliest of (i) April 26, 2016, (ii) the closing of a sale of our company or business, as defined in the BMR secured promissory note, and (iii) the date that any distribution is made to our stockholders, as defined in the BMR secured promissory note. We may prepay the BMR secured promissory note, in whole or in part, at any time without prepayment penalty or premium. Further, we are required

 

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to prepay the BMR secured promissory note immediately prior to, or in connection with, a sale or partial sale of our company or business, as defined as a transaction in which we are acquired or in which we exclusively license or sell all or substantially all of our assets. In any similar transaction that does not qualify as a sale but results in our cash balance being at least $5.0 million in excess of our cash requirements for the 12 months following the closing of such transaction, we are required to prepay an amount equal to half of the excess cash balance over $5.0 million. The BMR secured promissory note is secured by a first priority security interest and lien in and to all of our tangible and intangible properties and assets, including intellectual property. As of the date of this prospectus, the aggregate outstanding principal and accrued interest under the BMR secured promissory note is approximately $10.0 million. In June 2014, we amended the BMR secured promissory note to increase the interest rate during the period our $4.0 million term loan facility with Hercules Technology Growth Capital remains outstanding to match the interest rate of the Hercules loan and to provide that any failure by us to pay any amount under the BMR secured promissory note during the period from the maturity date of the BMR secured promissory note through the date that the Hercules loan is repaid in full will not constitute a default under the BMR secured promissory note. As a result of this amendment, during the period our $4.0 million term loan facility with Hercules Technology Growth Capital remains outstanding, the BMR secured promissory note bears interest at an annual rate equal to the greater of (i) 12.05% and (ii) 12.05% plus the “prime rate” as reported in The Wall Street Journal minus 5.25%. The interest rate floats, and will be determined in accordance with the preceding sentence based on changes to the prime rate as reported in The Wall Street Journal. In connection with the Hercules loan, the BMR affiliate that is the holder of the BMR secured promissory note agreed to subordinate the BMR secured promissory note to the Hercules loan, and we issued 31,250 shares of our common stock to this BMR affiliate in June 2014.

In December 2012, BMR Holdings transferred the BMR secured promissory note and its 1,236,769 shares of our common stock to its affiliate, BMV Direct SOTRS LP. In December 2012, BioMed Realty, L.P. transferred its 107,545 shares of our common stock to its affiliate, BMV Direct SO LP. As a result of these transfers, each of BMV Direct SOTRS LP and BMV Direct SO LP owns more than 5% of our voting securities.

We also have an operating lease with BMR-34790 Ardentech Court LP, which is an affiliate of BMV Direct SOTRS LP and BMV Direct SO LP, for a 55,000 square foot facility in Fremont, California, where we operate our manufacturing operations and house our engineering, research and development and administrative employees. In 2011, 2012 and 2013, we recorded rent expense to BMR-34790 Ardentech Court LP in the amounts of approximately $1,636,000, $874,000 and $620,000, respectively. In April 2012, we amended the lease agreement to reduce future rent obligations to amounts ranging from approximately $600,000 to $891,000 per year over a new lease term of seven years.

2013 Bridge Loan

In September 2013, we issued and sold convertible promissory notes, which we refer to as the 2013 bridge notes, in the aggregate original principal amount of approximately $3.0 million to our stockholders BMV Direct SOTRS LP, BMV Direct SO LP, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P. and ProQuest Management LLC. Each of BMV Direct SOTRS LP, BMV Direct SO LP (together with its affiliate BMV Direct SOTRS LP), New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P., and ProQuest Management LLC (together with its affiliate ProQuest Investments IV, L.P.) then owned more than 5% of our voting securities, and as of the date of this prospectus each of BMV Direct SOTRS LP, BMV Direct SO LP (together with its affiliate BMV Direct SOTRS LP) and New Enterprise Associates 12, Limited Partnership owns more than 5% of our voting securities. The following is the original principal amount of 2013 bridge notes that were issued to our directors, executive officers and holders of more than 5% of our voting securities, and their affiliates or immediate family members:

 

    BMV Direct SOTRS LP, in the original principal amount of approximately $1.0 million;

 

    BMV Direct SO LP, in the original principal amount of approximately $300,000;

 

    New Enterprise Associates 12, Limited Partnership, in the original principal amount of approximately $1.2 million; and

 

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    ProQuest Investments IV, L.P. and its affiliate ProQuest Management LLC, in the aggregate original principal amount of approximately $600,000.

As consideration for our issuance of the 2013 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The 2013 bridge notes mature on September 9, 2014 and accrue simple interest at the annual rate of 8%. As of October 31, 2014, the aggregate outstanding principal and accrued interest under the 2013 bridge notes is approximately $3.3 million. Upon the closing of a qualified financing, which is defined under the terms of the notes as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing. In June 2014, we amended the 2013 bridge notes to provide that any failure by us to pay any amount under the 2013 bridge notes during the period from maturity of the 2013 bridge notes through the date that the Hercules loan is repaid in full will not constitute a default under the 2013 bridge notes. In September 2014, we amended the 2013 bridge notes to extend the date by which a qualified financing must occur in order for the 2013 bridge notes to convert into equity securities to December 31, 2014, and in December 2014, we amended the 2013 bridge notes to further extend the date by which a qualified financing must occur in order for the 2013 bridge notes to convert into equity securities to March 31, 2015.

February 2014 Bridge Loan

In February 2014, we issued and sold convertible promissory notes, which we refer to as the February 2014 bridge notes, in the aggregate original principal amount of $2.5 million to our stockholders BMV Direct SOTRS LP, BMV Direct SO LP and New Enterprise Associates 12, Limited Partnership. Each of BMV Direct SOTRS LP, BMV Direct SO LP and New Enterprise Associates 12, Limited Partnership then owned, and as of the date of this prospectus owns, more than 5% of our voting securities. The following is the original principal amount of February 2014 bridge notes that were issued to our directors, executive officers and holders of more than 5% of our voting securities, and their affiliates or immediate family members:

 

    BMV Direct SOTRS LP, in the original principal amount of approximately $1.1 million;

 

    BMV Direct SO LP, in the original principal amount of approximately $250,000; and

 

    New Enterprise Associates 12, Limited Partnership, in the original principal amount of approximately $1.2 million.

As consideration for our issuance of the February 2014 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The February 2014 bridge notes mature on September 9, 2014 and accrue simple interest at the annual rate of 8%. As of October 31, 2014, the aggregate outstanding principal and accrued interest under the February 2014 bridge notes is approximately $2.6 million. Upon the closing of a qualified financing, which is defined under the terms of the notes as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing. In June 2014, we amended the February 2014 bridge notes to provide that any failure by us to pay any amount under the February 2014 bridge notes during the period from maturity of the February 2014 bridge notes through the date that the Hercules loan is repaid in full will not constitute a default under the February 2014 bridge notes. In September 2014, we amended the February 2014 bridge notes to extend the date by which a qualified financing must occur in order for the February 2014 bridge notes to convert into equity securities to December 31, 2014, and in December 2014, we amended the February 2014 bridge notes to further extend the date by which a qualified financing must occur in order for the February 2014 bridge notes to convert into equity securities to March 31, 2015.

 

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December 2014 Bridge Loan

In December 2014, we issued and sold convertible promissory notes, which we refer to as the December 2014 bridge notes, in the aggregate original principal amount of $1.3 million to our stockholders BMV Direct SOTRS LP and New Enterprise Associates 12, Limited Partnership. Each of BMV Direct SOTRS LP and New Enterprise Associates 12, Limited Partnership then owned, and as of the date of this prospectus owns, more than 5% of our voting securities. The following is the original principal amount of December 2014 bridge notes that were issued to our directors, executive officers and holders of more than 5% of our voting securities, and their affiliates or immediate family members:

 

    BMV Direct SOTRS LP, in the original principal amount of approximately $710,000; and

 

    New Enterprise Associates 12, Limited Partnership, in the original principal amount of approximately $620,000.

As consideration for our issuance of the December 2014 bridge notes, each investor paid us an amount equal to the original principal amount of the note issued to the investor. The December 2014 bridge notes mature on June 1, 2017 and accrue simple interest at the annual rate of 8%. As of December 1, 2014, the aggregate outstanding principal and accrued interest under the December 2014 bridge notes is approximately $1.3 million. Upon the closing of a qualified financing, which is defined under the terms of the notes as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing.

Agreement with Our Stockholders

In April 2012, in connection with our April 2012 recapitalization, we entered into a stockholder rights and voting agreement, which we refer to as the stockholders agreement, with certain holders of our common stock, including Vikram Lamba, our President and Chief Executive Officer and a holder of more than 5% of our voting securities, Peter Daddona, our Chief Scientific Officer and a holder of more than 5% of our voting securities, BMR, then a holder of more than 5% of our voting securities, BioMed Realty, L.P., then a holder of more than 5% of our voting securities (together with its affiliate BMR), New Enterprise Associates 12, Limited Partnership, a holder of more than 5% of our voting securities, NEA Ventures 2006, Limited Partnership, a holder of more than 5% of our voting securities (together with New Enterprise Associates 12, Limited Partnership), ProQuest Investments IV, L.P., then a holder of more than 5% of our voting securities, and Nomura Phase4 Ventures L.P., then a holder of more than 5% of our voting securities. In December 2012, BMR and BioMed Realty, L.P. assigned its rights under the stockholders agreement to BMV Direct SOTRS LP and BMV Direct SO LP, respectively. Each of BMV Direct SOTRS LP and BMV Direct SO LP owns more than 5% of our voting securities. The stockholders agreement provides each of the stockholders that is a party to the agreement with a secondary right of first refusal in respect of sales of securities by certain holders of our capital stock, and contains provisions with respect to the election of our board of directors and its composition. The stockholders agreement will terminate upon the closing of this offering.

Interests of Directors in our Financial Relationships

Two of our directors, Bruce Steel and M. James Barrett, may be deemed to have indirect material interests in our financial relationships with certain of our stockholders based on their association with such stockholders:

 

    Bruce Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SO LP, which entitles him to a percentage of certain distributions of these entities. Mr. Steel does not have voting or dispositive control of either of these entities. Mr. Steel disclaims beneficial ownership in our securities directly held by these entities except to the extent of his pecuniary interest therein.

 

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    M. James Barrett is one of seven Managers of NEA 12 GP, LLC, or NEA 12 LLC, the sole general partner of NEA Partners 12, Limited Partnership, or NEA Partners 12, which is the sole general partner of our stockholder, New Enterprise Associates 12, Limited Partnership. NEA Partners 12, NEA 12 LLC and each of the Managers of NEA 12 LLC share voting and dispositive power with regard to our securities directly held by New Enterprise Associates 12, Limited Partnership. Dr. Barrett disclaims beneficial ownership in these shares except to the extent of his pecuniary interest therein, if any.

Participation in this Offering

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. Any shares purchased by these potential investors will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”

Indemnification of Directors and Officers

Our amended and restated certificate of incorporation and amended and restated bylaws that will be effective as of the closing date of this offering provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with each of our directors that are broader in scope than the specific indemnification provisions contained in the Delaware General Corporation Law. See the “ Executive Compensation—Limitation of Liability and Indemnification ” section of this prospectus for a further discussion of these arrangements.

Policies and Procedures for Related Person Transactions

While we have not historically had a written policy with respect to the review and approval of transactions with our directors, officers and principal stockholders, it has been the practice of our board of directors to review all interested party transactions and not to authorize any such transaction unless the board of directors, excluding any interested directors, determines that the terms of the proposed transaction are as favorable or more favorable to our company than would be available from an unrelated party in an arms’ length negotiation. Pursuant to the charter of our audit committee that we expect to become effective upon the closing of this offering, our audit committee will be responsible for reviewing and approving in advance any related person transactions. For the purposes of this policy, a “related person transaction” is any transaction between us or any of our subsidiaries and any (a) of our directors or executive officers, (b) nominee for election as a director, (c) person known to us to own more than five percent of any class of our voting securities, or (d) member of the immediate family of any such person, if the nature of such transaction is such that it would be required to be disclosed under Item 404 of Regulation S-K (or any similar successor provision).

In determining whether to approve a related person transaction, the audit committee will take into account, among other factors it deems appropriate, whether the related person transaction is on terms no less favorable than terms generally available to an unaffiliated third-person under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to beneficial ownership of our common stock, as of October 31, 2014, by:

 

    each person or entity, or group of affiliated persons or entities, known by us to beneficially own more than 5% of our common stock;

 

    each of our directors;

 

    each of our named executive officers; and

 

    all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of October 31, 2014, shares of common stock issuable upon automatic conversion of our convertible promissory notes held by that person, and the shares of common stock issuable in the concurrent private placement (in the case of Lilly) are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is c/o Zosano Pharma Corporation, 34790 Ardentech Court, Fremont, California 94555.

Each stockholder’s percentage ownership before the offering is determined in accordance with Rule 13d-3 under the Exchange Act and is based on 5,140,359 shares of our common stock outstanding as of October 31, 2014. Each stockholder’s percentage ownership after the offering assumes the issuance of the                 shares of our common stock offered hereby and assumes no exercise of the underwriters’ over- allotment option. Shares beneficially owned before and after the offering also assume the issuance of                 shares of common stock (based on the 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) that will be sold to Lilly in the concurrent private placement and                  shares of common stock that will be issued upon the closing of this offering in connection with the automatic conversion of our outstanding convertible promissory notes outstanding at October 31, 2014, based on the assumed initial public offering price of $         per share.

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. The information set forth below does not reflect any potential purchases by these potential investors.

 

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Name of Beneficial Owner (1)

   Shares
Beneficially
Owned
Prior to the
Offering
     Percentage
Prior to the
Offering
    Shares
Beneficially
Owned
After the
Offering
   Percentage
After the
Offering

5%+ Stockholders

          

BMV Direct SOTRS LP (2)

17190 Bernardo Center Drive

San Diego, CA 92128

                 

New Enterprise Associates 12,

Limited Partnership (3)

Chevy Chase, MD 20815

5425 Wisconsin Avenue, Suite 800

                 

Eli Lilly and Company (4)

Lilly Corporate Center

Indianapolis, IN 46285

                 

Directors and Named Executive Officers:

          

Vikram Lamba (5)

     716,743         13.72     

Peter Daddona (6)

     363,008         7.00     

Thorsten von Stein (7)

     2,681         *        

M. James Barrett

     5         *        

Bruce Steel

     —           *        

Troy Wilson (8)

     3,538         *        

Kleanthis Xanthopoulos (9)

     12,382         *        

Current Directors and Executive Officers as a Group
(8 persons)  (10)

     1,112,480         20.98     

 

 * Less than 1%
(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
(2) Shares owned prior to the offering includes 1,579,573 shares of common stock owned by BMV Direct SOTRS LP, 454,243 shares of common stock owned by BMV Direct SO LP,                  shares of common stock that will be issued to BMV Direct SOTRS LP upon automatic conversion of our convertible promissory notes (based on the 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) and                  shares of common stock that will be issued to BMV Direct SO LP upon automatic conversion of our convertible promissory notes (based on the assumed initial public offering price of $         per share). Shares owned after the offering includes                  shares of common stock owned by BMV Direct SOTRS LP and                 shares of common stock owned by BMV Direct SO LP. The sole general partner of BMV Direct SOTRS LP is BioMed Realty Holdings, Inc. The sole shareholder of BioMed Realty Holdings, Inc. and the sole general partner of BMV Direct SO LP is BioMed Realty, L.P. The sole general partner of BioMed Realty, L.P. is BioMed Realty Trust, Inc. BioMed Realty Trust, Inc. has sole voting and dispositive power with respect to the shares directly held by BMV Direct SOTRS LP and BMV Direct SO LP. Bruce Steel is a limited partner with a variable economic interest in each of BMV Direct SOTRS LP and BMV Direct SO LP. Mr. Steel disclaims beneficial ownership in the shares directly held by each of BMV Direct SOTRS LP and BMV Direct LP except to the extent of his pecuniary interest therein.
(3)

Shares owned prior to the offering includes 1,793,881 shares of common stock owned by New Enterprise Associates 12, Limited Partnership, or NEA 12, 4 shares of common stock owned by NEA Ventures 2006, Limited Partnership, or Ven 2006, and                  shares of common stock that will be issued to NEA 12

 

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  upon automatic conversion of our convertible promissory notes (based on the 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). Shares owned after the offering includes                 shares of common stock owned by NEA 12 and 4 shares of common stock owned by Ven 2006. The shares directly held by NEA 12 are indirectly held by NEA Partners 12, Limited Partnership (“NEA Partners 12”), the sole general partner of NEA 12, NEA 12 GP, LLC, or NEA 12 LLC, the sole general partner of NEA Partners 12, and each of the individual Managers of NEA 12 LLC. The individual Managers of NEA 12 LLC are M. James Barrett, Peter J. Barris, Forest Baskett, Ryan D. Drant, Patrick J. Kerins, Krishna “Kittu” Kolluri and Scott D. Sandell. The shares directly held by Ven 2006 are indirectly held by Karen P. Welsh, the general partner of Ven 2006. NEA Partners 12, NEA 12 LLC and the Managers share voting and dispositive power with regard to the shares of the securities directly held by NEA 12. M. James Barrett has neither voting nor dispositive power with respect to the shares held by Ven 2006. M. James Barrett and all other indirect holders of these shares have disclaimed his beneficial ownership in these shares except to the extent of their pecuniary interest therein, if any.
(4) Consists of                  shares of our common stock that will be purchased by Lilly in the concurrent private placement (based on the 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).
(5) Includes options to purchase 85,493 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.
(6) Includes options to purchase 44,221 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.
(7) Includes options to purchase 2,670 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.
(8) Consist of options to purchase 3,538 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.
(9) Consists of options to purchase 12,382 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.
(10) Includes options to purchase 162,438 shares of our common stock anticipated to be exercisable within 60 days after October 31, 2014.

 

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DESCRIPTION OF CAPITAL STOCK

The following is a summary of all material characteristics of our capital stock as set forth in our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective upon the consummation of this offering. The summary does not purport to be complete and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated bylaws, all of which are incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and the applicable provisions of Delaware law. The numbers of outstanding shares of common stock set forth in the summary below give effect to a 1-for-4 reverse split of our common stock effected on July 11, 2014.

General

Upon the completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock will be undesignated. As of October 31, 2014, we had 5,140,359 shares of common stock issued and outstanding, outstanding stock options to purchase 526,890 shares of common stock, and                 shares of common stock that will be issued upon the automatic conversion of our outstanding convertible promissory notes, assuming the closing of this offering on or before March 31, 2015 and an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus. The terms of the convertible promissory notes provide that upon the closing of a qualified financing, which is defined as an equity financing on or before March 31, 2015 where we raise at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the equity security sold in the qualified financing at a price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing. In addition, in November 2014, we entered into a stock purchase agreement with Lilly under which Lilly has agreed to purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. Lilly may elect to not purchase any shares that would cause Lilly to own in excess of 18% of our outstanding common stock after this offering and the concurrent private placement (which would result in Lilly investing less than $15 million).

Common Stock

Voting rights . Holders of our common stock are entitled to one vote per share held of record on all matters to be voted upon by our stockholders. The election of directors by our stockholders is determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Other matters subject to a vote by our stockholders are decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter. Our common stock does not have cumulative voting rights.

Dividend rights . Subject to preferences that may be applicable to the holders of any outstanding shares of our preferred stock, the holders of our common stock are entitled to receive such lawful dividends as may be declared by our board of directors.

Liquidation and dissolution . In the event of our liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of our preferred stock, the holders of shares of our common stock will be entitled to receive pro rata all of our remaining assets available for distribution to our stockholders.

Other rights and restrictions . Our certificate of incorporation does not permit us to redeem shares of our common stock at our election, provide for a sinking fund with respect to our common stock or provide for the granting of preemptive rights to any stockholder. All outstanding shares are fully paid and nonassessable.

 

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Preferred Stock

Prior to this offering, our certificate of incorporation did not provide for any preferred stock. Upon the closing of this offering, pursuant to our amended and restated certificate of incorporation, our board of directors will be authorized, without stockholder approval, from time to time to issue up to 5,000,000 shares of preferred stock in one or more series, each of the series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as the board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for others to acquire, or of discouraging others from attempting to acquire, a majority of our outstanding voting stock. We have no current plans to issue any shares of preferred stock.

Options

As of October 31, 2014, options to purchase 526,890 shares of our common stock were outstanding under our 2012 Stock Incentive Plan, at a weighted average exercise price of $1.58 per share.

As of October 31, 2014, we had an outstanding warrant to purchase 31,674 shares of our common stock at an exercise price of $8.84 per share.

Anti-Takeover Effects of Provisions of Delaware Law and Our Charter and By-laws

Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

We must comply with Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to an interested stockholder. An “interested stockholder” includes a person who, together with affiliates and associates, owns, or did own within three years before the determination of interested stockholder status, 15% or more of the corporation’s voting stock. The existence of this provision generally will have an anti-takeover effect for transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Upon the closing of this offering, our amended and restated certificate of incorporation and our amended and restated bylaws will require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, upon the closing of this offering, special meetings of our stockholders may be called only by the board of directors and some of our officers. Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to our board of directors. Our amended and restated certificate of incorporation and amended and restated bylaws also provide that, effective upon the closing of this offering, our board of directors will be divided into three classes, with each class serving staggered three-year terms. These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management.

 

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Listing on the NASDAQ Global Market

Our common stock has been approved for listing on the NASDAQ Global Market under the symbol “ZSAN.”

Authorized but Unissued Shares

The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the NASDAQ Listing Rules. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be 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 public trading market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares issued upon exercise of outstanding options or warrants or in the public market after this offering, or the anticipation of those sales, could adversely affect the public market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. Our common stock has been approved for listing on the NASDAQ Global Market under the symbol “ZSAN.”

Upon the closing of this offering and the concurrent private placement with Lilly, and after giving effect to the issuance of the                 shares of our common stock offered in this offering, the issuance of              shares of common stock (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus) to Lilly in the concurrent private placement, and the conversion of our convertible promissory notes outstanding at October 31, 2014 into              shares of common stock upon the closing of this offering (assuming an initial public offering price of $         per share), we will have outstanding an aggregate of                 shares of common stock, assuming no exercise of outstanding options after October 31, 2014. Of these shares, the                 shares sold by us (assuming that the underwriters do not exercise their over-allotment option), in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement, and shares purchased by our existing investors, which will be subject to lock-up agreements as described below.

The remaining                 shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act, and substantially all of these shares will further be subject to either restrictions on transfer under the lock-up agreements described below or restrictions on transfer for a period of 180 days from the effectiveness of the registration statement of which this prospectus forms a part under stock option agreements entered into between us and the holders of those shares. Following the expiration of these restrictions, these shares will become eligible for public sale if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.

In addition, of the 526,890 shares of common stock that were issuable pursuant to stock options outstanding under our 2012 Stock Incentive Plan as of October 31, 2014, options to purchase 218,853 shares of common stock had vested and were exercisable as of October 31, 2014. Upon exercise, these shares will be eligible for sale, subject to the lock-up agreements and securities laws described below. As of October 31, 2014, an outstanding warrant was exercisable for 31,674 shares of common stock, and upon issuance these shares will be eligible for sale, subject to the securities laws described below.

Rule 144

Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within any three-month period that does not exceed the greater of:

 

    1% of the number of shares of our common stock then outstanding, which will equal approximately                 shares immediately after this offering and the concurrent private placement; or

 

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    the average weekly trading volume in our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and the NASDAQ Stock Market concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.

Non-Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.

Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.

Rule 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchased shares from us in connection with a compensatory stock or option plan or other written agreement entered into before the effective date of our initial public offering is entitled to sell such shares without further restriction under the Securities Act.

Lock-up Agreements

All of our executive officers and directors and the holders of substantially all of our outstanding stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters.

The representatives of the underwriters currently do not anticipate shortening or waiving any of the lock-up agreements and do not have any pre-established conditions for such modifications or waivers. The representatives of the underwriters may, however, release for sale in the public market all or any portion of the shares subject to the lock-up agreements.

Stock Options and Warrant

As of October 31, 2014, we had outstanding options to purchase 526,890 shares of common stock, of which options to purchase 218,853 shares of common stock were vested and exercisable. Following this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock subject to outstanding options and options and other awards issuable pursuant to our 2012 Stock Incentive Plan and 2014 Equity and Incentive Plan.

As of October 31, 2014, we also had an outstanding and exercisable warrant to purchase 31,674 shares of our common stock at an exercise price of $8.84 per share. Any shares purchased by the non-affiliate warrant holder pursuant to the cashless exercise feature of the warrant will be freely tradable under Rule 144(b)(1), and any shares purchased through the exercise of the warrant for cash will be eligible for sale subject to the securities laws described above.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

The following is a general discussion of the material U.S. federal income tax considerations applicable to non-U.S. holders (as defined below) with respect to their purchase, ownership and disposition of shares of our common stock. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-U.S. holders of our common stock should consult their tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing and proposed U.S. Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, all as in effect as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences to non-U.S. holders described in this prospectus. We assume in this discussion that a non-U.S. holder holds shares of 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 aspects of U.S. federal income taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances nor does it address, except to the limited extent provided below with respect to estate tax, any aspects of U.S. federal estate or gift taxes, and state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as:

 

    insurance companies;

 

    integral parts or controlled entities of a foreign sovereign;

 

    tax-exempt organizations;

 

    banks or other financial institutions;

 

    brokers or dealers in securities or currencies;

 

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

 

    regulated investment companies or real estate investment trusts;

 

    individual retirement accounts, tax-deferred accounts or pension plans;

 

    controlled foreign corporations or passive foreign investment companies;

 

    hybrid entities;

 

    corporations that accumulate earnings to avoid U.S. federal income tax;

 

    persons who own (or are deemed to own) more than 5% of our common stock (except to the extent specifically set forth below);

 

    persons subject to the alternative minimum tax or the 3.8% Medicare tax on net investment income;

 

    owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and

 

    certain U.S. expatriates.

In addition, this discussion does not address the tax treatment of partnerships or other pass-through entities, or persons who hold our common stock through partnerships or other pass-through entities, for U.S. federal income tax purposes. A partner in a partnership or other pass-through entity that will hold our common stock should consult his, her or its tax advisor regarding the tax consequences of acquiring, holding and disposing of our common stock through a partnership or other pass-through entity, as applicable.

 

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We have not sought and will not seek any ruling from the Internal Revenue Service, which we refer to as the IRS, with respect to the statements made and the conclusions reached in the following discussion. There can be no assurance that the IRS will not challenge one or more of the tax consequences described herein, or that any such challenge would not be sustained by a court.

NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL TAX LAWS TO THEIR PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK IN LIGHT OF THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

Non-U.S. Holder Defined

For purposes of this discussion, a non-U.S. holder means a beneficial owner of our common stock that, for U.S. federal income tax purposes, is an individual, corporation, estate or trust that is not a U.S. person. For purposes of this discussion, a U.S. person is:

 

    an individual who is a citizen or resident of the United States (as determined under U.S. federal income tax rules);

 

    a corporation, or any other organization taxable as a corporation for U.S. federal income tax purposes, created or organized in the United States or under the laws of the United States, any political subdivision thereof, any state thereof or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

    a trust if (1) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect to be treated as a U.S. person.

Distributions on Our Common Stock

As described in the section entitled “Dividend Policy,” we have not made distributions on our common stock and do not plan to make any distributions for the foreseeable future. However, if we do make distributions of cash or property on our common stock, those payments generally 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. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in the common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “Gain on Sale, Exchange or Other Disposition of Our Common Stock.”

Subject to the discussion below on backup withholding and FATCA, dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder of our common stock who claims the benefit of an applicable income tax treaty generally will be required to provide a properly executed IRS Form W-8BEN (or other appropriate version of IRS Form W-8 or successor form) and satisfy applicable certification and other requirements. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements by providing a properly executed IRS Form W-8ECI (or successor form). However, such U.S. effectively

 

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connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to U.S. persons. In addition, any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing a U.S. tax return with the IRS.

Gain on Sale, Exchange or Other Disposition of Our Common Stock

Subject to the discussion below on backup withholding and FATCA, a non-U.S. holder generally will not be subject to any U.S. federal income tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless:

 

    the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained by such non-U.S. holder in the United States, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to U.S. persons and, if the non- U.S. holder is a foreign corporation for U.S. federal income tax purposes, it also may be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on such effectively connected gain;

 

    the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non- U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty) on the net gain derived from the disposition, which may be offset by certain U.S. source capital losses of the non-U.S. holder, if any; or

 

    we are, or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter) a “U.S. real property holding corporation.” Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. Even if we are or were to become a U.S. real property holding corporation, gains realized by a non-U.S. holder on a disposition of our common stock will not be subject to U.S. federal income tax if our common stock is regularly traded on an established securities market and the non-U.S. holder holds no more than 5% of our outstanding common stock, actually or constructively, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our common stock. No assurance can be provided that our common stock will continue to be regularly traded on an established securities market for purposes of the rules described above.

Federal Estate Tax

Common stock owned (or treated as owned) by an individual who is not a citizen or a resident of the United States (as defined for U.S. federal estate tax purposes) at the time of death will be included in the individual’s gross estate for U.S. federal estate tax purposes, and therefore may be subject to U.S. federal estate tax, unless an applicable estate or other tax treaty provides otherwise.

Backup Withholding and Information Reporting

We must report annually to the IRS and to each non-U.S. holder payments of dividends on our common stock to such holder and the tax withheld, if any, with respect to such dividends, along with certain other

 

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information. Non-U.S. holders may have to comply with specific certification procedures to establish that the holder is not a U.S. person in order to avoid backup withholding with respect to dividends on our common stock. Dividends paid to non-U.S. holders subject to the U.S. withholding tax, as described above in “Distributions on Our Common Stock,” generally will be exempt from U.S. backup withholding.

Information reporting and backup withholding generally will apply to the proceeds of a disposition of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non- U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of information returns may be made available to the tax authorities of the country in which the non- U.S. holder resides or is incorporated under the provisions of a specific treaty or other agreement.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

FATCA Withholding and Information Reporting

The Foreign Account Tax Compliance Act of 2010, commonly referred to as FATCA, generally will impose a U.S. federal withholding tax at a rate of 30% on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to certain foreign entities (including foreign financial institutions and non-financial foreign entities, each as defined in the Code), unless (1) in the case of a foreign financial institution, such foreign entity undertakes certain information reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in or accounts with the entity), (2) in the case of a non-financial foreign entity, such entity either certifies that it does not have any substantial United States owners, as defined in the Code, or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules.

If a non-U.S. holder is a foreign financial institution and is subject to the information reporting and due diligence requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain specified United States persons or United States-owned foreign entities, each as defined in the Code, annually report certain information about such accounts, and withhold 30% on payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

The FATCA withholding tax rules generally will be applicable to dividends on our common stock that are paid after June 30, 2014, and to gross proceeds from a sale or other disposition of our common stock that occurs after December 31, 2016.

Non-U.S. holders may be required to provide us with certifications of their respective classifications for FATCA purposes, and, in the case of non-U.S. holders that are not individuals, also may be required to provide us with information about their beneficial owners. Prospective investors should consult their tax advisors regarding the possible implications of FATCA on their investment in our common stock.

 

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UNDERWRITING (CONFLICTS OF INTEREST)

Ladenburg Thalmann & Co. Inc. and Roth Capital Partners, 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 set forth in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of common stock set forth opposite its name below.

 

Underwriters

   Number of Shares

Ladenburg Thalmann & Co. Inc.

  

Roth Capital Partners, LLC

  

Total

  

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

Certain of our existing investors have indicated an interest in purchasing an aggregate amount of up to $5 million worth of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these potential investors, or any of these potential investors may determine to purchase more, less or no shares in this offering. Any shares purchased by these potential investors will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

The following table shows the per share and total underwriting discount to be paid to the underwriters by us at the assumed initial public offering price set forth on the cover page of this prospectus. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

     No Exercise of
Over-Allotment
Option
     Full Exercise of
Over-Allotment
Option
 

Per Share

   $                    $                

Total

   $         $     

The representatives have advised us that the underwriters propose to offer directly to the public the shares purchased pursuant to the underwriting agreement at the initial public offering price set forth on the cover page of this prospectus and to certain securities dealers at the initial public offering price less a concession not in excess of $             per share. After the offering, the representatives may change the offering price and other selling terms.

Private Placement Fee

The representatives are entitled to a private placement fee in an amount equal to 3.5% of the gross proceeds we receive in the concurrent private placement with Lilly, or up to $525,000 payable by us in cash upon the closing of the concurrent private placement.

 

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The expenses of the offering, not including the underwriting discount, are estimated at approximately $1.7 million and are payable by us.

We have also agreed to reimburse the representatives for certain of their expenses relating to this offering in an amount of up to $45,000, of which $20,000 is considered by the Financial Industry Regulatory Authority, Inc. to be underwriter compensation.

Option to Purchase Additional Shares

We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to                 additional shares at the public offering price, less the underwriting discount. If the underwriters exercise this option, each underwriter will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table.

Lock-Up Agreements

We, all of our directors and executive officers, and holders of substantially all of our outstanding stock have agreed that, for a period of 180 days, or the lock-up period, after the date of this prospectus subject to certain limited exceptions described below, we and they will not directly or indirectly, without the prior written consent of the representatives of the underwriters, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by us or them in accordance with the rules and regulations of the SEC and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common stock, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or other securities, in cash or otherwise, (3) make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any of our other securities, or (4) publicly disclose the intention to do any of the foregoing.

These lock-up restrictions will not apply to: (1) bona fide gifts, sales or other dispositions made exclusively by the holder to the holder’s family, partners, members, stockholders or affiliates (as applicable), and transfers or other dispositions by will, other testamentary documents or intestate succession, provided that such transferee agrees to be bound by the terms of the lock-up agreement, the parties agree to not make any filing or public announcement regarding such transfer or disposition prior to the expiration of the lock-up period and the holder notifies the representatives of the underwriters at least two business days prior to the proposed transfer or disposition; (2) the exercise of warrants or stock options granted pursuant to the Company’s stock option/incentive plans or otherwise, or the conversion of securities, in each case outstanding on the date of this prospectus, provided that the restrictions shall apply to the shares of common stock issued upon such exercise or conversion; (3) the establishment of any trading plan established pursuant to Rule 10b5-1 under the Exchange Act, provided that no sales or securities convertible into common stock shall be made pursuant to such plan prior to the expiration of the lock-up period, and the Company does not, and is not required to, report the establishment of such plan in any public report or filing with the SEC under the Exchange Act prior to the expiration of the lock-up period; (4) any forfeiture, sale or other transfer to the company in connection with the termination of the holder’s employment with or services to the company; and (5) the transfer of shares to the company to satisfy withholding taxes for any equity award granted prior to the date of this prospectus.

The representatives of the underwriters may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to release

 

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common stock and other securities from lock-up agreements, the representatives of the underwriters will consider, among other factors, the holder’s reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time.

At least three business days before the effectiveness of any release or waiver of any of the restrictions described above with respect to an officer or director of the Company, the representatives of the underwriters will notify us of the impending release or waiver and we have agreed to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver.

Offering Price Determination

Prior to this offering, there has been no public market for our common stock. The initial public offering price was negotiated between the representative and us. In determining the initial public offering price of our common stock, the representative considered:

 

    the history and prospects for the industry in which we compete;

 

    our financial information;

 

    the ability of our management and our business potential and earning prospects;

 

    the prevailing securities markets at the time of this offering; and

 

    the recent market prices of, and the demand for, publicly traded shares of generally comparable companies.

An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make for these liabilities.

Stabilization, Short Positions and Penalty Bids

The representatives may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:

 

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

   

A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for

 

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purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions.

 

    Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NASDAQ Global Market or otherwise and, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Listing on The NASDAQ Global Market

Our common stock has been approved for listing on The NASDAQ Global Market under the symbol “ZSAN.”

Electronic Distribution

In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.

Other Relationships

Some of the underwriters and their affiliates have provided in the past to us and our affiliates, and may provide from time to time in the future, certain financial advisory, investment banking and other services in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, the underwriters and their affiliates may effect transactions for their own account or the accounts of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

Conflicts of Interest

Theodore D. Roth, the President and an associated person of Roth Capital Partners, LLC, or Roth, one of the underwriters in this offering, is also a director of BMR. Under the rules of the Financial Regulatory Authority, Inc., a conflict of interest is deemed to exist with respect to Roth because Mr. Roth is deemed to “control” BMR (as a director of BMR) and BMR is deemed to “control” us (as an affiliate of a beneficial owner of in excess of 10% of our outstanding capital stock). A portion of the net proceeds of this offering will be used to make required payments of interest and principal as they become due under our note payable to our largest stockholder, which is an affiliate of BMR. See “Use of Proceeds.”

 

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NOTICE TO INVESTORS

Notice to Investors in the United Kingdom

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities which are the subject of the offering contemplated by this prospectus supplement and the related prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

(c) by the underwriter to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or

(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of these securities shall result in a requirement for the publication by the issuer or the underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any such securities to be offered so as to enable an investor to decide to purchase any such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Each underwriter has represented, warranted and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of the securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and

(b) it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom.

European Economic Area

In particular, this document does not constitute an approved prospectus in accordance with European Commission’s Regulation on Prospectuses no. 809/2004 and no such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance

 

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with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:

 

    to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

    to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in the last annual or consolidated accounts; or

 

    in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of securities to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. For these purposes the shares offered hereby are “securities.”

 

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LEGAL MATTERS

The validity of the common stock being offered will be passed upon for us by Foley Hoag LLP, Boston, Massachusetts. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York, New York, has acted as counsel for the underwriters in connection with certain legal matters related to this offering.

EXPERTS

The balance sheets as of December 31, 2013 and 2012 and the related statements of operations, statements of stockholders’ (deficit) equity and statements of cash flows for the years then ended, appearing in this prospectus have been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein, and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933 with respect to the shares of common stock to be sold in this offering. This prospectus, which constitutes part of the registration statement, does not include all of the information contained in the registration statement and the exhibits, schedules and amendments to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement and to the exhibits and schedules to the registration statement filed as part of the registration statement. Statements contained in this prospectus about the contents of any contract or any other document filed as an exhibit are not necessarily complete, and, and in each instance, we refer you to the copy of the contract or other documents filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You may read and copy the registration statement of which this prospectus is a part at the SEC’s public reference room, which is located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of the registration statement by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s public reference room. In addition, the SEC maintains an Internet website, which is located at www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. You may access the registration statement of which this prospectus is a part at the SEC’s Internet website.

Upon the closing of this offering, we will become subject to the full informational and periodic reporting requirements of the Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our stockholders with annual reports containing financial statements certified by an independent registered public accounting firm. We also maintain a website at www.zosanopharma.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website is not a part of this prospectus.

 

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Zosano Pharma Corporation and Subsidiaries

Financial Statements

December 31, 2013 and 2012

Contents

 

Report of Independent Registered Public Accounting Firm

     F-2   

Audited Consolidated Financial Statements:

  

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations

     F-4   

Consolidated Statements of Stockholders’ Equity (Deficit)

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Shareholders

of Zosano Pharma Corporation

We have audited the accompanying consolidated balance sheets of Zosano Pharma Corporation and subsidiaries (formerly known as ZP Holdings, Inc. and subsidiaries) (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zosano Pharma Corporation and subsidiaries, as of December 31, 2013 and 2012, and the consolidated results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements—Going Concern and Management’s Plans, the Company’s recurring losses from operations and the need for additional capital raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2—Going Concern and Management’s Plans. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum LLP

Marcum LLP

San Francisco, CA

May 13, 2014, except for the Reverse Stock Split paragraph of Note 2, as to which the date is July 16, 2014

 

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ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

     December 31,  
     2013     2012  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 5,913      $ 4,973   

Accounts receivable

     —          130   

Accounts receivable from joint venture partner

     3,426        730   

Short-term investment

     361        —     

Prepaid expenses and other current assets

     465        73   
  

 

 

   

 

 

 

Total current assets

     10,165        5,906   

Restricted cash

     65        35   

Property and equipment, net

     11,714        1,389   

Investment in joint venture

     —          12,298   

Other long-term assets

     140        —     
  

 

 

   

 

 

 

Total assets

   $ 22,084      $ 19,628   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 3,412      $ 383   

Accrued compensation

     2,676        124   

Revolving line of credit

     496        —     

Deferred revenue

     1,125        3,375   

Related parties notes payable, current

     3,108        —     

Other accrued liabilities

     716        99   
  

 

 

   

 

 

 

Total current liabilities

     11,533        3,981   

Deferred rent

     363        601   

Related party secured promissory note

     9,711        9,026   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.0001 par value: 30,000 shares authorized; 5,107 shares issued and outstanding as of December 31, 2013 and 2012

     1        1   

Additional paid-in capital

     124,699        124,634   

Accumulated deficit

     (124,223     (118,615
  

 

 

   

 

 

 

Stockholders’ equity

     477        6,020   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 22,084      $ 19,628   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year ended December 31,  
         2013             2012      

License fees revenue

   $ 4,250      $ 9,250   

Collaborative development support services

     —          2,374   
  

 

 

   

 

 

 

Total revenue

     4,250        11,624   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     7,637        5,399   

General and administrative

     4,582        3,077   
  

 

 

   

 

 

 

Total operating expenses

     12,219        8,476   
  

 

 

   

 

 

 

(Loss) income from operations

     (7,969     3,148   

Other income (expense):

    

Interest expense, net

     (760     (663

Warrant revaluation income

     —          71   
  

 

 

   

 

 

 

(Loss) income before equity in loss of joint venture and gain on termination of joint venture

     (8,729     2,556   

Equity in loss of joint venture

     (366     (738

Gain on termination of joint venture

     3,487        —     
  

 

 

   

 

 

 

Net (loss) income

   $ (5,608   $ 1,818   
  

 

 

   

 

 

 

Net (loss) income per common share:

    

Basic

   $ (1.10   $ 0.47   
  

 

 

   

 

 

 

Diluted

   $ (1.10   $ 0.47   
  

 

 

   

 

 

 

Weighted-average shares used in computing net (loss) income per common share:

    

Basic

     5,107        3,908   
  

 

 

   

 

 

 

Diluted

     5,107        3,908   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

 

   

 

Common Stock

    Additional
Paid-In Capital
    Accumulated
Deficit
    Total
Stockholders’ (Deficit)
Equity
 
    Shares     Amount        

Balance at January 1, 2012

    595        —          114,907        (120,433     (5,526

Issuance of common stock at date of merger in January 2012

    938        —          —          —          —     

Conversion of convertible promissory notes to common stock in April 2012

    2,217        1        7,089          7,090   

Exchange of ZP Opco, Inc. common stock options for Zosano Pharma Corporation common stock in April 2012

    —          —          —          —          —     

Conversion of BMR loans to common stock in April 2012

    1,344        —          2,575        —          2,575   

Stock-based compensation expense

    —          —          45        —          45   

Issuance of restricted stock awards in lieu of cash bonus in December 2012

    13        —          18        —          18   

Net income

    —          —          —          1,818        1,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    5,107        1        124,634        (118,615     6,020   

Stock-based compensation expense

    —          —          65        —          65   

Net loss

    —          —          —          (5,608     (5,608
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

    5,107      $ 1      $ 124,699      $ (124,223   $ 477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONSOLIDATED CASH FLOW STATEMENTS

(in thousands)

 

     Year Ended December 31,  
         2013             2012      

Cash flows from operating activities:

    

Net (loss) income

   $ (5,608   $ 1,818   

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

    

Depreciation

     428        1,069   

Stock-based compensation

     65        63   

Equity in loss of joint venture

     366        738   

Gain on termination of joint venture

     (3,487     —     

Accretion of interest payment

     765        830   

Revaluation of warrants to fair value

     —          (71

Deferred rent

     (239     (489

Change in operating assets and liabilities:

    

Accounts receivable

     130        1,082   

Accounts receivable from joint venture partner

     3,204        (730

Prepaid expenses and other assets

     (532     116   

Accounts payable

     265        (100

Accrued compensation and other liabilities

     3,169        (985

Deferred revenue

     (2,250     (2,840
  

 

 

   

 

 

 

Net cash flow (used in) provided by operating activities

     (3,724     501   
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Distribution from joint venture

     2,431        1,539   

Purchase of property and equipment

     (897     (21

Proceeds from sale of property and equipment

     —          16   

(Increase) decrease in restricted cash

     (30     35   

Sales of short-term investments

     —          415   

Purchase of short-term investment

     (365     —     
  

 

 

   

 

 

 

Net cash flow provided by investing activities

     1,139        1,984   
  

 

 

   

 

 

 

Cash flow from financing activities:

    

Proceeds from borrowings under bridge financing and line of credit

     3,525        —     

Repayment of equipment loan

     —          (1,112
  

 

 

   

 

 

 

Net cash flow provided by (used in) financing activities

     3,525        (1,112
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     940        1,373   

Cash and cash equivalents at beginning of year

     4,973        3,600   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 5,913      $ 4,973   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Income taxes paid

   $ 20      $ —     

Transfer of receivables as a result of termination of joint venture

   $ 5,900      $ —     

Assumption of accounts payable and accrued liabilities as a result of termination of joint venture

   $ 2,764      $ —     

Non-cash investing and financing activities:

    

Conversion of debt to common stock

   $ —        $ 9,665   

Transfer of property and equipment upon termination of joint venture

   $ 9,856      $ —     

The accompanying notes are an integral part of these consolidated financial statements.

 

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Zosano Pharma Corporation and Subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2013 and 2012

 

1. Organization

The Company

Zosano Pharma Corporation and subsidiaries (the Company) is a clinical stage specialty pharmaceutical company that has developed a drug delivery platform, based on its proprietary transdermal microneedle patch system, which is used to deliver the Company’s proprietary formulations of established drugs through the skin to treat a variety of indications. The Company’s microneedle patch system offers rapid onset, consistent drug delivery, improved ease of use and room-temperature stability, which often are unavailable using oral formulations or injections. The Company believes its microneedle patch system can be used to deliver numerous medications for a wide variety of indications, in commercially attractive markets. The Company also believes that by focusing its internal development efforts on proprietary formulations of generic molecules with known safety and efficacy, it can reduce its clinical and regulatory risk and development costs and accelerate its time to commercialization.

The Company’s wholly owned subsidiary, ZP Opco, Inc. (formerly named Zosano Pharma, Inc.), was incorporated in the State of Delaware on February 6, 2006. The Company’s headquarters and operations are located in Fremont, California. The Company has two wholly owned subsidiaries as of December 31, 2013: ZP Opco, Inc. (Opco), through which the Company conducts its primary research and development activities, and ZP Group LLC, originally a joint venture with Asahi Kasei Pharmaceuticals USA. The joint venture ceased operations in December 2013.

In April 2012, the Company commenced its planned principal operations, established its manufacturing facility and received revenues from its microneedle patch system technology including payment for its collaboration support services and therefore, exited the development stage.

Reverse Merger and Recapitalization

The Company was incorporated on January 26, 2012 under the laws of the State of Delaware. In April 2012, the Company entered into a reverse merger and recapitalization transaction with Opco. The reverse merger, which resulted in a recapitalization, was achieved through an agreement and plan of merger between the Company and Opco. The Company was the acquiring legal entity in the transaction while Opco was the surviving reporting entity for accounting purposes because its former stockholders emerged from the transaction with a controlling interest. The acquisition is treated as a recapitalization of Opco as, prior to the transaction, the Company had no significant assets, liabilities or operations. The recapitalization was achieved by converting common stock and Series A, B, and C Preferred Stock of Opco into 595,258 shares of the Company’s common stock as follows:

 

ZP Opco, Inc.      Conversion Rate      The Company’s Common Stock  

Type

   Number of shares         Pre-Reverse Split
(# of shares)
     Post-Reverse Split
(# of shares)
 

Series A Preferred Stock

     4,140,000         0.001703397851193810         7,052         1,763   

Series B Preferred Stock

     14,000,000         0.004132587086262290         57,856         14,464   

Series C Preferred Stock

     4,666,667         0.495747988320586000         2,313,491         578,373   

Common Stock

     5,362,829         0.000490963849667203         2,633         658   
        

 

 

    

 

 

 
           2,381,032         595,258   
        

 

 

    

 

 

 

In addition, convertible unsecured promissory notes originally issued by Opco to certain of its stockholders prior to the recapitalization in the aggregate principal amount of approximately $6.2 million, plus accrued interest of approximately $0.9 million, were converted into 2,217,027 shares of common stock of the Company.

 

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All outstanding and unexercised stock options granted under Opco’s 2007 Equity Incentive Plan were cancelled and in exchange, the holders received 213 shares of common stock of the Company.

All outstanding warrants to purchase securities of Opco were terminated as a result of the reverse merger and recapitalization.

All shares and per share amounts have been retroactively restated for the effect of this reverse merger and recapitalization for all periods presented.

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of the accompanying consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Going Concern and Management’s Plans

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has a history of incurring operating losses and negative cash flows from operating activities. The Company had an accumulated deficit of approximately $124.2 million as of December 31, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Through December 31, 2013, the Company has relied primarily on the proceeds from private equity offerings and loan proceeds to finance its operations. Management expects to incur additional losses in the future to conduct product research and development and to conduct pre-commercialization activities. Additional capital will be required to undertake these activities and to meet the operating requirements of the Company through 2014 and beyond. The Company intends to raise such capital through the issuance of additional equity through public or private offerings, borrowings, and strategic alliances with partner companies. However, if such financing is not available at adequate levels or on acceptable terms, the Company could be required to significantly reduce operating expenses and delay or reduce the scope of or eliminate some of its development programs or its commercialization efforts, enter into a collaboration or other similar arrangement with respect to commercialization rights to any of its product candidates, out-license intellectual property rights to its transdermal delivery technology and sell unsecured assets, or a combination of the above, which may have a material adverse effect on the Company’s business, results of operations, financial condition and/or its ability to fund its scheduled obligations on a timely basis or at all.

Consolidation

The consolidated financial statements include the accounts of Zosano Pharma Corporation, ZP Opco, Inc., and ZP Group LLC post-termination of the joint venture (see Note 6 – Joint Venture). Intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

The Company operates in one business segment to develop human pharmaceutical products. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States.

Short-Term Investment

On October 31, 2013, the Company entered into a Stock Purchase Agreement with Zosano, Inc. (the Shell Corporation), a Delaware corporation, pursuant to which the Company acquired 10,016,973 shares of the Shell

 

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Corporation’s common stock, $0.0001 par value, for an aggregate cash purchase price of $0.4 million. Immediately following the closing of the acquisition, 10,027,000 shares of the Shell Corporation’s common stock were issued and outstanding, approximately 99.9% of which were held by the Company.

The Company planned to raise new investment capital through the sale of the Company’s common stock or other securities to institutional investors in a private placement (the “PIPE Financing”). The Company had anticipated that in connection with the PIPE Financing it would enter into a registration rights agreement pursuant to which the Company would agree to file a registration statement with the SEC to register for resale the securities it planned to issue through the PIPE Financing. As of December 31, 2013, the Company has decided not to undertake the PIPE Financing as planned and it is actively pursuing the sale of the Shell Corporation. Accordingly, the Company accounts for its investment in the Shell Corporation using the cost method of accounting and classifies it as a short-term investment in its consolidated balance sheet.

Equity Investments and Joint Venture

The Company’s equity investments include investment in entities over which the Company has significant influence but not control, generally representing an ownership of between 20% and 50% of the voting rights or membership interest. The Company’s equity investments are accounted for using the equity method of accounting and are initially recognized at cost. The Company’s share of the equity investments’ profits or losses is recognized in the consolidated statements of operations. When the Company’s share of losses in an equity investment equals or exceeds the Company’s interest in the equity method investment, the Company will not recognize further losses unless the Company has incurred obligations or made payments on behalf of the equity investment.

Unrealized gains on transactions between the Company and entities accounted for as equity investments are eliminated to the extent of its interest in the equity investment. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

The entire carrying amount of the investments is tested for impairment by comparing its recoverable amount with its carrying amount, whenever there is an indication that the investment may be impaired.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

The Company entered into a pledge and security agreement with a bank whereby $65,000 and $35,000 was restricted for use as security for its corporate purchasing cards and is classified as restricted cash as of December 31, 2013 and 2012, respectively.

Accounts Receivable from Joint Venture Partner

The Company records a receivable from Asahi Kasei Pharma Corporation (Asahi) and its affiliate AKP USA, Inc. (AKPUS) for payment due the Company pursuant to the terms of the joint venture operating agreement. Such receivable includes reimbursement for the depreciation of the Company’s contributed equipment capital in the formation of ZP Group LLC and other payments stipulated under the joint venture termination agreement. (See Note 6—Joint Venture.)

Fair Value Measurements

The Company records its financial assets and liabilities 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

 

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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 should maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance for fair value establishes a three-level hierarchy for disclosure of fair value measurements, as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted market prices included in Level 1) that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying values of certain financial assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable from joint venture partner, short-term investment, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term related parties notes payable approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company’s long-term debt approximates its fair value because the interest rate approximates market rates that the Company could obtain for debt with similar terms and maturities.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, and restricted cash. Bank deposits are held by a single financial institution having a strong credit rating. These deposits may at times be in excess of insured limits. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, and restricted cash.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, which range from three to five years for computer equipment and software, and nine years for manufacturing, laboratory, and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the respective assets.

Impairment of Long-Lived Assets

The Company identifies and records impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset likely is not recoverable. Recoverability is measured by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. The Company has not experienced any impairment of its long-lived assets for the years ended December 31, 2013 and 2012.

Deferred Rent

Rent expense is recognized on a straight-line basis over the non-cancelable term of the Company’s operating lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. The Company also records lessor-funded lease incentives, such as reimbursable leasehold improvements, as a deferred rent liability, which is amortized as a reduction of rent expense over the non-cancelable term of its operating lease.

 

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Related Parties Promissory Notes

The Company accounts for its unsecured and secured promissory notes issued to certain related parties as liabilities. They are recorded on the Company’s consolidated balance sheets at cost plus accrued interest, and classified as short-term and long-term liabilities based on their maturities.

Revenue Recognition

The Company generates revenue from collaboration arrangements for the development and commercialization of its technology. Collaboration and license agreements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products. The Company’s performance obligations under the collaborations may include the license or transfer of intellectual property rights, obligations to provide research and development services and related materials and obligations to participate on certain development and/or commercialization committees with the collaborators.

The Company recognizes revenue when all four of the following criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. Revenue under collaboration and license arrangements is recognized based on the performance requirements of the contract. The Company’s credit policy does not provide for rights of refund or return. Determinations of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management’s judgments regarding the fixed nature of the fees charged for deliverables and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for any new or modified transactions, revenue recognized could be adversely affected.

The Company’s license and collaboration agreements may contain multiple elements as evaluated under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25, Revenue Recognition Multiple-Element Arrangements , including grants of licenses to know-how and technologies relating to the Company’s product candidates as well as agreements to provide research and development services, and manufacturing and commercialization services. Each deliverable under the agreement is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has standalone value to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. This evaluation requires subjective determinations and requires the Company to make judgments about the selling price of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

Upfront payments for licenses are evaluated to determine if the licensee can obtain standalone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by the Company. The assessment of multiple element arrangements also requires judgment in order to determine the allocation of revenue to each deliverable and the appropriate point in time, or period of time, over which revenue should be recognized. If the Company determines that the license does not have standalone value separate from the research and development services, the license and the services are combined as one unit of accounting and upfront payments are recorded as deferred revenue in the consolidated balance sheet and are recognized as revenue over an estimated performance period that is consistent with the term of performance obligations as determined by the Company. When standalone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property is delivered.

The Company’s license and collaboration agreements may also contain milestone payments that become due to the Company upon achievements of certain milestones. Under the milestone method, the Company recognizes revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance,

 

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(ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. A milestone payment is considered substantive when the consideration payable to the Company for each milestone (a) is consistent with the Company’s performance necessary to achieve the milestone or the increase in value to the collaboration resulting from the Company’s performance, (b) relates solely to the Company’s past performance, and (c) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

Amounts related to research and development funding are recognized as the related services or activities are performed, in accordance with the contract terms. Payments are generally made to the Company based on the number of full-time equivalent employees assigned to the collaboration project and the related research and development expenses incurred.

Royalty revenue from sales of the Company’s licensed products, if any, will be recognized when earned and collectible.

Research and Development Expenses

Research and development costs are charged to expense as incurred and consist of costs related to (i) servicing the Company’s collaborative development efforts with other pharmaceutical companies, (ii) furthering the Company’s research and development efforts, and (iii) designing and manufacturing the Company’s transdermal microneedle patch and applicator for the Company’s clinical and nonclinical studies. Research and development costs include salaries and related employee benefits, costs associated with clinical trials, nonclinical research and development activities, regulatory activities, costs of active pharmaceutical ingredients and raw materials, research and development related overhead expenses, fees paid to contract research organizations that conduct clinical trials on behalf of the Company, and fees paid to contract manufacturing organizations that conduct manufacturing activities on behalf of the Company. For the year ended December 31, 2013, the Company incurred research and development costs of approximately $6.5 million in connection with the Company’s research and development efforts and approximately $1.1 million in the manufacturing of the Company’s microneedle patch system for the development of the Company’s product candidates. For the year ended December 31, 2012, the Company incurred research and development costs of approximately $1.9 million in support of the Company’s collaborative development services to Asahi, approximately $2.8 million in connection with the Company’s research and development efforts, and approximately $0.7 million in the manufacturing of the Company’s microneedle patch system for the development of the Company’s product candidates.

Clinical Trial Accruals

Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with clinical research organizations and clinical sites. The Company determines the actual costs through discussions with internal personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

Stock-Based Compensation

The Company accounts for its stock-based compensation expense based on the fair value of the stock-based awards that are ultimately expected to vest. The fair value of employee stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, and is recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period), net of estimated forfeitures. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the prior estimates.

 

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The Company records the expense attributed to non-employee services paid with stock-based awards based on the estimated fair value of the awards determined using the Black-Scholes option pricing model. The measurement of stock-based compensation for non-employees is subject to re-measurement as the options vest, and the expense is recognized over the period during which services are received.

The Company accounts for stock options granted to employees of its joint venture, ZP Group LLC, in accordance with the recognition provisions of ASC 323-10-25 and ASC 323-10-35, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee , using a fair value approach. The fair value of these awards is subject to re-measurement over the vesting period at each reporting date based upon the Company’s valuation at that time.

Income Taxes

The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Financial statement effects of uncertain tax positions are recognized when it is more-likely-than-not, based on the technical merits of the position, that it will be sustained upon examination. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources. There have been no items qualifying as comprehensive income (loss) and, therefore, for all periods presented, the Company’s comprehensive income (loss) was the same as its reported net income (loss).

Net Income (Loss) per Common Share

Basic net income (loss) per common share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration for potential dilutive common stock equivalents. Diluted net income (loss) per common share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible promissory notes and options to purchase common stock are considered potential dilutive common stock equivalents.

The Company follows guidance under ASC 260-10-45-48 for the calculation of diluted net income per common share for contingently convertible debt. The guidance provides that if convertible debt is convertible only upon a contingency that is not based on the issuer’s stock price or the price of the convertible instrument, the if-converted method generally should be applied only if the necessary conditions have been satisfied by the end of the period by using the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period.

For the year ended December 31, 2013, diluted net loss per common share was the same as basic net loss per common share since the effect of inclusion of potentially dilutive common stock equivalents would have an antidilutive impact due to the loss reported. For the year ended December 31, 2012, the effect of inclusion of common stock options in the computation of diluted net income per common share would have been anti-dilutive under the treasury stock method because the average fair value of the Company’s common stock for the period, as determined by the Board of Directors with input from management, did not exceed the exercise prices of the stock options.

 

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A total of 469,776 shares and 314,935 shares of common stock options were excluded from the computations of diluted net income (loss) per common share for the year ended December 31, 2013 and 2012, respectively.

Reverse Stock Split

On July 11, 2014, the Company effected a 1-for-4 reverse stock split of its common stock, whereby each share of common stock outstanding immediately prior to that date was changed into one-fourth (1/4th) of a fully paid and non-assessable share of common stock. All common shares and per share amounts have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

In July 2013, the FASB issued Accounting Standards Update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) . The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In February 2013, the FASB issued guidance which addresses the presentation of amounts reclassified from accumulated other comprehensive income. This guidance does not change current financial reporting requirements, instead an entity is required to cross-reference to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. In addition, the guidance requires an entity to present significant amounts reclassified out of accumulated other comprehensive income by line item of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. Adoption of this standard is required for periods beginning after December 15, 2012 for public companies. The amended guidance became effective for the Company in the first quarter of fiscal year 2013. The election to adopt this guidance did not have a material impact on the Company’s consolidated financial statements.

 

3. Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value. The carrying values of certain financial assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable from joint venture partner, short-term investment, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term related parties notes payable approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company’s long-term related party secured promissory note approximates its fair value because the interest rate approximates market rates that the Company could obtain for debt with similar terms and maturities.

 

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Index to Financial Statements

The following tables set forth the fair value of the Company’s financial instruments as of December 31, 2013 and 2012:

 

     December 31, 2013  
     Level I      Level II      Level III      Total  
     (in thousands)  

Financial Assets:

           

Certificates of deposit (restricted cash)

   $ 65       $ —         $ —         $ 65   
     December 31, 2012  
     Level I      Level II      Level III      Total  
     (in thousands)  

Financial Assets:

           

Certificates of deposit (restricted cash)

   $ 35       $ —         $ —         $ 35   

 

4. Property and Equipment

The following table is a summary of property and equipment:

 

     December 31,  
           2013                 2012        
     (in thousands)  

Laboratory and office equipment

   $ 1,108      $ 1,049  

Manufacturing equipment

     10,769        1,196   

Computer equipment and software

     230        186  

Leasehold improvements

     15,534        1,084   

Construction in progress

     738        91  
  

 

 

   

 

 

 
     28,379        3,606   

Less: Accumulated depreciation

     (16,665     (2,217 )
  

 

 

   

 

 

 

Property and equipment, net

   $ 11,714      $ 1,389   
  

 

 

   

 

 

 

Property and equipment depreciation and amortization expense was approximately $0.4 million and $1.1 million for the years ended December 31, 2013 and 2012, respectively.

 

5. Collaboration with Asahi Kasei Pharma Corporation

In February 2011, the Company entered into a strategic collaboration and license agreement with Asahi Kasei Pharma Corporation (Asahi), a pharmaceutical company headquartered in Japan, to develop and commercialize Teribone™, Asahi’s formulation of parathyroid hormone 1-34, administered once per week using the Company’s microneedle patch system for the treatment of severe osteoporosis in Japan, China, Taiwan and South Korea.

Under the collaboration and license agreement, the Company was obligated to deliver, using its best efforts, multiple services over an extended period of time. Such deliverables included granting of perpetual licenses of its proprietary technology and research and development services (i.e., development of intended product, designing of manufacturing equipment for volume commercialization, transferring of its know-how to Asahi, among others). In exchange for these deliverables, during 2011 the Company received an up-front payment for the delivery of its proprietary licenses totaling $7.5 million, reimbursement for the full cost (at no margin) associated with research and development services and out-of-pocket expenses (billed on time and material basis), for which the associated costs are recorded in operating expenses in the consolidated statements of operations.

The Company applied the guidance under ASC 605-25, Multiple Element Arrangements , to account for the collaboration agreement with Asahi. The Company evaluated the underlying goods and services delivered and

 

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Index to Financial Statements

concluded that the licenses delivered under the collaboration agreement do not have standalone value and, accordingly, the consideration received under the upfront license fee of $7.5 million was initially deferred and recorded as deferred revenue in the consolidated balance sheet. The Company recognized the deferred revenue over the term of the research and development services. Revenue recognized from the upfront license fee was approximately $2.3 million for each of the year ended December 31, 2013 and 2012, and was recorded as license fees revenue in the consolidated statements of operations.

Also under the collaboration agreement, the Company was eligible to receive payments based upon the achievement of certain contractually specified events. Revenue recognized for the fulfillment of these contractually specified events of $2.0 million and $7.0 million was recorded as license fees revenue in the consolidated statements of operations for the years ended December 31, 2013 and 2012, respectively.

Reimbursement of research and development and out-of-pocket expenses becomes due as the related services are performed under the collaboration agreement and were recognized as revenue on a time and material basis and recorded as collaborative research and development services revenue, with the corresponding cost of service revenue recorded as research and development and manufacturing services expense in the consolidated statements of operations.

In January 2014, Asahi terminated the collaboration and license agreement with the Company and as a result, commercialization rights for the Company’s proprietary transdermal delivery technology in Japan, China, Taiwan and South Korea were returned to the Company. (See Note 13—Subsequent Events.)

 

6. Joint Venture

In April 2012, the Company acquired a 50% interest in ZP Group LLC. ZP Group LLC was formed to provide product development services and manufacturing of clinical trial material to Asahi that the Company was obligated to supply under the collaboration and license agreement with Asahi. The Company contributed approximately $14.6 million (net book value) of certain equipment to ZP Group LLC in exchange for its 50% membership interest. The Company accounts for the joint venture in ZP Group LLC as an equity investment using the equity method of accounting. The Company’s share of loss on investment in ZP Group LLC is presented as equity in loss of equity investment in the consolidated statements of operations.

Pursuant to ZP Group LLC’s operating agreement, the Company was entitled to distributions from the joint venture entity (ZP Group LLC). Distributions received by the Company from ZP Group LLC are accounted for as a reduction of the carrying amount of the Company’s investment in joint venture when the payment is received. For the years ended December 31, 2013 and 2012, the Company recorded approximately $2.3 million and $1.5 million, respectively, as a reduction to the carrying amount of its investment in joint venture.

On December 20, 2013, the Company and Asahi entered into a termination agreement to terminate the joint venture in ZP Group LLC, which effectively caused ZP Group LLC to cease all operations as of the effective date of the termination. In connection with the termination, the Company was to receive:

 

  (i) $2.4 million termination payment in connection with the notice period provision of the joint venture agreement;

 

  (ii) $3.5 million for the settlement of employee-related termination costs, including salaries and benefits, severance payment, and other termination-related fees and expenses, where the excess payment over actual settlement cost is non-refundable to Asahi; and

 

  (iii) reimbursement for certain out-of-pocket expenses and non-cancelable purchase commitments of ZP Group LLC.

The Company accounts for the notice period termination payment and the excess employee termination settlement payment as a gain on investment, and the reimbursement for out-of-pocket expenses and non-cancelable purchase commitments as a reduction in operating expenses in the consolidated statements of

 

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Index to Financial Statements

operations. Pursuant to the joint venture termination agreement, the Company recorded a receivable from joint venture partner for the net amount due the Company on its consolidated balance sheet as of December 31, 2013.

The joint venture termination agreement also provides for a period of reconciliation and true-up for costs and expenses in connection with the wind-down of ZP Group LLC’s operations and settlement for outstanding liabilities and commitments. The Company subsequently entered into a settlement agreement on March 25, 2014 to settle all costs and expenses as stipulated in the joint venture termination agreement. (See Note 13—Subsequent Events.)

The following summarizes the Company’s investment in the joint venture as of December 31, 2013 and 2012:

 

     Carrying Value  
     (in thousands)  

Balance as of January 1, 2012

   $ —     

Investment in ZP Group LLC

     14,575   

Share of loss from equity investment

     (738 )

Distribution

     (1,539 )
  

 

 

 

Balance as of December 31, 2012

     12,298  

Share of loss from equity investment

     (366

Distribution

     (2,324 )

Disposition of interest in ZP Group LLC

     (9,608
  

 

 

 

Balance as of December 31, 2013

   $ —     
  

 

 

 

The financial positions and results of operations of the investment accounted for under the equity method are as follows:

 

Joint Venture in ZP Group LLC    December 20,
2013
    December 31,
2012
 
     (in thousands, except percentages)  

Current assets

   $ 5,289     $ 7,391  

Non-current assets

     9,856        12,488   

Current liabilities

     5,785       7,447  

Non-current liabilities

     —          300   

Revenue

     17,143       13,004  

Operating expenses

     17,563        13,932   

Net loss

     (423 )     (929 )

Interest held (%)

     50     50

 

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Index to Financial Statements

The following table provides a reconciliation of ZP Group LLC’s net loss to the Company’s equity in loss in the joint venture:

 

     For the Period
December 20, 2013
    For the Year Ended
December 31, 2012
 
     (in thousands)  
     ZP
Group
LLC
    Company’s
Equity in
Loss of Joint
Venture
Computation
    ZP
Group
LLC
    Company’s
Equity in
Loss of Joint
Venture
Computation
 

Reported net loss of joint venture

   $ (423     $ (929  

Contractual adjustment for special items solely allocated to the Company*

     308      $ (308     548      $ (548
  

 

 

     

 

 

   

Adjusted net loss of joint venture to be allocated to members

     (115       (381  

The Company’s share of allocated net loss

       (58       (190
    

 

 

     

 

 

 

Equity in loss of joint venture

     $ (366     $ (738
    

 

 

     

 

 

 

 

* Pursuant to ZP Group LLC’s operating agreement, items related to the loss in connection with depreciation of the property and equipment contributed to ZP Group LLC by the Company, net of reimbursement received by ZP Group LLC from Asahi for a portion of the amount of the depreciation, are to be allocated exclusively to the Company and excluded from the joint venture entity’s calculation of income or loss to be allocated to its members.

 

7. Debt Financing

Bridge Financing—Related Parties Convertible Promissory Notes

In September 2013, the Company and certain of its major stockholders entered into a debt financing pursuant to a note purchase agreement under which the Company issued to these stockholders unsecured, subordinated convertible promissory notes for an aggregate of approximately $3.0 million. Each note bears simple interest of 8% per annum, with all unpaid principal and accrued interest due and payable on the earlier of: (i) September 9, 2014; (ii) an event of default, as defined; or (iii) the date that is 30 days following the closing of the Company’s first firm commitment underwritten initial public offering pursuant to a registration statement filed under the 1933 Securities Act. The Company may accelerate and repay any portion of the outstanding principal and/or interest at any time upon written consent of the noteholders representing not less than 60% of the principal amount then outstanding.

Upon the closing of a qualified financing, which is defined as an equity financing where the Company raises at least $25.0 million, the principal and all unpaid and accrued interest on each note shall automatically convert into shares of the Company’s common stock based on a pre-determined formula. Upon the sale of the Company, as defined in the note purchase agreement, each noteholder shall be entitled to receive an amount equal to any unpaid and accrued interest plus twice (2 times) the outstanding principal balance of each note.

The note purchase agreement contains customary conditions related to events of default and certain general covenants. The note purchase agreement does not require that the Company to comply with any affirmative covenants.

Secured Financing with BMR Holdings

In July 2011, the Company issued a convertible, unsecured promissory note (the 2011 Note) to its landlord, BioMed Realty Holdings, Inc. and affiliates (BMR Holdings), for unpaid rent with interest at a rate of 10% per annum, compounded annually, due January 31, 2012. In connection with the recapitalization of the Company in

April 2012, the Company entered into and completed a stock purchase and loan restructuring agreement with

 

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Index to Financial Statements

BMR Holdings in which the outstanding balance of the 2011 Note of approximately $2.6 million and then outstanding warrants were cancelled. In exchange, the Company issued to BMR Holdings 1,344,314 shares of common stock, making BMR Holdings a 23.75% shareholder of the Company at time of the recapitalization.

Also in April 2012, the Company renegotiated a new lease agreement with BMR Holdings to include reduced rent obligations. In connection with the rent reduction, the Company issued a new secured promissory note (the 2012 Note) to BMR Holdings and all previously accrued interest, unpaid rent, future rent obligations and other fees due to BMR Holdings were either rolled into the 2012 Note or eliminated. The 2012 Note is a 4-year non-callable promissory note that bears interest at the rate of 8% per annum, compounded annually and has an original principal amount of approximately $8.6 million. The 2012 Note is secured by a first priority security interest and lien in and to all of the Company’s tangible and intangible properties and assets, including intellectual properties. All principal and interest are due and payable to BMR Holdings on the earliest of (i) April 26, 2016, (ii) the closing of a sale of the Company, as defined, or (iii) the date that any distribution is made, as defined under the terms of the 2012 Note. The Company may prepay the 2012 Note, in whole or in part, at any time without prepayment penalty or premium. Further, the Company is required to prepay the 2012 Note immediately prior to, or in connection with, a sale or partial sale of the Company, as defined as a transaction in which the Company is acquired or in which the Company exclusively licenses or sells all or substantially all of its assets. In any similar transaction that does not qualify as a sale but results in the Company’s cash balance being at least $5.0 million in excess of its cash requirements for the 12 months following the closing of such transaction, the Company is required to prepay an amount equal to half of the excess cash balance over $5.0 million.

The 2012 Note and the security agreement in connection with the note contain customary conditions related to borrowing, events of default, and covenants, including covenants limiting the Company’s ability to dispose of collateralized assets, undergo a change of jurisdiction or relocation of its business, incur debt or incur liens, subject to certain exceptions. The 2012 Note and security agreement also require the Company to comply with certain basic affirmative covenants, such as maintenance of financial records, insurance and prompt payment of taxes.

Line of Credit with AKP USA, Inc.

In April 2012, ZP Group LLC obtained a $25 million facility under a revolving line of credit arrangement with AKP USA, Inc. (AKPUS), an affiliate of Asahi. The facility bore an interest rate of 1.15% per year, and ZP Group LLC was obliged to pay interest on the principal outstanding on the last day of each month until any outstanding principal is paid in full. All outstanding and unpaid principal and interest were due and payable upon the earlier of (i) the date on which AKPUS no longer holds any membership interest in ZP Group LLC, or (ii) March 31, 2021.

Pursuant to the termination of the Company’s joint venture with AKPUS, the termination agreement resulted in the cancellation of the remaining unused line of credit under the revolving line of credit facility. The termination agreement also provides that the entire outstanding principal and any unpaid and accrued interest shall be discharged, released and forgiven on March 14, 2014, the effective date of the termination of this line of credit facility (See Note 13—Subsequent Events).

 

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Index to Financial Statements

Security Priority

BMR Holdings has a first priority security interest and lien in and to all of the Company’s tangible and intangible properties and assets, including intellectual properties.

The following tables summarize the Company’s outstanding short-term financing and long-term debt as of December 31, 2013:

Short-term related parties notes payable:

 

Lender

  Description   Maturity
Date
  Outstanding
Principal
Amount
    Accrued
Interest
    Interest
Rate/
Weighted-
Average
Interest Rate
Per Annum
  Security/Covenant
    (in thousands)

BMV Direct SO LP

  Working capital   September 9, 2014   $ 303      $ 7      8.00%   Unsecured, convertible
to common

BMV Direct SOTRS LP

  Working capital   September 9, 2014     990        24      8.00%   Unsecured, convertible
to common

New Enterprise Associates 12, L.P.

  Working capital   September 9, 2014     1,160        30      8.00%   Unsecured, convertible
to common

ProQuest Investments IV, L.P.

  Working capital   September 9, 2014     580        14      8.00%   Unsecured, convertible
to common

AKP USA, Inc.

  Line of credit   March 14, 2014     491        5      1.15%   Unsecured
     

 

 

   

 

 

     
      $ 3,524      $ 80      7.05%  
     

 

 

   

 

 

     

Long-term related party debt:

 

Lender

  Description   Maturity
Date
  Outstanding
Principal
Amount
    Accrued
Interest
    Interest
Rate
Per
Annum
  Security/Covenant
            (in thousands)    

BMV Direct SOTRS LP

  Recapitalization   April 26, 2016     $8,557        $1,154      8.00%   First security interest in
all properties and
assets, including certain
intellectual properties
     

 

 

   

 

 

     
      $ 8,557      $ 1,154       
     

 

 

   

 

 

     

The following table summarizes the Company’s outstanding long-term debt as of December 31, 2012:

 

Lender

  Description   Maturity
Date
  Outstanding
Principal
Amount
    Accrued
Interest
    Interest
Rate
Per
Annum
  Security/Covenant
            (in thousands)    

BMV Direct SOTRS LP

  Recapitalization   April 26, 2016     $8,557        $469      8.00%   First security interest in
all properties and
assets, including certain
intellectual properties
     

 

 

   

 

 

     
      $ 8,557      $ 469       
     

 

 

   

 

 

     

 

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For the years ended December 31, 2013 and 2012, total interest expense on the Company’s short-term bridge financing was approximately $80,000 and none, respectively, and interest expense on the Company’s long-term related party debt was approximately $0.7 million and $0.5 million, respectively.

 

8. Commitments and Contingencies

Operating Leases

The Company has an operating lease with an affiliate of BMR for its office, research and development, and manufacturing facilities in Fremont, California. The original lease was scheduled to expire in 2017. The lease agreement provides for an escalation of rent payments. The initial lease agreement provided for tenant improvement allowances of up to $8.3 million for application against construction costs incurred by the Company. In October 2008, the lease agreement was amended to provide for additional tenant improvement advances of up to $2.1 million. Through December 31, 2010, the Company had received the entire amount of $10.4 million of tenant improvement allowances. The allowances are being amortized over the term of the lease as a reduction of rent expense.

The Company executed a Fifth Amendment to the lease in April 2012 which extended the lease term through March 2019 and provided a reduction in annual rents due to a potential reduction of premises from a recapturable premises clause.

The Company records rent expense under the lease on a straight-line basis over the term of the lease. The difference between the actual lease payments and the expense recognized under the lease, along with the unamortized tenant improvement allowances, resulted in a deferred rent liability of $6.3 million and $7.4 million as of December 31, 2013 and 2012, respectively.

As a result of the lease renegotiation in April 2012, the Company issued the 2012 Note in consideration for previously accrued interest, unpaid rent, future rent obligations and other fees due to the landlord resulting in prepaid rent which is being expensed on a straight-line basis over the term of the lease. As of December 31, 2013, the prepaid rent of approximately $5.9 million is offset against the deferred rent liability of approximately $6.3 million, resulting in a net deferred rent liability of approximately $0.4 million. As of December 31, 2012, the net deferred rent liability was approximately $0.6 million.

Also in April 2012, the Company entered into a sub-lease agreement with ZP Group LLC, an equity investment of the Company. The sub-lease terminated on December 20, 2013 as a result of the termination of the Company’s joint venture with Asahi. Rental income of $0.6 million and $0.5 million for the year ended December 31, 2013 and 2012, respectively, were recorded as reduction of rental expense.

For the years ended December 31, 2013 and 2012, rental expense under operating leases before rental income was $0.6 million and $0.9 million, respectively.

Future minimum payments under non-cancelable operating leases as of December 31, 2013, are as follows (in thousands):

 

2014

   $ 885   

2015

     673   

2016

     614  

2017

     632   

2018

     651  

Thereafter

     164   
  

 

 

 

Total future minimum payments

   $ 3,619   
  

 

 

 

 

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Indemnification

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its officers and directors for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company has director and officer insurance that may enable the Company to recover a portion of any amounts paid for future potential claims. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2013.

 

9. Stockholders’ Equity

Common Stock

The Company’s certificate of incorporation authorizes the Company to issue 30.0 million shares of common stock. Common stockholders are entitled to dividends if and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. Each share of common stock is entitled to one vote. As of December 31, 2013 and 2012, 5,106,800 shares of the Company’s common stock were issued and outstanding.

 

10. Stock Incentive Plan

The Company adopted the 2012 Stock Incentive Plan (the 2012 Plan) which provides for the granting of stock options and restricted stock awards to employees, directors and consultants of the Company. Options granted under the 2012 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted only to Company employees. Nonqualified stock options may be granted to Company employees, outside directors and consultants. As of December 31, 2013, the Company has reserved 566,027 shares of common stock for issuance under the 2012 Plan. Options and awards under the 2012 Plan may be granted for periods of up to ten years and are exercisable immediately subject to rights of repurchase by the Company dependent upon the continued employment of the optionee and/or other conditions as determined. Employee options granted by the Company generally vest over four years. Restricted stock awards granted to employees, directors and consultants can be subject to the same vesting conditions as determined by the Board of Directors. In 2012, 12,500 shares of fully vested restricted stock awards were granted to certain officers of the Company.

 

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Index to Financial Statements

The following table summarizes options and restricted stock awards activity under the 2012 Plan and related information:

 

     Shares
Available for
Grant
    Outstanding
Number of
Awards
(in shares)
    Weighted-
Average
Exercise
Price per Share
     Weighted-
Average
Remaining
Contractual
Term
(In Years)
     Aggregate
Intrinsic
Value
 

Shares reserved under the 2012 Plan

     566,027             

Granted

     (327,435     327,435      $ 1.41         

Exercised/vested and released

     —          (12,500     —           

Cancelled/forfeited

     —          —          —           
  

 

 

   

 

 

         

Balance at December 31, 2012

     238,592        314,935      $ 1.46         9.53      

Granted

     (203,943     203,943      $ 1.40         

Exercised/vested and released

     —          —          —           

Cancelled/forfeited

     49,102        (49,102   $ 1.40         
  

 

 

   

 

 

         

Balance at December 31, 2013

     83,751        469,776      $ 1.44         8.88      
  

 

 

   

 

 

         

Exercisable at December 31, 2013

       107,813      $ 1.47         8.26       $ —     
    

 

 

      

 

 

    

 

 

 

Vested and expected to vest at December 31, 2013

       409,826      $ 1.43         8.69       $ —     
    

 

 

      

 

 

    

 

 

 

The aggregate intrinsic values of options outstanding and exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock as determined by the Board of Directors with input from management as of December 31, 2013. The estimated fair value of the common stock underlying the stock options was determined at each grant date by the board of directors and was supported by periodic independent third-party valuations.

The following summarizes the composition of stock options outstanding and exercisable as of December 31, 2013:

 

       Options Outstanding and Exercisable    

Exercise Price

   Number of
Shares
     Weighted-
Average
Remaining
Contractual
Life (in years)
 

$1.40

     54,748         8.39   

$1.54

     53,065         8.13   

The weighted-average grant-date fair value of options and awards granted during the years ended December 31, 2013 and 2012 were $0.97 per share and $1.04 per share, respectively. The total fair value of options and awards that vested during the years ended December 31, 2013 and 2012 were approximately $0.1 million and $52,000, respectively. No option was exercised in the year ended December 31, 2013 and 2012. 12,500 shares of fully vested restricted stock awards were released in 2012.

 

F-23


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Index to Financial Statements

Stock-Based Compensation Expense

Total stock-based compensation expense included in the Company’s consolidated statements of operations is as follows:

 

       Year Ended December 31,    
     2013      2012  
     (in thousands)  

Research and development

   $ 16       $ 26   

General and administrative

     49         37   
  

 

 

    

 

 

 
   $ 65       $ 63   
  

 

 

    

 

 

 

The total unrecognized stock-based compensation expense related to stock-based compensation arrangements at December 31, 2013, was approximately $0.2 million, and is expected to be recognized over a weighted-average period of approximately 2.88 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Since the Company is private and does not have any trading history for its common stock, the expected stock price volatility was calculated based on the average historical volatility for comparable publicly traded pharmaceutical companies. The Company selected companies with comparable characteristics, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the Company’s stock-based awards. The expected term of the options is based on the average period the stock options are expected to remain outstanding. As the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the expected term is calculated as the midpoint between the weighted-average vesting term and the contractual expiration period, also known as the simplified method. The risk-free interest rate is based on U.S. Treasury zero coupon issues with remaining terms consistent with the expected terms of the stock options, as determined at the time of grant. To date, the Company has not declared or paid any cash dividends and does not have any plans to do so in the future. Therefore, the Company used an expected divided yield of zero.

The following table presents the weighted-average assumptions for the Black-Scholes option-pricing model used in determining the fair value of options granted to employees:

 

       Year Ended December 31,    
     2013     2012  

Dividend yield

     —          —     

Risk-free interest rate

     1.74     0.97

Expected volatility

     89.00     89.00

Expected term (in years)

     6.08        6.08   

In the years ended December 31, 2013 and 2012, the Company granted 2,500 shares and 4,836 shares of common stock options, respectively, with an exercise price of $1.40 per share, in exchange for services from consultants. Stock-based compensation expense related to stock options granted to nonemployees is measured and recognized as earned. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. The fair value of these options is measured using the Black-Scholes option pricing model reflecting an expected life that is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned. For the years ended December 31, 2013 and 2012, the Company recorded an immaterial amount of stock-based compensation expense related to the stock options granted to non-employees.

 

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Index to Financial Statements

The fair value of the stock options granted to nonemployees was calculated using the Black-Scholes option pricing model with the following assumptions:

 

     Year Ended December 31,  
           2013                 2012        

Dividend yield

     —          —     

Risk-free interest rate

     3.01     1.78

Expected volatility

     89.00     89.00

Expected term (in years)

     10.00        10.00   

 

11. Income Taxes

The Company has incurred cumulative net operating losses since inception and, consequently, has not recorded any income tax expense for the years ended December 31, 2013 and 2012 due to its net operating loss position.

The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:

 

     Year Ended December 31,  
           2013                 2012        

Federal statutory tax rate

     (34.00 )%      34.00

State statutory tax rate

     (5.85 )%      5.85

Warrant revaluation

     1.16     (3.32 )% 

Other

     0.37     5.87

Valuation allowance

     38.32     (42.40 )% 
  

 

 

   

 

 

 

Provision for income taxes

     —       —  
  

 

 

   

 

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2013 and 2012, the Company had net deferred tax assets of $56.5 million and $53.9 million, respectively. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $2.6 million during the year ended December 31, 2013, and decreased by approximately $0.8 million during the year ended December 31, 2012.

 

F-25


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Index to Financial Statements

Significant components of the Company’s net deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows:

 

     Year Ended December 31,  
           2013                 2012        
     (in thousands)  

Net operating loss carryforwards

   $ 52,823     $ 48,690  

Deferred revenue

     448        1,344   

Accruals

     300       46  

Deferred rent

     601        792   

Research and development credits

     5,850       5,376  

AMT credit

     20        20   

Other

     294       691  

Depreciation and amortization

     (2,498     (144

Investments

     —         (1,645 )

Research and development credit reserves

     (1,359     (1,249
  

 

 

   

 

 

 

Net deferred tax assets

     56,479       53,921  

Valuation allowance

     (56,479     (53,921
  

 

 

   

 

 

 
   $ —       $ —    
  

 

 

   

 

 

 

As of December 31, 2013, the Company had federal net operating loss carryforwards of approximately $133.1 million and state net operating loss carryforwards of approximately $129.6 million. If not utilized, the federal net operating loss carryforwards will begin to expire in 2026 and state net operating loss carryforwards will begin to expire in 2016.

Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to substantial annual limitation in the event that there is a change in ownership as provided by section 382 of the Internal Revenue Code and similar state provisions. Such a limitation could result in the expiration of the net operating loss carryforwards and tax credits before utilization. The Company has not performed an analysis under Section 382 since its formation and, accordingly, some or all of its net operating loss carryforwards may not be available to offset future taxable income.

As of December 31, 2013, the Company had federal and state research and development credit carryforwards of approximately $3.4 million and $3.4 million, respectively. If not utilized, the federal tax credits will begin to expire in 2026 and state tax credits currently do not expire. Utilization of the research and development credit carryforwards are also subject to the limitations as discussed above. The Company has not performed an analysis under Internal Revenue Code Section 383 since its formation and, accordingly, some or all of its research and development credit carryforwards may not be available to offset future taxable income.

The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended Section 41 research credits for two years retroactively from January 1, 2012 through December 31, 2013. The new law also resolves an issue regarding the treatment of qualified research expenditures in the event of an acquisition or disposition of a trade or business. The credit rates for both the regular credit, 20%, and the alternative simplified credit, 14%, remain unchanged by this credit extension. The Act retroactively extended the federal research credit through 2013 and extended 50% bonus depreciation. The Act does not have any impact on the Company’s federal tax credits carryforward as of December 31, 2013.

The Company files income tax returns in the U.S. federal and California state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years due to the accumulated net operating losses that are being carried forward for tax purposes.

 

F-26


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Index to Financial Statements

Uncertain Income Tax Positions

The Company only recognizes tax benefits if it is more likely than not that they will be sustained upon audit by the relevant tax authority based upon their technical merits. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The Company had approximately $1.4 million and $1.2 million of unrecognized tax benefits as of December 31, 2013 and 2012, respectively. As the Company has a full valuation allowance on its deferred tax assets, the unrecognized tax benefits will reduce the deferred tax assets and the valuation allowance in the same amount. The Company does not expect the amount of unrecognized tax benefits to materially change in the next twelve months. A reconciliation of the beginning and ending balance of the unrecognized tax benefits is as follows:

 

     Year Ended December 31,  
           2013                  2012        
     (in thousands)  

Balance at the beginning of year

   $ 1,249       $ 1,167  

Increase related to prior year tax positions

     —           —     

Increase related to current year tax positions

     110         82  
  

 

 

    

 

 

 

Balance at the end of year

   $ 1,359       $ 1,249   
  

 

 

    

 

 

 

Interest and penalty related to unrecognized tax benefits would be included as income tax expense in the Company’s consolidated statements of operations. As of December 31, 2013 and 2012, the Company had not recognized any tax-related penalties or interest in its consolidated financial statements.

 

12. 401(k) Plan

The Company’s employees, upon meeting certain requirements, are eligible to participate in a 401(k) plan. The 401(k) plan provides that each participant may contribute a portion of his or her pre-tax compensation, up to a statutory limit. Participants that are 50 years or older can also make “catch-up” contributions up to certain additional amount above the statutory limit. Employee contributions are held and invested by the plan’s trustee. The 401(k) plan also permits the Company to make discretionary matching contributions. The Company did not make any matching contribution for the years ended December 31, 2013 and 2012.

 

13. Subsequent Events

Termination of License Agreement and Return of Asian Marketing Rights

The Company’s collaboration and license agreement with Asahi was terminated on January 27, 2014, at which time the performance and service period effectively ended. In connection with the collaboration and license agreement with Asahi, Company had previously received a $7.5 million nonrefundable upfront license fee. The $7.5 million payment was recorded in the Company’s consolidated balance sheet as deferred revenue upon receipt and recognized in its consolidated statements of operations as revenue on a straight-line basis over the performance and service period. Pursuant to the terms of the collaboration and license agreement, the Company is under no obligation to return any portion of the upfront license fee to Asahi. As a result, the Company will recognize as revenue the remaining $1.1 million of the nonrefundable upfront license fee as of March 31, 2014. Effective upon Asahi’s notice of termination on January 27, 2014, the Company no longer provides development support services to Asahi and therefore those services will no longer be a source of revenue. Pursuant to the terms of the collaboration and license agreement and upon its termination, commercialization rights in Japan, China, Taiwan and South Korea were returned to the Company.

 

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Index to Financial Statements

Collaboration with Novo Nordisk

In January 2014, the Company entered into an agreement with Novo Nordisk A/S (Novo Nordisk) to develop a new transdermal presentation of semaglutide, an investigational proprietary human GLP-1 (Glucagon-Like Peptide-1) analogue, to be administered once weekly using the Company’s microneedle patch system for the treatment of type 2 diabetes. Initially, the Company and Novo Nordisk will engage in collaborative efforts to carry out preclinical experiments to verify delivery of semaglutide using the microneedle patch system.

Under the terms of the agreement, the Company granted Novo Nordisk a worldwide, exclusive license to develop and commercialize Novo Nordisk’s proprietary GLP-1 analogues using the Company’s microneedle patch system. Novo Nordisk will, pending successful outcomes of preclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Potential payments to the Company under the agreement include an upfront payment and additional payments upon achieving certain preclinical, clinical, regulatory and sales milestones, with aggregate payments totaling more than $60 million for the first product. As of the date of this report, the Company has received an upfront payment. The Company is also eligible to receive milestones and royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs.

Bridge Financing—Related Parties Convertible Promissory Notes

In February 2014, the Company further issued certain unsecured, subordinated convertible promissory notes to certain existing noteholders for an additional $2.5 million in debt financing. All terms of the promissory notes, including interest rate and maturity date, automatic conversation features, and change of control or sale of company provisions, remain the same as the promissory notes issued to the same parties in September 2013.

Final Settlement of Joint Venture Affairs

In March 2014, the Company entered into a settlement agreement with Asahi, AKPUS, and ZP Group LLC for the settlement of all remaining liabilities, distribution, disposition and transfer of assets pursuant to the joint venture termination agreement entered into in December 2013. All outstanding liabilities, materials, drug supplies and equipment are settled through provisions under the settlement agreement.

 

F-28


Table of Contents
Index to Financial Statements

Zosano Pharma Corporation and Subsidiaries

Index to Unaudited Interim Condensed Consolidated Financial Statements

September 30, 2014

 

Unaudited Interim Condensed Consolidated Financial Statements:

  

Condensed Consolidated Balance Sheets

     F-30  

Condensed Consolidated Statements of Operations

     F-31  

Condensed Consolidated Statements of Cash Flows

     F-32  

Notes to Unaudited Interim Condensed Consolidated Financial Statements

     F-33  

 

F-29


Table of Contents
Index to Financial Statements

ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

     September 30,
2014
    December 31,
2013
 
     (unaudited)        
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 2,303      $ 5,913   

Accounts receivable

     173        —     

Accounts receivable from joint venture partner

     —          3,426   

Short-term investment

     343        361   

Prepaid expenses and other current assets

     213        465   
  

 

 

   

 

 

 

Total current assets

     3,032        10,165   

Restricted cash

     35        65   

Property and equipment, net

     10,515        11,714   

Other long-term assets

     1,583        140   
  

 

 

   

 

 

 

Total assets

   $ 15,165      $ 22,084   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   

Current liabilities:

    

Accounts payable

   $ 1,409      $ 3,412   

Accrued compensation

     1,399        2,676   

Revolving line of credit

     —          496   

Deferred revenue

     306        1,125   

Secured promissory note, current portion (net of issuance cost and incl. accrued interest)

     1,018        —     

Related parties convertible notes (incl. accrued interest)

     5,909        3,108   

Freestanding warrant liability

     114        —     

Other accrued liabilities

     730        716   
  

 

 

   

 

 

 

Total current liabilities

     10,885        11,533   

Deferred rent

     166        363   

Secured promissory note, net of issuance cost (incl. accrued interest)

     2,878        —     

Related party note payable (incl. accrued interest)

     10,458        9,711   

Commitments and contingencies

    

Stockholders’ equity (deficit):

    

Common stock, $0.0001 par value: 30,000 shares authorized; 5,140 shares issued and outstanding as of September 30, 2014 and 5,107 shares issued and outstanding as of December 31, 2013

     1        1   

Additional paid-in capital

     124,964        124,699   

Accumulated deficit

     (134,187     (124,223
  

 

 

   

 

 

 

Stockholders’ equity (deficit)

     (9,222     477   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 15,165      $ 22,084   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-30


Table of Contents
Index to Financial Statements

ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Nine Months
Ended September 30,
 
     2014     2013  
     (unaudited)  

Revenue:

    

License fees revenue

   $ 1,819      $ 3,688   

Collaborative development support services

     662        —     
  

 

 

   

 

 

 

Total revenue

     2,481        3,688   
  

 

 

   

 

 

 

Operating expenses:

    

Cost of license fees revenue

     100        —     

Research and development

     8,230        4,760   

General and administrative

     3,208        2,692   
  

 

 

   

 

 

 

Total operating expenses

     11,538        7,452   
  

 

 

   

 

 

 

Loss from operations

     (9,057     (3,764

Other expense:

    

Interest expense, net

     (1,261     (526

Other expense

     (143     (20
  

 

 

   

 

 

 

Loss before equity in gain of joint venture and gain on debt forgiveness

     (10,461     (4,310

Equity in gain of joint venture

     —          45   

Gain on debt forgiveness

     497        —     
  

 

 

   

 

 

 

Net loss

   $ (9,964   $ (4,265
  

 

 

   

 

 

 

Net loss per common share—basic and diluted

   $ (1.95   $ (0.84
  

 

 

   

 

 

 

Weighted-average shares used in computing net loss per common share—basic and diluted

     5,121        5,107   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-31


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Index to Financial Statements

ZOSANO PHARMA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED CASH FLOW STATEMENTS

(in thousands)

 

     Nine Months Ended September 30,  
             2014                     2013          
     (unaudited)  

Cash flows from operating activities:

    

Net loss

   $ (9,964   $ (4,265

Adjustments to reconcile net loss to net cash (used in) operating activities:

    

Depreciation

     2,278        260   

Stock-based compensation

     122        55   

Equity in gain of joint venture

     —          (45

Gain on debt forgiveness

     (497     —     

Amortization of debt issuance cost

     34        —     

Accretion of interest payment

     1,106        526   

Cost of debt subordination

     141        —     

Revaluation of warrant liability to fair value

     (2     —     

Deferred rent

     (197     (178

Change in operating assets and liabilities:

    

Accounts receivable

     (173     101   

Accounts receivable from joint venture partner

     3,426        115   

Prepaid expenses and other assets

     (1,191     (399

Accounts payable

     (2,003     485   

Accrued compensation and other liabilities

     (1,262     609   

Deferred revenue

     (819     (1,688
  

 

 

   

 

 

 

Net cash flow used in operating activities

     (9,001     (4,424
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Distribution from joint venture

     —          1,213   

Purchase of property and equipment

     (1,079     (506

Decrease in restricted cash

     30        —     

Decrease in short-term investment

     18        —     
  

 

 

   

 

 

 

Net cash flow (used in) provided by investing activities

     (1,031     707   
  

 

 

   

 

 

 

Cash flow from financing activities:

    

Proceeds from exercise of stock options and issuance of common stock

     2        —     

Proceeds from borrowings under related parties bridge notes

     2,500        3,034   

Proceeds from debt financing, net of issuance cost

     3,920        —     
  

 

 

   

 

 

 

Net cash flow provided by financing activities

     6,422        3,034   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,610     (683

Cash and cash equivalents at beginning of period

     5,913        4,973   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,303      $ 4,290   
  

 

 

   

 

 

 

Non-cash financing activities:

    

Issuance of common stock in connection with debt financing

   $ 141        —     

Accrued deferred offering costs

   $ 1,068        —     

The accompanying notes are an integral part of these consolidated financial statements.

 

F-32


Table of Contents
Index to Financial Statements

Zosano Pharma Corporation and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

September 30, 2014

 

1. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Going Concern and Management’s Plans

The accompanying condensed consolidated financial statements have been prepared assuming Zosano Pharma Corporation and subsidiaries (the Company) will continue as a going concern. The Company has a history of incurring operating losses and negative cash flows from operating activities. The Company had an accumulated deficit of approximately $134.2 million as of September 30, 2014. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Through September 30, 2014, the Company has relied primarily on the proceeds from private equity offerings and loan proceeds to finance its operations. Management expects to incur additional losses in the future to conduct product research and development and to conduct pre-commercialization activities. Additional capital will be required to undertake these activities and to meet the operating requirements of the Company in the next twelve months and beyond. The Company intends to raise such capital through the issuance of additional equity through public or private offerings, borrowings, and strategic alliances with partner companies. However, if such financing is not available at adequate levels or on acceptable terms, the Company could be required to significantly reduce operating expenses and delay or reduce the scope of or eliminate some of its development programs or its commercialization efforts, enter into a collaboration or other similar arrangement with respect to commercialization rights to any of its product candidates, out-license intellectual property rights to its transdermal delivery technology and sell unsecured assets, or a combination of the above, which may have a material adverse effect on the Company’s business, results of operations, financial condition and/or its ability to fund its scheduled obligations on a timely basis or at all.

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of September 30, 2014, condensed consolidated statements of operations and statements of cash flows for the nine months ended September 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2014, and the results of operations and cash flows for the nine months ended September 30, 2014 and 2013. The financial data and other information disclosed in these notes to the interim condensed consolidated financial statements as of September 30, 2014 and for the nine month periods ended September 30, 2014 and 2013 are also unaudited. The results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year. These financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2013.

 

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Initial Public Offering Related Events

On June 20, 2014, the Company’s board of directors approved a change of name of the Company from ZP Holdings, Inc. to Zosano Pharma Corporation.

On June 24, 2014, the Company filed a registration statement with the Securities and Exchange Commission related to a planned initial public offering of its common stock.

On July 11, 2014, the Company effected a 1-for-4 reverse stock split of its common stock, whereby each share of common stock outstanding immediately prior to that date was changed into one-fourth (1/4th) of a fully paid and non-assessable share of common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse split. All common shares and per share amounts have been retroactively adjusted to reflect the reverse stock split for all periods presented.

On July 11, 2014, the Company’s board of directors and stockholders approved an amendment to the Company’s certificate of incorporation, effective upon the closing of the Company’s planned initial public offering of shares of its common stock, pursuant to which the Company will be authorized to issue up to 100.0 million shares of common stock and up to 5.0 million shares of preferred stock.

On July 11, 2014, the Company’s board of directors approved the 2014 Equity and Incentive Plan, which will become effective in connection with the closing of the Company’s planned initial public offering.

Consolidation

The consolidated financial statements include the accounts of Zosano Pharma Corporation, ZP Opco, Inc., and ZP Group LLC post-termination of the joint venture. Intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

The Company operates in one business segment to develop human pharmaceutical products. Management uses one measurement of profitability and does not segregate its business for internal reporting.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

The Company entered into a pledge and security agreement with a bank whereby $35,000 and $65,000 was restricted for use as security for its corporate purchasing cards and is classified as restricted cash as of September 30, 2014 and December 31, 2013, respectively.

Short-Term Investment

The Company accounts for its investment in Zosano, Inc., the public shell corporation it acquired in October 2013, using the cost method of accounting and classifies this investment as a short-term investment in its consolidated balance sheet. The Company continues to actively pursue selling this investment.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting, printing and filing fees related to the initial public offering are capitalized and will be offset against proceeds from the initial public offering upon the closing of the

 

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offering. In the event the offering is terminated, all capitalized deferred offering costs will be expensed. As of September 30, 2014, approximately $1.4 million of expenses related to the initial public offering had been deferred as other long-term assets in the Company’s consolidated balance sheet. No offering costs were deferred as of December 31, 2013.

Revenue Recognition

The Company generates revenue from collaboration arrangements for the development and commercialization of its microneedle patch system and product candidates. Collaboration and license agreements may include non-refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products.

The Company’s license and collaboration agreements may contain multiple elements, including grants of licenses to the Company’s proprietary technology and know-how related to the Company’s product candidates as well as agreements to provide research and development services, and manufacturing and commercialization services. Each deliverable under the agreement is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has standalone value to the customer. Upfront payments for licenses are evaluated to determine if the licensee can obtain standalone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by the Company. If the Company determines that the license does not have standalone value separate from the research and development services, the license and the services are combined as one unit of accounting and upfront payments are recorded as deferred revenue in the consolidated balance sheet and are recognized as revenue over an estimated performance period that is consistent with the term of performance obligations as determined by the Company. The Company periodically reviews the estimated period of performance based on the progress made under each arrangement.

Payments that are contingent upon achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. Milestones are defined as an event that can only be achieved based on the Company’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to the milestone method guidance. Further, the amounts received must relate solely to prior performance, be reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with the Company’s performance to achieve the milestone after commencement of the agreement. Other contingent payments received for which payment is contingent solely on the results of a collaborative partner’s performance or the achievement of certain pre-defined corporate objectives are not accounted for using the milestone method. Such payments will be recognized as revenue when the objective is met and collectability is reasonably assured.

Amounts related to research and development funding are recognized as the related services or activities are performed, in accordance with the contractual terms. Payments are generally made to the Company based on the number of full-time equivalent employees assigned to the collaboration project and the related research and development expenses incurred.

Research and Development Expenses

Research and development costs are charged to expense as incurred and consist of costs related to (i) servicing the Company’s collaborative development efforts with other pharmaceutical companies, (ii) furthering the Company’s research and development efforts, and (iii) designing and manufacturing the Company’s transdermal microneedle patch and applicator for the Company’s clinical and nonclinical studies.

For the nine months ended September 30, 2014, the Company incurred research and development costs of approximately $0.4 million in support of the Company’s collaborative development services to Novo Nordisk A/S,

 

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approximately $3.5 million in connection with the Company’s research and development efforts, and approximately $4.3 million in the manufacturing of the Company’s microneedle patch system for the development of the Company’s product candidates. For the nine months ended September 30, 2013, the Company incurred research and development costs of approximately $3.5 million in connection with the Company’s research and development efforts and approximately $1.3 million in the manufacturing of the Company’s microneedle patch system for the development of the Company’s product candidates.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources. There have been no items qualifying as comprehensive income (loss) and, therefore, for all periods presented, the Company’s comprehensive income (loss) was the same as its reported net income (loss).

Net Income (Loss) per Common Share

Basic net income (loss) per common share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, without consideration for potential dilutive common stock equivalents. Diluted net income (loss) per common share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible promissory notes, warrants and options to purchase common stock are considered potential dilutive common stock equivalents.

For the nine months ended September 30, 2014 and 2013, diluted net loss per common share was the same as basic net loss per common share since the effect of inclusion of potentially dilutive common stock equivalents would have an antidilutive effect due to the loss reported.

The following outstanding common stock equivalents were excluded from the computations of diluted net loss per common share for the periods presented as the effect of including such securities would be antidilutive:

 

     September 30,  
     2014      2013  
     (unaudited)  

Warrant to purchase common stock—as exercised

     31,674         —     

Outstanding options to purchase common stock—as exercised

     527,619         499,525   
  

 

 

    

 

 

 
     559,293         499,525   
  

 

 

    

 

 

 

 

2. Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

    Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.

 

    Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

    Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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The carrying values of certain assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable, short-term investment, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Company’s short-term notes payable approximates their fair value as the terms of the borrowing are consistent with current market rates and the duration to maturity is short. The carrying value of the Company’s long-term notes payable approximates fair value because the interest rates approximate market rates that the Company could obtain for debt with similar terms and maturities.

The following tables set forth the fair value of the Company’s financial instruments as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     Level I      Level II      Level III      Total  
     (unaudited; in thousands)  

Financial assets:

           

Certificates of deposit (restricted cash)

   $ 35       $ —         $ —         $ 35   

Financial liabilities:

           

Freestanding warrant liability

     —           —           114         114   

 

     December 31, 2013  
     Level I      Level II      Level III      Total  
     (in thousands)  

Financial assets:

           

Certificates of deposit (restricted cash)

   $ 65       $ —         $ —         $ 65   

The Company’s freestanding warrant liability, which is measured and disclosed at fair value on a recurring basis, is classified within the Level 3 designation. (See Note 9—Freestanding Warrant Liability for significant unobservable inputs used to determine the fair value of the freestanding warrant liability.) There were no transfers between levels within the fair value hierarchy during the periods presented.

The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs:

 

     September 30, 2014  
Financial liabilities:   

(unaudited;

in thousands)

 

Balance at January 1, 2014

   $ —     

Issuance of freestanding warrant

     116   

Transfer from (to) Level 1 and 2

     —     

Change in fair value of freestanding warrant liability (1)

     (2
  

 

 

 

Balance at September 30, 2014

   $ 114   
  

 

 

 

 

(1) Change in fair value of the freestanding warrant is recorded as other income (expense) in the Company’s condensed statement of operations. For the nine months ended September 30, 2014, the Company recorded approximately $2,000 related to the change in fair value of its freestanding warrant liability.

 

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3. Property and Equipment

The following table is a summary of property and equipment:

 

     September 30, 2014     December 31, 2013  
     (unaudited)        
     (in thousands)  

Laboratory and office equipment

   $ 1,108      $ 1,108   

Manufacturing equipment

     10,851        10,769   

Computer equipment and software

     230        230   

Leasehold improvements

     15,534        15,534   

Construction in progress

     1,736        738   
  

 

 

   

 

 

 
     29,459        28,379   

Less: Accumulated depreciation

     (18,944     (16,665
  

 

 

   

 

 

 

Property and equipment, net

   $ 10,515      $ 11,714   
  

 

 

   

 

 

 

Property and equipment depreciation and amortization expense was approximately $2.3 million and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively.

 

4. Termination of Collaboration with Asahi Kasei Pharma Corporation

The Company’s collaboration and license agreement with Asahi Kasei Pharma Corporation (Asahi) was terminated on January 27, 2014, at which time the performance and service period effectively ended. In connection with the collaboration and license agreement with Asahi, the Company had previously received a $7.5 million nonrefundable upfront license fee. The $7.5 million payment was recorded in the Company’s consolidated balance sheet as deferred revenue upon receipt and recognized in its consolidated statements of operations as revenue on a straight-line basis over the performance and service period. Pursuant to the terms of the collaboration and license agreement, the Company is under no obligation to return any portion of the upfront license fee to Asahi. As a result, the Company recognized as revenue the remaining $1.1 million of the nonrefundable upfront license fee in the first quarter of 2014. Effective upon Asahi’s notice of termination on January 27, 2014, the Company no longer provides development support services to Asahi and therefore those services will no longer be a source of revenue to the Company. Pursuant to the terms of the collaboration and license agreement and upon its termination, commercialization rights to the Company’s transdermal drug delivery technology in Japan, China, Taiwan and South Korea were returned to the Company.

 

5. Settlement of Joint Venture Affairs

On December 20, 2013, the Company and Asahi entered into a termination agreement to terminate the joint venture in ZP Group LLC, which effectively caused ZP Group LLC to cease all operations as of the effective date of the termination. The joint venture termination agreement provided for a period of reconciliation and finalization of costs and expenses in connection with the wind-down of ZP Group LLC’s operations and settlement for outstanding liabilities and commitments. In March 2014, the Company entered into a settlement agreement with Asahi, AKP USA Inc. (AKPUS), and ZP Group LLC for the settlement of all remaining liabilities, distribution, disposition and transfer of assets pursuant to the joint venture termination agreement entered into in December 2013. The agreement did not result in any changes to the balances recorded as of December 31, 2013 pursuant to the terms of the December 2013 joint venture termination agreement with Asahi and its impact on the September 30, 2014 financial statements was limited to the collection of the Company’s receivables from Asahi of approximately $3.4 million as final settlement.

 

6. Collaboration with Novo Nordisk

In January 2014, the Company entered into an agreement with Novo Nordisk A/S (Novo Nordisk) to develop a new transdermal presentation of semaglutide, an investigational proprietary human GLP-1

 

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(Glucagon-Like Peptide-1) analogue, to be administered once weekly using the Company’s microneedle patch system for the treatment of type 2 diabetes. Under the terms of the agreement, the Company granted Novo Nordisk a worldwide, exclusive license to develop and commercialize Novo Nordisk’s proprietary GLP-1 analogues using the Company’s microneedle patch system. Novo Nordisk will, pending successful outcomes of preclinical and clinical testing, be responsible for commercialization of all products under the agreement.

Potential payments to the Company under the agreement include an upfront payment and additional payments upon achieving certain preclinical, clinical, regulatory and sales milestones, with aggregate payments totaling more than $60 million for the first product. The Company is also eligible to receive royalties on sales of products and will receive development support, as well as reimbursement of all development and manufacturing costs.

Initially, the Company and Novo Nordisk had agreed to engage in collaborative efforts to carry out preclinical experiments to verify delivery of semaglutide using the microneedle patch system, known as a feasibility study plan.

As of September 30, 2014, the Company has received an upfront payment of $1.0 million. The Company evaluated the upfront payment for the license of its technology and determined that the license does not have standalone value apart from the development support services. Accordingly, the license and the development support services are combined as one unit of accounting and the upfront payment is recorded as deferred revenue in the consolidated balance sheet and recognized as revenue over an estimated fourteen months performance period that is consistent with the term of performance obligations under the specified feasibility study plan. The Company will continue to reevaluate the estimated performance period as the study progresses and adjust the period over which the upfront payment is recognized prospectively as needed.

 

7. Payment Obligations to ALZA

The Company is a party to an intellectual property license agreement dated October 5, 2006, as amended, with ALZA Corporation, or ALZA, where the Company licensed certain patents and patent applications from ALZA on an exclusive basis worldwide. Under the terms of the license agreement with ALZA, the Company is obligated to pay ALZA royalties on sales by the Company of products that would otherwise infringe one of the licensed patents or that is developed by the Company based on certain ALZA know-how or inventions, and to pay ALZA royalties on sales by its sublicensees of such products. The Company is also obligated to pay ALZA a percentage of non-royalty revenue, defined as upfront payments, milestone payments and all other considerations (other than royalties), that the Company receives from its sublicensees on third party products where no generic equivalent is available to the public. The license agreement will terminate upon the expiration of the Company’s obligations to make the royalty and other payments described above. The Company may terminate the agreement at any time upon prior written notice to ALZA.

Pursuant to the intellectual property license agreement with ALZA, the Company is therefore obligated to make the respective royalty payments to ALZA for each milestone payment received under its agreement with Novo Nordisk beginning with the upfront payment it received upon the execution of the agreement. The payment of $100,000 was charged to expense and recorded as cost of license fees revenue in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2014.

 

8. Debt Financing

Bridge Financing—Related Parties Convertible Notes

In February 2014, the Company issued certain unsecured, subordinated convertible promissory notes to certain existing noteholders for an additional $2.5 million in debt financing. All terms of the promissory notes, including interest rate and maturity date, automatic conversation features and change of control or sale of company provisions, remain the same as the promissory notes issued to the same parties in September 2013.

 

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In June 2014, the Company amended the convertible bridge notes to provide that any failure by the Company to pay any amount under the convertible bridge notes during the period from maturity of the convertible bridge notes through the date that the loan with Hercules Technology Growth Capital, Inc. (Hercules) is repaid in full will not constitute a default under the convertible bridge notes. In September 2014, the Company further amended the convertible bridge notes to extend the date by which a qualified financing must occur in order for the convertible bridge notes to convert into equity securities to March 31, 2015. Upon the closing of a qualified financing, which is defined in the convertible bridge notes as an equity financing on or prior to December 31, 2014 in which the Company raises at least $25 million, the convertible bridge notes convert into the equity security sold in the qualified financing, at price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing.

Line of Credit with AKP USA, Inc.

Pursuant to the termination of the Company’s joint venture with AKPUS, the termination agreement resulted in the cancellation of the remaining unused line of credit under the revolving line of credit facility. The termination agreement also provided that the entire outstanding principal and any unpaid and accrued interest shall be discharged, released and forgiven on March 14, 2014, the effective date of the termination of this line of credit facility. Accordingly, the Company recorded a gain on debt forgiveness of approximately $0.5 million on its consolidated statement of operations for the nine months ended September 30, 2014.

Senior Secured Term Loan with Hercules

On June 3, 2014, the Company entered into a loan and security agreement with Hercules which provided the Company $4.0 million in debt financing (Hercules Term Loan). In accordance with the terms of the loan and security agreement, the Company paid $25,000 as a non-refundable upfront loan origination fee to Hercules and issued Hercules a warrant to purchase shares of the Company’s stock having a purchase price of up to $280,000 at an exercise price equal to the lesser of the lowest price per share of the stock sold in the Company’s next round of equity financing that results in gross proceeds of at least $3.0 million prior to the closing of an initial public offering, or $8.84 per share. The agreement provides that amounts borrowed will be subject to an interest-only period beginning July 1, 2014 and expiring on December 31, 2014, followed by 30 equal monthly installment payments of principal and interest beginning January 1, 2015 at a variable rate of the greater of (i) 12.05%, or (ii) 12.05% plus the prime rate as quoted in the Wall Street Journal minus 5.25%. In addition, the Company will be obligated to make an end-of-term payment of $100,000 at loan maturity or at the date the Company prepays the outstanding obligation. Further, should the Company elect to prepay the loan after the twelve month lock-in period, a 1% prepayment penalty on the outstanding principal will become due and payable.

Under the loan and security agreement, Hercules is given the right to invest up to $1.0 million in the Company’s stock on the same terms, conditions and pricing as others participating in the Company’s first subsequent equity financing after the closing of the Hercules Term Loan. Hercules is further given an additional right to convert up to $0.5 million of the principal amount of the Hercules Term Loan in the first subsequent equity financing on the same terms, conditions and pricing as others on such equity financing. In July 2014, Hercules waived its participation and conversion rights in respect of the Company’s planned initial public offering.

The Hercules Term Loan is secured by a first priority security interest and lien in and to all of the Company’s tangible and intangible properties and assets, including intellectual properties. Accordingly, an affiliate of BioMed Realty Holdings, Inc. (BMR Holdings) agreed to subordinate its existing secured financing to the Hercules Term Loan. In exchange for its agreement to subordinate the BMR secured promissory note to the Hercules Term Loan, the Company issued, in June 2014, 31,250 shares of common stock to the BMR Holdings affiliate that is the holder of the BMR secured promissory note. The Company recorded the fair value of the common stock issued to the BMR Holdings affiliate of approximately $141,000 as a cost of debt subordination and included this amount as other expense in its condensed statement of operations for the nine months ended September 30, 2014.

 

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In addition, the Company amended the BMR secured promissory note to increase the interest rate during the period that the Hercules Term Loan remains outstanding to match the interest rate of the Hercules Term Loan. The change to the terms of the BMR secured promissory note did not result in debt modification accounting in accordance with ASC 470-50.

The Company incurred legal and closing costs of approximately $80,000 (including the $25,000 upfront loan origination fee) in connection with the Hercules financing that have been capitalized as debt issuance costs and are being amortized to interest expense using the effective interest method over the term of the loan. For the nine month periods ended September 30, 2014, the Company recorded interest expense related to the Hercules Term Loan of approximately $177,000.

The following tables summarize the Company’s outstanding short-term financing and long-term debt as of September 30, 2014:

Short-term related parties convertible notes and current portion of long-term debt:

 

Lender

  Description     Maturity
Date
  Outstanding
Principal
Amount
    Debt
Discount
    Accrued
Interest
    Interest
Rate/

Weighted-
Average
Interest Rate
Per Annum
    Security/Covenant
              (unaudited; in thousands)            

BMV Direct SO LP

    Working capital      September 9, 2014   $ 552      $ —        $ 37        8.00   Unsecured, convertible
to common

BMV Direct SOTRS LP

    Working capital      September 9, 2014     2,061        —          135        8.00   Unsecured, convertible
to common

New Enterprise Associates 12, L.P.

    Working capital      September 9, 2014     2,341        —          154        8.00   Unsecured, convertible
to common

ProQuest Investments IV, L.P.

    Working capital      September 9, 2014     580        —          49        8.00   Unsecured, convertible
to common

Hercules Technology Growth Capital, Inc.

    Working capital      June 3, 2017     1,072        (94     40        12.05   First security interest
in all properties and
assets, including
intellectual properties
     

 

 

   

 

 

   

 

 

     
      $ 6,606      $ (94   $ 415        8.66  
     

 

 

   

 

 

   

 

 

     

Long-term debt:

 

Lender

  Description   Maturity
Date
  Outstanding
Principal
Amount
    Debt
Discount
    Accrued
Interest
    Interest Rate
Per Annum
    Security/Covenant
            (unaudited; in thousands)            

BMV Direct SOTRS LP

  Recapitalization   April 26, 2016   $ 8,557      $ —        $ 1,901        8% - 12.05%*      Second security interest
in all properties and
assets, including
intellectual properties

Hercules Technology Growth Capital, Inc.

  Working capital   June 3, 2017     2,928        (67     17        12.05%      First security interest in
all properties and
assets, including
intellectual properties
     

 

 

   

 

 

   

 

 

     
      $ 11,485      $ (67   $ 1,918       
     

 

 

   

 

 

   

 

 

     

 

* In June 2014, the Company amended the BMR secured promissory note to increase the interest rate during the period that the Hercules loan remains outstanding to match the interest rate of the Hercules loan. The change to the terms of the BMR note did not result in debt modification accounting in accordance with ASC 470-50.

 

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The following tables summarize the Company’s outstanding short-term financing and long-term debt as of December 31, 2013:

Short-term related parties convertible notes:

 

Lender

  Description   Maturity
Date
  Outstanding
Principal
Amount
    Accrued
Interest
    Interest
Rate/

Weighted-
Average
Interest Rate
Per Annum
    Security/Covenant
            (in thousands)            

BMV Direct SO LP

  Working capital   September 9, 2014   $ 303      $ 7        8.00   Unsecured, convertible
to common

BMV Direct SOTRS LP

  Working capital   September 9, 2014     990        24        8.00   Unsecured, convertible
to common

New Enterprise Associates 12, L.P.

  Working capital   September 9, 2014     1,160        30        8.00   Unsecured, convertible
to common

ProQuest Investments IV, L.P.

  Working capital   September 9, 2014     580        14        8.00   Unsecured, convertible
to common

AKP USA, Inc.

  Line of credit   March 14, 2014     491        5        1.15   Unsecured
     

 

 

   

 

 

     
      $ 3,524      $ 80        7.05  
     

 

 

   

 

 

     

Long-term related party debt:

 

Lender

  Description     Maturity
Date
    Outstanding
Principal
Amount
    Accrued
Interest
    Interest
Rate

Per
Annum
    Security/Covenant
                (in thousands)            

BMV Direct SOTRS LP

    Recapitalization        April 26, 2016      $ 8,557      $ 1,154        8.00   First security interest in
all properties and
assets, including
intellectual properties
     

 

 

   

 

 

     
      $ 8,557      $ 1,154       
     

 

 

   

 

 

     

For the nine months ended September 30, 2014 and 2013, total interest expense on the Company’s short-term debt was approximately $0.5 million and $14,000, respectively, and interest expense on the Company’s long-term debt was approximately $0.8 million and $0.5 million, respectively.

 

9. Freestanding Warrant Liability

In connection with the Hercules Term Loan (see Note 8, Senior Secured Term Loan with Hercules), the Company issued a warrant to Hercules to purchase shares of the Company’s stock having a purchase price of up to $280,000 at an exercise price per share equaling the lesser of (1) the lowest price per share of the stock sold in the Company’s next round of equity financing that results in gross proceeds of at least $3.0 million prior to the closing of an initial public offering, or (2) $8.84 per share. The warrant is exercisable at any time, in whole or in part, until the earlier of (1) ten years from date of issuance, or (2) five years from the date of the Company’s initial public offering.

In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company accounts for the warrant to purchase shares of the Company’s common stock in connection with the Hercules Term Loan as a liability in its condensed consolidated balance sheet. The warrant is recorded on the Company’s balance sheet at fair value on the date of issuance as a debt discount and is being amortized to interest expense over the debt repayment period using the effective interest method. The warrant liability is revalued at each subsequent balance sheet date

 

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until the earlier of (1) the exercise of warrant, or (2) the expiration of warrant, with fair value changes recognized as increases or decreases to other income (expense) in the accompanying condensed consolidated statements of operations. For the nine months ended September 30, 2014, the Company recorded an income of approximately $2,000 related to the changes in fair value of the warrant. The Company determined the fair value of the warrant as of September 30, 2014 using a Black-Scholes option valuation model with the following assumptions: expected term equals to the remaining life of the warrant of approximately 9.67 years; volatility equals 89%; risk free interest rate of 2.63%; and no dividend yield.

 

10. Stock Incentive Plan

As of September 30, 2014, the Company has reserved 566,027 shares of common stock for issuance under the 2012 Plan.

The following table summarizes options and restricted stock awards activity under the 2012 Plan and related information:

 

     Shares
Available
for

Grant
(in shares)
    Outstanding
Number
of Awards
(in shares)
    Weighted-
Average
Exercise
Price per
Share
     Weighted-
Average
Remaining
Contractual
Term
(in years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Balance at December 31, 2013

     83,751        469,776      $ 1.44         7.39      

Granted (unaudited)

     (130,784     130,784      $ 1.98         

Exercised (unaudited)

     —          (1,580   $ 1.40         

Cancelled/forfeited (unaudited)

     71,361        (71,361   $ 1.40         
  

 

 

   

 

 

         

Balance at September 30, 2014 (unaudited)

     24,328        527,619      $ 1.58         7.12      
  

 

 

   

 

 

         

Exercisable at September 30, 2014 (unaudited)

       207,956      $ 1.48         6.24       $ 633   
    

 

 

      

 

 

    

 

 

 

Vested and expected to vest at September 30, 2014 (unaudited)

       501,931      $ 1.59         7.02       $ 1,468   
    

 

 

      

 

 

    

 

 

 

The aggregate intrinsic values of options outstanding and exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock of $4.52 per common share as determined by the Board of Directors with input from management as of September 30, 2014. The estimated fair value of the common stock underlying the stock options was determined at each grant date by the board of directors and was supported by periodic independent third-party valuations.

The following summarizes the composition of stock options outstanding and exercisable as of September 30, 2014:

 

       Options Outstanding and Exercisable    

Exercise Price

   Number of
Shares
     Weighted-
Average
Remaining
Contractual
Life (in years)
 
     (unaudited)  

$1.28

     —           —     

$1.40

     129,538         8.25   

$1.54

     76,649         2.75   

$4.52

     1,769         9.78   
  

 

 

    

$1.28 – $4.52

     207,956         6.24   
  

 

 

    

 

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The weighted-average grant-date fair value of options and awards granted during the nine months ended September 30, 2014 and 2013 were $1.47 per share and $0.97 per share, respectively. The total fair value of options and awards that vested during the nine months ended September 30, 2014 and 2013 were approximately $96,000 and $67,000, respectively.

Stock-Based Compensation Expense

Total stock-based compensation expense included in the Company’s consolidated statements of operations is as follows:

 

       Nine Months Ended September 30,    
     2014      2013  
     (unaudited; in thousands)  

Research and development

   $ 58       $ 16   

General and administrative

     64         39   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 122       $ 55   
  

 

 

    

 

 

 

In February 2014, the Company’s board of directors, based on recommendation by management, adopted a resolution to extend the stock option exercise period to certain former ZP Group LLC employees whose employment was terminated as a result of the termination of the joint venture with Asahi from 60 days to 120 days post-termination. As a result, a total of 19,354 options were modified. In accordance with the provisions of ASC 718, the Company accounted for the modification as an exchange of the original award for a new award and accordingly, approximately $3,000 of incremental compensation cost related to these options was recognized during the nine month period ended September 30, 2014.

In June 2014 and pursuant to an employment agreement between the Company and one of its former officers, the vesting of an additional 7,075 shares of stock options was accelerated upon the termination of the officer’s employment. As a result, the Company recognized $7,000 as compensation expense for the nine month period ended September 30, 2014.

The total unrecognized stock-based compensation expense related to stock-based compensation arrangements as of September 30, 2014 was approximately $0.4 million, and is expected to be recognized over a weighted-average period of approximately 2.74 years.

The following table illustrates the weighted-average assumptions for the Black-Scholes option-pricing model used in determining the fair value of options granted to employees:

 

     Nine Months Ended September 30,  
           2014                  2013        

Dividend yield

     0%         0%   

Risk-free interest rate

     2.02% – 2.12%         1.74%   

Expected volatility

     89.00%         89.00%   

Expected term (years)

     6.08         6.08   

Stock-based compensation expense related to stock options granted to nonemployees is measured and recognized as earned. The fair value of these options is measured using the Black-Scholes option pricing model reflecting an expected life that is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned. No options were granted to nonemployees in the nine months ended September 30, 2014, and 2,500 options were granted to a nonemployee in the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, the Company recorded stock-based compensation expense related to stock options granted to non-employees of approximately $12,000 and an immaterial amount, respectively.

 

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11. Subsequent Events

Strategic Alliance with Eli Lilly and Company

In November 2014, the Company entered into an agreement with Eli Lilly and Company (Lilly) to develop a formulation of PTH to be administered daily using the Company’s microneedle patch system for the treatment of osteoporosis. Under the terms of the agreement, the Company granted to Lilly an exclusive, worldwide license to commercialize any PTH product using the Company’s microneedle patch system. Lilly will be responsible, pending successful clinical study outcomes and regulatory approval, for commercialization of the daily PTH product, and the Company is responsible, at its own expense, for developing the daily PTH product. Potential payments to the Company under the agreement include non-refundable milestone payments of up to $300 million upon achievement of certain regulatory approvals of the daily PTH product and up to $125 million upon achievement of certain sales milestones for the daily PTH product. The Company is also eligible to receive royalties at a percentage up to the low teens on sales of the daily PTH product in major markets, and will receive reimbursement of manufacturing costs. The Company also entered into a stock purchase agreement with Lilly pursuant to which Lilly will purchase up to $15 million worth of the Company’s common stock in a private placement concurrent with the closing of the Company’s planned initial public offering of shares of its common stock, at a price per share equal to the initial public offering price.

Bridge Financing—Related Parties Convertible Notes

In December 2014, the Company entered into a note purchase agreement with certain of the purchasers of the February 2014 convertible bridge notes pursuant to which the Company issued convertible bridge notes, raising an aggregate amount of approximately $1.3 million in debt financing. These convertible bridge notes bear simple interest of 8% per annum, with all unpaid principal and accrued interest due and payable on the earlier of: (i) June 1, 2017; (ii) an event of default, as defined in the notes; or (iii) the date that is 30 days following the closing of a first firm commitment underwritten initial public offering pursuant to a registration statement filed under the 1933 Securities Act. Upon the closing of a qualified financing, which is defined in the convertible bridge notes as an equity financing on or before March 31, 2015 in which the Company raises at least $25 million, the principal and all unpaid and accrued interest shall automatically convert into the equity security sold in the qualified financing, at price equal to 85% of the lowest per share price at which the equity security is sold in the qualified financing.

 

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                 Shares

 

LOGO

 

Common Stock

 

 

PROSPECTUS

 

 

 

Joint Book-Running Managers

 

Ladenburg Thalmann     Roth Capital Partners

                    , 2014

Until                     , 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

 

 


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Index to Financial Statements

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

The following table indicates the expenses to be incurred in connection with this offering described in this Registration Statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the Securities and Exchange Commission registration fee and the FINRA filing fee.

 

     Amount  

Securities and Exchange Commission registration fee

   $ 11,376   

FINRA filing fee

     13,748   

NASDAQ Global Market listing fee

     125,000   

Accountants’ fees and expenses

     125,000   

Legal fees and expenses

     1,000,000   

Transfer agent’s fees and expenses

     10,000   

Blue Sky fees and expenses

     12,500   

Printing and engraving expenses

     300,000   

Miscellaneous

     52,376   
  

 

 

 

Total Expenses

   $ 1,650,000   
  

 

 

 

 

Item 14. Indemnification of Directors and Officers.

Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Upon the closing of this offering, our certificate of incorporation will provide that none of our directors shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as director, notwithstanding any provision of law imposing such liability, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty.

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, in any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Upon the closing of this offering, our amended and restated bylaws will provide that we will indemnify each person who was or is a party or threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director or officer of Zosano Pharma Corporation, or is or was serving at our request as a director or officer of another corporation,

 

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partnership, joint venture, trust or other enterprise to the fullest extent permitted by the Delaware General Corporation Law. Upon the closing of this offering, our amended and restated bylaws will provide that expenses must be advanced to these indemnitees under certain circumstances.

The indemnification provisions contained in our amended and restated bylaws that will be effective as of the closing of this offering are not exclusive. In addition, we have entered into indemnification agreements with each of our directors. Each indemnification agreement provides that we will indemnify the director to the fullest extent permitted by law for claims arising in his capacity as a director, provided that he acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. In the event that we do not assume the defense of a claim against a director, we are required to advance his expenses in connection with his defense, provided that he undertakes to repay all amounts advanced if it is ultimately determined that he is not entitled to be indemnified by us.

In addition, we maintain standard policies of insurance under which coverage is provided to our directors and officers against losses arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law. In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933, as amended, against certain liabilities.

 

Item 15. Recent Sales of Unregistered Securities.

Stock Options

At various times since June 2012, we have granted options to purchase an aggregate of 662,162 shares of common stock to our employees, directors, and consultants pursuant to our 2012 Stock Incentive Plan, at exercise prices ranging from $1.28 to $4.52 per share. During this time, we have issued 2,309 shares of common stock upon exercise of these options, for aggregate consideration of approximately $3,233. The issuance of these options and shares was exempt from registration pursuant to Rule 701 of the Securities Act of 1933, as securities issued pursuant to a compensatory benefit plan.

The following table provides information regarding the number of options issued pursuant to our 2012 Stock Incentive Plan and the number of shares of common stock issued upon exercise of options in each calendar year during this period.

 

Year

   Options Issued (#)      Weighted average
exercise price of
issued options ($)
     Total shares of stock issued
upon exercise of outstanding
options (#)
     Weighted average
exercise price of
exercised options ($)
 

2012

     327,435       $ 1.41         —         $ —     

2013

     203,943       $ 1.40         —         $ —     

2014

     130,784       $ 1.98         2,309       $ 1.40   

Warrant

In June 2014, in connection with our term loan facility with Hercules Technology Growth Capital, Inc., or Hercules, we issued to Hercules a warrant to purchase either (i) shares of our common stock or (ii) shares of the series of preferred stock that we issue in any non-public equity financing resulting in gross proceeds to us of at least $3.0 million that occurs prior to the consummation of an underwritten initial public offering of our common stock. The exercise price per share under the warrant is equal to the lesser of the lowest price per share of the stock issued in the non-public equity financing or $8.84, and the warrant can be exercised for shares having an aggregate exercise price of up to $280,000. The warrant is exercisable, in whole or in part, at any time until the

 

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earlier of June 3, 2024 or five years after our underwritten initial public offering of our common stock. The warrant is currently exercisable for an aggregate of 31,674 shares of our common stock at an exercise price of $8.84 per share. The issuance of this warrant to Hercules was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

Common Stock

On January 26, 2012, we sold an aggregate of 937,500 shares of common stock to our Chief Executive Officer, Vikram Lamba, and our Chief Scientific Officer, Peter Daddona. On December 11, 2012, we issued an aggregate of 12,500 additional shares of common stock to Mr. Lamba and Dr. Daddona pursuant to our 2012 Stock Incentive Plan. The issuance of these shares was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering, and pursuant to Rule 701 of the Securities Act of 1933, as securities issued pursuant to a compensatory benefit plan.

In April 2012, in a transaction to recapitalize our business, structured as a reverse triangular merger, a wholly-owned subsidiary of Zosano Pharma Corporation (then named ZP Holdings, Inc.) was merged with and into ZP Opco, Inc. (then named Zosano Pharma, Inc.), whereby ZP Opco was the surviving entity and became a wholly-owned subsidiary of Zosano Pharma Corporation. As part of this reorganization, we issued 2,812,498 shares of our common stock to the stockholders and optionholders of ZP Opco in exchange for the cancellation of all outstanding common and preferred stock of ZP Opco and all outstanding stock options. Also, in connection with this reorganization, all outstanding debt and related accrued interest of ZP Opco held by investors was cancelled, and all outstanding warrants to purchase capital stock were terminated. The issuance of these shares was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

In April 2012, in connection with the restructuring of our lease with an affiliate of BioMed Realty Holdings, Inc., or BMR, for our facilities located in Fremont, California, we issued an aggregate of 1,344,314 shares of our common stock to BMR and another affiliate of BMR. The issuance of these shares was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering. In June 2014, in consideration of BMR agreeing to subordinate its secured promissory note and related security interest to our term loan facility with Hercules and its related security interest, we issued an aggregate of 31,250 shares of our common stock to BMR. The issuance of these shares was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

In November 2014, we entered into a stock purchase agreement with Eli Lilly and Company, or Lilly, under which Lilly agreed to purchase up to $15 million worth of our common stock in a separate private placement concurrent with the closing of this offering, at a price per share equal to the initial public offering price. Lilly may elect to not purchase any shares that would cause Lilly to own in excess of 18% of our outstanding common stock after this offering and the concurrent private placement (which would result in Lilly investing less than $15 million). The issuance of the shares of common stock to Lilly is exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

BMR Promissory Note

In April 2012, in consideration of the amendment of our lease agreement with BMR’s affiliate, we issued a new four year non-callable secured promissory note to BMR with an original principal amount of $8.6 million bearing interest at the rate of 8% per annum, compounded annually. All principal and interest will become due and payable under the note in April 2016. The note is secured by substantially all of our assets, including intellectual property. In addition to the note, we issued shares of our common stock to BMR and another affiliate of BMR in connection with the restructuring, described above under the heading “ Common Stock ”. The issuance of the secured promissory note to BMR was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

 

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Convertible Promissory Notes

In September 2013, we issued and sold convertible promissory notes in the aggregate original principal amount of approximately $3.0 million to certain of our existing stockholders. In February 2014, we issued and sold additional convertible promissory notes in the aggregate original principal amount of $2.5 million to certain of our existing stockholders. In December 2014, we issued and sold additional convertible promissory notes in the aggregate original principal amount of approximately $1.3 million to certain of our existing stockholders. Pursuant to their terms, the principal and all unpaid and accrued interest on each note will automatically convert upon the closing of this offering into shares of our common stock if the closing occurs on or before March 31, 2015, at a conversion price equal to 85% of the lowest price per share at which our common stock is sold in this offering. The issuance of these bridge notes was exempt from registration under Section 4(a)(2) of the Securities Act, as a sale not involving a public offering.

 

Item 16. Exhibits and Financial Statement Schedules.

The exhibits to the registration statement are listed in the Exhibit Index attached hereto and incorporated by reference herein.

 

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 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 Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

 

    For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

    For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 10 th  day of December, 2014.

 

ZOSANO PHARMA CORPORATION
By:   /s/ Vikram Lamba
 

Vikram Lamba

 

President and Chief Executive Officer

In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Vikram Lamba

Vikram Lamba

   Chief Executive Officer, President and Director (Principal Executive Officer)   December 10, 2014

/s/ Winnie W. Tso

Winnie W. Tso

   Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)   December 10, 2014

*

Peter Daddona

   Director   December 10, 2014

*

Bruce Steel

   Director   December 10, 2014

*

M. James Barrett

   Director   December 10, 2014

*

Kleanthis G. Xanthopoulos

   Director   December 10, 2014

*

Troy Wilson

   Director   December 10, 2014

 

* The undersigned, by signing his name hereto, does sign and execute this registration statement as attorney-in-fact pursuant to the powers of attorney executed by the above-named directors of the registrant, which powers of attorney were included in the signature page to the Registration Statement of Zosano Pharma Corporation on Form S-1 (File No. 333-196983) filed with the Securities and Exchange Commission on June 24, 2014.

 

/s/ Vikram Lamba
Vikram Lamba, attorney-in fact


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Index to Financial Statements

EXHIBIT INDEX

 

Exhibit
number

 

Description

  1.1   Form of Underwriting Agreement
  3.1†   Certificate of Incorporation of Zosano Pharma Corporation
  3.2†   Certificate of Amendment to Certificate of Incorporation of Zosano Pharma Corporation, effective April 18, 2012
  3.3†   Certificate of Amendment to Certificate of Incorporation of Zosano Pharma Corporation, effective June 23, 2014
  3.4†   Amended and Restated Certificate of Incorporation of Zosano Pharma Corporation, to be effective upon the closing of this offering
  3.5†   Bylaws of Zosano Pharma Corporation
  3.6†   Amended and Restated Bylaws of Zosano Pharma Corporation, to be effective upon the closing of this offering
  3.7†   Certificate of Amendment to Certificate of Incorporation of Zosano Pharma Corporation, effective July 11, 2014
  4.1†   Specimen certificate evidencing shares of common stock
  4.2†   Note Purchase Agreement, dated as of September 9, 2013, among ZP Holdings, Inc., BMV Direct SO LP, BMV Direct SOTRS LP, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P. and ProQuest Management LLC
  4.3†   Form of Subordinated Convertible Promissory Note dated September 9, 2013
  4.4†   Note Purchase Agreement, dated as of February 26, 2014, among ZP Holdings, Inc., BMV Direct SO LP, BMV Direct SOTRS LP and New Enterprise Associates 12, Limited Partnership
  4.5†   Form of Subordinated Convertible Promissory Note dated February 26, 2014
  4.6†   Stock Repurchase Option Agreement, dated May 15, 2012, between ZP Holdings, Inc. and Peter Daddona
  4.7†   Stock Repurchase Option Agreement, dated May 15, 2012, between ZP Holdings, Inc. and Vikram Lamba
  4.8†   First Amendment, dated as of June 3, 2014, to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated September 9, 2013
  4.9†   First Amendment, dated as of June 3, 2014, to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated February 26, 2014
  4.10   Second Amendment, dated as of September 4, 2014, to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated September 9, 2013
  4.11   Second Amendment, dated as of September 4, 2014, to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated February 26, 2014
  4.12   Note Purchase Agreement, dated as of December 2, 2014, among Zosano Pharma Corporation, BMV Direct SOTRS LP and New Enterprise Associates 12, Limited Partnership
  4.13   Form of Subordinated Convertible Promissory Note dated December 2, 2014
  5.1†   Opinion of Foley Hoag LLP
10.1**†   Collaboration, Development and License Agreement, dated January 31, 2014, between Zosano Pharma, Inc. and Novo Nordisk A/S


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Index to Financial Statements

Exhibit
number

 

Description

10.2†   Notice of Termination, dated January 27, 2014, of the Amended and Restated License Agreement dated as of April 1, 2012 among Zosano Pharma, Inc. and Asahi Kasei Pharma Corporation
10.3†   Letter Amendment to Intellectual Property License Agreement, dated February 22, 2011 between ALZA Corporation and Zosano Pharma, Inc.
10.4**†   Intellectual Property License Agreement, dated as of October 5, 2006, between ALZA Corporation and The Macroflux Corporation
10.5†   Secured Promissory Note, dated April 26, 2012, between ZP Holdings, Inc. and BioMed Realty Holdings, Inc.
10.6†   Security Agreement, dated as of April 26, 2012, between ZP Holdings, Inc. and BioMed Realty Holdings, Inc.
10.7†   Intellectual Property Security Agreement, dated as of April 26, 2012, between ZP Holdings, Inc. and BioMed Realty Holdings, Inc.
10.8†   Guaranty, made as of April 1, 2012, by ZP Holdings, Inc. in favor of BMR-34790 Ardentech Court LP
10.9†   Lease Agreement, dated May 1, 2007, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.10†   First Amendment to Lease, dated June 20, 2008, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.11†   Second Amendment to Lease, dated October 16, 2008, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.12†   Third Amendment to Lease, dated April 29, 2011, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.13†   Fourth Amendment to Lease, dated July 31, 2011, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.14†   Fifth Amendment to Lease, dated April 1, 2012, between Zosano Pharma, Inc. and BMR-34790 Ardentech Court LP
10.15†   Form of Indemnification Agreement for Directors associated with an Investment Fund
10.16†   Form of Indemnification Agreement for Directors not associated with an Investment Fund
10.17 ±   Employment Letter Agreement, dated April 30, 2014, among Zosano Pharma, Inc., ZP Holdings, Inc. and W. Tso
10.18 ±   Amendment to Amended and Restated Employment Letter Agreement, dated January 31, 2014, among Zosano Pharma, Inc., ZP Holdings, Inc. and Nandan Oza
10.19 ±   Amended and Restated Employment Letter Agreement, dated July 22, 2013, among Zosano Pharma, Inc., ZP Holdings, Inc. and Nandan Oza
10.20†  

Loan and Security Agreement, dated as of June 3, 2014, between Zosano Pharma, Inc. and Hercules Technology Growth Capital, Inc.

10.21†  

Joinder Agreement, dated as of June 3, 2014, between ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.

10.22†  

ZP Holdings, Inc. Pledge Agreement, dated as of June 3, 2014, between ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.


Table of Contents
Index to Financial Statements

Exhibit
number

 

Description

10.23 ±   Amendment No. 2 to Employment Letter Agreement, dated January 16, 2014, among Zosano Pharma, Inc., ZP Holdings, Inc. and Peter Daddona
10.24 ±   Amendment to Employment Letter Agreement, dated January 6, 2014, among Zosano Pharma, Inc., ZP Holdings, Inc. and Peter Daddona
10.25 ±   Employment Letter Agreement, dated May 11, 2012, among Zosano Pharma, Inc., ZP Holdings, Inc. and Peter Daddona
10.26 ±   Amendment to Employment Letter Agreement, dated December 17, 2013, among Zosano Pharma, Inc., ZP Holdings, Inc. and Vikram Lamba
10.27 ±   Employment Letter Agreement, dated May 11, 2012, among Zosano Pharma, Inc., ZP Holdings, Inc. and Vikram Lamba
10.28†   Letter Amendment to Independent Director Agreement, dated July 15, 2013, between ZP Holdings, Inc. and Kleanthis G. Xanthopoulos
10.29†   Independent Director Agreement, dated as of March 28, 2013, between ZP Holdings, Inc. and Kleanthis G. Xanthopoulos
10.30 ±   ZP Holdings, Inc. 2012 Stock Incentive Plan
10.31 ±   Form of Incentive Stock Option under ZP Holdings, Inc. 2012 Stock Incentive Plan
10.32 ±   Form of Non-Statutory Stock Option under ZP Holdings, Inc. 2012 Stock Incentive Plan
10.33 ±   ZP Holdings, Inc. 2014 Equity and Incentive Plan
10.34†   Warrant Agreement, dated as of June 3, 2014, between ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.
10.35†   Subordination Agreement, dated as of June 3, 2014, among BMV Direct SOTRS LP, BioMed Realty Holdings, Inc., Zosano Pharma, Inc., ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.
10.36†   Subordination Agreement, dated as of June 3, 2014, among BMV Direct SOTRS LP, BMV Direct SO LP, New Enterprise Associates 12, Limited Partnership, ProQuest Investments IV, L.P., ProQuest Management LLC, Zosano Pharma, Inc., ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.
10.37†   Subordination Agreement, dated as of June 3, 2014, among BMV Direct SOTRS LP, BMV Direct SO LP, New Enterprise Associates 12, Limited Partnership, Zosano Pharma, Inc., ZP Holdings, Inc. and Hercules Technology Growth Capital, Inc.
10.38†   First Amendment to Secured Promissory Note, dated as of June 3, 2014, among BMV Direct SOTRS LP, ZP Holdings, Inc. and Zosano Pharma, Inc.
10.39†   Independent Director Agreement, dated as June 23, 2014, between Zosano Pharma Corporation and Troy Wilson
10.40   Subordination Agreement, dated as of December 2, 2014, among BMV Direct SOTRS LP, New Enterprise Associates 12, Limited Partnership, ZP Opco, Inc., Zosano Pharma Corporation and Hercules Technology Growth Capital, Inc.
10.41**   Collaboration, Development and License Agreement, dated as of November 21, 2014, between ZP Opco, Inc. and Eli Lilly and Company
10.42   Common Stock Purchase Agreement, dated as of November 21, 2014, between Zosano Pharma Corporation and Eli Lilly and Company


Table of Contents
Index to Financial Statements

Exhibit
number

  

Description

21.1†    Subsidiaries of Registrant
23.1    Consent of Marcum LLP
23.2†    Consent of Foley Hoag LLP (included in Exhibit 5.1)
24.1†    Power of Attorney (included on signature page)
24.2†    Secretary’s Certificate dated July 25, 2014

 

** Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission
Previously filed
±   Management contract or compensatory plan or arrangement

Exhibit 1.1

            Shares

ZOSANO PHARMA CORPORATION

Common Stock

UNDERWRITING AGREEMENT

[date]

L ADENBURG T HALMANN  & C O . I NC .

570 Lexington Avenue, 11th Floor

New York, NY 10022

R OTH C APITAL P ARTNERS , LLC

888 San Clemente Drive

Newport Beach, CA 92660

As Representatives of the several

  Underwriters named in Schedule I attached hereto

Ladies and Gentlemen:

Zosano Pharma Corporation, a Delaware corporation (the “ Company ”), confirms its agreement with you and each of the other Underwriters named in Schedule I hereto (collectively, the “ Underwriters ,” which term shall also include any underwriter substituted as hereinafter provided in Section 9 hereof), for whom you are acting as representatives (in such capacity, the “ Representatives ”), with respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $0.0001 per share, of the Company (“ Common Stock ”) set forth in Schedule I hereto and (ii) the grant by the Company to the Underwriters of the option described in Section 2 hereof to purchase, severally and not jointly, all or any part of             additional shares of Common Stock. The             shares of Common Stock (the “ Firm Stock ”) set forth in Schedule I hereto to be purchased by the Underwriters and all or any part of the             shares of Common Stock subject to the option described in Section 2 hereof (the “ Option Stock ”) are herein called, collectively, the “ Stock .”

The Company understands that the Underwriters propose to make a public offering of the Stock as soon as the Representatives deem advisable after this Agreement has been executed and delivered.

1. Representations, Warranties and Agreements of the Company . The Company represents, warrants and agrees that:

(a) A registration statement on Form S-1 (File No. 333-196983) relating to the Stock has (i) been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), and the rules and regulations of the Securities and


Exchange Commission (the “ Commission ”) thereunder (the “ Securities Act Regulations ”); (ii) been filed with the Commission under the Securities Act; and (iii) become effective under the Securities Act. Copies of such registration statement and any amendment thereto have been delivered by the Company to the Representatives. Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A (“ Rule 430A ”) of the Securities Act Regulations and Rule 424(b) (“ Rule 424(b) ”) thereunder. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus (as defined below), the Prospectus (as defined below) or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system or any successor system (“ EDGAR ”). As used in this Agreement:

(i) “ Applicable Time ” means [            ] [a.m./ p.m.] (New York City time), [date];

(ii) “ Effective Date ” means the date and time as of which such registration statement, or the most recent post-effective amendment thereto, was declared effective by the Commission;

(iii) “ Issuer Free Writing Prospectus ” means each “issuer free writing prospectus” (as defined in Rule 433 under the Securities Act) relating to the Stock, excluding any issuer free writing prospectus prepared by or on behalf any Underwriter without the Company’s consent;

(iv) “ Preliminary Prospectus ” means any preliminary prospectus relating to the Stock included in such registration statement or filed with the Commission pursuant to Rule 424(a) under the Securities Act;

(v) “ Pricing Disclosure Package ” means, as of the Applicable Time, the most recent Preliminary Prospectus, together with the information included in Schedule III hereto and each Issuer Free Writing Prospectus listed in Schedule III hereto;

(vi) “ Prospectus ” means the final prospectus relating to the Stock, as filed with the Commission pursuant to Rule 424(b) under the Securities Act;

(vii) “ Registration Statement ” means such registration statement, as amended as of the Effective Date, including any Preliminary Prospectus or the Prospectus, all exhibits to such registration statement and including the information deemed by virtue of Rule 430A under the Securities Act to be part of such registration statement as of the Effective Date. Any registration statement filed pursuant to Rule 462(b) under the Securities Act is herein called the “ Rule 462(b) Registration Statement ” and, after such filing, the term “Registration Statement” shall include the Rule 462(b) Registration Statement;

(viii) “ Testing-the-Waters Communication ” means any oral or written communication with potential investors undertaken by the Company or, with the prior written consent of the Company, another person acting on behalf of the Company, in reliance on Section 5(d) of the Securities Act; and

 

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(ix) “ Written Testing-the-Waters Communication ” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.

Any reference to the “ most recent Preliminary Prospectus ” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement or filed pursuant to Rule 424(b) under the Securities Act prior to or on the date hereof.

(b) No order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, threatened by the Commission. The Company has complied with each request (if any) from the Commission for additional information.

(c) From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any Person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “ Emerging Growth Company ”).

(d) The Company (i) has not engaged in any Testing-the-Waters Communication with respect to the Stock other than Testing-the-Waters Communications with the consent of the Representatives or as otherwise described on Schedule VI hereto with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) has not authorized anyone other than the Representatives to engage in Testing-the-Waters Communications except as described on Schedule VI hereto. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communications with respect to the Stock. The Company has not distributed or approved for distribution any Written Testing-the-Waters Communications other than those listed on Schedule VI hereto.

(e) At the time of the filing of the Registration Statement and any post-effective amendment thereto with the Commission and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.

(f) The Registration Statement conformed and will conform in all material respects on the Effective Date and on the applicable Delivery Date, and any amendment to the Registration Statement filed after the date hereof will conform in all material respects when filed, to the requirements of the Securities Act and the Securities Act Regulations. The most recent Preliminary Prospectus conformed, and the Prospectus will conform, in all material respects when filed with the Commission pursuant to Rule 424(b) under the Securities Act and on the applicable Delivery Date (as defined in Section 4) to the requirements of the Securities Act and the Securities Act Regulations.

 

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(g) The Registration Statement did not, as of the Effective Date or at any Delivery Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 8(e).

(h) The Prospectus will not, as of its date or as of the applicable Delivery Date, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 8(e).

(i) The Pricing Disclosure Package did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Pricing Disclosure Package in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 8(e).

(j) Each Issuer Free Writing Prospectus listed on Schedule IV hereto, when taken together with the Pricing Disclosure Package, did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from such Issuer Free Writing Prospectus listed on Schedule IV hereto in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 8(e).

(k) Each Written Testing-the-Waters Communication listed on Schedule VI hereto, when taken together with the Pricing Disclosure Package, did not, as of the Applicable Time (and, with respect to the Written Testing-the-Waters Communication enumerated (1) on Schedule VI hereto, as of the date presented), contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from such Written Testing-the-Waters Communication listed on Schedule VI hereto in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 8(e); and

 

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the Company has filed publicly on EDGAR at least 21 calendar days prior to any “road show” (as defined in Rule 433 under the Securities Act), any confidentially submitted registration statement and registration statement amendments relating to the offer and sale of the Stock.

(l) Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations on the date of first use, and the Company has complied with all prospectus delivery and any filing requirements applicable to such Issuer Free Writing Prospectus pursuant to the Securities Act and Securities Act Regulations. The Company has not made any offer relating to the Stock that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representatives, except as set forth on Schedule V hereto. The Company has retained in accordance with the Securities Act and the Securities Act Regulations all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the Securities Act and the Securities Act Regulations. The Company has taken all actions necessary so that any “road show” (as defined in Rule 433 under the Securities Act) in connection with the offering of the Stock will not be required to be filed pursuant to the Securities Act and the Securities Act Regulations.

(m) The Company has been duly organized, is validly existing and in good standing as a corporation under the laws of its jurisdiction of organization and is duly qualified to do business and in good standing as a foreign corporation or other business entity in each jurisdiction in which its ownership or lease of property or the conduct of its businesses requires such qualification, except where the failure to be so qualified or in good standing could not, in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or otherwise), results of operations, stockholders’ equity, assets, properties, business or prospects of the Company and its subsidiaries taken as a whole, or on its ability to perform its obligations under this Agreement (a “ Material Adverse Effect ”). The Company has all power and authority necessary to own or hold its properties and to conduct the businesses in which it is engaged.

(n) The Company has three subsidiaries: (i) ZP Opco, Inc., a Delaware corporation wholly-owned by the Company; (ii) Zosano, Inc., a Delaware corporation 99.9% owned by the Company; and (iii) ZP Group LLC, a Delaware limited liability company wholly owned by ZP Opco, Inc. (each, a “ Subsidiary ,” and collectively, the “ Subsidiaries ”). Each Subsidiary has been duly organized and is validly existing as a corporation or limited liability company, as applicable, in good standing under the laws of its jurisdiction of organization. Each Subsidiary has the power and authority (corporate or otherwise) to own its properties and conduct its business as currently being conducted and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and is duly qualified to do business as a foreign corporation or other entity in good standing in each jurisdiction in which it owns or leases real property or in which the conduct of its business makes such qualification necessary, except where the failure to so qualify would not have or is not reasonably likely to result in a Material Adverse Effect. As used herein, the term “ Company Group ” means the Company and the Subsidiaries, taken as a whole, and the term “ member of the Company Group ” means the Company or any Subsidiary.

(o) The Company has an authorized capitalization as set forth in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus, and all of the issued

 

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shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, conform in all material respects to the description thereof contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus and were issued in compliance with federal securities laws and in material compliance with applicable state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. All of the equity interests of each Subsidiary have been duly and validly authorized and issued, are (in the case of any Subsidiary that is a corporation) fully paid and non-assessable and, except as disclosed in clause (n) above, are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims, other than liens, encumbrances, equities and claims imposed in connection with arrangements described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All of the Company’s options, warrants and other rights to purchase or exchange any securities for shares of the Company’s capital stock have been duly authorized and validly issued, conform in all material respects to the description thereof contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus and were issued in compliance with federal securities laws and in material compliance with applicable state securities laws. Except for such options, warrants and other rights to purchase or exchange any securities for shares of the Company’s capital stock as are described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no outstanding convertible or exchangeable securities, options, warrants, agreements, contracts or other rights to purchase or acquire from the Company any shares of the capital stock of the Company.

(p) The shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly authorized for issuance and sale to the Underwriters and, upon payment and delivery in accordance with this Agreement, will be validly issued, fully paid and non-assessable, will conform in all material respects to the description thereof contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will be issued in compliance with federal and state securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights.

(q) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by the Company.

(r) The issue and sale of the Stock by the Company, the execution, delivery and performance of this Agreement by the Company, the consummation by the Company of the transactions contemplated hereby and the application by the Company of the net proceeds from the sale of the Stock as described under “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus will not (i) whether with or without the giving of notice or passage of time or both, conflict with or result in a breach or violation of any of the terms or provisions of, impose any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary, or constitute a default or a Repayment Event (as defined below) under, any indenture, mortgage, deed of trust, loan agreement, license, lease or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or to which any of the property or assets of the Company or any Subsidiary is subject; (ii) result in any violation of the provisions of the charter or by-laws (or similar organizational documents) of the Company or any Subsidiary; or (iii) result in any

 

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violation of any statute, rule or regulation applicable to the Company or any Subsidiary or any judgment, order or decree of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary or any of their respective properties or assets, except in each case under clauses (i) and (iii) for such breaches, violations, liens, charges, encumbrances, defaults or Repayment Events as would not reasonably be expected to have a Material Adverse Effect. As used herein, a “ Repayment Event ” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment (which, for the avoidance of doubt, shall exclude any conversion into equity securities) of all or a portion of such indebtedness by the Company or any Subsidiary.

(s) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental agency or body having jurisdiction over the Company or any Subsidiary or any of their respective properties or assets is required for the issue and sale of the Stock by the Company, the execution, delivery and performance of this Agreement by the Company, the consummation by the Company of the transactions contemplated hereby, or the application by the Company of the net proceeds from the sale of the Stock as described under “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for the registration of the Stock under the Securities Act (including each order declaring the Registration Statement effective), the filing of the Prospectus, the filing of the exhibits to the Registration Statement, the filing of each Preliminary Prospectus, the filing of any free writing prospectus, and such consents, approvals, authorizations, orders, filings, registrations or qualifications as may be required under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), applicable state or foreign securities laws and/or the bylaws and rules of the Financial Industry Regulatory Authority (the “ FINRA ”) in connection with the purchase and sale of the Stock by the Underwriters.

(t) The consolidated financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, together with the related schedules and notes, comply as to form in all material respects with the requirements of Regulation S-X under the Securities Act and present fairly, in all material respects, the financial condition, results of operations and cash flows of the Company Group at the dates and for the periods indicated (in the case of unaudited interim financial statements, subject to year-end audit adjustments) in conformity with accounting principles generally accepted in the United States (“ GAAP ”) applied on a consistent basis throughout the periods indicated (except for such changes in the application of such accounting principles described therein). The supporting schedules included in the Registration Statement, if any, present fairly, in all material respects, in accordance with GAAP and Regulation S-X the information required to be stated therein. The selected financial data and the summary financial information included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been derived from the consolidated financial statements included therein and have been prepared in accordance with the requirements of Regulation S-K. The pro forma financial statements and the related notes thereto, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus present fairly, in all material respects, the information shown therein, have been prepared in accordance with the requirements of Regulation S-X and have been properly compiled, in all material respects, on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances

 

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referred to therein. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations.

(u) Marcum LLP, whose report appears in the Registration Statement, the Pricing Disclosure Package and the Prospectus and who have delivered the initial letter referred to in Section 7(g) hereof, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations.

(v) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company maintains internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States and to maintain accountability for its assets, (iii) access to the Company’s and each Subsidiary’s assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for the Company’s and each Subsidiary’s assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as of the date of the most recent balance sheet of the Company included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there were no material weaknesses in the Company’s internal controls.

(w) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (i) the Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), (ii) such disclosure controls and procedures are designed to ensure that information is accumulated and communicated to management of the Company, including its principal executive officer and principal financial officer, as appropriate, and (iii) such disclosure controls and procedures are effective in all material respects to perform the functions for which they were established.

(x) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, since the date of the most recent balance sheet of the Company included in the most recent Preliminary Prospectus, (i) the Company has not been advised of or become aware of (A) any significant deficiencies in the design or operation of internal controls that could adversely affect the ability of the Company to record, process, summarize and report financial data, or any material weaknesses in internal controls, and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal controls of the Company; and (ii) there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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(y) The section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus provides a fair and accurate description in all material respects of (i) the accounting policies that the Company believes are the most important in the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult, subjective or complex judgments (“ Critical Accounting Policies ”); and (ii) the judgments and uncertainties affecting the application of Critical Accounting Policies.

(z) The Company has taken all necessary actions to ensure that, upon the effectiveness of the Registration Statement, it will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof (the “ Sarbanes-Oxley Act ”) that are then in effect and with which the Company is required to comply as of the effectiveness of the Registration Statement, and is actively taking steps to ensure that it will be in compliance with any other provisions of the Sarbanes-Oxley Act when they become applicable to the Company.

(aa) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, since the date of the most recent balance sheet of the Company included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, neither the Company nor any Subsidiary has (i) sustained any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute, or been the named subject of any court or governmental action, order or decree, (ii) issued or granted any securities (other than pursuant to employee benefit plans, stock option plans or other equity compensation plans or arrangements existing on the date hereof), (iii) incurred any material liability or obligation, direct or contingent, other than liabilities and obligations that were incurred in the ordinary course of business, (iv) entered into any material transaction not in the ordinary course of business, or (v) declared or paid any dividend on its capital stock, and, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, since such date, there has not been any change in the capital stock or long-term debt of the Company or any adverse change outside the ordinary course of business, or any development involving a prospective adverse change outside the ordinary course of business, in or affecting the condition (financial or otherwise), results of operations, stockholders’ equity, properties, management, business or prospects of the Company, in each case except as would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

(bb) No member of the Company Group owns any real property. Each member of the Company Group has good and marketable title to, or a valid leasehold interest in, all personal property owned or held by it and material to the operation of its business as currently conducted or as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus, in each case free and clear of all liens, encumbrances and defects, except such liens, encumbrances and defects imposed in connection with arrangements described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by such member of the Company Group in the conduct of its business as currently conducted or as proposed to be conducted as described in the

 

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Registration Statement, the Pricing Disclosure Package or the Prospectus. All assets held under lease by any member of the Company Group and material to the operation of its business as currently conducted or as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus are held under valid, subsisting and enforceable leases, with such exceptions as do not materially interfere with the use made and proposed to be made of such assets by the applicable member of the Company Group in the conduct of its business as currently conducted or as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus.

(cc) Each member of the Company Group holds, and is operating in material compliance with, such material permits, licenses, franchises, registrations, exemptions, approvals, authorizations and clearances of the United Stated Food and Drug Administration (“ FDA ”) and other U.S. or foreign governmental authorities required for the conduct of its business as currently conducted (collectively, the “ Permits ”), and all such Permits are in full force and effect, except where the failure to hold such Permit or of such Permit to be so in full force and effect would not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. Each member of the Company Group has fulfilled and performed all of its material obligations with respect to the Permits, and, to the Company’s knowledge, no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any Permit. To the Company’s knowledge, all applications, notifications, submissions, information, claims, reports and statistics, and other data and conclusions derived therefrom, utilized as the basis for any and all requests for a Permit from the FDA or other U.S. or foreign governmental authority relating to the Company or a Subsidiary, their respective businesses and their respective product candidates, when submitted to the FDA or other U.S. or foreign governmental authority by or on behalf of the Company or the applicable Subsidiary, were true, complete and correct in all material respects, and any necessary or required updates, changes, corrections or modifications to such applications, submissions, information and data have been submitted to the FDA or other U.S. or foreign governmental authority, except as would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received any notification, correspondence or any other written or oral communication, including notification of any pending or, to the Company’s knowledge, threatened claim, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any governmental authority, including, without limitation, the FDA or the United States Drug Enforcement Administration (“ DEA ”), of potential or actual material non-compliance by, or material liability of, the Company under any Permits. Each member of the Company Group has acquired and maintained all Permits in accordance with normal business practices and all applicable laws of the United States or any other foreign jurisdiction, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. To the Company’s knowledge, there are no facts or circumstances that would reasonably be expected to give rise to any material liability of the Company or any Subsidiary under any Permits.

(dd) The Company and each Subsidiary, and to the knowledge of the Company, its directors, officers, employees and agents (in their capacities as such), have operated and currently are in compliance in all material respects with applicable statutes and implementing regulations administered or enforced by the FDA, DEA, or any other federal, state, local, or

 

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foreign governmental authority, including, without limitation, the federal Anti-kickback Statute (42 U.S.C. § 1320a-7b(b)); the Anti-Inducement Law (42 U.S.C. § 1320a-7a(a)(5)); the civil False Claims Act (31 U.S.C. §§ 3729 et seq.); the administrative False Claims Law (42 U.S.C. § 1320a-7b(a)); the Health Insurance Portability and Accountability Act of 1996 (42 U.S.C. § 1320d et seq.), as amended by the Health Information Technology for Economic and Clinical Health Act (42 U.S.C. §§ 17921 et seq.); the exclusion laws (42 U.S.C. § 1320a-7); the Federal Food, Drug, and Cosmetic Act (21 U.S.C. §§ 301 et seq.); Medicare (Title XVIII of the Social Security Act); Medicaid (Title XIX of the Social Security Act); the regulations promulgated pursuant to such laws; and any other similar local, state or federal law or regulation. Neither the Company nor any Subsidiary is a party to, or has any ongoing reporting obligations pursuant to, any corporate integrity agreement, deferred prosecution agreement, monitoring agreement, consent decree, settlement order, plan of correction or similar agreement imposed by any governmental authority. Neither the Company nor any Subsidiary nor, to the knowledge of the Company, any of their respective directors, officers, employees or agents, has been debarred by any United States or foreign governmental authority, including but not limited to by the FDA pursuant to the Generic Drug Enforcement Act of 1992 (21 U.S.C. Sec . 335(a) or (b)), or, excluded or suspended from participation in or receiving payment from any federal, state, local or foreign government health care program, including, but not limited to the Medicare or Medicaid programs.

(ee) Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or as would not reasonably be expected to have a Material Adverse Effect, since January 1, 2011, neither the Company nor any Subsidiary has had any product candidate or manufacturing site (including such a site of a contract manufacturer for any product candidate of the Company or any Subsidiary) subject to a U.S. or foreign governmental authority (including the FDA) shutdown or import or export prohibition, nor received any FDA Form 483 or other U.S. or foreign governmental authority notice of inspectional observations, “warning letters,” “untitled letters,” requests to make changes to the product candidates, processes or operations, safety alerts, field corrective actions (including voluntary or involuntary recalls) of the Company or any Subsidiary, or similar correspondence or notice from the FDA or other U.S. or foreign governmental authority alleging or asserting material noncompliance with any applicable laws. To the Company’s knowledge, neither the FDA nor any other U.S. or foreign governmental authority has threatened such action.

(ff) The clinical and pre-clinical studies and tests conducted by the Company or any Subsidiary, and, to the knowledge of the Company, the clinical and pre-clinical studies conducted on behalf of or sponsored by the Company or any Subsidiary were, and if still pending, are, being conducted in all material respects in accordance with all applicable laws of the United States or foreign jurisdictions, including, but not limited to, the Federal Food, Drug and Cosmetic Act and its applicable implementing regulations at 21 C.F.R. Part 812. Any descriptions of clinical, pre-clinical and other studies and tests, including any related results and regulatory status, contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus are, and will be, fair and accurate in all material respects. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, to the Company’s knowledge, there are no studies, tests or trials the results of which reasonably call into question in any material respect the clinical trial results described or referred to in the Registration Statement, the Pricing Disclosure Package or the Prospectus. No investigational device

 

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exemption filed by or on behalf of the Company or any Subsidiary with the FDA or any applicable foreign regulatory authority has been terminated or suspended by the FDA or such applicable foreign regulatory authority, and neither the FDA nor any applicable foreign regulatory authority has commenced, or, to the Company’s knowledge, threatened to initiate, any action to place a clinical hold order on, or otherwise terminate, delay or suspend, any proposed or ongoing clinical investigation conducted or proposed to be conducted by or on behalf of the Company or any Subsidiary.

(gg) Each member of the Company Group owns or possesses adequate rights to use all material patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, trademark registrations, service mark registrations, copyrights, inventions, know-how, software, databases, internet domain names, systems and technology (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), and other intellectual property (collectively, “ Intellectual Property ”), in each case material to the operation of its business as currently conducted and as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus; provided, however, that this sentence makes no representation, warranty or agreement regarding any infringement or violation of the Intellectual Property of any person. To the Company’s knowledge, the business of the Company Group, as currently conducted and as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus, does not and will not infringe or violate any Intellectual Property of any person, except for such infringements or violations as would not have a Material Adverse Effect, individually or in the aggregate. No claim is pending or, to the knowledge of the Company, threatened against any member of the Company Group alleging that the conduct of the business of any member of the Company Group, as currently conducted and as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus, infringes or violates the Intellectual Property of any person. Each member of the Company Group has taken commercially reasonable steps to protect, maintain and safeguard its rights in all Intellectual Property owned or held by it and material to the operation of its business as currently conducted or as proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus, including the execution of appropriate nondisclosure and confidentiality agreements. The consummation of the transactions contemplated by this Agreement will not result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other person in respect of, the right of any member of the Company Group to own, use, or hold for use any of the Intellectual Property as owned, used or held for use by it for the operation of its business as currently conducted or proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus. Each member of the Company Group has at all times complied in all material respects with all applicable laws relating to privacy, data protection, and the collection and use of personal information collected, used, or held for use by it for the operation of its business as currently conducted or proposed to be conducted as described in the Registration Statement, the Pricing Disclosure Package or the Prospectus. No claims are currently pending or, to the Company’s knowledge, threatened, against the Company or any Subsidiary alleging a violation of any person’s privacy or personal information or data rights. Each member of the Company Group takes commercially reasonable measures to protect such information against unauthorized access, use, modification, or other misuse.

 

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(hh) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there is no action, suit or proceeding before or brought by any U.S. or foreign governmental entity now pending or, to the knowledge of the Company, threatened, nor to the knowledge of the Company is there any inquiry or investigation brought by any U.S. or foreign governmental entity now pending or threatened, in each case against or affecting the Company or any Subsidiary, which, if determined adversely to the Company or the applicable Subsidiary, would reasonably be expected to result in a Material Adverse Effect or would reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement or the performance by the Company of its obligations hereunder. The aggregate liability of the Company and the Subsidiaries with respect to all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective properties or assets is the subject which are not described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, including ordinary routine litigation incidental to the business, if all of such proceedings were determined adversely to the Company or the applicable Subsidiary, would not reasonably be expected to result in a Material Adverse Effect.

(ii) There are no contracts or other documents required under the Securities Act to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or filed as exhibits to the Registration Statement that are not described or filed as required. The statements made in the Registration Statement, the Pricing Disclosure Package and the Prospectus, insofar as they contain descriptions of the terms of the contracts and other documents so described and filed, are fair and accurate in all material respects. No other party to any such contract or other document has notified the Company or any Subsidiary that it will not render full performance as contemplated by the terms thereof, except as would not reasonably be expected to have a Material Adverse Effect.

(jj) The statements made in the Registration Statement, the Pricing Disclosure Package and the Prospectus under the captions “Risk Factors—Risks Related to the Development and Commercialization of Our Product Candidates,” “Risk Factors—Risks Related to Our Intellectual Property,” “Risk Factors—Risks Related to Legislation and Administrative Actions,” “Business—Intellectual Property,” “Business—Government regulation and product approval,” “Executive Compensation—Stock Incentive and Equity Compensation Plans,” “Related Person Transactions,” “Description of Capital Stock,” “Shares Eligible for Future Sale,” and “Material U.S. Federal Income Tax Considerations for Non-U.S. Holders” and the information in the Registration Statement under Items 14 and 15, insofar as they contain descriptions of the terms of statutes, rules, regulations or legal or governmental proceedings, or contracts or other documents, are fair and accurate in all material respects.

(kk) Each member of the Company Group carries, or is covered by, insurance from insurers of recognized financial responsibility in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries, except that the Company is in the process of procuring a replacement officer and director insurance policy appropriate for a public company. All policies of insurance of the Company Group are in full force and effect; each member of the Company Group is in compliance with the terms of such policies in all material respects; and no member of the Company Group has received written notice from any insurer or

 

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agent of such insurer that material capital improvements or other material expenditures are required or necessary to be made in order to continue such insurance; there are no claims by the Company or any Subsidiary under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; and the Company has no reason to believe that any member of the Company Group will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have a Material Adverse Effect.

(ll) No relationship, direct or indirect, exists between or among the Company or any Subsidiary, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any Subsidiary, on the other hand, that is required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus which is not so described.

(mm) No labor disturbance by or dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent that would reasonably be expected to have a Material Adverse Effect.

(nn) Neither the Company nor any Subsidiary (i) is in violation of its charter or by-laws (or similar organizational documents), (ii) is in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant, condition or other obligation contained in any indenture, mortgage, deed of trust, loan agreement, license or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, or (iii) is in violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over it or its property or assets and has not failed to obtain any license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, except in the case of clauses (ii) and (iii), to the extent any such default, violation or failure would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(oo) Each member of the Company Group (i) is, and at all times prior hereto was, in compliance with all laws, regulations, ordinances, rules, orders, judgments, decrees, permits or other legal requirements of any governmental authority, including without limitation any international, foreign, national, state, provincial, regional, or local authority, relating to pollution, the protection of human health or safety, the environment, or natural resources, or to use, handling, storage, manufacturing, transportation, treatment, discharge, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants (“ Environmental Laws ”) applicable to it, which compliance includes, without limitation, obtaining, maintaining and complying with all permits and authorizations and approvals required by Environmental Laws to conduct its business, and (ii) has not received notice or otherwise has knowledge of any actual or alleged violation of Environmental Laws, or of any actual or potential liability for or other obligation concerning the presence, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, except in the case of clause (i) or (ii) where such non-compliance, violation, liability, or other obligation would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as described in the Registration Statement,

 

14


the Pricing Disclosure Package and the Prospectus, (x) there are no proceedings that are pending, or to the Company’s knowledge, threatened, against any member of the Company Group under Environmental Laws in which a governmental authority is also a party, other than such proceedings regarding which the Company reasonably believes no monetary sanctions of $100,000 or more will be imposed, (y) the Company is not aware of any non-compliance with Environmental Laws, including any pending or proposed Environmental Laws, or liabilities or other obligations under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that would reasonably be expected to have a material adverse effect on the capital expenditures, earnings or competitive position of the Company Group, and (z) the Company does not anticipate any material expenditures by the Company Group required by applicable Environmental Laws.

(pp) Each member of the Company Group has filed all federal, state, local and foreign tax returns required to be filed through the date hereof, subject to permitted extensions, and has paid all taxes due except for such taxes, if any, that are being contested in good faith and as to which adequate reserves have been established on the books and records of the Company Group, and no tax deficiency has been determined adversely to any member of the Company Group, nor does the Company have any knowledge of any tax deficiencies that have been, or would reasonably be expected to be asserted against any member of the Company Group, that would, in the aggregate, reasonably be expected to have a Material Adverse Effect. There are no tax liens on any of the assets or properties of the Company Group.

(qq) (i) Each “employee benefit plan” (within the meaning of Section 3(3) of the Employee Retirement Security Act of 1974, as amended (“ ERISA ”)) for which the Company or any member of its “Controlled Group” (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the “ Code ”)) would have any liability (each a “ Plan ”) has been maintained in compliance in all material respects with its terms and with the requirements of all applicable statutes, rules and regulations, including ERISA and the Code; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan, excluding transactions effected pursuant to a statutory or administrative exemption; (iii) with respect to each Plan subject to Title IV of ERISA (A) no “reportable event” (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur that would reasonably be expected to result in a material loss to the Company, (B) no “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, has occurred or is reasonably expected to occur, (C) the fair market value of the assets under each Plan that is required to be funded exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan), and (D) neither the Company or any member of its Controlled Group has incurred, or reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the Pension Benefit Guaranty Corporation in the ordinary course and without default) in respect of a Plan (including a “multiemployer plan”, within the meaning of Section 4001(c)(3) of ERISA); and (iv) each Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

 

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(rr) The statistical and market-related data included in the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate in all material respects and, to the extent required, the Company has obtained the written consent to use such data from such sources.

(ss) The Company is not, and as of the applicable Delivery Date and, after giving effect to the offer and sale of the Stock and the application of the proceeds therefrom as described under “Use of Proceeds” in the most recent Preliminary Prospectus and the Prospectus, will not be, (i) an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “ Investment Company Act ”), and the rules and regulations of the Commission thereunder, or (ii) a “business development company” (as defined in Section 2(a)(48) of the Investment Company Act).

(tt) Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act, except for such rights as have been irrevocably waived prior to the execution and delivery of this Agreement, which waivers are in full force and effect.

(uu) Neither the Company nor any Subsidiary is a party to any contract, agreement or understanding with any person that would give rise to a valid claim against it or the Underwriters for a brokerage commission, finder’s fee or like payment to any person other than the Underwriters in connection with the offering and sale of the Stock.

(vv) The Company has not sold or issued any securities that would be integrated with the offering of the Stock contemplated by this Agreement pursuant to the Securities Act, the Securities Act Regulations or the interpretations thereof by the Commission.

(ww) The Company and, to the Company’s knowledge, its affiliates have not taken, directly or indirectly, any action designed to or that has constituted or that would reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the shares of the Stock or to result in a violation of Regulation M under the Exchange Act.

(xx) The Stock has been approved for listing, subject to official notice of issuance and evidence of satisfactory distribution on, The NASDAQ Global Market.

(yy) The Company has not distributed and, prior to the later to occur of any Delivery Date and completion of the distribution of the Stock, will not distribute any offering material in connection with the offering and sale of the Stock other than any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus to which the Representatives have consented in accordance with Section 1(l) or 5(i) and any Issuer Free Writing Prospectus set forth on Schedule V hereto.

 

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(zz) Neither the Company nor any Subsidiary is in violation of or has received notice of any violation with respect to any federal or state law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal or state wage and hour laws, nor any state law precluding the denial of credit due to the neighborhood in which a property is situated, the violation of any of which would reasonably be expected to have a Material Adverse Effect.

(aaa) Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any Subsidiary, has (i) used any Company or Subsidiary funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from Company funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or (iv) made any (A) bribe or (B) rebate, payoff, influence payment, kickback or other payment in violation of applicable law.

(bbb) The operations of the Company and each Subsidiary have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(ccc) Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person then subject to any U.S. sanctions administered by OFAC.

(ddd) There are no debt securities or preferred stock issued, or guaranteed by, the Company that are rated by a “nationally recognized statistical rating organization,” as such term is defined in Section 3(a)(62) of the Exchange Act.

(eee) To the Company’s knowledge, there are no affiliations or associations between (i) any member of FINRA and (ii) the Company or any of the Company’s officers, directors or 5% or greater security holders or any beneficial owner of the Company’s unregistered equity securities that were acquired at any time on or after the one hundred eightieth (180th) day immediately preceding the date the Registration Statement was initially filed with the Commission, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus or as otherwise disclosed in writing to the Representatives.

 

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(fff) No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement and the Pricing Disclosure Package has been made without a reasonable basis or has been disclosed other than in good faith.

Any certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Stock shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each Underwriter.

2. Purchase of the Stock by the Underwriters . On the basis of the representations, warranties and covenants contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell          shares of the Firm Stock to the several Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set forth opposite that Underwriter’s name in Schedule I hereto. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine.

In addition, the Company grants to the Underwriters an option to purchase up to          additional shares of Option Stock. Such option is exercisable in the event that the Underwriters sell more shares of Common Stock than the number of shares of Firm Stock in the offering and as set forth in Section 4 hereof. Each Underwriter agrees, severally and not jointly, to purchase the number of shares of Option Stock (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of shares of Option Stock to be sold on such Delivery Date as the number of shares of Firm Stock set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of shares of Firm Stock.

The purchase price payable by the Underwriters for both the Firm Stock and any Option Stock is $[        ] 1 per share.

The Company is not obligated to deliver any of the Firm Stock or Option Stock to be delivered on the applicable Delivery Date, except upon payment for all such Stock to be purchased on such Delivery Date as provided herein.

3. Offering of Stock by the Underwriters . Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions to be set forth in the Prospectus.

4. Delivery of and Payment for the Stock . Delivery of and payment for the Firm Stock shall be made at 10:00 A.M., New York City time, on the third (fourth, if the pricing occurs after 4:30 P.M. (New York City time) on any given day) business day following the date of this Agreement (unless postponed in accordance with the provisions of Section 9) or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the “ Initial Delivery Date ”. Delivery

 

1  

93% of the public offering price.

 

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of the Firm Stock shall be made to the Representatives for the account of each Underwriter against payment by the several Underwriters through the Representatives of the aggregate purchase price of the Firm Stock being sold by the Company to or upon the order of the Company by wire transfer in immediately available funds to the accounts specified by the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. The Company shall deliver the Firm Stock through the facilities of The Depository Trust Company (“ DTC ”) unless the Representatives shall otherwise instruct.

The option granted in Section 2 will expire 30 days after the date of this Agreement and may be exercised in whole or from time to time in part by written notice being given to the Company by the Representatives; provided that if such date falls on a day that is not a business day, the option granted in Section 2 will expire on the next succeeding business day. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representatives, when the shares of Option Stock are to be delivered; provided, however , that this date and time shall not be earlier than the Initial Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. Each date and time that shares of Option Stock are delivered is sometimes referred to as an “ Option Stock Delivery Date ”, and the Initial Delivery Date and any Option Stock Delivery Date are sometimes each referred to as a “ Delivery Date ”.

Delivery of the Option Stock by the Company and payment for the Option Stock by the several Underwriters through the Representatives shall be made at 10:00 A.M., New York City time, on the date specified in the corresponding notice described in the preceding paragraph or at such other date or place as shall be determined by agreement between the Representatives and the Company. On the applicable Option Stock Delivery Date, the Company shall deliver or cause to be delivered the Option Stock to the Representatives for the account of each Underwriter against payment by the several Underwriters through the Representatives of the aggregate purchase price of the Option Stock being sold by the Company to or upon the order of the Company by wire transfer in immediately available funds to the accounts specified by the Company. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. The Company shall deliver the Option Stock through the facilities of DTC unless the Representatives shall otherwise instruct.

5. Further Agreements of the Company and the Underwriters .

(a) The Company, subject to Section 5(b), will comply with the requirements of Rule 430A, and will notify the Representatives as soon as practicable, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall have become effective or any amendment or supplement to the Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending

 

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the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the offering of the Stock. The Company will effect all filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems reasonably necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will use its reasonable best efforts to prevent the issuance of any stop order, or any other order for such prevention or suspension and, if any such order is issued, to obtain the lifting thereof as soon as practicable.

(b) The Company will comply with the Securities Act and the Securities Act Regulations so as to permit the completion of the distribution of the Stock as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Stock is (or, but for the exception afforded by Rule 172 of the Securities Act (“ Rule 172 ”), would be) required by the Securities Act to be delivered in connection with sales of the Stock, any event shall occur or condition shall exist as a result of which it is necessary, in the reasonable opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representatives notice of such event, (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use thereof, furnish the Representatives with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representatives or counsel for the Underwriters shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.

(c) The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto

 

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(without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(d) The Company has delivered or will deliver to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requests, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Stock is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(e) The Company will use its reasonable best efforts, in cooperation with the Underwriters, to qualify the Stock for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representatives may reasonably designate and to maintain such qualifications in effect so long as required to complete the distribution of the Stock; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in any jurisdiction in which it is not otherwise so subject.

(f) The Company will timely file such reports pursuant to the Exchange Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the Securities Act.

(g) The Company will use its reasonable best efforts to effect the listing of the Common Stock (including the Stock) on The NASDAQ Global Market.

(h) The Company, during the period when a Prospectus relating to the Stock is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and the rules and regulations promulgated thereunder. Additionally, the Company shall report the use of proceeds from the issuance of the Stock as may be required under Rule 463 under the Securities Act.

(i) The Company agrees that, unless it obtains the prior written consent of the Representatives, it will not make any offer relating to the Stock that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representatives will be deemed to have consented to the Issuer Free Writing Prospectuses listed on Schedule V hereto and any “road show for an offering that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been

 

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reviewed by the Representatives. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representatives as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or conflicts with the information contained at that subsequent time in the Registration Statement, the then-most recent Preliminary Prospectus or the Prospectus, and not superseded or modified at that subsequent time, or included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives, will not thereafter use such Free Writing Prospectus and shall promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission unless such conflict, untrue statement or omission shall have been superseded or modified by the information contained at that subsequent time in the Registration Statement, the then-most recent Preliminary Prospectus or the Prospectus.

(j) If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives, will not thereafter use such Written Testing-the-Waters Communication and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission unless such untrue statement or omission shall have been superseded or modified by the information contained at that subsequent time in the Registration Statement, the then-most recent Preliminary Prospectus or the Prospectus.

(k) For a period commencing on the date hereof and ending on the 180 th day after the date of the Prospectus (the “ Lock-Up Period ”), the Company shall not, directly or indirectly, (A) offer for sale, sell, pledge, or otherwise dispose (or enter into any transaction or device that is designed to, or would reasonably be expected to, result in the disposition by any person at any time in the future) any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (other than the Stock and securities issued pursuant to employee benefit plans, stock option plans or other equity compensation plans or arrangements existing on the date hereof or pursuant to currently outstanding options, warrants or rights not issued under one of those plans or arrangements), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the sale or grant of securities pursuant to employee benefit plans, stock option plans or other equity compensation plans or arrangements existing on the date hereof), (B) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise (other than the sale or grant

 

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of securities pursuant to employee benefit plans, stock option plans or other equity compensation plans or arrangements existing on the date hereof and disclosed in the Pricing Disclosure Package and the Prospectus), (C) file or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of Common Stock or securities convertible, exercisable or exchangeable into Common Stock or any other securities of the Company (other than any registration statement on Form S-8 or any successor form thereto), or (D) publicly disclose the intention to do any of the foregoing (other than actions permitted hereby), in each case without the prior written consent of the Representatives, on behalf of the Underwriters, and to request each officer, director and stockholder of the Company set forth on Schedule II hereto to furnish to the Representatives, prior to the Initial Delivery Date, a letter or letters, substantially in the form of Exhibit A hereto (the “ Lock-Up Agreements ”).

(l) If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a Lock-Up Agreement (a form of release or waiver is attached hereto as Annex A ) for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by issuing a press release substantially in the form of Exhibit B hereto, and containing such other lawful information as the Representatives may require with respect to the circumstances of the release or waiver and/or the identity of the officer(s) and/or director(s) with respect to which the release or waiver applies, through a major news service at least two business days before the effective date of the release or waiver.

(m) The Company shall apply the net proceeds from the sale of the Stock being sold by the Company substantially in accordance with the description as set forth in the Prospectus under the caption “Use of Proceeds.”

(n) If the Company elects to rely upon Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act by 10:00 P.M., Eastern time, on the date of this Agreement, and the Company shall at the time of filing pay the Commission the filing fee for the Rule 462(b) Registration Statement or, if such fee cannot be paid at such time, as promptly thereafter as practicable and in any event within one business day.

(o) The Company shall promptly notify the Representatives if the Company ceases to be an Emerging Growth Company at any time prior to the later of (A) the time when a prospectus relating to the offering or sale of the Stock is not required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) and (B) completion of the Lock-Up Period.

(p) The Company shall not take, and shall direct its affiliates not to take, directly or indirectly, any action designed to or that has constituted or that reasonably would be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the Stock.

(q) The Company shall do and perform all things required or necessary to be done and performed under this Agreement by it prior to each Delivery Date, and shall use commercially reasonable efforts to cause all conditions precedent to the Underwriters’ obligations hereunder to purchase the Stock to be satisfied.

 

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(r) Each Underwriter, severally and not jointly, agrees that, unless it obtains the prior written consent of the Company, it will not make any offer relating to the Stock that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Securities Act, required to be filed with the Commission, nor shall it use any “issuer information,” as defined in Rule 433 under the Securities Act, in a manner that would require the Company to make a filing under the Securities Act or the Securities Act Regulations. “ Permitted Issuer Information ” shall mean any such “issuer information” the use of which by an Underwriter shall have been consented to in writing by the Company. The Company consents to the use by any Underwriter of a free writing prospectus that (a) is not an “issuer free writing prospectus” as defined in Rule 433 under the Securities Act, and (b) contains only information that describes the final terms of the Stock.

6. Expenses . The Company agrees, whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, to pay all expenses, costs, fees and taxes incident to and in connection with (a) the authorization, issuance, sale and delivery of the Stock and any stamp duties or other taxes payable in that connection, and the preparation and printing of certificates for the Stock; (b) the preparation, printing and filing under the Securities Act of the Registration Statement (including any exhibits thereto), any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, and any amendment or supplement thereto; (c) the distribution of the Registration Statement (including any exhibits thereto), any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, and any amendment or supplement thereto, all as provided in this Agreement; (d) the production and distribution of this Agreement, any supplemental agreement among Underwriters, and any other related documents in connection with the offering, purchase, sale and delivery of the Stock; (e) any required review by FINRA of the terms of sale of the Stock (including related reasonable and documented fees and expenses of counsel to the Underwriters in an amount that is not greater than $20,000); (f) the listing of the Stock on The NASDAQ Global Market and/or any other exchange; (g) the qualification of the Stock under the securities laws of the several jurisdictions as provided in Section 5(e) and the preparation, printing and distribution of a Blue Sky Memorandum (including related reasonable and documented fees and expenses of counsel to the Underwriters in an amount that is not greater than $15,000); (h) the preparation, printing and distribution of one or more versions of the Preliminary Prospectus and the Prospectus for distribution in Canada, including in the form of a Canadian “wrapper” (including related reasonable and documented fees and expenses of counsel, including any Canadian counsel, to the Underwriters in an amount that is not greater than $10,000); (i) the investor presentations on any “road show” or any Testing-the-Waters Communication, undertaken in connection with the marketing of the Stock, including, without limitation, expenses associated with any electronic road show, travel and lodging expenses of the representatives and officers of the Company (but specifically excluding the travel and lodging expenses of any representatives of the Underwriters) and one-half of the cost of any aircraft chartered in connection with the road show with the prior written consent of the Company; and (j) all other costs and expenses incident to the performance of the obligations of the Company

 

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under this Agreement; provided that, except as provided in this Section 6 and in Section 11, the Underwriters shall pay their own costs and expenses, including travel and lodging of their representatives, the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters (which shall be limited to a customary “tombstone” advertisement). For the avoidance of doubt, neither the Representatives nor any other Underwriter is or has been authorized to incur or pay on behalf of the Company any expenses, costs, fees and taxes without the prior consent of the Company.

7. Conditions of Underwriters’ Obligations . The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions:

(a) The Registration Statement, including any Rule 462(b) Registration Statement, shall have become effective and, at such Delivery Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus shall have been issued and no proceedings for any of those purposes shall have been instituted or shall be pending or, to the Company’s knowledge, threatened; and the Company shall have complied with each request (if any) from the Commission for additional information. The Prospectus shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.

(b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement, the Prospectus or the Pricing Disclosure Package, or any amendment or supplement thereto, contains an untrue statement of a fact which, in the opinion of counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary in order to make the statements therein (in the case of the Prospectus or the Pricing Disclosure Package or any amendment or supplement thereto, in the light of the circumstances under which they were made) not misleading.

(c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement, the Prospectus, the Pricing Disclosure Package and any Issuer Free Writing Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information (other than additional opinions of counsel) that they may reasonably request to enable them to pass upon such matters.

 

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(d) Foley Hoag LLP shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably acceptable to the Representatives.

(e) Sunstein Kann Murphy & Timbers LLP shall have furnished to the Representatives its written opinion, as intellectual property counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably acceptable to the Representatives.

(f) The Representatives shall have received from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and the Pricing Disclosure Package and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents (other than additional opinions of counsel) as they reasonably request for the purpose of enabling them to pass upon such matters.

(g) At the time of execution of this Agreement, the Representatives shall have received from Marcum LLP a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that Marcum LLP is an independent registered public accounting firm within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, and (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the most recent Preliminary Prospectus, as of a date not more than two days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants’ “comfort letters” to underwriters in connection with registered public offerings.

(h) With respect to the letter of Marcum LLP referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the “ initial letter ”), the Company shall have furnished to the Representatives a letter (the “ bring-down letter ”) of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than two days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter, and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter.

(i) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of each of its Chief Executive Officer and its Chief Financial Officer on behalf of the Company stating:

(i) That the representations and warranties of the Company in Section 1 are true and correct on and as of such Delivery Date, and the Company has complied in all material respects with all its agreements contained herein and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Delivery Date;

 

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(ii) That no stop order suspending the effectiveness of the Registration Statement has been issued; and no proceedings or examination for that purpose have been instituted or, to the knowledge of such officer, threatened;

(iii) That he or she has examined the Registration Statement, the Prospectus and the Pricing Disclosure Package, and, in his or her opinion, (A) (1) the Registration Statement, as of the Effective Date and on the applicable Delivery Date did not contain any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (2) the Prospectus, as of its date and on the applicable Delivery Date did not and does not contain any untrue statement of a material fact and did not and does not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (3) the Pricing Disclosure Package, as of the Applicable Time, did not contain any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (B) since the Effective Date, no event has occurred that should have been set forth in a supplement or amendment to the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus and that has not been so set forth; and

(iv) To the effect of Section 7(j) ( provided that no representation with respect to the judgment of the Representatives need be made).

(j) Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (i) neither the Company nor any Subsidiary shall have sustained, since the date of the latest balance sheet included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, or (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), results of operations, stockholders’ equity, assets, properties, management, business or prospects of the Company and the Subsidiaries taken as a whole, the effect of which, in any such case described in clause (i) or (ii), is, individually or in the aggregate, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus.

(k) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) (A) trading in securities generally on the New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market, or (B) trading in any securities of the Company on any exchange,

 

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shall have been suspended or materially limited or the settlement of such trading generally shall have been materially disrupted or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a general moratorium on commercial banking activities shall have been declared by federal or New York state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States, or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions, including, without limitation, as a result of terrorist activities after the date hereof (or the effect of international conditions on the financial markets in the United States shall be such), as to make it, in the judgment of the Representatives, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus.

(l) The NASDAQ Stock Market, Inc. shall have approved the Stock for listing on The NASDAQ Global Market, subject only to official notice of issuance and evidence of satisfactory distribution.

(m) The Lock-Up Agreements between the Representatives and the officers, directors and stockholders of the Company set forth on Schedule II , delivered to the Representatives on or before the date of this Agreement, shall be in full force and effect on such Delivery Date.

(n) FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering and the Stock.

(o) The Lilly Purchase Agreement shall be in full force and effect, and arrangements reasonably satisfactory to the Representatives shall have been made such that the Private Placement will close simultaneously with the Initial Delivery Date.

(p) On or prior to each Delivery Date, the Company shall have furnished to the Underwriters such further certificates and documents (other than additional opinions of counsel) as the Representatives may reasonably request.

All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.

8. Indemnification and Contribution .

(a) The Company hereby agrees to indemnify and hold harmless each Underwriter, its affiliates, directors, officers and employees and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, affiliate, director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any

 

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untrue statement or alleged untrue statement of a material fact contained in (A) any Preliminary Prospectus, the Pricing Disclosure Package, the Registration Statement, the Prospectus or in any amendment or supplement thereto, (B) any Issuer Free Writing Prospectus or in any amendment or supplement thereto, (C) any Permitted Issuer Information used or referred to in accordance with this Agreement in any “free writing prospectus” (as defined in Rule 405 under the Securities Act) used or referred to by any Underwriter, (D) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Stock, including any “road show” (as defined in Rule 433 under the Securities Act) not constituting an Issuer Free Writing Prospectus and any Written Testing-the-Waters Communication (“ Marketing Materials ”), or (E) any Blue Sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company for use therein) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a “ Blue Sky Application ”) or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Pricing Disclosure Package, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Permitted Issuer Information, any Marketing Materials or any Blue Sky Application, any material fact required to be stated therein or necessary in order to make the statements therein (except in the case of the Registration Statement, in the light of the circumstances under which they were made) not misleading, and shall reimburse each Underwriter and each such affiliate, director, officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, affiliate, director, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred, subject to delivery to the Company of reasonable documentation thereof; provided , however , that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Pricing Disclosure Package, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement to any of the foregoing or in any Permitted Issuer Information, any Marketing Materials or any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information consists solely of the information specified in Section 8(e). The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any affiliate, director, officer, employee or controlling person of that Underwriter.

(b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its directors, officers and employees, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which the Company or any such director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Pricing

 

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Disclosure Package, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement to any of the foregoing or in any Marketing Materials or Blue Sky Application, or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Pricing Disclosure Package, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement to any of the foregoing or in any Marketing Materials or Blue Sky Application, any material fact required to be stated therein or necessary in order to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, which information is limited to the information set forth in Section 8(e). The foregoing indemnity agreement is in addition to any liability that any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person.

(c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided , however , that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced (through the forfeiture of substantive rights and defenses) by such failure and, provided , further , that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however , that the indemnified party shall have the right to employ counsel (limited to one firm plus, for each relevant jurisdiction, one local counsel firm, if necessary) to represent jointly the indemnified party and those other indemnified parties and their respective directors, officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought under this Section 8 if (i) the indemnified party and the indemnifying party shall have so mutually agreed; (ii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to the indemnified party; (iii) the indemnified party and its directors, officers, employees and controlling persons shall have reasonably concluded that there may be legal defenses available to them that are different from or in addition to those available to the indemnifying party; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the indemnified parties or their respective directors, officers, employees or controlling persons, on the one hand, and the indemnifying party, on the other hand, and representation of both sets of parties by the same counsel would be inappropriate due to actual or potential differing interests between them, and in any such event the fees and expenses of such separate counsel shall be paid by the indemnifying party. No indemnifying

 

30


party shall (x) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld, delayed or conditioned), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and does not include a statement as to, or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party, or (y) be liable for any settlement, compromise or consent judgment of any such action effected without its written consent (which consent shall not be unreasonably withheld, delayed or conditioned), but if settled with the written consent of the indemnifying party or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment to the extent set forth in this Section 8. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(a) or (b) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request or disputed in good faith the indemnified party’s entitlement to such reimbursement prior to the date of such settlement.

(d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the offering of the Stock, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not

 

31


be just and equitable if contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8(d) shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Stock exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint.

(e) The Underwriters severally confirm and the Company acknowledges and agrees that the following statements are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in any Preliminary Prospectus, the Pricing Disclosure Package, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement to any of the foregoing or in any Marketing Materials: (i) the sentence on the cover page of the Prospectus regarding delivery of shares by the Underwriters (and corresponding sentences in each Preliminary Prospectus, the Pricing Disclosure Package and the Registration Statement), and (ii) the fourth, sixth, fifteenth, seventeenth, nineteenth (excluding the information in the bulleted subparagraphs, but including the sixth sentence of the second bulleted subparagraph), twenty-third, twenty-fourth (the second sentence only) and twenty-fifth (the first sentence only and only with respect to Roth Capital Partners, LLC) paragraphs appearing under the caption “Underwriting” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

9. Defaulting Underwriters .

(a) If, on any Delivery Date, any Underwriter defaults in its obligations to purchase the Stock that it has agreed to purchase under this Agreement, the remaining non-defaulting Underwriters may in their discretion arrange for the purchase of such Stock by the non-defaulting Underwriters or other persons satisfactory to the Company on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Stock, then the Company shall be entitled to a further period of 36 hours within which to procure other persons reasonably satisfactory to the non-defaulting Underwriters to purchase such Stock on such terms. In the event that within the respective prescribed periods, the non-defaulting Underwriters notify the Company that they have so arranged for the purchase of such Stock, or the Company notifies the non-defaulting Underwriters that it has so arranged for the purchase of such Stock, either the non-defaulting Underwriters or the Company may postpone such Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company

 

32


or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement, the Prospectus or any such other document or arrangement that effects any such changes. As used in this Agreement, the term “Underwriter” includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule I hereto that, pursuant to this Section 9, purchases Stock that a defaulting Underwriter agreed but failed to purchase.

(b) If, after giving effect to any arrangements for the purchase of the Stock of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the total number of shares of the Stock that remains unpurchased does not exceed one-eleventh of the total number of shares of all the Stock, then the Company shall have the right to require each non-defaulting Underwriter to purchase the total number of shares of Stock that such Underwriter agreed to purchase hereunder plus such Underwriter’s pro rata share (based on the total number of shares of Stock that such Underwriter agreed to purchase hereunder) of the Stock of such defaulting Underwriter or Underwriters for which such arrangements have not been made; provided that the non-defaulting Underwriters shall not be obligated to purchase more than 110% of the total number of shares of Stock that it agreed to purchase on such Delivery Date pursuant to the terms of Section 2.

(c) If, after giving effect to any arrangements for the purchase of the Stock of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the total number of shares of Stock that remains unpurchased exceeds one-eleventh of the total number of shares of all the Stock, or if the Company shall not exercise the right described in paragraph (b) above, then this Agreement or, with respect to any Option Stock Delivery Date, the obligation of the Underwriters to purchase Stock on the Option Stock Delivery Date, shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 9 shall be without liability on the part of the Company, except that the Company will continue to be liable for the payment of expenses as set forth in Sections 6 and 11 and except that the provisions of Section 9 shall not terminate and shall remain in effect.

(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company or any non-defaulting Underwriter for damages caused by its default.

10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(j) and 7(k) shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement.

11. Reimbursement of Underwriters’ Expenses. If (a) the Company shall fail to tender the Stock for delivery to the Underwriters for any reason, or (b) the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel for the Underwriters) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company

 

33


shall pay the full amount thereof to the Representatives, subject to the delivery to the Company of reasonable documentation thereof. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses.

12. Research Analyst Independence. The Company acknowledges that the Underwriters’ research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such Underwriters’ research analysts may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company and/or the offering that differ from the views of their respective investment banking divisions. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by their independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company by such Underwriters’ investment banking divisions. The Company acknowledges that each of the Underwriters is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies that may be the subject of the transactions contemplated by this Agreement.

13. No Fiduciary Duty . The Company acknowledges and agrees that in connection with this offering, the sale of the Stock or any other services the Underwriters may be deemed to be providing hereunder, notwithstanding any preexisting relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by the Underwriters: (a) no fiduciary or agency relationship between the Company and any other person, on the one hand, and the Underwriters, on the other, exists; (b) the Underwriters are not acting as advisors, expert or otherwise, to the Company, including, without limitation, with respect to the determination of the public offering price of the Stock, and such relationship between the Company, on the one hand, and the Underwriters, on the other, is entirely and solely commercial, based on arms-length negotiations; (c) any duties and obligations that the Underwriters may have to the Company shall be limited to those duties and obligations specifically stated herein; and (d) the Underwriters and their respective affiliates may have interests that differ from those of the Company. The Company hereby waives any claims that the Company may have against the Underwriters with respect to any breach of fiduciary duty in connection with this offering.

14. Notices, etc . All statements, requests, notices and agreements hereunder shall be in writing, and:

(a) if to the Underwriters, shall be delivered or sent by mail, nationally recognized overnight courier service or facsimile transmission to Ladenburg Thalmann & Co. Inc., 570 Lexington Avenue, 11 th Floor, New York, New York 10022, Attention: Equity Capital Markets (Fax: 646-417-6094) and Roth Capital Partners, LLC, 888 San Clemente Drive, Newport Beach, California 92660, Attention: Equity Capital Markets (Fax: 949-720-7227), with a copy to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., 666 Third Avenue, New York, New York 10017, Attention: Ivan K. Blumenthal (Fax: 212-983-3115); and

 

34


(b) if to the Company, shall be delivered or sent by mail, nationally recognized overnight courier service or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Chief Executive Officer (Fax: 510-742-6282), with a copy to Foley Hoag LLP, Seaport West, 155 Seaport Boulevard, Boston, Massachusetts 02210, Attention: Jeffrey L. Quillen, Esq. (Fax: 617-832-7000).

Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Representatives. Each of the Representatives and the Company may update the address for notices to the Underwriters and the Company, respectively, by notice given in accordance with this Section 14.

15. Persons Entitled to Benefit of Agreement . This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (a) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the directors, officers and employees of the Underwriters and each person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act, and (b) the indemnity agreement of the Underwriters contained in Section 8 of this Agreement shall be deemed to be for the benefit of the directors, officers and employees of the Company and any person controlling the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 15, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.

16. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them.

17. Definition of the Terms “Business Day”, “Affiliate” and “Subsidiary” . For purposes of this Agreement, (a) “ business day ” means each Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close, and (b) “ affiliate ” and “ subsidiary ” have the meanings set forth in Rule 405 under the Securities Act.

18. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of laws principles (other than Section 5-1401 of the General Obligations Law).

19. Waiver of Jury Trial . The Company and the Underwriters hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

35


20. Counterparts. This Agreement may be executed in one or more counterparts, including by facsimile or other electronic transmission, and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument.

21. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

 

36


If the foregoing correctly sets forth the agreement between the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below.

 

Very truly yours,
Z OSANO P HARMA C ORPORATION
By:  

 

  Name:  
  Title:  

 

Accepted:
For themselves and as Representatives of the several Underwriters named in Schedule I hereto
By:   L ADENBURG T HALMANN & C O . INC.
By:  

 

  Name:  
  Title:  
By:   R OTH C APITAL P ARTNERS , LLC
By:  

 

  Name:  
  Title:  

 

37


SCHEDULE I

 

Underwriters

   Number of Shares of
Firm Stock

Ladenburg Thalmann & Co. Inc.

  

Roth Capital Partners, LLC

  

Total

  
  

 


SCHEDULE II

PERSONS DELIVERING LOCK-UP AGREEMENTS

Directors and Officers

Bruce D. Steel

M. James Barrett

Troy Wilson

Kleanthis G. Xanthopoulos

Vikram Lamba

Peter E. Daddona

Nandan Oza

Winnie W. Tso

Stockholders and Other Persons

Thorsten von Stein

Zander Strange

BMV Direct SOTRS LP

BMV Direct SO LP

New Enterprise Associates 12, Limited Partnership

NEA Ventures 2006, Limited Partnership

ProQuest Investments IV, L.P.

ProQuest Management LLC

Nomura Phase4 Ventures L.P.

Hercules Technology Growth Capital


SCHEDULE III

ORALLY CONVEYED PRICING INFORMATION

1. Price per share to the public: $[            ]

2. Firm Stock offered:             shares

3. Option Stock offered:          shares


ISSUER FREE WRITING PROSPECTUSES

INCLUDED IN THE PRICING DISCLOSURE PACKAGE

Free writing prospectus filed with the Commission on July 28, 2104 consisting of an e-mail, dated July 26, 2014, from Vikram Lamba to a potential investor, with attachments.

[TO BE UPDATED]


SCHEDULE IV

ISSUER FREE WRITING PROSPECTUSES – ROAD SHOW MATERIALS

Free writing prospectus filed with the Commission on July 28, 2014 consisting of an e-mail, dated July 26, 2014, from Vikram Lamba to a potential investor, with attachments.

[TO BE UPDATED]


SCHEDULE V

ISSUER FREE WRITING PROSPECTUS

Free writing prospectus filed with the Commission on July 28, 2014 consisting of an e-mail, dated July 26, 2014, from Vikram Lamba to a potential investor, with attachments.

[TO BE UPDATED]


SCHEDULE VI

WRITTEN TESTING-THE-WATERS COMMUNICATIONS

(1) The 38-slide investor presentation entitled “Zosano Pharma [with company logo] – Better Therapeutics Through Innovative Delivery – Investor Presentation – Confidential – April 2014”

Testing-the-Waters Communications between April 17, 2014 and December 9, 2014 with the consent of the representatives of a former proposed underwriting syndicate that included one or more of the Representatives.

[TO BE UPDATED]


EXHIBIT A

FORM OF LOCK-UP LETTER AGREEMENT

L ADENBURG T HALMANN  & C O . INC.

570 Lexington Avenue, 11th Floor

New York, NY 10022

R OTH C APITAL P ARTNERS , LLC

888 San Clemente Drive

Newport Beach, CA 92660

As Representatives of the several

  Underwriters named in Schedule I attached

  to the Underwriting Agreement

Ladies and Gentlemen:

The undersigned understands that you and certain other firms (the “ Underwriters ”) propose to enter into an Underwriting Agreement (the “ Underwriting Agreement ”) providing for the purchase by the Underwriters of shares (the “ Stock ”) of Common Stock, par value $0.0001 per share (the “ Common Stock ”), of Zosano Pharma Corporation, a Delaware corporation (the “ Company ”), and that the Underwriters propose to reoffer the Stock to the public (the “ Offering ”).

In consideration of the execution of the Underwriting Agreement by you, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Ladenburg Thalmann & Co. Inc. and Roth Capital Partners, LLC (together, the “ Representatives ”), on behalf of the Underwriters, the undersigned will not, directly or indirectly: (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or would reasonably be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by the undersigned in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) and shares of Common Stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for Common Stock; (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise; (3) make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock or any other securities of the Company (other than (i) registration statements, including amendment thereto, for the Offering, and (ii)

 

Exhibit A-1


registration statements on Form S-8, including amendment thereto, for the issuance by the Company of shares of Common Stock); or (4) publicly disclose the intention to do any of the foregoing (other than with respect to registration statements, including any amendments thereto, excluded from the restrictions set forth in the foregoing clause (3)) for a period commencing on the date hereof and ending on the 180th day after the date of the final prospectus relating to the Offering (such 180-day period, the “ Lock-Up Period ”).

The foregoing paragraph shall not apply to:

(a) bona fide gifts, sales or other dispositions or distributions, in each case that are made exclusively between and among the undersigned, members of the undersigned’s family (including trusts, partnerships, corporations, limited liability companies and other tax and estate planning vehicles, in each case owned by, or held for the benefit of, the undersigned, the undersigned’s family and charitable beneficiaries), the undersigned’s partners (if a partnership), members (if a limited liability company) or stockholders (if a corporation) and affiliates of the undersigned (including funds or other entities managed by the same manager), and transfers or other dispositions by will, other testamentary document or intestate succession; provided that it shall be a condition to any transfer pursuant to this clause (a) that (i) the transferee/donee agrees to be bound by the terms of this Lock-Up Letter Agreement (including, without limitation, the restrictions set forth in the preceding sentence) to the same extent as if the transferee/donee were a party hereto, (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), and the Exchange Act) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the Lock-Up Period (except that this clause (ii) shall not apply to transfers or other dispositions by will, other testamentary document or intestate succession), and (iii) the undersigned promptly notifies the Representatives of the transfer or disposition;

(b) the exercise of warrants, the exercise of stock options granted pursuant to the Company’s stock option/incentive plans or otherwise, or the conversion of securities, in each case outstanding on the date of the prospectus relating to the Offering; provided , that the restrictions set forth herein shall apply to shares of Common Stock issued upon such exercise or conversion;

(c) the establishment of any contract, instruction or plan intended to satisfy all of the requirements of Rule 10b5-1 (a “ Rule 10b5-1 Plan ”) under the Exchange Act; provided , however , that no sales of Common Stock or securities convertible into, or exchangeable or exercisable for, Common Stock, shall be made pursuant to a Rule 10b5-1 Plan prior to the expiration of the Lock-Up Period; provided further , that the Company is not required to report the establishment of such Rule 10b5-1 Plan in any public report or filing with the Securities and Exchange Commission (the “ Commission ”) under the Exchange Act during the Lock-Up Period and does not otherwise voluntarily effect any such public filing or report regarding such Rule 10b5-1 Plan during the Lock-Up Period;

(d) any forfeiture, sale or other transfer to the Company in connection with the termination of the undersigned’s employment with or services to the Company; and

(e) the transfer of shares to the Company to satisfy withholding taxes for any equity award granted prior to the date of the prospectus relating to the Offering, such as upon exercise, vesting, lapse of substantial risk of forfeiture, or other similar taxable event, in each case on a “cashless” or “net exercise” basis.

 

Exhibit A-2


If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing provisions shall be equally applicable to any issuer-directed Stock (as referred to in FINRA Rule 5131(d)(2)(A)) that the undersigned may purchase in the Offering pursuant to an allocation of Stock that is directed in writing by the Company, (ii) the Representatives agree on behalf of the Underwriters that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, the Representatives will notify the Company of the impending release or waiver, and (iii) the Company will undertake in the Underwriting Agreement to announce the impending release or waiver by issuing a press release through a major news service (as referred to in FINRA Rule 5131(d)(2)(B)) at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives on behalf of the Underwriters hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if both (a) the release or waiver is effected solely to permit a transfer not for consideration, and (b) the transferee has agreed in writing to be bound by the same terms described in this letter that are applicable to the transferor, to the extent and for the duration that such terms remain in effect at the time of the transfer.

In furtherance of the foregoing, the Company and its transfer agent are hereby authorized to (a) decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement and (b) place legends on and issue stop transfer instructions with respect to any shares of Common Stock subject to this Lock-Up Letter Agreement.

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement. The undersigned hereby waives any applicable notice requirement concerning the Company’s intention to file the prospectus and sell Stock thereunder.

It is understood that, if the Company notifies the Underwriters in writing that it does not intend to proceed with the Offering, the undersigned will be released from its obligations under this Lock-Up Letter Agreement.

The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. The undersigned further understands that this Lock-Up Letter Agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.

Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters and there is no assurance that the Company and the Underwriters will enter into an Underwriting Agreement with respect to the Offering or that the Offering will be consummated.

 

Exhibit A-3


This Lock-Up Letter Agreement shall automatically terminate upon the earlier to occur, if any, of (1) the termination of the Underwriting Agreement before the sale of any Stock to the Underwriters, (2) March 31, 2015, in the event that the Underwriting Agreement has not been executed by that date or (3) the withdrawal of the registration statement filed with the Commission with respect to the Offering.

This Lock-Up Letter Agreement and any claim, controversy or dispute arising under or related to it, shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its principles of conflicts of laws.

[Signature page follows]

 

Exhibit A-4


The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.

 

Very truly yours,

 

Name:

Dated:                         

 

Exhibit A-5


EXHIBIT B

Form of Press Release

Zosano Pharma Corporation

[date]

Zosano Pharma Corporation (the “ Company ”) announced today that Ladenburg Thalmann and Roth Capital Partners, the joint book-running managers in the Company’s recent public sale of          shares of common stock, are [waiving] [releasing] a lock-up restriction with respect to [        ] shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on [ insert date ], and the shares may be sold or otherwise disposed of on or after such date.

This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.

 

Exhibit B-1


ANNEX A

Form of Waiver of Lock-up

Zosano Pharma Corporation

Public Offering of Common Stock

[ Insert date ]

[ Insert Name and Address of

Officer or Director

Requesting Waiver ]

Dear Mr./Ms. [ Insert Name ]:

This letter is being delivered to you in connection with the offering by Zosano Pharma Corporation (the “ Company ”) of          shares of common stock, $0.0001 par value (the “ Common Stock ”), of the Company and the lock-up letter agreement dated [ insert date ] (the “ Lock-Up Agreement ”), executed by you in connection with such offering, and your request for a [waiver] [release] dated [ insert date ] with respect to          shares of Common Stock (the “ Shares ”).

Ladenburg Thalmann & Co. Inc. and Roth Capital Partners, LLC, on behalf of the Underwriters (as defined in the Lock-Up Agreement), hereby agree (subject to the proviso below) to [waive] [release] the transfer restrictions set forth in the Lock-Up Agreement, but only with respect to the Shares, effective [ insert date ] (the “ Anticipated Effective Date ”); provided, however, that such [waiver] [release] shall not take effect until (and in any case not before the Anticipated Effective Date) two business days after the Company shall have announced the impending [waiver] [release] by issuing a press release through a major news service. This letter will serve as notice to the Company of the impending [waiver] [release].

Except as expressly [waived] [released] hereby, the Lock-Up Agreement shall remain in full force and effect.

Yours very truly,

 

cc: Zosano Pharma Corporation

 

Annex A

Exhibit 4.10

THE SECURITIES REPRESENTED BY THE NOTES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT AND THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION AND FILING IN ALL SUCH JURISDICTIONS.

THE HOLDERS OF THE NOTES ACKNOWLEDGE AND UNDERSTAND THAT THE NOTES ARE SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JUNE 3, 2014 AMONG HERCULES TECHNOLOGY GROWTH CAPITAL, INC., THE COMPANY, ZOSANO PHARMA, INC. (NOW NAMED ZP OPCO, INC.) AND THE PURCHASERS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.

SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT AND

8% SUBORDINATED CONVERTIBLE PROMISSORY NOTES

This Second Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes (this “ Amendment ”) is executed as of September 4, 2014 by and among Zosano Pharma Corporation, a Delaware corporation formerly named ZP Holdings, Inc. (the “ Company ”), and the Requisite Noteholders whose signatures appear on the signature page hereto, and amends that certain Note Purchase Agreement dated as of September 9, 2013 among the Company and the Purchasers named therein, as amended by the First Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated as of June 3, 2014 (as so amended, the “ Purchase Agreement ”). Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Purchase Agreement.

NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree to amend the Purchase Agreement as follows:

1. Qualified Financing . The Purchase Agreement is hereby amended by deleting Section 3.6(b) thereof in its entirety and replacing it with the following:

“(b) “ Qualified Financing ” shall mean an equity financing consummated on or prior to December 31, 2014 involving the sale of equity securities of the Company (or equity securities of the ultimate parent of the surviving entity of a merger to which the Company is a party that does not constitute a Sale Transaction) to one or more institutional investors primarily for capital-raising purposes and resulting in aggregate gross proceeds


to the Company (or such ultimate parent) of at least $25,000,000 (which threshold may be waived in connection with an equity financing with aggregate gross proceeds less than such amount (but in any case not less than $4,000,000) upon the written consent of the Requisite Noteholders in which case such equity financing shall constitute a Qualified Financing notwithstanding the amount of such equity financing), excluding the outstanding principal amount of the Notes to be converted into Qualified Financing Securities upon the closing of such financing.”

2. Effect of Amendment . Except as expressly modified by this Amendment, the Purchase Agreement shall remain unmodified and in full force and effect.

3. Counterparts . This Amendment may be executed in two or more counterparts (including by facsimile or PDF copy), each of which shall be deemed an original and all of which together shall constitute one instrument.

(Signature Page Follows)

 

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The parties have executed this Second Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes as of the date first written above.

 

ZOSANO PHARMA CORPORATION       
By:  

/s/ Vikram Lamba

      
  Name: Vikram Lamba       
  Title: President and CEO       
PROQUEST INVESTMENTS IV, L.P.       
By:   ProQuest Associates IV, LLC,       
  its general partner      PROQUEST MANAGEMENT LLC
By:  

/s/ Pasquale DeAngelis

     By:  

/s/ Pasquale DeAngelis

  Name: Pasquale DeAngelis        Name: Pasquale DeAngelis
  Title: Managing Member        Title: Managing Member

NEW ENTERPRISE ASSOCIATES 12,

LIMITED PARTNERSHIP

      
By:   NEA Partners 12, Limited Partnership,       
  its general partner       
By:  

/s/ Louis S. Citron

      
  Name: Louis S. Citron       
  Title: Chief Legal Officer       
BMV DIRECT SO LP      BMV DIRECT SOTRS LP
By:   BioMed Realty, L.P.,      By:   BioMed Realty Holdings, Inc.,
  its general partner        its general partner
By:  

/s/ Brian Wolfe

     By:  

/s/ Brian Wolfe

  Name: Brian Wolfe        Name: Brian Wolfe
  Title: Senior Corp. Counsel        Title: Senior Corp. Counsel

Exhibit 4.11

THE SECURITIES REPRESENTED BY THE NOTES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT AND THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION AND FILING IN ALL SUCH JURISDICTIONS.

THE HOLDERS OF THE NOTES ACKNOWLEDGE AND UNDERSTAND THAT THE NOTES ARE SUBJECT TO THE SUBORDINATION AGREEMENT DATED AS OF JUNE 3, 2014 AMONG HERCULES TECHNOLOGY GROWTH CAPITAL, INC., THE COMPANY, ZOSANO PHARMA, INC. (NOW NAMED ZP OPCO, INC.) AND THE PURCHASERS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.

SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT AND

8% SUBORDINATED CONVERTIBLE PROMISSORY NOTES

This Second Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes (this “ Amendment ”) is executed as of September 4, 2014 by and among Zosano Pharma Corporation, a Delaware corporation formerly named ZP Holdings, Inc. (the “ Company ”), and the Requisite Noteholders whose signatures appear on the signature page hereto, and amends that certain Note Purchase Agreement dated as of February 26, 2014 among the Company and the Purchasers named therein, as amended by the First Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes dated as of June 3, 2014 (as so amended, the “ Purchase Agreement ”). Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Purchase Agreement.

NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree to amend the Purchase Agreement as follows:

1. Qualified Financing . The Purchase Agreement is hereby amended by deleting Section 3.6(b) thereof in its entirety and replacing it with the following:

“(b) “ Qualified Financing ” shall mean an equity financing consummated on or prior to December 31, 2014 involving the sale of equity securities of the Company (or equity securities of the ultimate parent of the surviving entity of a merger to which the Company is a party that does not constitute a Sale Transaction) to one or more institutional investors primarily for capital-raising purposes and resulting in aggregate gross proceeds


to the Company (or such ultimate parent) of at least $25,000,000 (which threshold may be waived in connection with an equity financing with aggregate gross proceeds less than such amount (but in any case not less than $4,000,000) upon the written consent of the Requisite Noteholders in which case such equity financing shall constitute a Qualified Financing notwithstanding the amount of such equity financing), excluding the outstanding principal amount of the Notes to be converted into Qualified Financing Securities upon the closing of such financing.”

2. Effect of Amendment . Except as expressly modified by this Amendment, the Purchase Agreement shall remain unmodified and in full force and effect.

3. Counterparts . This Amendment may be executed in two or more counterparts (including by facsimile or PDF copy), each of which shall be deemed an original and all of which together shall constitute one instrument.

(Signature Page Follows)

 

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The parties have executed this Second Amendment to Note Purchase Agreement and 8% Subordinated Convertible Promissory Notes as of the date first written above.

 

ZOSANO PHARMA CORPORATION      
By:  

/s/ Vikram Lamba

     
  Name: Vikram Lamba      
  Title: President and CEO      

NEW ENTERPRISE ASSOCIATES 12,

LIMITED PARTNERSHIP

     
By:  

NEA Partners 12, Limited Partnership,

its general partner

     
By:  

/s/ Louis S. Citron

     
  Name: Louis S. Citron      
  Title: Chief Legal Officer      
BMV DIRECT SO LP    

BMV DIRECT SOTRS LP

By:   BioMed Realty, L.P.,     By:   BioMed Realty Holdings, Inc.,
  its general partner       its general partner
By:  

/s/ Brian Wolfe

    By:  

/s/ Brian Wolfe

  Name: Brian Wolfe       Name: Brian Wolfe
  Title: Senior Corp. Counsel       Title: Senior Corp. Counsel

Exhibit 4.12

Execution Version

NOTE PURCHASE AGREEMENT

This Note Purchase Agreement (this “ Agreement ”) is dated as of December 2, 2014 by and among Zosano Pharma Corporation, a Delaware corporation formerly named ZP Holdings, Inc. (the “ Company ”), and the entities listed on Exhibit A attached hereto (each, a “ Purchaser ” and collectively, the “ Purchasers ”).

In consideration of the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows:

1. Authorization; Sale of Notes .

1.1. Authorization . The Company has duly authorized the sale and issuance, pursuant to the terms of this Agreement, of unsecured, subordinated Convertible Promissory Notes in the form attached hereto as Exhibit B in the aggregate principal amount of up to $2,000,000 (each, a “ Note ” and collectively, the “ Notes ”). The term “ Closing ” shall apply to each of the Initial Closing and the Second Closing (each as defined below) unless otherwise specified. The date of such Closing is referred to herein as the “ Closing Date .”

1.2. Use of Proceeds . The Company will use the proceeds from the sale of the Notes for working capital and other general corporate purposes.

2. Closings .

2.1. Initial Closing . Subject to the terms and conditions of this Agreement, the initial closing of the sale and purchase of Notes under this Agreement (the “ Initial Closing ”) shall take place at the offices of Foley Hoag LLP, Seaport West, 155 Seaport Boulevard, Boston, MA 02210-2600 (or remotely via the exchange of documents and signatures) simultaneously with the execution and delivery of this Agreement by the Company and all of the Purchasers. At the Initial Closing, the Company shall deliver a Note to each Purchaser in the original principal amount set forth next to such Purchaser’s name on Exhibit A attached hereto under the heading “Initial Closing Original Principal Amount,” and each Purchaser shall pay to the Company the purchase price therefor, which shall be equal to such original principal amount.

2.2. Second Closing . After the Initial Closing and conditional upon the Company and the Purchasers having agreed to proceed with the Second Closing, the Company and the Purchasers shall participate in the closing of the sale and purchase of additional Notes under this Agreement (the “ Second Closing ”). The Second Closing shall take place on the date that the Company and the Purchasers shall agree. At the Second Closing, the Company shall deliver a Note to each Purchaser in the original principal amount set forth next to such Purchaser’s name on Exhibit A attached hereto under the heading “Second Closing Original Principal Amount,” and each Purchaser shall pay to the Company the purchase price therefor, which shall be equal to such original principal amount.

3. Certain Terms of the Notes .

3.1. Maturity; Prepayment . Each Note shall be due and payable on the earlier of: (a) June 1, 2017 (the “ Maturity Date ”); (b) the occurrence of an Event of Default (as defined


in Section 3.5 below); or (c) the date that is thirty days following the closing of the Company’s first firm commitment underwritten initial public offering pursuant to a registration statement filed under the Securities Act (as defined below and such offering, an “ IPO ”) unless such Note is converted into equity securities in connection with such offering. Notwithstanding the immediately preceding sentence, (i) the Company may accelerate and repay any portion of the outstanding principal and/or interest balance of the Notes, at a time of its choosing (including in the absence of an Event of Default or prior to the Maturity Date) only upon the prior written consent of the Requisite Noteholders (as defined below), and (ii) if any portion of the Senior Debt (as defined in the Subordination Agreement (as defined in Section 3.6 below)) remains outstanding on the date the Notes are due and payable, then the Company’s failure to pay any amount under the Notes during the time period from such date through the date that the Senior Debt is paid in full shall not constitute an Event of Default or a violation or breach of the Notes or this Agreement, and shall not cause additional interest to accrue on the Notes at any higher default rate that may be provided for therein or herein.

3.2. Interest . The principal balance of the Notes will bear simple interest at a rate of eight percent (8%) per annum. All unpaid and accrued interest and any other amounts payable pursuant to the Notes shall be due and payable on the Maturity Date.

3.3. Payments . Any payments on the Notes (including any permitted pre-payments made in accordance with Section 3.1) will be made in proportion to the outstanding principal amount each such Note represents relative to the aggregate outstanding principal amount of all Notes.

3.4. Automatic Conversion .

(a) Upon a Qualified Financing . Upon the closing of a Qualified Financing (as defined in Section 3.6 below), the principal and all unpaid and accrued interest on each Note shall automatically convert into that number of shares of the equity securities issued in such Qualified Financing (the “ Qualified Financing Securities ”) equal to the quotient of (i) the outstanding principal amount of such Note and all unpaid and accrued interest divided by (ii) the Discounted Qualified Financing Price (as defined in Section 3.6 below). The Purchasers agree in connection with the conversion of the Notes in accordance with this Section 3.4(a) to execute all necessary documents in connection with such Qualified Financing reasonably requested of the Purchasers and executed by all other participants in such Qualified Financing (such documents, the “ Financing Documents ”), including executing a definitive securities purchase agreement and such other financing agreements as shall be agreed upon by the Company or its ultimate parent, as the case may be, and the other investors participating in such Qualified Financing.

(b) Upon a Sale of the Company . The Company shall notify the holders of the Notes of the closing of a Sale Transaction (as defined in Section 3.6 below) at least ten (10) days prior to the expected date of closing of such Sale Transaction. Such notice shall include any information generally provided by the Company to the holders of the common stock, $0.0001 par value per share, of the Company (“ Common Stock ”) in connection with the Sale Transaction, if any, and such other information as reasonably requested by the Purchasers. Upon the closing of such Sale Transaction, each Purchaser shall be entitled to receive in respect of such Purchaser’s Note and in preference to the holders of Common Stock, an amount equal to

 

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any unpaid interest on the Note plus three times (3X) the outstanding principal balance of such Note.

(c) Effect of Conversion . Upon conversion of any Note pursuant to this Section 3, provided in the case of a conversion pursuant to Section 3.4(a) that the securities issued upon such conversion are duly and validly issued, fully-paid and are nonassessable, the Company (and its ultimate parent, if any) will be forever released and discharged from all of its obligations and liabilities under such Note, including without limitation the obligation to pay the principal amount and accrued interest thereon. No fractional shares shall be issuable by the Company or its ultimate parent, as applicable, upon conversion of any Note pursuant to Section 3.4(a). In lieu of any fractional share which would otherwise be issuable upon conversion of any Note pursuant to Section 3.4(a), the Company or its ultimate parent, as applicable, shall pay the holder of such Note an amount in cash equal to the product of (i) such fraction multiplied by (ii) the Discounted Qualified Financing Price. Upon conversion of each Note, the holder thereof shall surrender such Note, duly endorsed, at the principal offices of the Company; provided, however , that upon the closing of the Qualified Financing, each Note shall be deemed converted and of no further force and effect, whether or not it is delivered for cancellation as set forth in this sentence. Following such surrender, the Company or its ultimate parent, as applicable, will, at its expense, (i) in the case of a conversion pursuant to Section 3.4(a), issue and deliver to such holder a certificate or certificates for the securities to which such holder is entitled as a result of such conversion in accordance with Section 3.4(a) and a check payable to such holder for any cash amounts payable in lieu of any fractional share in accordance with this Section 3.4(c), or (ii) in the case of a conversion pursuant to Section 3.4(b), issue and deliver, or cause to be issued and delivered, to such holder a check payable to such holder for the cash amount payable in respect of such Note in accordance with Section 3.4(b).

3.5. Events of Default . Each of the following shall constitute an “ Event of Default ,” unless waived by the holders of Notes representing at least sixty percent (60%) of the principal amount then outstanding on all of the Notes (the “ Requisite Noteholders ”):

(a) the failure by the Company to pay any amount due hereunder within five (5) days of the due date thereof;

(b) the appointment of a receiver of any property, the assignment or trust mortgage for the benefit of creditors, the commencement of any kind of voluntary or involuntary insolvency proceedings under any bankruptcy or other law relating to the relief of debtors, or the entry of an order for relief with respect to the Company in any proceeding pursuant to the United States Bankruptcy Code, as amended;

(c) a final judgment or judicial order for the payment of money in excess of $250,000 (exclusive of amounts covered by insurance) shall be rendered against the Company and the same shall remain undischarged for a period of thirty days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company or any of its subsidiaries, if any and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty days after issue or levy; or

 

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(d) the Company shall fail to observe or perform in any material respect any covenant, obligation, condition or agreement contained in this Agreement or any Note (other than those otherwise specified in this Section 3.5) and such failure shall continue for twenty (20) days after the Company’s receipt of written notice to the Company of such failure.

3.6. Definitions . For purposes of this Agreement:

(a) “ Discounted Qualified Financing Price ” shall mean the price that is equal to 85% of the lowest per share price at which the shares of Qualified Financing Securities are to be sold in the Qualified Financing (not including any discounts applicable as a result of the Notes).

(b) “ Qualified Financing ” shall mean an equity financing consummated on or prior to March 31, 2015 involving the sale of equity securities of the Company (or equity securities of the ultimate parent of the surviving entity of a merger to which the Company is a party that does not constitute a Sale Transaction) to one or more institutional investors primarily for capital-raising purposes and resulting in aggregate gross proceeds to the Company (or such ultimate parent) of at least $25,000,000 (which threshold may be waived in connection with an equity financing with aggregate gross proceeds less than such amount (but in any case not less than $4,000,000) upon the written consent of the Requisite Noteholders in which case such equity financing shall constitute a Qualified Financing notwithstanding the amount of such equity financing), excluding the outstanding principal amount of the Notes to be converted into Qualified Financing Securities upon the closing of such financing.

(c) “ Sale Transaction ” shall have the meaning given to such term in the Stockholder Rights and Voting Agreement, dated as of April 26, 2012, by and among the Company, the Purchasers and certain other of the Company’s stockholders.

(d) “ Subordination Agreement ” shall mean the Subordination Agreement of even date herewith among Hercules Technology Growth Capital, Inc., a Maryland corporation, the Company, ZP Opco, Inc., a Delaware corporation formerly named Zosano Pharma, Inc. and wholly owned subsidiary of the Company, and the Purchasers, in the form attached hereto as Exhibit C .

4. Representations and Warranties of the Company . The Company represents and warrants to each Purchaser as of the Closing Date that:

4.1. Corporate Organization and Authority . The Company:

(a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware;

(b) has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted; and

(c) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed could

 

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reasonably be expected to have a material adverse effect on the Company.

4.2. Corporate Power . The Company has all requisite legal and corporate power and authority to execute, perform and deliver this Agreement, to sell and issue the Notes hereunder, and to carry out and perform its obligations hereunder.

4.3. Due Authorization and Execution . The execution and delivery of this Agreement and the Notes by the Company and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Company. This Agreement and the Notes to be issued at the Closing have been duly executed and delivered by the Company and constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except to the extent that such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application relating to or affecting enforcement of creditors’ rights and laws concerning equitable remedies.

4.4. Capitalization . The capitalization of the Company as of the date hereof is set forth in Exhibit D attached hereto. The equity securities (“ Equity Securities ”) of the Company have the respective rights, preferences and privileges set forth in the Company’s certificate of incorporation and bylaws, as amended, in effect on the date hereof. All of the outstanding Equity Securities of the Company have been duly authorized and are validly issued, fully paid and nonassessable. Except as expressly referenced herein or as set forth in Exhibit D , there are as of the date of this Agreement no options, warrants or other convertible securities or rights to purchase Equity Securities of the Company authorized, issued or outstanding, and the Company is not obligated in any other manner to issue shares of its Equity Securities. The offer and sale of all Equity Securities of the Company issued before the Closing Date complied with or were exempt from registration or qualification under all applicable federal and state securities laws.

4.5. No Conflict . The execution and delivery of this Agreement and the Notes by the Company, the performance by the Company of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby will not be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a violation of or a default under any provision of the Company’s certificate of incorporation or bylaws, or instrument, judgment, order, writ, decree, contract, rule, statute, regulation or agreement to which the Company is a party or by which it is bound, or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets, property or revenue of the Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to the Company.

4.6. Governmental Filings . Assuming the accuracy of the representations made by the Purchasers in Section 5 of this Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority is required on the part of the Company in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Regulation D of the Securities Act of 1933, as amended (the “ Securities Act ”), and applicable state securities laws.

 

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5. Representations, Warranties, and Covenants of each Purchaser . Each Purchaser represents and warrants to and covenants with the Company as follows:

5.1. Authorization . When executed and delivered by the Purchaser, and assuming execution and delivery by the Company, this Agreement will constitute a valid and binding obligation of the Purchaser, enforceable against such Purchaser in accordance with its terms, except to the extent that such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium, or other laws of general application relating to or affecting enforcement of creditors’ rights and laws concerning equitable remedies.

5.2. Brokers and Finders . The Purchaser has not retained any investment banker, broker, or finder in connection with the transactions contemplated by this Agreement.

5.3. Investment . The Purchaser is acquiring the Note as well as any shares of the Qualified Financing Securities (collectively, the “ Securities ”) for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof. The Purchaser has no present intention of selling, granting any participation in, or otherwise distributing any Securities. By executing this Agreement, the Purchaser further represents that it has no contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any Securities.

5.4. No Public Market . The Purchaser understands and acknowledges that the offering of the Securities pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration pursuant to one or more exemptions under the Securities Act, including without limitation the exemption provided by Section 4(a)(2) thereof, and that the Company’s reliance upon such exemption is predicated upon the Purchaser’s representations as set forth in this Agreement. The Purchaser further understands that no public market now exists for any of the securities issued by the Company and that the Company has given no assurances that a public market will ever exist for the Company’s securities.

5.5. Experience; Etc . The Purchaser represents that he, she or it: (a) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of a prospective investment in the Note being purchased by the Purchaser; (b) believes that he, she or it has received all the information requested from the Company that might be necessary or appropriate for deciding whether to obtain the Note; (c) has had the opportunity to discuss the Company’s business, management, and financial affairs with the Company’s management; (d) has the ability to bear the economic risks of this investment; and (e) is able, without materially impairing its financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss on this investment.

5.6. Accredited Investor . The Purchaser qualifies as an “accredited investor” within the meaning of Regulation D of the rules and regulations promulgated under the Securities Act.

5.7. Investment Representations, Warranties and Covenants by Non-United

 

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States Persons . Each Purchaser who is a Non-U.S. person (as defined in Section 5.7(d) below) hereby represents and warrants to the Company as follows:

(a) This Agreement is made by the Company with the Purchaser, who is a Non-U.S. person, in reliance upon such Non-U.S. person’s representations, warranties and covenants made in this Section 5.7.

(b) Such Non-U.S. person has been advised and acknowledges that:

(i) the Securities have not been, and when issued, will not be registered under the Securities Act, the securities laws of any state of the United States or the securities laws of any other country;

(ii) in issuing and selling the Securities to such Non-U.S. person pursuant hereto, the Company is relying upon the “safe harbor” provided by Regulation S and/or on Section 4(a)(2) under the Securities Act;

(iii) it is a condition to the availability of the Regulation S “safe harbor” that the Securities not be offered or sold in the United States or to a U.S. person until the expiration of a one-year “distribution compliance period” (or a six-month “distribution compliance period,” if the issuer is a “reporting issuer,” as defined in Regulation S) following the date of issuance; and

(iv) notwithstanding the foregoing, prior to the expiration of the one-year “distribution compliance period” (or six-month “distribution compliance period,” if the issuer is a “reporting issuer,” as defined in Regulation S) after the date of issuance (the “ Restricted Period ”), the Securities may be offered and sold by the holder thereof only if such offer and sale is made in compliance with the terms of this Agreement and either: (A) if the offer or sale is within the United States or to or for the account of a U.S. person (as such terms are defined in Regulation S), the securities are offered and sold pursuant to an effective registration statement or pursuant to Rule 144 under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act; or (B) the offer and sale is outside the United States and to other than a U.S. person.

(c) As used herein, the term “United States” means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia, and the term “U.S. person” (as defined in Regulation S) means:

(i) a natural person resident in the United States;

(ii) any partnership or corporation organized or incorporated under the laws of the United States;

(iii) any estate of which any executor or administrator is a U.S. person;

(iv) any trust of which any trustee is a U.S. person;

 

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(v) any agency or branch of a foreign entity located in the United States;

(vi) any nondiscretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person;

(vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated and (if an individual) resident in the United States; and

(viii) a corporation or partnership organized under the laws of any foreign jurisdiction and formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) under the Securities Act) who are not natural persons, estates or trusts.

(d) As used herein, the term “Non-U.S. person” means any person who is not a U.S. person or is deemed not to be a U.S. person under Rule 902(k)(2) of the Securities Act.

(e) Such Non-U.S. person agrees that with respect to the Securities, until the expiration of the Restricted Period:

(i) such Non-U.S. person, its agents or its representatives have not and will not solicit offers to buy, offer for sale or sell any of the Securities, or any beneficial interest therein in the United States or to or for the account of a U.S. person; and

(ii) notwithstanding the foregoing, the Securities may be offered and sold by the holder thereof only if such offer and sale is made in compliance with the terms of this Agreement and either: (A) if the offer or sale is within the United States or to or for the account of a U.S. person (as such terms are defined in Regulation S), the securities are offered and sold pursuant to an effective registration statement or pursuant to Rule 144 under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act; or (B) the offer and sale is outside the United States and to other than a U.S. person; and

(iii) such Non-U.S. person shall not engage in hedging transactions with regard to the Securities unless in compliance with the Securities Act.

The foregoing restrictions are binding upon subsequent transferees of the Securities, except for transferees pursuant to an effective registration statement. Such Non-U.S. person agrees that after the Restricted Period, the Securities may be offered or sold within the United States or to or for the account of a U.S. person only pursuant to applicable securities laws.

(f) Such Non-U.S. person has not engaged, nor is it aware that any party has engaged, and such Non-U.S. person will not engage or cause any third party to engage, in any directed selling efforts (as such term is defined in Regulation S) in the United States with respect to the Securities.

 

8


(g) Such Non-U.S. person: (i) is domiciled and has its principal place of business outside the United States; (ii) certifies it is not a U.S. person and is not acquiring the Securities for the account or benefit of any U.S. person; and (iii) at the time of the date of the Closing, the Non-U.S. person or persons acting on Non-U.S. person’s behalf in connection therewith will be located outside the United States.

(h) At the time of offering to such Non-U.S. person and communication of such Non-U.S. person’s order to purchase the Securities, and at the time of such Non-U.S. Person’s execution of this Agreement, the Non-U.S. person or persons acting on Non-U.S. person’s behalf in connection therewith were located outside the United States.

(i) Such Non-U.S. person is not a “distributor” (as defined in Regulation S) or a “dealer” (as defined in the Securities Act).

(j) Such Non-U.S. person acknowledges that the Company shall make a notation in its stock books regarding the restrictions on transfer set forth in this Section 5.7 and shall transfer such Securities on the books of the Company only to the extent consistent therewith.

In particular, such Non-U.S. person acknowledges that the Company shall refuse to register any transfer of the Note not made in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration.

6. Legends and Restrictions on Transfer .

6.1. Securities Act . The Securities shall bear such restrictive legends as required by the Financing Documents, including, without limitation, a legend substantially in the following form:

“THE SECURITIES REPRESENTED HEREBY AND ANY SECURITIES ISSUED UPON CONVERSION HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT AND THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION AND FILING IN ALL SUCH JURISDICTIONS.”

6.2. No Transfer . No Purchaser may sell or transfer any Note without the prior written consent of the Requisite Noteholders, except to any affiliated fund, investment vehicle, partner or limited partner or equity holder of such Purchaser; provided, however , that any sale or transfer of any Note shall be subject to Section 9.6 thereof requiring the assignee or transferee of the Note to first become a party to the Subordination Agreement. A Purchaser that transfers a

 

9


Note shall promptly notify the Company of such transfer. The Company shall not transfer or assign its obligations under any Note without the prior written consent of the Requisite Noteholders (except as set forth in Section 8.1).

7. Amendment to 2013 and 2014 Note Purchase Agreements . In accordance with Section 7.7 of the Note Purchase Agreement dated as of September 9, 2013 among the Company, the Purchasers, ProQuest Investments IV, L.P. and ProQuest Management LLC, as amended to date (the “ 2013 Purchase Agreement ”), and Section 8.7 of the Note Purchase Agreement dated as of February 26, 2014 among the Company and the Purchasers, as amended to date (the “ 2014 Purchase Agreement ”), the Purchasers, as the Requisite Noteholders (as defined in each of the 2013 Purchase Agreement and the 2014 Purchase Agreement), and the Company hereby amend the definition of the term “Qualified Financing” in Section 3.6(b) of each of the 2013 Purchase Agreement and the 2014 Purchase Agreement by deleting “December 31, 2014” from such definition and replacing it with “March 31, 2015”.

8. Miscellaneous .

8.1. Successors and Assigns . Subject to the restrictions on transfers of the Notes set forth in Section 6.2, this Agreement shall be assignable by any party without the written consent of the other parties hereto; provided, however , that a merger to which the Company is a party shall not be considered an assignment requiring consent for purposes of Section 6.2; provided, further , that the Company may assign the Notes without the consent of the other parties hereto to any individual or entity that acquires control of the stock, all or substantially all assets or business of the Company, or to the surviving entity of a merger to which the Company is a party or the entity that controls such surviving entity. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

8.2. Survival of Representations and Warranties . All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Closing.

8.3. Severability . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

8.4. Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without reference to the conflicts of law provisions thereof. The Purchaser consents to service of process in any such action by certified or registered mail, return receipt requested. The Purchaser consents to the jurisdiction of such courts over the Purchaser, stipulates the convenience, efficiency and fairness of proceeding in such courts, and covenants not to allege or assert the inconvenience, inefficiency or unfairness of proceeding in such courts.

8.5. Notices . All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent by overnight courier, facsimile or e-mail, or mailed by first class certified or registered mail, return receipt requested,

 

10


postage prepaid:

(a) If to the Company:

Zosano Pharma Corporation

34790 Ardentech Court

Fremont, CA 94555

Attn: President and CEO

Fax: (510) 952-4632

with a copy to:

Foley Hoag LLP

Seaport West

155 Seaport Boulevard

Boston, MA 02210-2600

Attn: Jeffrey Quillen, Esq.

Fax: (617) 832-7000

(b) If to a Purchaser, at the address set forth beneath the Purchaser’s name on Exhibit A attached hereto, or at such other address as may have been furnished in writing by such Purchaser to the Company.

Notices provided in accordance with this Section 8.5 shall be deemed delivered (i) upon personal delivery with signature required, (ii) one Business Day after they have been sent to the recipient by reputable overnight courier service (charges prepaid and signature required), (iii) upon confirmation of successful transmission of a facsimile message containing such notice if sent before 5 p.m., local time of the recipient, on any Business Day, and as of 9 a.m. local time of the recipient on the next Business Day if sent thereafter, or (iv) three Business Days after deposit in the United States mail. The term “ Business Day ” as used in this Section 8.5 shall mean any day other than Saturday, Sunday or a day on which banking institutions are not required to be open in the State of California or New York.

8.6. Complete Agreement . This Agreement (including the Exhibits hereto and the issued Notes) constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter.

8.7. Amendments and Waivers . This Agreement and each Note may be amended, modified, or terminated, and the observance of any term of this Agreement may be waived, with respect to all parties to this Agreement (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Requisite Noteholders; provided, however , that no such amendment, modification or waiver shall be effective to the extent such amendment, modification or waiver adversely affects the rights of any holder of a Note in a manner different from those of such consenting holders (other than differences related to the different principal amounts of the Notes) without the consent of each such differently affected holder. No waivers of or exceptions to any term, condition or provision

 

11


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.

8.8. Counterparts; Facsimile Signatures; Expenses . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original instrument, and all of which together shall for all purposes constitute one and the same Agreement. A signature of any party to this Agreement transmitted by facsimile, electronic mail (including pdf) or other electronic means shall be deemed to have been duly and validly delivered and be valid and effective for all purposes. The Company shall pay on demand all reasonable fees and expenses, including reasonable attorney’s fees and expenses, in connection with the preparation, execution and delivery of this Agreement and the Notes up to a maximum amount of $10,000.

8.9. Pronouns . Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

8.10. Section Headings and References . The section headings are for the convenience of the parties and in no way alter, modify, amend, limit, or restrict the contractual obligations of the parties. Any reference in this agreement to a particular section or subsection shall refer to a section or subsection of this Agreement, unless specified otherwise.

[signature page follows]

 

12


IN WITNESS WHEREOF, the parties have executed this Note Purchase Agreement as of the date first written above.

 

ZOSANO PHARMA CORPORATION
By:  

/s/ Vikram Lamba

  Name: Vikram Lamba
  Title: President and CEO

 

NEW ENTERPRISE ASSOCIATES 12,

LIMITED PARTNERSHIP

By:  

NEA Partners 12, Limited Partnership,

its general partner

By:  

/s/ Louis S. Citron

  Name: Louis S. Citron
  Title: Chief Legal Officer

 

BMV DIRECT SOTRS LP
By:  

BioMed Realty Holdings, Inc.,

its general partner

By:  

/s/ Brian Wolfe

  Name: Brian Wolfe
  Title: Assistant Secretary

Signature Page to Note Purchase Agreement


EXHIBIT A

Schedule of Purchasers

 

Name and Address

  

Initial Closing Original

Principal Amount

  

Second Closing Original

Principal Amount

BMV Direct SOTRS LP

17190 Bernardo Center Drive

San Diego, CA 92128

Attn: Corporate Legal

Fax No.: (858) 485-9843

   $708,278.09    $354,404.71

New Enterprise Associates 12, Limited Partnership

c/o New Enterprise Associates

1954 Greenspring Drive, Suite 600

Timonium, MD 21093

Attn: Louis Citron, General Counsel

Fax No.: (410) 842-4100

   $624,721.91    $312,595.29

Total:

   $1,333,000    $$667,000


EXHIBIT B

Form of Subordinated Convertible Promissory Note

[see attached]


THE SECURITIES REPRESENTED HEREBY AND ANY SECURITIES ISSUED UPON CONVERSION HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT AND THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION AND FILING IN ALL SUCH JURISDICTIONS.

THE HOLDER OF THIS NOTE ACKNOWLEDGES AND UNDERSTANDS THAT THIS NOTE IS SUBJECT TO THE SUBORDINATION AGREEMENT (AS DEFINED BELOW).

8% SUBORDINATED CONVERTIBLE PROMISSORY NOTE

 

$[            ]    [ Date ]

FOR VALUE RECEIVED, ZOSANO PHARMA CORPORATION, a Delaware corporation formerly named ZP Holdings, Inc. (the “ Company ”), hereby promises to pay to the order of [            ] (the “ Payee ”), the principal amount of [            ] Dollars ($[            ]) upon the earliest to occur of: (i) an Event of Default; (ii) the date that is thirty days following an IPO; or (iii) the Maturity Date, unless earlier converted in accordance with Section 5 below and subject to Section 6 below.

This unsecured Note is one of a series of Notes that are being issued pursuant to a Note Purchase Agreement, dated as of December 2, 2014, by and among the Company and the Purchasers named therein, including the Payee (as it may be amended from time to time, the “ Purchase Agreement ”). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. Each Note ranks equally and ratably with the other Notes without priority over one another. Any payments on the Notes (including any pre-payments made in accordance with Section 3) will be made in proportion to the outstanding principal amount each such Note represents relative to the aggregate outstanding principal amount of all Notes.

This Note is subject to that certain Subordination Agreement dated as of December 2, 2014 (the “ Subordination Agreement ”) among Hercules Technology Growth Capital, Inc., a Maryland corporation ( “Hercules ”), the Company, ZP Opco, Inc., a Delaware corporation formerly named Zosano Pharma, Inc. and wholly owned subsidiary of the Company (“ Opco ”), and the Purchasers, a copy of which is on file at the principal office of the Company and which is being entered into pursuant to that certain Loan and Security Agreement dated as of June 3, 2014 between Hercules and Opco.


1. Interest. The principal balance of this Note outstanding from time to time shall bear simple interest at a rate of eight percent (8%) per annum. Such interest shall accrue and shall be due and payable in arrears (together with principal) on the Maturity Date, subject to Sections 3, 4, 5 and 6 below.

2. Payments. Payment of principal and interest shall be made in lawful money of the United States of America in immediately available funds at the address of the Payee set forth below, or at such other place as the holder hereof shall have designated to the Company in writing.

3. Prepayment. The Company may accelerate and repay any portion of the outstanding principal and/or interest balance of this Note at a time of its choosing (including in the absence of an Event of Default or prior to the Maturity Date) only upon the prior written consent of the Requisite Noteholders.

4. Events of Default. Upon the occurrence of any Event of Default, the entire unpaid principal balance of this Note and all unpaid accrued interest hereunder shall become immediately due and payable without notice or demand.

5. Conversion.

5.1. Qualified Financing . Upon the closing of a Qualified Financing, the principal balance of this Note and any and all accrued and unpaid interest shall automatically convert into shares of Qualified Financing Securities at the Discounted Qualified Financing Price, and the Payee shall execute all necessary documents in connection with such Qualified Financing, subject to and all as more fully described in the Purchase Agreement.

5.2. Sale Transaction . Upon the closing of a Sale Transaction, the Payee shall be entitled to receive in respect of this Note certain consideration as more fully described in the Purchase Agreement.

6. Subordinated Debt. Notwithstanding anything to the contrary contained herein or in the Purchase Agreement, if any portion of the Senior Debt (as defined in the Subordination Agreement) remains outstanding on the date this Note is due and payable, then the Company’s failure to pay any amount under this Note or the Purchase Agreement during the time period from such date through the date that the Senior Debt is paid in full shall not constitute an Event of Default or a violation or breach of this Note or the Purchase Agreement, and shall not cause additional interest to accrue hereon at any higher default rate that may be provided for herein or therein.

7. New Note. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, the Company will issue a new promissory note, of like tenor and amount and dated the original date of this Note, in lieu of such lost, stolen, destroyed or mutilated Note, and in such event the holder thereof agrees to indemnify and hold harmless the Company in respect of any such lost, stolen, destroyed or mutilated Note.

8. Officers and Directors Not Liable. In no event shall any officer or director of the Company be liable for any amounts due and payable pursuant to this Note.


9. Miscellaneous.

9.1. The undersigned and every endorser or guarantor of this Note, regardless of the time, order or place of signing, waives presentment, demand, protest and notice of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral available to the Payee, if any, and to the additions or releases of any other parties or persons primarily or secondarily liable.

9.2. By accepting this Note, the Payee and each subsequent holder of this Note acknowledges and agrees that all payments under this Note shall be expressly subordinate in right of payment and otherwise to any present or future debt obligation of the Company to any bank or other institutional lender, including, but not limited to, the Senior Debt (as defined in the Subordination Agreement) and the BioMed Indebtedness (as defined below) and to any present or future indebtedness on account of trade payables evidenced by secured promissory notes. Upon request by the Company, the Payee and each subsequent holder of this Note agrees to confirm this subordination relationship to any such bank or institutional lender in a form reasonably acceptable to or required by such bank or other institutional lender. The “ BioMed Indebtedness ” shall mean any and all indebtedness that may exist from time to time pursuant to that certain Secured Promissory Note, dated as of April 26, 2012, between the Company and BMV Direct SOTRS LP (as assignee of BioMed Realty Holdings, Inc.) or any successor of transferee thereto, including any amendment, modification, continuation or replacement thereof.

9.3. The provisions of this Note shall be governed by, and construed and enforced in accordance with, the substantive laws of the State of Delaware, without regard to its principles of conflicts of laws.

9.4. Notwithstanding anything herein to the contrary, payment of any interest, expense or other amount shall not be required if such payment would be unlawful. In any such event, this Note shall automatically be deemed amended so that interest charges and all other payments required hereunder, individually and in the aggregate, shall be equal to but not greater than the maximum permitted by law.

9.5. This Note may be amended or modified, and any provision of this Note may be waived, only with the written consent of the Company, on the one hand, and either (a) the holder hereof or (b) the Requisite Noteholders, on the other hand; provided, however , that in the case of clause (b), no such amendment, modification or waiver shall be effective without the written consent of the holder hereof to the extent such amendment, modification or waiver adversely affects the rights of the holder of this Note in a manner different from those of the holders of the other Notes (other than differences related solely to the different principal amounts of the Notes). Any amendment effected in accordance with the immediately preceding sentence shall be binding upon the Company, the Payee and each transferee of this Note.

9.6. This Note may not be assigned or transferred without first having the assignee or transferee hereof become a party to the Subordination Agreement.

9.7. In the event any one or more of the provisions of this Note shall for any


reason be held to be invalid, illegal or unenforceable, in whole or in part or in any respect, or in the event that any one or more of the provisions of this Note operate or would prospectively operate to invalidate this Note, then and in any such event, such provision(s) only shall be deemed null and void and shall not affect any other provision of this Note and the remaining provisions of this Note shall remain operative and in full force and effect and in no way shall be affected, prejudiced, or disturbed thereby.

[remainder of page intentionally left blank]


IN WITNESS WHEREOF, the undersigned has executed this Note as an instrument under seal as of the date first above written.

 

ZOSANO PHARMA

CORPORATION

By:  

 

  Name: Vikram Lamba
  Title: President and CEO


EXHIBIT C

Subordination Agreement

[see attached]


SUBORDINATION AGREEMENT

This Subordination Agreement is made as of December 2, 2014 (this “ Agreement ”), by and among the parties listed on Exhibit A hereto (each a “ Creditor ” and collectively, the “ Creditors ”), ZP OPCO, INC. (f/k/a Zosano Pharma, Inc.) (“ Borrower ”), ZOSANO PHARMA CORPORATION (f/k/a ZP Holdings, Inc.) (“ Parent ”), and HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland corporation (the “ Lender ”).

Recitals

A. Borrower has requested and/or obtained a loan in the principal amount of $4,000,000.00 (the “ Senior Loan ”) from Lender which is or will be from time to time secured by assets and property of Borrower pursuant to the terms of that certain Loan and Security Agreement dated as of June 3, 2014 by and between Borrower and Lender, as the same may be amended from time to time (the “ Senior Loan Agreement ”). Capitalized terms not otherwise defined herein shall have the same meaning as in the Senior Loan Agreement.

B. Creditors have extended loans or other credit accommodations to Borrower, Parent and/or ZP Group, LLC (“ Group ” and collectively with Borrower and Parent, the “ Zosano Group ”), and/or may extend loans or other credit accommodations to the Zosano Group from time to time, subject to the terms of this Agreement.

C. In order to induce Lender to amend the Senior Loan Agreement to increase the credit facility available to Borrower and make the other changes requested by Borrower and Parent to be evidenced in that certain First Amendment to Loan and Security Agreement dated after the date hereof, and, at any time or from time to time, at Lender’s option, to make such further loans or other credit accommodations to or for the account of Borrower, and grant such renewals or extensions of the Senior Loan as Lender may deem advisable, Creditors are willing to subordinate the Subordinated Debt (as defined below) to the Senior Debt (as defined below), on the terms and conditions set forth herein.

Agreement

NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree as follows:

1. The term “ Senior Debt ” shall mean all obligations of any of Borrower to Lender, now existing or hereafter arising, under the Senior Loan Agreement and/or any other related documents governing, evidencing or securing the Senior Loan (collectively, “ Senior Debt Documents ”), together with all costs of collecting such obligations (including attorneys’ fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any Bankruptcy, reorganization or similar


proceeding. The term “ Senior Security Interest ” shall mean any security interest in or lien on the “ Collateral ” (as defined in the Senior Loan Agreement) in favor of Lender arising from the Senior Debt.

2. The term “ Subordinated Debt ” shall mean all obligations of any of the Zosano Group to any Creditor, now existing or hereafter arising, under (a) the Note Purchase Agreement dated as of December 2, 2014, executed by Parent in favor of the Creditors (the “ NPA ”), and (b) the series of related 8% Subordinated Convertible Promissory Notes dated even date therewith issued to the Creditors in the principal amount of up to $2,000,000.00 (the “ Subordinated Notes ”). The NPA and the Subordinated Notes are collectively referred to herein as the “ Subordinated Debt Documents .” The term “ Subordinated Security Interest ” shall mean any security interest in or lien, if any, on the Collateral in favor of the Creditors, or any of them, arising from the Subordinated Debt.

3. All Subordinated Debt is subordinated in right of payment to the Senior Debt. Creditor subordinates to the Senior Security Interest the Subordinated Security Interest, if any. Notwithstanding the respective dates of attachment or perfection of the Subordinated Security Interest, if any, and the Senior Security Interest, the Senior Security Interest shall at all times be prior to the Subordinated Security Interest. Creditor acknowledges that it will not be entitled to receive payment of the Subordinated Debt when due if, at the time such payment is required, any portion of the Senior Debt remains outstanding.

4. Each Creditor represents and warrants to Lender that, other than such Creditor, there are no Affiliates of Creditor to whom Borrower, Parent or Group owe any Indebtedness, except:

(a) in the case of BMV Direct SOTRS LP, pursuant to (i) the Lease dated as of May 1, 2007, as amended by the First Amendment to Lease dated as of June 20, 2008, the Second Amendment to Lease dated as of October 16, 2008, the Third Amendment to Lease dated as of April 29, 2011, the Fourth Amendment to Lease dated as of July 31, 2011, and the Fifth Amendment to Lease dated as of April 1, 2012, between BMR-34790 Ardentech Court LP, a Delaware limited partnership (“ Landlord ,” as successor in interest to BMR-34790 Ardentech Court LLC), and Borrower, which is guaranteed by the Guaranty dated as of April 1, 2012, executed by Parent in favor of Landlord (collectively, the “ Lease Documents ”), (ii) the Secured Promissory Note dated as of April 26, 2012 executed by Parent originally in favor of BioMed Realty Holdings, Inc., a Maryland corporation (“ BMR ”), in the principal amount of $8,556,533.00, together with the agreements securing such note, including the (A) LLC Pledge Agreement, dated as of April 26, 2012 executed by Borrower originally in favor of BMR (the “ LLC Pledge Agreement ”), (B) the Intellectual Property Security Agreement dated as of April 26, 2012 executed by Parent originally in favor of BMR, and (C) the Security Agreement dated as of April 26, 2012 executed by Parent originally in favor of BMR, all of which have been assigned to BMV DIRECT SOTRS LP, a Delaware limited partnership, and collectively are referred to as the “ BMV Debt ”; (iii) the Note Purchase Agreement dated as of September 9, 2013 (the “ 2013 NPA ”) among Parent, BMV Direct


SO LP, a Delaware limited partnership (“ BMV SO ”), BMV Direct SOTRS LP, a Delaware limited partnership (“ BMV SOTRS ”), ProQuest Investments IV, L.P., ProQuest Management LLC, and New Enterprise Associates 12, Limited Partnership (“ NEA ”), the 8% Subordinated Convertible Promissory Note in the principal amount of $303,372.00 dated as of September 9, 2013 by Parent in favor of BMV SO, the 8% Subordinated Convertible Promissory Note in the principal amount of $991,047.43 dated as of September 9, 2013 by Parent in favor of BMV SOTRS, and other related agreements (collectively, the “ 2013 BMV Notes ”); and (iv) the Note Purchase Agreement dated as of February 26, 2014 (the “ February 2014 NPA ”) among Parent, BMV SO, BMV SOTRS and NEA, the 8% Subordinated Convertible Promissory Note in the principal amount of $249,000.00 dated as of February 26, 2014 by Parent in favor of BMV SO, the 8% Subordinated Convertible Promissory Note in the principal amount of $1,069,709.23 dated as of February 26, 2014 by Parent in favor of BMV SOTRS, and other related agreements (collectively, the “ February 2014 BMV Notes ”); and

(b) in the case of NEA, (i) the 2013 NPA and the 8% Subordinated Convertible Promissory Note in the principal amount of $1,159,532.21 dated as of September 9, 2013 by Parent in favor of NEA (the “ 2013 NEA Note ”) and (ii) the February 2014 NPA and the 8% Subordinated Convertible Promissory Note in the principal amount of $1,181,290.77 dated as of February 26, 2014 by Parent in favor of NEA the “ February 2014 NEA Note ”);.

For purposes of this Agreement, in no event shall the Subordinated Debt include any of the Lease Documents, the BMV Debt, the 2013 NPA or the Indebtedness owed pursuant thereto (including the 2013 BMV Notes and the 2013 NEA Note), or the February 2014 NPA or the Indebtedness owed pursuant thereto (including the February 2014 BMV Notes and the February 2014 NEA Note), as such obligations are subordinated pursuant to separate agreements.

5. Without Lender’s written consent, each Creditor agrees that it will not demand or receive from Borrower, Parent or Group (and Borrower and Parent agrees not to pay to Creditor) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will such Creditor exercise any remedy with respect to the Collateral, nor will such Creditor commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower or Parent, for so long as any portion of the Senior Debt remains outstanding, provided , however , that each Creditor may convert any part of the Subordinated Debt (other than Subordinated Debt owed to such Creditor by Group) into equity securities of Borrower in accordance with the terms of the Subordinated Notes.

6. Each Creditor shall promptly deliver to Lender in the form received (except for endorsement or assignment by such Creditor, where required by Lender) for application to the Senior Debt any payment, distribution, transfer of property or proceeds received by such Creditor with respect to the Subordinated Debt other than in accordance with this Agreement.


7. In the event of Borrower’s, Holding’s or Group’s insolvency, reorganization or any case or proceeding under any Bankruptcy or insolvency law or laws relating to the relief of debtors, this Agreement shall remain in full force and effect, and Lender’s claims arising from the Senior Debt against Borrower and Parent and the respective estates of Borrower and Parent, to the extent that such claims have priority over the Subordinated Debt under this Agreement, shall be paid in full before any payment with respect to the Subordinated Debt is made to any Creditor.

8. For so long as any of the Senior Debt remains unpaid, each Creditor irrevocably appoints Lender as such Creditor’s attorney-in-fact, and grants to Lender a power of attorney with full power of substitution in the name of such Creditor or in the name of Lender for the use and benefit of Lender, without notice to such Creditor, to perform at Lender’s option the following acts in any Bankruptcy, insolvency or similar proceeding involving Borrower, Parent and/or Group:

(a) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of any Creditor if such Creditor does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Lender elects, in its sole discretion, to file such claim or claims; and

(b) To accept or reject any plan of reorganization or arrangement on behalf of any Creditor and to otherwise vote any Creditor’s claims in respect of any Subordinated Debt in any manner that Lender deems appropriate for the enforcement of its rights hereunder.

9. Section 5 of this Agreement shall automatically terminate and be of no further force or effect upon the occurrence of the Termination Date (defined below). “ Termination Date ” means the earlier to occur of ninety (90) days following Lender’s acceleration of the Senior Debt and October 1, 2017 (the “ Enforcement Period ”), provided however, that the Termination Date shall be extended if (and for so long as) at the time the Enforcement Period would otherwise terminate, Lender is, in good faith, diligently pursuing Material Enforcement Actions. If Borrower becomes subject to a bankruptcy proceeding under Title 11 of the United States Code, as amended (the “ Bankruptcy Code ”) prior to the occurrence of the Termination Date, the Termination Date shall be extended to a date ninety (90) days following the effective date of the removal or lifting of any restriction imposed by the Bankruptcy Code which prohibits or materially restricts Lender from enforcing its rights against Borrower or Borrower’s property (the “ Post-Bankruptcy Enforcement Period ”), provided however, that the Termination Date shall be extended for so long as and if immediately prior to the expiration of the Post-Bankruptcy Enforcement Period, Lender is, in good faith, diligently pursuing Material Enforcement Actions. For the purposes of this Section 9, the following would constitute diligent pursuit of Material Enforcement Actions: the solicitation of bids from third parties to conduct the liquidation of any material portion of the Collateral; the engagement or retention of sales brokers, marketing agents, investment bankers, accountants, auctioneers or other third parties for the purpose of valuing, marketing, promoting or selling any material portion of the Collateral; the initiation of any action to take physical possession of or to exercise dominion or control over (other


than cash dominion) any material portion of the Collateral; the notification of all or substantially all account debtors to make payments to Lender in respect of Accounts comprising Collateral; or the commencement of any legal proceedings or actions against or with respect to any material portion of the Collateral.

10. Each Creditor shall immediately affix a legend to the instruments evidencing the Subordinated Debt stating that the instruments are subject to the terms of this Agreement. No amendment of the documents evidencing or relating to the Subordinated Debt shall directly or indirectly modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated Debt.

11. Subject to Section 9 hereof, this Agreement shall remain effective for so long as the Lender has any obligation to make disbursements or credit extensions to Borrower under the Senior Debt Documents or Borrower owes any amounts to Lender under the Senior Debt Documents. If, at any time after payment in full of the Senior Debt, any payments of the Senior Debt must be disgorged by Lender for any reason (including, without limitation, the Bankruptcy of Borrower), this Agreement and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made, and each Creditor shall immediately pay over to Lender all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, with notice to Creditors but without Creditors’ consent, Lender may take such actions with respect to the Senior Debt as Lender, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount as allowed herein, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of the Senior Debt Documents, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Lender’s rights hereunder.

12. Creditors hereby consent to the incurrence by the Borrower of the Senior Debt.

13. This Agreement shall bind and benefit any successors or assignees of each Creditor and any successors or assigns of Lender. This Agreement is solely for the benefit of Creditors and Lender and not for the benefit of Borrower, Parent, Group or any other party. Creditors further agree that if Borrower is in the process of refinancing a portion of the Senior Debt with a new lender, and if Lender makes a request of Creditors, Creditors shall agree to enter into a new subordination agreement with the new lender on substantially the terms and conditions of this Agreement.

14. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

15. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of


law. Jurisdiction shall lie in the State of California. THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES. If the jury waiver set forth in this Section is not enforceable, then any dispute, controversy or claim arising out of or relating to this Agreement or any of the transactions contemplated herein shall be resolved by judicial reference pursuant to Code of Civil Procedure Section 638 et seq. before a mutually acceptable referee or, if none is selected, then a referee chosen by the Presiding Judge of the California Superior Court for Santa Clara County, provided this provision shall not restrict any party from seeking to enforce any prejudgment remedies.

16. This Agreement represents the entire agreement with respect to the subject matter hereof, and supersedes all prior negotiations, agreements and commitments. Creditors are not relying on any representations by Lender or any of the Zosano Group in entering into this Agreement, and each Creditor has kept and will continue to keep itself fully apprised of the financial and other condition of the Zosano Group. This Agreement may be amended, modified, or terminated, and the observance of any term of this Agreement may be waived, with respect to all parties to this Agreement (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Lender and a majority in interest of the Creditors based on amount of the outstanding Subordinated Debt, provided, however, that no such amendment, modification or waiver shall be effective to the extent such amendment, modification or waiver adversely affects the rights of any Creditor in a manner different from the consenting Creditors (other than differences related to the different principal amounts of the Subordinated Notes) without the consent of each such differently affected Creditor.

17. In the event of any legal action to enforce the rights of a party under this Agreement, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys’ fees, incurred in such action.


IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

 

Lender

HERCULES TECHNOLOGY GROWTH

CAPITAL, INC., a Maryland corporation

Signature:  

 

Print Name:   Ben Bang
Title:   Associate General Counsel

 

Borrower
ZP OPCO, INC.
Signature:  

 

By:  

 

Title:  

 

 

Parent
ZOSANO PHARMA CORPORATION
Signature:  

 

By:  

 

Title:  

 

[C REDITOR S IGNATURE P AGE F OLLOWS ]


“Creditors”
BMV DIRECT SOTRS LP
By:   BioMed Realty Holdings, Inc., its general partner

 

Signature:  

 

By:  

 

Title:  

 

 

NEW ENTERPRISES ASSOCIATES 12, LIMITED PARTNERSHIP
By:   NEA Partners 12, Limited Partnership, its general partner

 

Signature:

 

 

By:

 

 

Title:  

 


EXHIBIT A

CREDITORS

BMV DIRECT SOTRS LP

NEW ENTERPRISES ASSOCIATES 12,

LIMITED PARTNERSHIP


EXHIBIT D

Capitalization

Authorized shares of Common Stock:             30,000,000

Outstanding shares of Common Stock:           5,140,359 as follows:

 

Name of Stockholder

  

Number of
Shares Owned

 

ALZA Corporation

     1,763   

Mahmoud Ameri

     4   

James Barrett

     5   

BMV Direct SO LP

     454,243   

BMV Direct SOTRS LP

     1,579,573   

Joseph Bravo

     1,497   

Peter Daddona

     318,787   

Allan Encarnacion

     83   

HBM BioCapital (EUR) L.P.

     97   

HBM BioCapital (US) L.P.

     33   

HBM BioVentures (Cayman) Ltd.

     523   

Vikram Lamba

     631,250   

Laurie Liu

     1   

Jim Mellers

     2   

NEA Ventures 2006, Limited Partnership

     4   

New Enterprise Associates 12, Limited Partnership

     1,793,881   

Nomura Phase4 Ventures L.P.

     196,880   

Gary Otake

     4   

Elaine Peters

     2   

ProQuest Investments IV, L.P.

     160,848   

ProQuest Management LLC

     1   

Asha Ramdas

     2   

John Richard

     7   

Suzanne Schlesinger

     729   

Gail Schulze

     116   

Thorsten von Stein

     11   


Cedric Wright

     1   

Greg Yedinak

     12   

The Company has reserved 566,027 shares of Common Stock for issuance pursuant to the terms of its 2012 Stock Incentive Plan. Options to purchase [524,138] of such shares have been granted and are outstanding.

Pursuant to that certain Note Purchase Agreement dated as of September 9, 2013 by and among the Company and the purchasers named therein, the Company issued (and there are currently outstanding) Convertible Promissory Notes in an aggregate original principal amount of $3,033,723.04, which Convertible Promissory Notes automatically convert into equity securities of the Company upon the closing of a Qualified Financing (as defined therein) as more fully described in such Note Purchase Agreement.

Pursuant to that certain Note Purchase Agreement dated as of February 26, 2014 by and among the Company and the purchasers named therein, the Company issued (and there are currently outstanding) Convertible Promissory Notes in an aggregate original principal amount of $2,500,000, which Convertible Promissory Notes automatically convert into equity securities of the Company upon the closing of a Qualified Financing (as defined therein) as more fully described in such Note Purchase Agreement.

The Company and Hercules Technology Growth Capital, Inc. (“ Hercules ”) are parties to a Warrant Agreement dated as of June 3, 2014 pursuant to which Hercules has the right as of the date of this Agreement to purchase 31,674 shares of Common Stock.

Under Section 8.1 of the Loan and Security Agreement dated as of June 3, 2014 between Hercules and ZP Opco, Inc., Hercules or its assignee or nominee has the right to participate in an amount of up to $1,000,000 in the Company’s first sale of its equity securities after June 3, 2014.

Under Section 8.2 of the Loan and Security Agreement dated as of June 3, 2014 between Hercules and ZP Opco, Inc., Hercules has the right to convert up to $500,000 of the principal amount of the $4,000,000 term loan made by Hercules thereunder in the Company’s first sale of its equity securities after June 3, 2014.

Note: All share numbers in this Exhibit D give effect to the 1-for-4 reverse split of the Common Stock effected on July 11, 2014.

Exhibit 4.13

THE SECURITIES REPRESENTED HEREBY AND ANY SECURITIES ISSUED UPON CONVERSION HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT AND THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN COMPLIED WITH OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION AND FILING IN ALL SUCH JURISDICTIONS.

THE HOLDER OF THIS NOTE ACKNOWLEDGES AND UNDERSTANDS THAT THIS NOTE IS SUBJECT TO THE SUBORDINATION AGREEMENT (AS DEFINED BELOW).

8% SUBORDINATED CONVERTIBLE PROMISSORY NOTE

 

$[            ]    December 2, 2014

FOR VALUE RECEIVED, ZOSANO PHARMA CORPORATION, a Delaware corporation formerly named ZP Holdings, Inc. (the “ Company ”), hereby promises to pay to the order of [            ] (the “ Payee ”), the principal amount of [            ] Dollars ($[            ]) upon the earliest to occur of: (i) an Event of Default; (ii) the date that is thirty days following an IPO; or (iii) the Maturity Date, unless earlier converted in accordance with Section 5 below and subject to Section 6 below.

This unsecured Note is one of a series of Notes that are being issued pursuant to a Note Purchase Agreement, dated as of December 2, 2014, by and among the Company and the Purchasers named therein, including the Payee (as it may be amended from time to time, the “ Purchase Agreement ”). Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement. Each Note ranks equally and ratably with the other Notes without priority over one another. Any payments on the Notes (including any pre-payments made in accordance with Section 3) will be made in proportion to the outstanding principal amount each such Note represents relative to the aggregate outstanding principal amount of all Notes.

This Note is subject to that certain Subordination Agreement dated as of December 2, 2014 (the “ Subordination Agreement ”) among Hercules Technology Growth Capital, Inc., a Maryland corporation ( “Hercules” ), the Company, ZP Opco, Inc., a Delaware corporation formerly named Zosano Pharma, Inc. and wholly owned subsidiary of the Company (“ Opco ”), and the Purchasers, a copy of which is on file at the principal office of the Company and which is being entered into pursuant to that certain Loan and Security Agreement dated as of June 3, 2014 between Hercules and Opco.


1. Interest . The principal balance of this Note outstanding from time to time shall bear simple interest at a rate of eight percent (8%) per annum. Such interest shall accrue and shall be due and payable in arrears (together with principal) on the Maturity Date, subject to Sections 3, 4, 5 and 6 below.

2. Payments . Payment of principal and interest shall be made in lawful money of the United States of America in immediately available funds at the address of the Payee set forth below, or at such other place as the holder hereof shall have designated to the Company in writing.

3. Prepayment . The Company may accelerate and repay any portion of the outstanding principal and/or interest balance of this Note at a time of its choosing (including in the absence of an Event of Default or prior to the Maturity Date) only upon the prior written consent of the Requisite Noteholders.

4. Events of Default . Upon the occurrence of any Event of Default, the entire unpaid principal balance of this Note and all unpaid accrued interest hereunder shall become immediately due and payable without notice or demand.

5. Conversion .

5.1. Qualified Financing . Upon the closing of a Qualified Financing, the principal balance of this Note and any and all accrued and unpaid interest shall automatically convert into shares of Qualified Financing Securities at the Discounted Qualified Financing Price, and the Payee shall execute all necessary documents in connection with such Qualified Financing, subject to and all as more fully described in the Purchase Agreement.

5.2. Sale Transaction . Upon the closing of a Sale Transaction, the Payee shall be entitled to receive in respect of this Note certain consideration as more fully described in the Purchase Agreement.

6. Subordinated Debt . Notwithstanding anything to the contrary contained herein or in the Purchase Agreement, if any portion of the Senior Debt (as defined in the Subordination Agreement) remains outstanding on the date this Note is due and payable, then the Company’s failure to pay any amount under this Note or the Purchase Agreement during the time period from such date through the date that the Senior Debt is paid in full shall not constitute an Event of Default or a violation or breach of this Note or the Purchase Agreement, and shall not cause additional interest to accrue hereon at any higher default rate that may be provided for herein or therein.

7. New Note . Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, the Company will issue a new promissory note, of like tenor and amount and dated the original date of this Note, in lieu of such lost, stolen, destroyed or mutilated Note, and in such event the holder thereof agrees to indemnify and hold harmless the Company in respect of any such lost, stolen, destroyed or mutilated Note.

8. Officers and Directors Not Liable . In no event shall any officer or director of the Company be liable for any amounts due and payable pursuant to this Note.


9. Miscellaneous .

9.1. The undersigned and every endorser or guarantor of this Note, regardless of the time, order or place of signing, waives presentment, demand, protest and notice of every kind and assents to any one or more extensions or postponements of the time of payment or any other indulgences, to any substitutions, exchanges or releases of collateral available to the Payee, if any, and to the additions or releases of any other parties or persons primarily or secondarily liable.

9.2. By accepting this Note, the Payee and each subsequent holder of this Note acknowledges and agrees that all payments under this Note shall be expressly subordinate in right of payment and otherwise to any present or future debt obligation of the Company to any bank or other institutional lender, including, but not limited to, the Senior Debt (as defined in the Subordination Agreement) and the BioMed Indebtedness (as defined below) and to any present or future indebtedness on account of trade payables evidenced by secured promissory notes. Upon request by the Company, the Payee and each subsequent holder of this Note agrees to confirm this subordination relationship to any such bank or institutional lender in a form reasonably acceptable to or required by such bank or other institutional lender. The “ BioMed Indebtedness ” shall mean any and all indebtedness that may exist from time to time pursuant to that certain Secured Promissory Note, dated as of April 26, 2012, between the Company and BMV Direct SOTRS LP (as assignee of BioMed Realty Holdings, Inc.) or any successor of transferee thereto, including any amendment, modification, continuation or replacement thereof.

9.3. The provisions of this Note shall be governed by, and construed and enforced in accordance with, the substantive laws of the State of Delaware, without regard to its principles of conflicts of laws.

9.4. Notwithstanding anything herein to the contrary, payment of any interest, expense or other amount shall not be required if such payment would be unlawful. In any such event, this Note shall automatically be deemed amended so that interest charges and all other payments required hereunder, individually and in the aggregate, shall be equal to but not greater than the maximum permitted by law.

9.5. This Note may be amended or modified, and any provision of this Note may be waived, only with the written consent of the Company, on the one hand, and either (a) the holder hereof or (b) the Requisite Noteholders, on the other hand; provided, however , that in the case of clause (b), no such amendment, modification or waiver shall be effective without the written consent of the holder hereof to the extent such amendment, modification or waiver adversely affects the rights of the holder of this Note in a manner different from those of the holders of the other Notes (other than differences related solely to the different principal amounts of the Notes). Any amendment effected in accordance with the immediately preceding sentence shall be binding upon the Company, the Payee and each transferee of this Note.

9.6. This Note may not be assigned or transferred without first having the assignee or transferee hereof become a party to the Subordination Agreement.


9.7. In the event any one or more of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part or in any respect, or in the event that any one or more of the provisions of this Note operate or would prospectively operate to invalidate this Note, then and in any such event, such provision(s) only shall be deemed null and void and shall not affect any other provision of this Note and the remaining provisions of this Note shall remain operative and in full force and effect and in no way shall be affected, prejudiced, or disturbed thereby.

[remainder of page intentionally left blank]


IN WITNESS WHEREOF, the undersigned has executed this Note as an instrument under seal as of the date first above written.

 

ZOSANO PHARMA CORPORATION
By:  

 

  Name: Vikram Lamba
  Title: President and CEO

Signature Page to Convertible Promissory Note (December 2014)

Exhibit 10.40

SUBORDINATION AGREEMENT

This Subordination Agreement is made as of December 2, 2014 (this “ Agreement ”), by and among the parties listed on Exhibit A hereto (each a “ Creditor ” and collectively, the “ Creditors ”), ZP OPCO, INC. (f/k/a Zosano Pharma, Inc.) (“ Borrower ”), ZOSANO PHARMA CORPORATION (f/k/a ZP Holdings, Inc.) (“ Parent ”), and HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland corporation (the “ Lender ”).

Recitals

A. Borrower has requested and/or obtained a loan in the principal amount of $4,000,000.00 (the “ Senior Loan ”) from Lender which is or will be from time to time secured by assets and property of Borrower pursuant to the terms of that certain Loan and Security Agreement dated as of June 3, 2014 by and between Borrower and Lender, as the same may be amended from time to time (the “ Senior Loan Agreement ”). Capitalized terms not otherwise defined herein shall have the same meaning as in the Senior Loan Agreement.

B. Creditors have extended loans or other credit accommodations to Borrower, Parent and/or ZP Group, LLC (“ Group ” and collectively with Borrower and Parent, the “ Zosano Group ”), and/or may extend loans or other credit accommodations to the Zosano Group from time to time, subject to the terms of this Agreement.

C. In order to induce Lender to amend the Senior Loan Agreement to increase the credit facility available to Borrower and make the other changes requested by Borrower and Parent to be evidenced in that certain First Amendment to Loan and Security Agreement dated after the date hereof, and, at any time or from time to time, at Lender’s option, to make such further loans or other credit accommodations to or for the account of Borrower, and grant such renewals or extensions of the Senior Loan as Lender may deem advisable, Creditors are willing to subordinate the Subordinated Debt (as defined below) to the Senior Debt (as defined below), on the terms and conditions set forth herein.

Agreement

NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties agree as follows:

1. The term “ Senior Debt ” shall mean all obligations of any of Borrower to Lender, now existing or hereafter arising, under the Senior Loan Agreement and/or any other related documents governing, evidencing or securing the Senior Loan (collectively, “ Senior Debt Documents ”), together with all costs of collecting such obligations (including attorneys’ fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any Bankruptcy, reorganization or similar

 

Subordination Agreement – December 2014 Bridge Debt / Zosano Pharma      -1-   


proceeding. The term “ Senior Security Interest ” shall mean any security interest in or lien on the “ Collateral ” (as defined in the Senior Loan Agreement) in favor of Lender arising from the Senior Debt.

2. The term “ Subordinated Debt ” shall mean all obligations of any of the Zosano Group to any Creditor, now existing or hereafter arising, under (a) the Note Purchase Agreement dated as of December 2, 2014, executed by Parent in favor of the Creditors (the “ NPA ”), and (b) the series of related 8% Subordinated Convertible Promissory Notes dated even date therewith issued to the Creditors in the principal amount of up to $2,000,000.00 (the “ Subordinated Notes ”). The NPA and the Subordinated Notes are collectively referred to herein as the “ Subordinated Debt Documents .” The term “ Subordinated Security Interest ” shall mean any security interest in or lien, if any, on the Collateral in favor of the Creditors, or any of them, arising from the Subordinated Debt.

3. All Subordinated Debt is subordinated in right of payment to the Senior Debt. Creditor subordinates to the Senior Security Interest the Subordinated Security Interest, if any. Notwithstanding the respective dates of attachment or perfection of the Subordinated Security Interest, if any, and the Senior Security Interest, the Senior Security Interest shall at all times be prior to the Subordinated Security Interest. Creditor acknowledges that it will not be entitled to receive payment of the Subordinated Debt when due if, at the time such payment is required, any portion of the Senior Debt remains outstanding.

4. Each Creditor represents and warrants to Lender that, other than such Creditor, there are no Affiliates of Creditor to whom Borrower, Parent or Group owe any Indebtedness, except:

(a) in the case of BMV Direct SOTRS LP, pursuant to (i) the Lease dated as of May 1, 2007, as amended by the First Amendment to Lease dated as of June 20, 2008, the Second Amendment to Lease dated as of October 16, 2008, the Third Amendment to Lease dated as of April 29, 2011, the Fourth Amendment to Lease dated as of July 31, 2011, and the Fifth Amendment to Lease dated as of April 1, 2012, between BMR-34790 Ardentech Court LP, a Delaware limited partnership (“ Landlord ,” as successor in interest to BMR-34790 Ardentech Court LLC), and Borrower, which is guaranteed by the Guaranty dated as of April 1, 2012, executed by Parent in favor of Landlord (collectively, the “ Lease Documents ”), (ii) the Secured Promissory Note dated as of April 26, 2012 executed by Parent originally in favor of BioMed Realty Holdings, Inc., a Maryland corporation (“ BMR ”), in the principal amount of $8,556,533.00, together with the agreements securing such note, including the (A) LLC Pledge Agreement, dated as of April 26, 2012 executed by Borrower originally in favor of BMR (the “ LLC Pledge Agreement ”), (B) the Intellectual Property Security Agreement dated as of April 26, 2012 executed by Parent originally in favor of BMR, and (C) the Security Agreement dated as of April 26, 2012 executed by Parent originally in favor of BMR, all of which have been assigned to BMV DIRECT SOTRS LP, a Delaware limited partnership, and collectively are referred to as the “ BMV Debt ”; (iii) the Note Purchase Agreement dated as of September 9, 2013 (the “ 2013 NPA ”) among Parent, BMV Direct

 

Subordination Agreement – December 2014 Bridge Debt / Zosano Pharma      -2-   


SO LP, a Delaware limited partnership (“ BMV SO ”), BMV Direct SOTRS LP, a Delaware limited partnership (“ BMV SOTRS ”), ProQuest Investments IV, L.P., ProQuest Management LLC, and New Enterprise Associates 12, Limited Partnership (“ NEA ”), the 8% Subordinated Convertible Promissory Note in the principal amount of $303,372.00 dated as of September 9, 2013 by Parent in favor of BMV SO, the 8% Subordinated Convertible Promissory Note in the principal amount of $991,047.43 dated as of September 9, 2013 by Parent in favor of BMV SOTRS, and other related agreements (collectively, the “ 2013 BMV Notes ”); and (iv) the Note Purchase Agreement dated as of February 26, 2014 (the “ February 2014 NPA ”) among Parent, BMV SO, BMV SOTRS and NEA, the 8% Subordinated Convertible Promissory Note in the principal amount of $249,000.00 dated as of February 26, 2014 by Parent in favor of BMV SO, the 8% Subordinated Convertible Promissory Note in the principal amount of $1,069,709.23 dated as of February 26, 2014 by Parent in favor of BMV SOTRS, and other related agreements (collectively, the “ February 2014 BMV Notes ”); and

(b) in the case of NEA, (i) the 2013 NPA and the 8% Subordinated Convertible Promissory Note in the principal amount of $1,159,532.21 dated as of September 9, 2013 by Parent in favor of NEA (the “ 2013 NEA Note ”) and (ii) the February 2014 NPA and the 8% Subordinated Convertible Promissory Note in the principal amount of $1,181,290.77 dated as of February 26, 2014 by Parent in favor of NEA the “ February 2014 NEA Note ”);.

For purposes of this Agreement, in no event shall the Subordinated Debt include any of the Lease Documents, the BMV Debt, the 2013 NPA or the Indebtedness owed pursuant thereto (including the 2013 BMV Notes and the 2013 NEA Note), or the February 2014 NPA or the Indebtedness owed pursuant thereto (including the February 2014 BMV Notes and the February 2014 NEA Note), as such obligations are subordinated pursuant to separate agreements.

5. Without Lender’s written consent, each Creditor agrees that it will not demand or receive from Borrower, Parent or Group (and Borrower and Parent agrees not to pay to Creditor) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will such Creditor exercise any remedy with respect to the Collateral, nor will such Creditor commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower or Parent, for so long as any portion of the Senior Debt remains outstanding, provided , however , that each Creditor may convert any part of the Subordinated Debt (other than Subordinated Debt owed to such Creditor by Group) into equity securities of Borrower in accordance with the terms of the Subordinated Notes.

6. Each Creditor shall promptly deliver to Lender in the form received (except for endorsement or assignment by such Creditor, where required by Lender) for application to the Senior Debt any payment, distribution, transfer of property or proceeds received by such Creditor with respect to the Subordinated Debt other than in accordance with this Agreement.

7. In the event of Borrower’s, Holding’s or Group’s insolvency,

 

Subordination Agreement – December 2014 Bridge Debt / Zosano Pharma      -3-   


reorganization or any case or proceeding under any Bankruptcy or insolvency law or laws relating to the relief of debtors, this Agreement shall remain in full force and effect, and Lender’s claims arising from the Senior Debt against Borrower and Parent and the respective estates of Borrower and Parent, to the extent that such claims have priority over the Subordinated Debt under this Agreement, shall be paid in full before any payment with respect to the Subordinated Debt is made to any Creditor.

8. For so long as any of the Senior Debt remains unpaid, each Creditor irrevocably appoints Lender as such Creditor’s attorney-in-fact, and grants to Lender a power of attorney with full power of substitution in the name of such Creditor or in the name of Lender for the use and benefit of Lender, without notice to such Creditor, to perform at Lender’s option the following acts in any Bankruptcy, insolvency or similar proceeding involving Borrower, Parent and/or Group:

(a) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of any Creditor if such Creditor does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Lender elects, in its sole discretion, to file such claim or claims; and

(b) To accept or reject any plan of reorganization or arrangement on behalf of any Creditor and to otherwise vote any Creditor’s claims in respect of any Subordinated Debt in any manner that Lender deems appropriate for the enforcement of its rights hereunder.

9. Section 5 of this Agreement shall automatically terminate and be of no further force or effect upon the occurrence of the Termination Date (defined below). “ Termination Date ” means the earlier to occur of ninety (90) days following Lender’s acceleration of the Senior Debt and October 1, 2017 (the “ Enforcement Period ”), provided however, that the Termination Date shall be extended if (and for so long as) at the time the Enforcement Period would otherwise terminate, Lender is, in good faith, diligently pursuing Material Enforcement Actions. If Borrower becomes subject to a bankruptcy proceeding under Title 11 of the United States Code, as amended (the “ Bankruptcy Code ”) prior to the occurrence of the Termination Date, the Termination Date shall be extended to a date ninety (90) days following the effective date of the removal or lifting of any restriction imposed by the Bankruptcy Code which prohibits or materially restricts Lender from enforcing its rights against Borrower or Borrower’s property (the “ Post-Bankruptcy Enforcement Period ”), provided however, that the Termination Date shall be extended for so long as and if immediately prior to the expiration of the Post-Bankruptcy Enforcement Period, Lender is, in good faith, diligently pursuing Material Enforcement Actions. For the purposes of this Section 9, the following would constitute diligent pursuit of Material Enforcement Actions: the solicitation of bids from third parties to conduct the liquidation of any material portion of the Collateral; the engagement or retention of sales brokers, marketing agents, investment bankers, accountants, auctioneers or other third parties for the purpose of valuing, marketing, promoting or selling any material portion of the Collateral; the initiation of any action to take physical possession of or to exercise dominion or control over (other than cash dominion) any material portion of the Collateral; the notification of all or

 

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substantially all account debtors to make payments to Lender in respect of Accounts comprising Collateral; or the commencement of any legal proceedings or actions against or with respect to any material portion of the Collateral.

10. Each Creditor shall immediately affix a legend to the instruments evidencing the Subordinated Debt stating that the instruments are subject to the terms of this Agreement. No amendment of the documents evidencing or relating to the Subordinated Debt shall directly or indirectly modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated Debt.

11. Subject to Section 9 hereof, this Agreement shall remain effective for so long as the Lender has any obligation to make disbursements or credit extensions to Borrower under the Senior Debt Documents or Borrower owes any amounts to Lender under the Senior Debt Documents. If, at any time after payment in full of the Senior Debt, any payments of the Senior Debt must be disgorged by Lender for any reason (including, without limitation, the Bankruptcy of Borrower), this Agreement and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made, and each Creditor shall immediately pay over to Lender all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, with notice to Creditors but without Creditors’ consent, Lender may take such actions with respect to the Senior Debt as Lender, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount as allowed herein, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of the Senior Debt Documents, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Lender’s rights hereunder.

12. Creditors hereby consent to the incurrence by the Borrower of the Senior Debt.

13. This Agreement shall bind and benefit any successors or assignees of each Creditor and any successors or assigns of Lender. This Agreement is solely for the benefit of Creditors and Lender and not for the benefit of Borrower, Parent, Group or any other party. Creditors further agree that if Borrower is in the process of refinancing a portion of the Senior Debt with a new lender, and if Lender makes a request of Creditors, Creditors shall agree to enter into a new subordination agreement with the new lender on substantially the terms and conditions of this Agreement.

14. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

15. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Jurisdiction shall lie in the State of California. THE UNDERSIGNED

 

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ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES. If the jury waiver set forth in this Section is not enforceable, then any dispute, controversy or claim arising out of or relating to this Agreement or any of the transactions contemplated herein shall be resolved by judicial reference pursuant to Code of Civil Procedure Section 638 et seq. before a mutually acceptable referee or, if none is selected, then a referee chosen by the Presiding Judge of the California Superior Court for Santa Clara County, provided this provision shall not restrict any party from seeking to enforce any prejudgment remedies.

16. This Agreement represents the entire agreement with respect to the subject matter hereof, and supersedes all prior negotiations, agreements and commitments. Creditors are not relying on any representations by Lender or any of the Zosano Group in entering into this Agreement, and each Creditor has kept and will continue to keep itself fully apprised of the financial and other condition of the Zosano Group. This Agreement may be amended, modified, or terminated, and the observance of any term of this Agreement may be waived, with respect to all parties to this Agreement (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Lender and a majority in interest of the Creditors based on amount of the outstanding Subordinated Debt, provided, however, that no such amendment, modification or waiver shall be effective to the extent such amendment, modification or waiver adversely affects the rights of any Creditor in a manner different from the consenting Creditors (other than differences related to the different principal amounts of the Subordinated Notes) without the consent of each such differently affected Creditor.

17. In the event of any legal action to enforce the rights of a party under this Agreement, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys’ fees, incurred in such action.

 

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

 

“Lender”

HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland corporation
Signature:  

/s/ Ben Bang

Print Name:   Ben Bang
Title:   Associate General Counsel
“Borrower”
ZP OPCO, INC.
Signature:  

/s/ Vikram Lamba

By:   Vikram Lamba
Title:   President and CEO
“Parent”
ZOSANO PHARMA CORPORATION
Signature:  

/s/ Vikram Lamba

By:   Vikram Lamba

Title:

  President and CEO

[C REDITOR S IGNATURE P AGE F OLLOWS ]

 

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“Creditors”
BMV DIRECT SOTRS LP
By:  

BioMed Realty Holdings, Inc.,

its general partner

Signature:  

/s/ Brian Wolfe

By:   Brian Wolfe
Title:   Assistant Secretary
NEW ENTERPRISES ASSOCIATES 12,
LIMITED PARTNERSHIP
By:   NEA Partners 12, Limited Partnership, its general partner
Signature:  

/s/ Louis S. Citron

By:   Louis S. Citron
Title:   Chief Legal Officer

 

Subordination Agreement – December 2014 Bridge Debt / Zosano Pharma      -8-   


EXHIBIT A

CREDITORS

BMV DIRECT SOTRS LP

NEW ENTERPRISES ASSOCIATES 12,

LIMITED PARTNERSHIP

 

Subordination Agreement – December 2014 Bridge Debt / Zosano Pharma      -9-   

Exhibit 10.41

Execution Version

COLLABORATION, DEVELOPMENT AND LICENSE AGREEMENT

THIS COLLABORATION, DEVELOPMENT AND LICENSE AGREEMENT (this “ Agreement ”) is entered into as of November 21, 2014 (the “ Effective Date ”) by and between ZP OPCO, INC. (formerly Zosano Pharma, Inc.), a Delaware corporation and wholly owned subsidiary of Zosano Pharma Corporation, having a place of business at 34790 Ardentech Court, Fremont, California 94555, USA (“ Zosano ”), and ELI LILLY AND COMPANY, an Indiana corporation, with its principal place of business at Lilly Corporate Center, Indianapolis, Indiana 46285 (“ Lilly ”).

RECITALS

WHEREAS, Zosano is a corporation organized and operated for the purpose of research, development and commercialization of products based on its proprietary transdermal drug delivery technology;

WHEREAS, Lilly is a leading global health care company engaged in the research, development and commercialization of pharmaceutical products;

WHEREAS, Zosano has completed a Phase 2 Clinical Trial (as defined below) for a patch utilizing a microprojection system containing a once-daily formulation of parathyroid hormone (“ PTH ”) and a Phase 1 Clinical Trial (as defined below) for such a patch containing a once-weekly formulation of PTH;

WHEREAS, Lilly currently markets Forteo®, a once-daily formulation of Lilly’s recombinant human PTH analog (1-34) rhPTH(1-34) administered by subcutaneous injection and approved in the United States for the treatment of severe osteoporosis;

WHEREAS, Lilly desires to obtain from Zosano, and Zosano is willing to grant to Lilly, an exclusive, worldwide license to Zosano’s transdermal microprojection patch technology for use with once-daily and other dosing duration PTH formulations in accordance with the terms and conditions of this Agreement;

WHEREAS, under this Agreement, Zosano will be responsible for the development activities for use of its transdermal microprojection patch technology with once-daily and other dosing duration PTH formulations, including a Phase 3 Clinical Trial (as defined below) for a patch containing a once-daily formulation of PTH, provided that Zosano may, but will not be obligated to, pursue development of a patch containing any dosing formulation of PTH other than a once-daily formulation;

WHEREAS, under this Agreement, Zosano will be responsible for the manufacture of commercial supplies of its transdermal microprojection patch technology with a once-daily PTH formulation; and

WHEREAS, concurrently with the execution and delivery of this Agreement, Lilly and Zosano Pharma Corporation, a Delaware corporation and parent of Zosano (“ Parent ”), are entering into a Common Stock Purchase Agreement pursuant to which Lilly will purchase up to $15,000,000 of Parent’s common stock in a private placement concurrent with the consummation of Parent’s first underwritten public offering of its common stock;

 

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NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

1. Definitions

 

1.1 Capitalized terms used but not otherwise defined in this Agreement shall have the meanings ascribed to them in Appendix 1.1 attached hereto.

 

2 The License and Grant of Rights

 

  2.1. Zosano License to Lilly . Subject to the terms and conditions of this Agreement, Zosano hereby grants to Lilly a worldwide, royalty-bearing, exclusive (even as to Zosano) license, with the right to grant sublicenses solely in accordance with Section 2.3, under the Licensed Technology, to make, have made, use, sell, offer for sale and import and otherwise Commercialize Licensed Products in the Field in the Territory.

 

  2.2. No Implied Rights . No right or license under any Intellectual Property is granted or shall be granted by implication, estoppel or otherwise under this Agreement. All such rights or licenses are or shall be granted only as expressly provided in the terms of this Agreement. All rights not expressly granted by a Party under this Agreement are reserved by such Party and may be used by such Party for any purpose. For avoidance of doubt, Lilly has not granted Zosano a license to make, have made, use, sell, offer for sale or import Lilly’s Forteo ® molecule (except for the Development activities under this Agreement) or a right to use Lilly’s Forteo ® trademark or any other Lilly trademark.

 

  2.3. Sublicensing by Lilly . From and after the date Lilly has made the first Development milestone payment under Section 8.2, Lilly shall be entitled, without the prior consent of Zosano, to grant one or more sublicenses to Third Parties of its rights to the Licensed Technology granted pursuant to Section 2.1 with respect to Licensed Products, provided that such sublicense is limited to a grant of rights no broader than the rights granted to Lilly under this Agreement to Lilly’s Affiliates or their respective commercialization subcontractors and distributors; provided, however , that if Lilly wishes to grant sublicenses for Licensed Technology to Third Parties, then Lilly (or its Affiliate) shall obtain a confidential nondisclosure and invention assignment agreement with the prospective sublicensee that contains terms at least as stringent as those terms included in Section 15. In the case of any sublicense, such sublicense will exclude the right of the sublicensee to further sublicense any of the rights granted by Lilly to such sublicensee under the sublicense and Lilly will be responsible for performance of this Agreement notwithstanding the appointment of such sublicensee to perform any part of this Agreement, and for any failure by its sublicensee to comply with all relevant restrictions, limitations and obligations in this Agreement, including the payment of all payments due, and making reports and keeping books and records.

 

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  Each such sublicense shall refer to this Agreement and shall be subordinate to and consistent with the terms and conditions of this Agreement, and shall not limit the ability of Lilly to fully perform all of its material obligations under this Agreement or Zosano’s rights under this Agreement. Lilly will provide to Zosano, within thirty (30) days after its execution a copy of each such sublicense, which Zosano may share with its licensors.

 

  2.4. Exclusivity . Each Party covenants and agrees during the Term to not, itself or with or through an Affiliate or Third Party, Develop, Manufacture or Commercialize in the Field in the Territory any products using a transdermal patch technology drug delivery system for PTH formulations or any other pharmaceutical formulation useful to treat osteoporosis, except as permitted under this Agreement.

 

  2.5. Retained Rights . Zosano shall at all times retain the unrestricted right, but not the obligation, under Intellectual Property Controlled by Zosano, to Develop, Manufacture or Commercialize a microprojection array which pierces through the outmost (i.e., the stratum corneum) layer of the skin and the Licensed Technology, by itself or with Third Parties, other than for use in the Field as set forth in Sections 3.1, 4.5 and 6. Nothing in this Agreement shall restrict Zosano’s right to Develop and Manufacture (but not Commercialize during the Term) any New Dosing Durations of the Licensed Product.

 

  2.6. Right to Engage Affiliates and Third Parties . Each Party shall have the right to engage their Affiliates or Third Party contractors (“ Subcontractors ”) to perform any portion of its Development or Commercialization obligations hereunder; except that no Subcontractor can be debarred or disqualified by a Regulatory Authority. Each Party shall be responsible for ensuring that, prior to engaging any Subcontractor that such Subcontractor is subject to written agreements containing terms and conditions: (i) consistent with the relevant terms and conditions of this Agreement protecting the rights of the Parties under the Agreement including imposing obligations of confidentiality on each such Subcontractor; (ii) that vests ownership of any and all inventions developed by such Subcontractor relating solely to Licensed Products in the course of performing such subcontracted work in the contracting Party; (iii) that does not impose any payment obligations or liability on the other Party without the prior written consent of the other Party and (iv) that is otherwise consistent with the terms of the Development Plan to the extent applicable.

 

3. Development . As between the Parties, Zosano shall, at Zosano’s cost and expense, oversee, have sole authority and responsibility for, and retain final decision-making authority over, all Development activities with respect to the Licensed Products, including the implementation of the Development Plan attached hereto as Exhibit A . The Development Plan shall be amended only upon mutual written agreement by the Parties, provided that Zosano may amend the Development Plan without such agreement by Lilly (but with a copy provided to Lilly within three (3) days) with respect to any amendments addressing discussions with and guidance by the FDA or PMDA. In connection with the Development Plan, Zosano shall use commercially reasonable efforts to achieve the Critical Success Factors set forth in Schedule 3.3.1 attached hereto. Zosano shall update the Joint Collaboration Committee, “JCC”, from

 

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  time to time on the status of its Development activities, including the Critical Success Factors, and data obtained from its research programs and clinical trials using the Daily Product. Zosano shall provide summaries to the JCC at least once every three (3) months of its Development of the Daily Product.

 

  3.1. Development Diligence . Each Party shall perform its obligations under the Development Plan in a professional and timely manner, and in compliance with all Laws applicable to its activities under the Development Plan. Lilly will provide Reasonable Assistance to Zosano from time to time, in advancing the Daily Product.

 

  3.2. Supply of Materials from Lilly to Zosano . During the Term, Lilly shall supply to Zosano, at a price of [**] for placebo filled Pens and [**] for Forteo ® filled Pens in quantities and at times determined by the JCC solely for the purpose of implementing the Development Plan. A Supply Agreement, pharmacovigilance and quality agreement will be entered into for the Pens within sixty (60) days of the Effective Date. Zosano shall, and shall cause its Affiliates and Third Party Subcontractors to, use the Pens solely in accordance with the terms of this Agreement and the Development Plan. Zosano or its Affiliates or permitted Subcontractors shall retain possession over such Pens and not relabel, resell or provide the Pens to any other Third Party without Lilly’s prior written consent, which consent may be withheld in Lilly’s sole discretion. Lilly shall provide to Zosano, its Affiliates or their respective sublicensees Reasonable Assistance, training and/or support as may be requested by Zosano from time to time during the Term, at Zosano’s expense, to use and practice the Intellectual Property owned or Controlled by Lilly solely for the purpose of using the Pens as set forth in this Section 3.2 and in the Development Plan (including with respect to the CSFs).

 

  3.3. Critical Success Factors.

 

  3.3.1. The Parties have agreed upon a set of criteria describing key indicators for success of the Development Plan for the Daily Product, which is set forth in Schedule 3.3.1 attached hereto (the “Critical Success Factors” or “CSFs” ). Lilly shall have final decision-making authority over whether CSF 1 (as defined below) has been achieved.

 

  3.3.2. As the first CSF, Zosano shall conduct a patient preference study for the Daily Product as part of its Development activities, in accordance with and as set forth in more detail in Exhibit B attached hereto (the “ Patient Preference Study ”). Lilly shall inform Zosano in writing within thirty (30) days after the complete written results from the Patient Preference Study have been received by Lilly as to whether the benchmarks for the Patient Preference Study as described therein (“ CSF 1 ”) have been achieved. If such benchmarks have not been achieved, then Lilly shall have the right to terminate this Agreement within fifteen (15) days after the complete written results from the Patient Preference Study have been received by Lilly or else the foregoing termination right with respect to the Patient Preference Study benchmarks shall lapse.

 

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  3.3.3. In the event Zosano does not achieve any one of the CSFs, Lilly shall have the right to terminate this Agreement in accordance with the termination provision set forth in clause (i) of Section 9.3, and for the Patient Preference Study, subject to the timeline set forth in Section 3.3.2.

 

  3.3.4. Subject to Lilly’s right of reinstatement in Section 9.5.3, if prior to Lilly’s payment of the first Development milestone payment under Section 8.2 Zosano determines, in its sole discretion, that it is commercially or scientifically unreasonable to pursue any CSF and discontinues the Development of the Daily Product, then Zosano shall have the right to terminate this Agreement in accordance with the termination provision set forth in Section 9.2.

 

  3.3.5. Notwithstanding the foregoing, prior to the termination by either Party under this Section 3.3 or in the event Zosano determines, based on the progress of the Development of the Daily Product, that a CSF should be adjusted, the Parties shall meet to discuss in good faith the reasons for such termination and consider amending this Agreement, including the financial terms and/or the CSFs, as appropriate.

 

4. Regulatory and Patient Safety Matters . The Parties shall come together to develop and execute a Safety-Regulatory Agreement, said execution shall be no later than thirty (30) days prior to first patient visit for any interventional or non-interventional clinical trials sponsored by Zosano, including the patient preference study. The Safety-Regulatory Agreement shall incorporate terms in this section and further define roles and responsibilities with respect to Lilly’s regulatory and/or safety obligations related to the Licensed Products and/or Lilly’s ongoing work with Forteo® including Adverse Event management, reporting and exchange, safety surveillance and signal detection, and risk management. Zosano shall, at Zosano’s cost and expense, oversee, have sole authority and responsibility for, and retain final decision-making authority over the planning, implementation and control of regulatory activities, and the preparation, prosecution and maintenance, in Zosano’s name, of any regulatory filings, INDs and Regulatory Approvals, for the Licensed Products in the Field in the Territory. Zosano shall be solely responsible for responding to any communications related to any Licensed Product from any Regulatory Authority in the Field in the Territory. After Zosano transfers a Regulatory Approval to Lilly pursuant to Section 4.6, then Lilly shall have final decision-making authority with regard to all regulatory issues for the transferred Regulatory Approval. For avoidance of doubt, Lilly shall retain rights and final decision-making authority for regulatory and safety in support of investigational applications and marketing authorizations for Forteo® including patient safety/pharmacovigilance, ownership of the global safety database, the role of Qualified Person for Pharmacovigilance, safety surveillance and risk management. After Zosano transfers a Regulatory Approval to Lilly pursuant to Section 4.6 then Lilly shall have final decision-making authority with regard to all regulatory and safety issues for the transferred Regulatory Approval. Lilly shall have the right to perform audits (“ Audits ”) of Zosano’s safety and regulatory activities including each Party’s oversight of any Third Party Organization (“ TPO ”) contracted to perform safety and/or regulatory activities as outlined in this Agreement and/or the Safety-Regulatory Agreement. The Audit(s) may be conducted through reviews of documentation and/or data and through interviews of relevant personnel, the purpose of which is to

 

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  understand the systems and processes in place and verify the compliance of practices to the same. The frequency of Audits will be no more than every three (3) years, except in the case where Lilly has a reasonable concern to initiate a for-cause audit. The notification of intent to conduct Audits will be provided in advance within a reasonable time period, according to the situation.

 

  4.1. Coordination . Lilly shall provide Reasonable Assistance to Zosano in seeking Regulatory Approval for the Licensed Products set forth in the Development Plan, initially, the Daily Product. To the extent Lilly receives written or material oral communication from the FDA, PMDA or any other Regulatory Authority relating to any Regulatory Approval with respect to any Licensed Product, Lilly shall notify Zosano and provide to Zosano a copy of any material written communication as soon as reasonably practicable. Zosano shall provide Lilly with drafts of all INDs/foreign equivalents and applications for Regulatory Approval for Licensed Products reasonably in advance of filing so that Lilly may provide comments thereon for consideration in good faith by Zosano.

 

  4.2. Records . Each Party shall keep complete, true and accurate books and records relating to Development, Manufacturing or Commercialization activities conducted by such Party under this Agreement for the period required by applicable Laws. Each Party, at its own costs, shall be responsible for archiving all relevant and required original documentation, notebooks and raw data in relation to the Development, Manufacturing and Commercialization of Licensed Products. Each Party shall adhere to its internal document and/or records retention policies relating to Development, Manufacture and Commercialization of Licensed Products consistent with applicable Laws.

 

  4.3. Right of Reference . Upon Zosano’s request, Lilly shall in good faith reasonably consider granting Zosano a right of reference and access, in the Field and in the Territory, to regulatory filings and clinical data information (“ Lilly Regulatory Filings”) Controlled by Lilly or its Affiliates that is necessary to obtain a Regulatory Approval for a Licensed Product or is specifically requested by a Regulatory Authority related to the research, Development, use, Manufacture or Commercialization by Zosano, its Affiliates or their respective sublicensees of Licensed Products under this Agreement. Any such right of reference shall not survive termination or expiration of this Agreement. Lilly hereby covenants that, during the Term and following the termination (other than by Lilly pursuant to Section 9.4 hereof) or expiration of this Agreement, neither it nor any Affiliate, nor any agent acting on its or its Affiliate’s behalf, shall file, cause to be filed or otherwise assert, or join or assist in any way, financially or otherwise, any party filing or asserting, against Zosano or any Affiliate, or any of their respective Subcontractors, manufacturers, distributors, sublicensees or agents, any administrative or judicial proceeding or claim of infringement or misappropriation of any Intellectual Property right that Covers a Licensed Product, or any other claim interfering with Zosano’s right to Develop or Manufacture the Licensed Technology in the Field in the Territory or seek Regulatory Approval for the Licensed Products under this Agreement (except as precluded under Sections 2.4 and 9.5.4) pursuant to Section 505(b)(2) of the United States Federal Food, Drug and Cosmetic Act, as amended and the regulations promulgated thereunder, and the right

 

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  of reference granted under this Section 4.3 shall continue following termination for this purpose. In the event of a violation of this covenant, Lilly agrees that injunctive relief or specific performance shall be an appropriate and available remedy, in addition to any other remedies available at law or equity.

 

  4.4. Letter of Authorization . Pursuant to any right of reference and access provided under Section 4.3, Lilly shall provide a letter of authorization to Zosano, and/or the applicable regulatory agency, as appropriate under applicable Law, in a form mutually acceptable to Zosano and Lilly, within fifteen (15) days of request from Zosano, in respect of the Lilly Regulatory Filings, for use solely in connection with the research, Development, use and Manufacture (including obtaining of Regulatory Approvals) of Licensed Products in the Field in the Territory under this Agreement. Notwithstanding the foregoing, Lilly shall not be obligated to provide Zosano copies of any Lilly Forteo ® Regulatory Filings to the United States Food & Drug Administration for more than the past five (5) years and such copies shall be limited to the IND Annual Report, Developmental Safety Update Report (DSUR) and Periodic Safety Update Report (PSUR). Lilly shall take all actions reasonably necessary to effect such letter of authorization and right of reference and access.

 

  4.5. Regulatory Diligence . Each Party shall use commercially reasonable efforts to perform its obligations under the Development Plan in a professional and timely manner with respect to regulatory obligations. Lilly shall have a right but not an obligation to audit or review clinical quality systems, clinical study data and clinical research organizations engaged by Zosano in carrying out the Development Plan.

 

  4.6. Regulatory Approval Transfer . Zosano shall exclusively transfer the Regulatory Approvals for Licensed Products to Lilly in order that Lilly can Commercialize the Licensed Product in the Field in the Territory in compliance with applicable Law and the Licensed Product’s approved label. The transfer of the Regulatory Approvals shall occur as soon as possible to permit Lilly to timely Commercialize the Daily Product/Licensed Product pursuant to and in compliance with applicable Law. The Parties will work together to minimize launch timing and optimize commercialization by determining the most efficient manner to transfer the Regulatory Approval, including but not limited to, transition activities to be conducted by one or both Parties, at each Party’s expense, prior to the receipt of Regulatory Approval. Lilly hereby grants to Zosano a right of reference and access to such transferred Regulatory Approvals (including all clinical data information referenced therein) solely for purposes outside the Field and unrelated to the treatment of osteoporosis. Zosano shall be permitted to retain copies of such transferred Regulatory Approvals (including clinical data information). Lilly shall provide a letter of authorization to Zosano, in a form mutually acceptable to Zosano and Lilly, within fifteen (15) days of request from Zosano, in respect of such transferred Regulatory Approvals. Lilly shall take all actions reasonably necessary to effect such letter of authorization and right of reference and access. This right of reference and access, and Lilly’s obligations under this Section 4.6, shall survive termination or expiration of this Agreement.

 

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  4.7. Notice Concerning Safety or Efficacy Issues . Each Party shall provide the other Party with notice, within one (1) business day after notification or other information (directly or indirectly) that it receives (and providing, as soon as reasonably possible, copies of any associated written requests) that (a) raises any material concerns regarding the safety or efficacy of any Licensed Product, (b) indicates or suggests a Third Party claim arising in connection with any Licensed Product, or (c) is reasonably likely to lead to a recall of any Licensed Product. Information that shall be disclosed (to the extent it relates to the subject matter of the foregoing clauses (a) through (c), inclusive) shall include, without limitation:

 

  4.7.1. inspections by a Regulatory Authority of manufacturing, distribution or other related facilities concerning any Licensed Product;

 

  4.7.2. inquiries by a Regulatory Authority concerning clinical investigation activities (including inquiries of investigators, clinical monitoring organizations, inquires related to patient safety and other related parties) with respect to any Licensed Product;

 

  4.7.3. any material communication (in any form, including written, oral or electronic form) from a Regulatory Authority involving the Manufacture or Commercialization of any Licensed Product or any other Regulatory Authority reviews or inquiries relating to any event set forth in this Section 4.7;

 

  4.7.4. an initiation of any Regulatory Authority investigation, detention, seizure or injunction concerning any Licensed Product; and

 

  4.7.5. any other regulatory action (e.g., proposed labeling or other registration dossier changes and recalls) that would affect any Licensed Product.

 

5. Commercialization Diligence . Lilly shall, at Lilly’s cost and expense, be responsible for and shall have the final decision-making authority for the planning, implementation and control of the Commercialization of the Daily Product in the Field in the Territory, including, without limitation, whether or not to launch the Daily Product in each country of the Territory, and determining and establishing the price and terms of sale (including any rebates or discounts) of the Daily Product in the Field for each country in the Territory. Zosano shall provide Reasonable Assistance to Lilly in initially implementing the Commercialization of the Daily Product. Following the achievement of each CSF with respect to the United States, Lilly shall use commercially reasonable efforts to Commercialize the Daily Product in the United States. Following the achievement of each CSF with respect to any other country, Lilly shall use commercially reasonable efforts to Commercialize the Daily Product in such country in compliance with all Laws applicable to Commercialization activities in such country.

 

6. Manufacturing . Zosano shall be responsible for development and scale up of the Manufacturing process for the complete Product Patch system (including the applicator) and packaging, and for the manufacturing of clinical and, subject to Lilly’s rights under Section 6.2, commercial supplies of the Daily Product. Until such time as Lilly elects to assume

 

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  responsibility for the Manufacture of commercial supplies of the Daily Product under Section 6.2, Zosano shall, at Zosano’s cost and expense, be responsible for and shall have the final decision-making authority (except for the selection of manufacturers which shall require Lilly’s consent, such consent not to be unreasonably withheld, conditioned or delayed) for the planning, implementation and control of the Manufacture of the Daily Product in the Field in the Territory. Aside from day to day management of the Manufacturing operations, Zosano’s final decision-making authority shall expire upon transfer of Regulatory Approval to Lilly pursuant to Section 4.6. Capital expenditures necessary to meet Zosano’s Manufacturing responsibilities to deliver the complete Product Patch system (including the applicator) and packaging shall be borne by Zosano. Lilly shall provide Reasonable Assistance to Zosano to enable Zosano to Manufacture commercial supplies of Daily Product. Zosano will provide commercial supplies of the complete Product Patch system (including the applicator) and packaging for the Daily Product to Lilly at the actual Manufacturing Cost but not to exceed the cost per day of therapy for the Product Patch system set forth in the table below.

 

Volume (Daily Product per calendar year)

   1 Million      5 Million      10 Million  

Price (per day of therapy)

     [**]         [**]         [**]   

The Parties shall negotiate in good faith Supply and Quality Agreements incorporating these terms within one hundred twenty (120) days after the first submission for Regulatory Approval of a Daily Product in the Territory.

6.1. Inspection by Lilly . Upon fifteen (15) days’ prior written notice to Zosano, and during normal working hours, Zosano shall allow Lilly and/or its authorized representative or agents, to inspect the premises of Zosano or their contract manufacturer where the Daily Product manufacturing are conducted for purposes of overseeing and auditing the Manufacture (the “ Audit ”), provided that such Audit does not (i) unduly disrupt the normal operation of Zosano’s business or (ii) require Zosano to provide Lilly or its authorized representatives or agents any Confidential Information that is not related to the Manufacture of the Daily Product. In addition, the Parties agree that any such Audit shall not be conducted more than once every calendar year. Notwithstanding the foregoing sentence, Lilly shall have the right to conduct one additional Audit prior to each first commercial sale of the Daily Product. Notwithstanding the above, for sufficient Cause which shall be communicated in writing to Zosano, Lilly may have immediate access during normal working hours limited to the extent of inspection directly related to such Cause, with appropriate protections to preserve the confidentiality of information at the applicable facility. “ Cause ” shall mean a Daily Product safety, health and safety, environmental or quality issue that has been specifically identified, or as mandated by Regulatory Authorities, and where time is of the essence. Any such audit conducted for “Cause” shall not supplant or negate the right for the annual Audit.

6.2. Zosano shall be responsible for obtaining the active pharmaceutical ingredients (“ API ”) required for its Manufacture of the Daily Product. The Parties acknowledge that as of the Effective Date, [**] is Zosano’s current supplier of API. Any change of supplier of

 

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the Daily Product shall be acceptable to and approved by Lilly (such approval not to be unreasonably withheld, conditioned or delayed). Zosano, in consultation with Lilly, shall be responsible for the Manufacture of the Daily Product according to specifications approved in the relevant Regulatory Approval. Lilly shall have the right to audit all Daily Product Manufacturing sites, in accordance with the procedures set forth in Section 6.1. Lilly shall have the right (but not the obligation), at any time after the transfer of Regulatory Approval to Lilly pursuant to Section 4.6, to assume responsibility for the Commercial Manufacturing governance/oversight. In the event that Lilly elects to assume responsibility for the Manufacture of commercial supplies of the Daily Product, Zosano shall provide Reasonable Assistance to Lilly in connection therewith.

 

7. Joint Collaboration Committee . For purposes of describing the general scope of the collaboration only, and subject to the obligations set forth more specifically in other sections of this Agreement, the Parties contemplate that Zosano would be responsible for management and funding of further Development activities and regulatory activities necessary to support registration of the Licensed Products in accordance with the Development Plan and, in the event Zosano achieves the Critical Success Factors, Lilly shall make the applicable milestone payments and thereafter be solely responsible for the conduct and funding of all Commercialization activities. Accordingly, the purpose of the JCC is to facilitate periodic communication between the Parties regarding their activities under this Agreement. The JCC will not serve as an alliance decision making body, nor will it have the power to amend or waive compliance with, or the terms of, this Agreement or determine whether a Party has committed a breach of this Agreement. For the avoidance of doubt, the JCC shall have no authority to determine whether a Development milestone should be pursued or amended or is achieved.

 

  7.1. Formation and Membership . As soon as practicable, but in no event more than thirty (30) days after the Effective Date, the Parties will form a Joint Collaboration Committee (the “ JCC ”).

 

  7.2. Meetings . During the Term, the JCC shall meet in person at least twice per calendar year (and at least once every six (6) months) at times mutually agreed upon by the Parties. The location of the meetings of the JCC to be held in person shall alternate between sites designated by each Party. Other employees of each Party involved in the Development, Manufacture or Commercialization of the Licensed Products under this Agreement may attend meetings of the JCC, with the consent of each Party, consultants, representatives or advisors involved in the Development, Manufacture, or Commercialization of Licensed Products under this Agreement may attend meetings of the JCC; provided, however, that such consultants, representatives and advisors are under obligations of confidentiality and non-use applicable to the Confidential Information of each Party and that are at least as stringent as those set forth in Section 15.

 

  7.3. Membership . The JCC shall be comprised of two (2) persons from each Party. A Party may replace any or all of its representatives on the JCC at any time upon written

 

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  notice to the other Party. Any member of the JCC may designate a substitute to attend and perform the functions of that member at any meeting of the JCC; provided, however , that each JCC representative shall have sufficient experience and expertise in development, manufacturing or commercialization matters in the pharmaceuticals and/or biotechnology industries to serve on the JCC. The JCC shall have a chairperson, who prior to Lilly’s payment of the first Development milestone payment under Section 8.2 shall be a representative of Zosano designated by Zosano, and from and after Lilly’s payment of the first Development milestone payment under Section 8.2 shall be a representative of Lilly designated by Lilly. The JCC shall operate by vote, with the chairperson of the JCC shall have the sole and controlling vote.

 

  7.4. Responsibilities . The JCC shall have the primary responsibility of facilitating communication between the Parties regarding Development, Manufacturing and Commercialization activities. The JCC shall annually review the Development Plan to assess progress and make recommendations for modification in view of current business and/or regulatory conditions. In addition, the JCC may perform such other functions as appropriate to further the purposes of this Agreement as mutually agreed in writing by the Parties. The chairperson of the JCC shall be responsible for preparing and circulating an agenda in advance of each meeting of the JCC, and preparing and issuing minutes of each meeting promptly thereafter.

 

  7.5. Alliance Managers . Each Party shall appoint one representative who possesses a general understanding of this Agreement and of Development, regulatory and Commercialization issues to act as its alliance manager (each, an “ Alliance Manager ”). The role of the Alliance Manager is to act as a central point of contact between the Parties to assure a successful relationship between the Parties and to facilitate the flow of information and resolution of disputes (in accordance with Section 16.1) that may arise. All requests for support or information from one Party to the other will be routed through and managed by the Alliance Manager in order to minimize disruption to both Parties. Alliance Managers shall be active participants and attend meetings of the JCC and, as appropriate or requested, any subcommittees (and will help set agendas and facilitate meetings, but will not be the chairman, secretary (except with respect to the JCC) or a voting member of any subcommittee). Each Party may change its designated Alliance Manager from time to time upon written notice to the other Party.

 

8. Consideration

 

  8.1. Scope . The financial terms set forth in this Section 8 only apply to the Daily Product. Subject to Section 9.5.4, if Lilly wishes to Commercialize a Licensed Product with a New Dosing Duration, then the Parties shall negotiate in good faith financial terms covering the additional Licensed Product.

 

  8.2. Development Milestone Payments . Zosano shall provide Lilly with written notice of the actual first occurrence of each of the Development milestones set forth below with respect to the Daily Product within thirty (30) days after such occurrence. Upon Regulatory Approval for the Daily Product in [**] on or prior to [**] (provided

 

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  that the other CSFs in respect of [**] have been achieved), Lilly shall pay to Zosano the amount set forth next to “Regulatory Approval in [**]” in the table below, within thirty (30) days after the first occurrence Regulatory Approval for the Daily Product in [**]. Upon Regulatory Approval for the Daily Product in [**] on or prior to [**] (provided that the other CSFs in respect of [**] have been achieved), Lilly shall pay to Zosano the amount set forth next to “Regulatory Approval in [**]” in the table below, within thirty (30) days after the first occurrence Regulatory Approval for the Daily Product in [**].

 

Development Milestone Event of Daily Product

   USD Payment  

Regulatory Approval in [**]

     [**]   

Regulatory Approval in [**]

     [**]   
  

 

 

 

Total

   $ 300,000,000   
  

 

 

 

For purposes of clarity, the above Development milestone payments are payable by Lilly to Zosano upon achievement of such milestone regardless of whether Regulatory Approval is first obtained in [**] or [**]. The above Development milestone payments shall be payable only once for the Daily Product in each of [**] and [**]. All payments made to Zosano pursuant to this Section 8.2 are non-refundable and may not be credited against any other payments payable by Lilly to Zosano under this Agreement.

 

  8.3. Commercial Milestones . Lilly shall provide Zosano with written notice of the actual first occurrence of each sales milestone set forth below with respect to the Daily Product within ninety (90) days after such occurrence. Within ninety (90) days of the end of the calendar quarter in which such sales milestone has been met, whether by Lilly, its Affiliates or any of their respective sublicensees, Lilly shall pay to Zosano the applicable payment set forth below:

 

Annual Net Sales of a Daily Product

   USD Payment  

Annual Worldwide Net Sales greater than USD [**]

     [**]   

Annual Worldwide Net Sales greater than USD [**]

     [**]   
  

 

 

 

Total

   $ 125,000,000   
  

 

 

 

For purposes of clarity, if for any reason a Net Sales milestone event, as set forth in the table above in this Section 8.3, does not occur prior to the occurrence of the subsequent milestone event for a Daily Product, then the skipped milestone event shall be deemed to occur upon the occurrence of the subsequent milestone event.

The payments set forth above in this Section 8.3 shall be triggered by the achievement of the specified sales for the Daily Product in the first twelve (12) month calendar period of such occurrence, and shall be payable only once despite potential repeated achievement

 

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of the specified sales by such Daily Product. All payments made to Zosano pursuant to this Section 8.3 are non-refundable and may not be credited against any other payments payable by Lilly to Zosano under this Agreement.

 

  8.4. Royalties .

 

  8.4.1. Rates .

 

  8.4.1.1. During the Royalty Term, Lilly shall pay to Zosano royalties equal to [**] of annual (calendar year) Net Sales of Daily Product in the United States and Japan; and for all other countries the royalty rate shall be equal to [**] provided, however , that in no event shall the royalty rate in any country be less than [**] of annual (calendar year) Net Sales of Daily Product in such country (the “ Royalty Floor ”). For clarity, the royalty rate for all countries other than the United States and Japan shall be determined in accordance with the following formula, subject to the Royalty Floor:

RR = [**]

For purposes of the foregoing formula: “RR” means royalty rate; “A” means [**]; and “B” means [**].

 

  8.4.1.2. Following the Royalty Term on a country-by-country basis, Zosano shall provide commercial supplies of the Product Patch for the Daily Product to Lilly at a [**] mark-up over Zosano’s actual Manufacturing Cost for the Product Patch, and Lilly’s obligation to pay royalties to Zosano under Section 8.4.1.1 following the Royalty Term for such country shall terminate.

 

  8.4.2. Royalty Term . Lilly’s royalty obligations under Section 8.4.1.1 with respect to Daily Product shall commence on a country-by-country basis on the date of First Commercial Sale of such Daily Product by Lilly, its Affiliates or sublicensees in the relevant country, and shall expire upon the later of (i) expiration of the last to expire Valid Patent Claims of the Licensed Technology Covering such Daily Product in such country, or (ii) [**] following First Commercial Sale of such Daily Product in such country (the “ Royalty Term ”).

 

  8.4.3. Third Party Licenses . In the event either Party is required to obtain one or more licenses under Intellectual Property Controlled by a Third Party in order to exercise Lilly’s rights to the Licensed Patents or Licensed Know-How in any country in the Territory as contemplated under this Agreement, Zosano shall have the first right (but not the obligation) to obtain a license to such Intellectual Property on terms that allow Zosano to include such Intellectual Property in the license granted herein to Lilly under the Licensed Patents and/or Licensed Know-How to research, develop, make, have made, use, import, export, sell, offer for sale, and otherwise transfer Daily Products. If Zosano does not obtain such license to such Third Party Intellectual Property, then Lilly, after consultation with Zosano, shall have the right (but not the obligation) to obtain a license to such Third Party Intellectual Property.

 

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  Zosano shall be responsible for paying all Third Party royalties necessary for Lilly to practice the license granted in Section 2.1 that relate to the complete Product Patch system including the applicator device and packaging, including, but not limited to, those under the ALZA Agreement.

 

  8.4.4. Royalty Reports . Royalty payments shall be calculated, reported and paid for each calendar quarter after the First Commercial Sale of the first Daily Product. All royalty payments due to Zosano under this Agreement shall be paid within [**] after the end of each calendar quarter. Each payment shall be accompanied by a quarterly report of Net Sales of Daily Product by Lilly, its Affiliates and their respective sublicensees, setting forth Net Sales and royalty due, on a country-by-country basis, as well as gross sales and total deductions and adjustments used to calculate such Net Sales of Daily Product, to permit confirmation of the accuracy of the payments made to Zosano hereunder and to enable Zosano to comply with its reporting obligations under the ALZA Agreement. Lilly shall keep, and shall cause its Affiliates and their respective sublicensees to keep, complete and accurate books and records pertaining to the sale or other disposition of Daily Products which may be necessary to ascertain properly and to verify the payments owed hereunder.

 

  8.4.5. Withholding Tax . Lilly shall not withhold from payments due to Zosano any amounts for payment of any withholding tax, except to the extent required by Law to be paid to any taxing authority with respect to such payments. Lilly shall provide to Zosano all relevant documents and correspondence, and shall also provide to Zosano any other cooperation or assistance as may be necessary to enable Zosano to claim exemption from such withholding taxes and to receive a full refund of such withholding tax or claim a foreign tax credit. Lilly shall give Zosano proper evidence from time to time or within fifteen (15) days of Zosano’s request as to the payment of such tax. The Parties shall cooperate with each other in seeking deductions under federal and state tax laws and any double taxation or other similar treaty or agreement from time to time in force.

 

  8.4.6. Interest Due . Without limiting any other rights or remedies available to Zosano, Lilly agrees to pay interest at an annual rate of U.S. 3-month Libor +1.5% or the maximum interest rate permitted by applicable law calculated based on number of days overdue on all good faith undisputed late payments due under this Section 8.

 

  8.4.7. Wire Transfer Instructions . All payments to be made by Lilly to Zosano under this Agreement shall be made by wire transfer from Lilly to the following account of Zosano:

Bank : Silicon Valley Bank

Bank Address : 3003 Tasman Drive, Santa Clara CA 95054

Bank Account : [**]

Routing & Transit : [**]

Swift Code : [**]

 

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9. Term and Termination

 

  9.1. Term . The term of this Agreement shall commence on the Effective Date and shall expire on a country-by-country basis, unless earlier terminated under this Section 9, upon the date of expiration of all of Lilly’s royalty payment obligations under Section 8.4.1.1 hereof in respect of such country (the “ Term ”); provided, however , that the provisions of Section 8.4.1.2 shall survive such expiration in respect of such country.

 

  9.2. Termination by Zosano . Zosano may terminate this Agreement pursuant to Section 3.3.4 on a country-by-country basis upon written notice to Lilly in the event it determines, in its sole discretion, that it is commercially or scientifically unreasonable to pursue a CSF and discontinues the development of the Daily Product. In accordance with Section 3.3.4, Zosano’s right to terminate under this Section 9.2 expires once Lilly makes the first Development Milestone payment under Section 8.2.

 

  9.3. Termination by Lilly . Lilly may terminate this Agreement (i) pursuant to Section 3.3.3 upon written notice to Zosano in the event Zosano is not successful in meeting a CSF or (ii) at any time after the first Development milestone payment has been made under Section 8.2, and upon six (6) months’ prior written notice to Zosano.

 

  9.4. Termination for Material Breach . Upon or after the material breach of any provision of this Agreement, the non-breaching Party may terminate this Agreement if the breaching Party has not cured such breach within a sixty (60) day period following written notice of such breach by the non-breaching Party. Notwithstanding the foregoing, in the event of a non-monetary default, if the default is not reasonably capable of being cured within the sixty (60) day cure period by the defaulting Party and such defaulting Party makes a good faith effort to cure such default, the cure period shall be extended from sixty (60) days to ninety (90) days from such original notice of default. If a breach remains uncured after the aforementioned periods of time to cure such breach, then the non-breaching Party shall have the option of terminating this Agreement or continuing under this Agreement (in which case the non-breaching Party shall be deemed to have waived its right to terminate this Agreement), but in either case the non-breaching Party shall be entitled to recover damages incurred as a result of such breach from the breaching Party pursuant to Section 16.1. If a breach remains uncured after the aforementioned periods of time to cure such breach and the non-breaching Party decides to terminate this Agreement, then all licenses granted hereunder shall automatically terminate and the non-breaching Party shall be entitled to recover damages incurred as a result of such breach from the breaching Party. The right of either Party to terminate this Agreement as hereinabove provided shall not be affected in any way by its waiver of, or failure to take action with respect to, any previous default.

 

  9.5. Effect of Termination.

 

  9.5.1. Upon termination of this Agreement by Zosano under Section 9.2, (i) all licenses hereunder shall automatically terminate and (ii) Lilly shall retain the right of reinstatement (as described in Section 9.5.3) and the Proposal (as described in Section 9.5.4).

 

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  9.5.2. Upon termination by Lilly pursuant to Section 9.3, (i) all licenses hereunder shall automatically terminate, (ii) Zosano shall retain all rights to Develop, Manufacture and Commercialize, and otherwise use and exploit, Licensed Products, and (iii) the right of reinstatement (as described in Section 9.5.3) and the Proposal (as described in Section 9.5.4) shall each terminate and be of no further force and effect.

 

  9.5.3. Right of Reinstatement . In the event Zosano terminates this Agreement pursuant to Section 9.2 and subsequently wishes to restart Development activities of a Daily Product, then it shall offer Lilly the right to reinstate the terms of this Agreement by providing written notice to Lilly (the “ Reinstatement Offer ”). If Lilly accepts the Reinstatement Offer by providing written notice of acceptance to Zosano within thirty (30) days after Lilly’s receipt of the Reinstatement Offer, then the terms of this Agreement shall be reinstated automatically. If Lilly does not accept the Reinstatement Offer but instead proposes to Zosano in writing within thirty (30) days after Lilly’s receipt of the Reinstatement Offer new financial terms for the Daily Product, and Zosano accepts such new financial terms, then this Agreement will be reinstated with such new financial terms. If Zosano does not accept Lilly’s proposed new financial terms, then Zosano shall not enter into an agreement to Develop, Manufacture and Commercialize a Daily Product with any Third Party prior to August 19, 2019. If Lilly refuses the Reinstatement Offer or fails to propose to Zosano in writing within thirty (30) days after Lilly’s receipt of the Reinstatement Offer new financial terms for the Daily Product, then this Agreement shall remain terminated, Lilly shall have no further rights of reinstatement hereunder and Zosano shall not Commercialize a Daily Product prior to August 19, 2019.

 

  9.5.4. New Dosing Duration Proposal . If Zosano determines in good faith during the Term of this Agreement, that a Licensed Product with a New Dosing Duration would be more successful than the Daily Product, then Zosano shall provide written notice thereof to Lilly. If Lilly and Zosano mutually agree to proceed with such New Dosing Duration, then they shall attempt to negotiate new financial terms for the Development, Manufacture and Commercialization of such Licensed Product. If Zosano accepts such financial terms, then the Parties shall negotiate in good faith the terms of a definitive agreement for the Development, Manufacture and Commercialization of such Licensed Product with a New Dosing Duration (a “ Definitive Agreement ”). If a Definitive Agreement cannot be entered into or Lilly refuses the initial written notice, then the Parties will not Develop such Licensed Product with a New Dosing Duration during the Term of this Agreement.

 

  9.5.5. Accrued Rights . Except as otherwise specifically set forth in this Agreement, all rights and obligations of the Parties shall terminate upon the expiration or termination of this Agreement; provided, however , that expiration or termination of this Agreement shall not relieve the Parties of any rights or obligations accruing prior to such expiration or termination.

 

  9.5.6. Return of Confidential Information . Within thirty (30) days following the expiration or termination of this Agreement, each Party shall promptly return to the other Party or destroy all Confidential Information of the other Party (and all copies

 

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  and reproductions thereof). In addition, each Party shall destroy (a) that portion of any notes, reports or other documents prepared by such Party which contain Confidential Information of the other Party, and (b) any Confidential Information of the other Party (and all copies and reproductions thereof) which is in electronic form or cannot otherwise be returned to the other Party. Notwithstanding the foregoing, each Party and its Representatives (i) may retain solely for compliance purposes copies of the Confidential Information of the other Party in order comply with law or regulation, and (ii) need not destroy electronic archives and backups made in the ordinary course of business where it would be commercially impracticable to do so. Moreover, notwithstanding the return or destruction of the Confidential Information of the other Party, each Party and its Representatives shall continue to be bound by their obligations of confidentiality and other obligations hereunder.

 

  9.5.7. Remedies . Expiration or termination of this Agreement shall not preclude either Party from claiming any other damages, compensation or other remedies available at law that it may be entitled to upon such expiration or termination.

 

  9.5.8. Rights in Bankruptcy . The occurrence of an Insolvency Event with respect to Zosano, will not, in itself, impact either Party’s license rights under this Agreement, or adversely impact the right of Zosano to receive royalties or milestones. All rights and licenses granted under or pursuant to this Agreement by either Party to the other Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to “intellectual property” as defined under the U.S. Bankruptcy Code. The Parties agree that each Party, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against either Party under the U.S. Bankruptcy Code (the “ Subject Party ”), the other Party (the “ Non-subject Party ”) shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, shall be promptly delivered to the Non-subject Party (i) upon any such commencement of a bankruptcy proceeding upon the Non-subject Party’s written request therefor, unless the Subject Party elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under (i) above, following the rejection of this Agreement by or on behalf of the Subject Party upon written request therefor by the Non-subject Party. Lilly agrees that in consideration of the rights granted under the license set forth in Section 2.1 it will pay to Zosano all royalty and milestone payments which would have been payable under this Agreement by Lilly with respect to the exercise of its rights under the license granted in this Agreement. The provisions of this Section 9.5.8 are without prejudice to any rights that either Party may have arising under any applicable insolvency statute or other applicable law.

 

  9.5.9. Surviving Provisions . Without limiting any other provisions of this Agreement that expressly provide for certain rights or obligations under this Agreement to survive any termination or expiration of this agreement, the provisions of Sections 1, 2.2, 4.2, 4.3, 4.6, 9.5, 10, 11.1, 13, 14.4, 14.5, 15 and 16 and any accrued rights and obligations under this Agreement shall survive the expiration or termination of this Agreement in accordance with their terms.

 

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10. Records And Audit Rights

 

  10.1. During the Term and for a period of one (1) year thereafter, Lilly shall keep (and cause its Affiliates and sublicensees to keep) complete and accurate books and records pertaining to the sale or other disposition of Licensed Products, in sufficient detail to permit Zosano to confirm the accuracy of payments due to Zosano hereunder, for at least three (3) years following the calendar quarter to which information relates.

 

  10.2. Within the Term of this Agreement and for a period of one (1) year thereafter, Zosano shall have the right to have a neutral, nationally recognized independent certified public accounting firm selected by Zosano subject to approval by Lilly (such approval to not be unreasonably withheld, conditioned or delayed) inspect, not more than once each year, Lilly’s records for the three (3) preceding years for the purpose of determining the accuracy of the royalty and milestone payments to Zosano hereunder. No period will be audited more than once. Zosano shall submit an audit plan, including audit scope, to Lilly for Lilly’s approval, which shall not be unreasonably withheld, conditioned or delayed, prior to audit implementation. The independent certified public accountants shall keep confidential any information obtained during such inspection and shall report to Zosano and Lilly the amounts of Net Sales, royalties and milestone payments due and payable, which information Zosano may share with ALZA Corporation in accordance with Section 5.8.1 of the ALZA Agreement, as well as gross sales and total deductions and adjustments used to calculate such Net Sales. If it is determined that additional royalties are owed, or that royalties were overpaid, during such period, Lilly will pay Zosano the additional royalties, or Zosano will pay Lilly the overpaid royalties within thirty (30) days of the date the independent certified public accountants written report is received by the paying party. The fees charged by such accounting firm will be paid by Zosano unless any additional royalties owed exceed five percent (5%) and $100,000 of the royalties paid for the royalty period subject to the audit, in which case Lilly will pay the reasonable fees of the accounting firm.

 

  10.3. Within the Term of this Agreement and for a period one (1) year thereafter, Lilly shall have the right to have a neutral, nationally recognized independent certified public accounting firm selected by Lilly subject to approval by Zosano (such approval to not be unreasonably withheld, conditioned or delayed) inspect, not more than once each year, Zosano’s records for the three (3) preceding years for the purpose of determining the accuracy of the Manufacturing Costs for such Daily Product or Product Patch hereunder as it may relate to Lilly’s purchase of Daily Product or Product Patch pursuant to Section 6. No period will be audited more than once. Lilly shall submit an audit plan, including audit scope, to Zosano for Zosano’s approval, which shall not be unreasonably withheld, conditioned or delayed, prior to audit implementation. The independent certified public accountants shall keep confidential any information obtained during such inspection and shall report to Zosano and Lilly the amounts of Manufacturing Costs. If it is determined that additional money is owed

 

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  or was overpaid during such period, as it may relate to Lilly’s purchases of Daily Product/Product Patch pursuant to Section 6 and the Supply Agreement, then the owing Party shall make payment within thirty (30) days of the date the independent certified public accountants written report is received by the paying party. The fees charged by any such accounting firm will be paid by Lilly unless any overage discovered exceeds five percent (5%) and $100,000 of the amount paid for the Daily Product or Product Patch subject to the audit, in which case Zosano will pay the reasonable fees of the accounting firm.

 

11. Ownership and Prosecution of Intellectual Property

 

  11.1. Ownership of Intellectual Property . Zosano shall own exclusively the Licensed Technology. Lilly hereby assigns and agrees to assign its right, title and interest in and to the Licensed Technology to Zosano and shall cause any employees, agents, representatives, advisors or consultants of Lilly and its Affiliates, and their respective sublicensees, to execute formal assignments and any such instruments prepared by Zosano, which Zosano deems necessary to vest its ownership of the Licensed Technology.

 

  11.2. Filing, Prosecution and Maintenance of Licensed Patents . Subject to the provisions of this Section 11.2 and any written agreements existing as of the Effective Date with respect to the prosecution of the Licensed Patents, Zosano, at its sole discretion and expense, will file, prosecute, maintain and determine the strategy of prosecution of the Licensed Patents. If requested by the JCC, Zosano shall timely provide the JCC with copies of all material correspondence from any Patent Authority regarding Licensed Patents, provided such material correspondence cannot be obtained from a Patent Authority website. Zosano shall provide Lilly with a copy of any proposed filing with any Patent Authority in connection with proceedings before any Patent Authority with Licensed Patents and shall provide to Lilly a reasonable opportunity (at least ten (10) calendar days) to comment on any such proposed filing with respect to such Licensed Patents, which comments Zosano shall consider in good faith. If Zosano elects to discontinue prosecution or maintenance of any Licensed Patent, Zosano shall so advise Lilly in writing at least sixty (60) calendar days in advance of such discontinuance and, if requested by Lilly, shall discuss with Lilly Zosano’s reasons for such discontinuance. If requested by Lilly, at Lilly’s cost, Zosano will or will authorize Lilly to take action to prevent such abandonment of such Licensed Patent, unless Zosano has a material business or legal reason for not taking such action.

 

12. Enforcement of Intellectual Property

 

  12.1. Notice of Infringement; Enforcement of Intellectual Property . Each Party shall promptly (and in any event within five (5) business days in the case of clause (ii) or (iii) below) report in writing to the other Party during the Term (i) any known or suspected infringement of, or unauthorized use of, or challenge to, any of the Licensed Technology, (ii) any certification filed pursuant to 21 U.S.C. § 355(b)(2)(A)(vii) or 21 U.S.C. § 355(j)(2)(A)(vii) (or any amendment or successor statute thereto) claiming

 

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  that any Patent Rights within the Licensed Technology are invalid or otherwise unenforceable, or that infringement will not arise from the manufacture, use, import, offer for sale, or sale of a product by a Third Party, or (iii) without limiting the generality of Section 13, any claim by a Third Party that the Development, Manufacture or Commercialization of any Licensed Product or the practice by either Party of the Licensed Technology infringes or misappropriates the intellectual property rights of such Third Party, and shall provide the other Party with all available evidence supporting such known or suspected infringement or unauthorized use. For any of the disclosure or notification obligations of the Parties under this Section 12.1, it is understood that all information disclosed under such obligations is covered by the provisions of Section 15, and further that neither Party shall be required, by such obligations, to disclose legally privileged information or information with respect to which such Party is subject to confidentiality or other contractual obligations to Third Parties, unless required to do so by operation of law.

 

  12.2. As between Zosano and Lilly, Zosano shall have the first right, but not the obligation, to enforce and/or defend the Licensed Patents. If requested to do so by Zosano, Lilly shall reasonably cooperate with Zosano, at Zosano’s cost, in the enforcement or defense of the Licensed Patents and provide Zosano Reasonable Assistance. Lilly shall be kept reasonably advised at all times of such suit or proceedings brought by Zosano with respect to the Licensed Patents. Within thirty (30) days after receiving notice of an infringement or a lawsuit on the validity of a patent (or, in the case of a certification received pursuant to either 21 U.S.C. §§ 355(b)(2)(A)(iv) or (j)(2)(A)(vii)(IV) or its successor provisions, or any similar provision in a country in the Territory other than the United States, within ten (10) business days), Zosano shall determine if it or a Third Party shall institute legal action and shall notify Lilly of such determination. If Zosano fails to institute legal action to enforce and/or defend the Licensed Patents within the aforementioned period, then subject to any rights of any Third Party to enforce the Licensed Patents, Lilly shall have the right, but not the obligation, to cause Zosano to initiate and to conduct such legal action, at Lilly’s sole cost and expense. If Zosano does institute such legal action, but desires at any point in such legal action to cease to continue with such action and no Third Party exercises its right to enforce the Licensed Patents, then Zosano will provide a reasonable written notice to Lilly prior to discontinuing such action. The foregoing will be subject in its entirety to the rights of any Third Party to enforce the Licensed Patents under any written agreement existing as of the Effective Date, including, without limitation, to ALZA Corporation’s rights under Sections 7.4 and 7.5 of the ALZA Agreement relating to infringement claims.

 

  12.3. Conduct of Enforcement . If Lilly is required under any law to join any such legal action initiated by Zosano or if the failure of Lilly to become a party to such suit, action or proceeding would in the opinion of counsel to the Zosano risk dismissal thereof, Lilly shall execute all papers and perform such other acts as may be reasonably required to permit the litigation to be initiated or conducted (including initiating a suit before a court or tribunal at the Zosano’s request or permitting Zosano or any Third Party with rights to enforce the Licensed Patents under written agreement with Zosano as of the Effective Date, initiate a legal action in the name of itself and

 

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  Lilly), and Zosano shall reimburse Lilly for its reasonable out-of-pocket expenses relating to its joining thereto and participation therein. If Lilly is required to be joined as a party in any action initiated by Zosano, then upon the request of Zosano, Lilly shall waive any objection to such joinder on the grounds of personal jurisdiction, venue, or forum non conveniens.

 

  12.4. Settlement and Recoveries . The party enforcing and/or defending the Licensed Patents may enter into any settlement, consent judgment or other voluntary final disposition of any action contemplated by this Section 12.2 without Lilly’s prior consent; provided, however , that (i) Lilly receives a general release of any claims against it in such proceeding and is promptly provided thereafter a copy of such settlement, consent judgment or other voluntary disposition, and (ii) such settlement does not have a material adverse impact on the rights granted to Lilly hereunder or on the scope or enforceability of the Licensed Patents or result in a payment or other liability or admission by Lilly to a Third Party. Any other settlement, consent judgment or voluntary final disposition of any proceeding under Section 12 by the Party enforcing and/or defending the Licensed Patents shall require the prior written consent of the other Party, which consent shall not be unreasonably withheld. With respect to any suit or action regarding the Licensed Technology as set forth in the above, any recovery obtained by Lilly or Zosano as a result of any such proceeding, by settlement or otherwise, shall (x) first be used to reimburse Lilly and Zosano for their reasonable costs and legal fees incurred in the conduct of such proceedings, and (y) any remaining proceeds shall be allocated equally (50/50) between the Parties.

 

  12.5. Trademarks . Lilly shall have the sole right to develop trademarks and trade dress in connection with the Commercialization of any Licensed Product in the Territory, and Lilly shall own such trademarks and trade dress, and all associated goodwill, and shall prosecute, maintain and enforce such trademarks and trade dress at its own cost and discretion. Lilly shall provide Zosano with the trademark and trade dress information necessary to apply for Regulatory Approvals and the parties shall cooperate in the preparation thereof. Notwithstanding the foregoing, Zosano shall promptly notify Lilly of any known, threatened or suspected infringement, imitation or unauthorized use of or unfair competition relating to such trademarks and trade dress, and shall cooperate with Lilly and use reasonable efforts to assist Lilly in the protection of such trademarks and trade dress, if such additional cooperation or assistance is reasonably requested by Lilly and at Lilly’s cost.

 

  12.6. Inventorship . Notwithstanding anything to the contrary herein, inventorship shall be determined in accordance with U.S. patent law.

 

13. Indemnification

 

  13.1. Indemnification by Lilly . Lilly agrees to indemnify, defend and hold harmless Zosano and its Affiliates, and their respective sublicensees, officers, directors, employees, and their respective successors, heirs and assigns (the “Zosano Indemnitees” ), from and against any and all claims, costs, expenses, damages and liabilities, including reasonable legal costs ( “Losses” ), to which the Zosano

 

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  Indemnitees may become subject as a result of any claim, demand, action, suit or other proceeding by any Third Party (a) arising out of (i) the negligence, recklessness or wrongful intentional acts or omissions of Lilly, its Affiliates and its or their respective directors, officers, employees and agents, in connection with Lilly’s performance of its obligations or exercise of its rights under this Agreement; (ii) any breach by Lilly of any representation, warranty or covenant set forth in this Agreement; or (iii) the making, having made, using, selling, offering for sale and importing and otherwise Commercializing of Licensed Products by Lilly, its Affiliates and/or sublicensees, or (b) alleging infringement of Third Party intellectual property rights by use of Intellectual Property owned or Controlled by Lilly (other than the Licensed Technology) in the Development, Manufacture, use, import, export, sale, offer for sale and/or any other Commercialization of Licensed Products, except to the extent such Losses result from (x) the gross negligence or willful misconduct of Zosano; (y) material breach of this Agreement by Zosano; or (z) any claim by a Third Party alleging that the grant of rights by Zosano to Lilly under this Agreement violates or conflicts with the terms of any license or other grant of rights by Zosano to such Third Party.

 

  13.2. Indemnification by Zosano . Zosano shall indemnify, defend and hold harmless Lilly and its Affiliates and their respective sublicensees, officers, directors, employees, and their respective successors, heirs and assigns (the “ Lilly Indemnitees ”) from and against any and all Losses to which the Lilly Indemnitees may become subject as a result of any claim, demand, action or other proceeding by any Third Party (a) arising out of (i) the negligence, recklessness or wrongful intentional acts or omissions of Zosano, its Affiliates and/or its sublicensees (excluding Lilly) and its or their respective directors, officers, employees and agents, in connection with Zosano’s performance of its obligations or exercise of its rights under this Agreement; (ii) the Development and Manufacture of Licensed Products by Zosano, its Affiliates or Subcontractors; or (iii) any breach by Zosano of any representation, warranty or covenant set forth in this Agreement, except to the extent such Losses result from (x) the gross negligence or willful misconduct of Lilly, or (y) material breach of this Agreement by Lilly, or (z) any claim by a Third Party alleging that the grant of rights by Lilly to Zosano under this Agreement violates or conflicts with the terms of any license or other grant of rights by Lilly to such Third Party.

 

  13.3. Conduct of Claims . The Party seeking an indemnity (the “First Party” ) shall:

 

  13.3.1. fully and promptly notify the other Party (the “Indemnifying Party” ) of any claim or proceedings, or threatened claim or proceedings, for which the First Party may assert indemnification from the Indemnifying Party pursuant to this Section 13;

 

  13.3.2. permit the Indemnifying Party and its insurers, at the Indemnifying Party’s expense, to take full control of such claim or proceedings, with counsel of the Indemnifying Party’s choice reasonably acceptable to the First Party; provided , however , that the Indemnifying Party shall reasonably and regularly consult with the First Party in relation to the progress and status of such claim or proceedings, and the First Party may participate in the defense of such claim or proceeding using counsel of its own choice at the First Party’s expense;

 

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  13.3.3. reasonably co-operate with the Indemnifying Party in the investigation and defense of such claim or proceedings at the Indemnifying Party’s expense; and

 

  13.3.4. take reasonable steps to mitigate any loss or liability in respect of any such claim or proceedings.

The Indemnifying Party may settle a claim or proceeding on terms that provide only for monetary relief and include a general release of the First Party and do not include any admission of liability or impose any obligation on the First Party. Except as set forth above, neither the Indemnifying Party nor the First Party shall acknowledge the validity of, compromise or otherwise settle any claim or proceeding without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed.

 

14. Representations and Warranties

 

  14.1. Mutual Representations, Warranties and Covenants . Each Party represents, warrants as of the Effective Date and, with respect to Sections 14.1.6 and 14.1.8 below, covenants to the other Party that:

 

  14.1.1. it is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation, and has full corporate power and legal right and authority to enter into this Agreement and to carry out the provisions hereof;

 

  14.1.2. it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder, and the person or persons executing this Agreement on its behalf has been duly authorized to do so by all requisite corporate action;

 

  14.1.3. this Agreement is legally binding upon it, enforceable in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (ii) laws relating to the availability of specific performance, injunctive relief, or other equitable remedies;

 

  14.1.4. the execution, delivery and performance of this Agreement by it does not conflict with, or result in the breach of the terms of, any agreement or instrument to which it is a Party or by which it may be bound, or violate any material law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it;

 

  14.1.5. no consent, approval, authorization or order of any court or governmental agency or governmental body or Third Party is required for execution and delivery by such Party of this Agreement;

 

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  14.1.6. it has not, and shall not during the Term, grant any rights to any Third Party, which would conflict in any material respect with the rights granted to the other Party hereunder;

 

  14.1.7. it is not engaged in any litigation or arbitration, or in any dispute reasonably likely to lead to litigation, arbitration or other proceeding, which would materially affect the validity of this Agreement or its ability to fulfill its obligations under this Agreement; and

 

  14.1.8. each employee, agent and consultant of such Party engaged in the performance of activities under this Agreement is, or shall be prior to the performance of any such activities under this Agreement, contractually bound to (i) assign to such Party all of its, his or her right, title and interest in and to any Intellectual Property arising from activities performed by such employee, agent or consultant under this Agreement, and (ii) comply with confidentiality and non-use obligations that are at least as restrictive as those set forth in Section 15.

 

  14.2. Zosano Representations, Warranties and Covenant . Zosano represents and warrants to Lilly that as of the Effective Date:

 

  14.2.1. the rights granted to Lilly and its Affiliates hereunder do not conflict with rights granted by Zosano to any Third Party;

 

  14.2.2. to Zosano’s knowledge, the use of the Licensed Technology as contemplated under this Agreement does not infringe any issued patents of any Third Party

 

  14.2.3. to Zosano’s knowledge, it is not aware of any other Patent Rights, Know How, or other Intellectual Property right, other than that which is licensed hereunder to Lilly and not controlled by Lilly, which the Development, Manufacture, use and/or Commercialization of Licensed Products as contemplated hereunder would infringe; and

 

  14.2.4. it Controls the Licensed Technology in the Field in the Territory and there are no agreements with, assignments by, restrictions, liens or encumbrances on, disputes with, or proceedings or claims against, Zosano or its Affiliates relating to, affecting or limiting Zosano’s rights with respect to the Licensed Technology, other than (i) a security interest granted in connection with a Loan and Security Agreement between Zosano and Hercules Technology Growth Capital, Inc. and a Joinder Agreement between Parent and Hercules Technology Growth Capital, Inc., and (ii) a security interest granted in connection with a promissory note of Zosano and Parent, with BMV Direct SOTRS LP (as assignee of BioMed Realty Holdings, Inc.).

 

  14.3. Lilly Representations and Warranties . Lilly represents and warrants to Zosano that, as of the Effective Date:

 

  14.3.1. the rights granted to Zosano and its Affiliates hereunder do not conflict with rights granted by Lilly to any Third Party; and

 

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  14.3.2. to Lilly’s knowledge, the use of the Pen or any molecule contained therein as contemplated under this Agreement does not infringe any issued patents of any Third Party and there are no agreements with, assignments by, restrictions, liens or encumbrances on, disputes with, or proceedings or claims against, Lilly or its Affiliates relating to, affecting or limiting Lilly’s rights with respect thereto.

 

  14.4. Disclaimer . EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR EXTENDS ANY WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES, IN ALL CASES WITH RESPECT THERETO. Without limiting the generality of the foregoing, each Party expressly does not warrant the successful Development, Manufacture or Commercialization of any Licensed Product.

 

  14.5. Limitation of Liability . EXCEPT FOR LIABILITY FOR BREACH OF SECTION 15 (CONFIDENTIALITY) AND WITHOUT PREJUDICE TO THE OBLIGATION OF EITHER PARTY TO INDEMNIFY THE OTHER PARTY WITH RESPECT TO CLAIMS BY A THIRD PARTY UNDER SECTION 13, NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR OTHER INDIRECT DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER; PROVIDED, HOWEVER, THAT THIS SECTION 14.5 SHALL NOT BE CONSTRUED TO LIMIT DAMAGES AWARDED SPECIFICALLY WITH RESPECT TO EITHER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

15. Confidentiality

 

  15.1. Use and Disclosure of Proprietary Information . Except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties, each Party agrees to hold, and will cause their respective officers, directors, employees, agents, attorneys, accountants, consultants, advisors and agents (“Representatives” ) to hold, including any of the aforementioned employed by a Party’s Affiliates, in confidence, and not disclose to any person, and shall not, and will cause its Representatives to not, use for any purpose, other than as expressly provided for in this Agreement, any Confidential Information furnished to it by the other Party pursuant to this Agreement or any Confidential Information of the other Party developed as part of the activities hereunder. Each Party may use such Confidential Information only to the extent required for the purposes of this Agreement. Each Party shall disclose Confidential Information of the other Party only to its Representatives (i) who have a need to know such Confidential Information in the course of the performance of their duties under this Agreement, (ii) who are informed of the confidential nature of the Confidential Information, and (iii) who agree in writing (enforceable by the other Party) to comply with the terms of this Agreement as if a party hereto or are otherwise bound by

 

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  obligations of confidentiality and non-use of Confidential Information at least as stringent as those set forth in this Agreement. Each Party shall adopt and maintain programs and procedures that are reasonably calculated to protect the confidentiality of Confidential Information, including maintaining a record of to whom Confidential Information has been disclosed, and shall be responsible to the other Party for any disclosure or misuse of Confidential Information that results from a failure to comply with the terms of this Section 15 by such Party or such Party’s Representatives. Each Party shall promptly report to the other Party any actual or suspected violation of the terms of this Section 15 and shall take all reasonable further steps requested by the other Party to prevent, control or remedy any such violation. A breach of this Section 15 by either Party’s Representative shall be considered a breach by such Party itself.

 

  15.2. Limitations on Obligations . The obligations of each Party specified in this Section 15 shall not apply, and such Party shall have no further obligations, with respect to any Confidential Information of the other Party that the receiving Party can prove by competent written evidence:

 

  15.2.1. is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party or its Affiliates, generally known or available to the public;

 

  15.2.2. is known by the receiving Party or its Affiliates at the time of receiving such information other than as a result of the receiving Party’s or its Affiliates’ breach of any legal obligation, as evidenced by its or its Affiliates’ records;

 

  15.2.3. becomes known to the receiving Party or its Affiliates through disclosure, as a matter of right and without restriction on disclosure, by a Third Party who is under no obligation of non-disclosure to the disclosing Party or its Affiliates;

 

  15.2.4. is independently developed by the receiving Party without the aid, reference to, reliance upon or use of the Confidential Information of the disclosing Party, as evidenced by such Party’s written records; or

 

  15.2.5. is the subject of a written permission to disclose provided by the disclosing Party.

 

  15.3. Exceptions . Each Party may disclose Confidential Information belonging to the other Party to the extent such disclosure is necessary in the following instances:

 

  15.3.1. filing or prosecuting patents as permitted by this Agreement in order to obtain Patent Rights that a Party is expressly permitted to obtain under this Agreement;

 

  15.3.2. regulatory filings for Licensed Products as permitted by this Agreement;

 

  15.3.3. prosecuting or defending litigation as permitted by this Agreement;

 

  15.3.4. complying with applicable court orders (or complying with oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) or governmental regulations or law, including the rules or guidance of the U.S. Securities and Exchange Commission and/or any stock exchange and including rules or guidance of the Internal Revenue Service and/or any taxing authority;

 

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  15.3.5. disclosure to Third Parties in connection with due diligence or similar investigations by such Third Parties, and disclosure to potential Third Party investors in confidential financing documents, provided, in each case, that any such Third Party agrees to be bound by reasonable obligations of confidentiality and non-use; and

 

  15.3.6. Zosano may provide to ALZA Corporation a copy of this Agreement, redacted by Lilly to exclude any information not necessary for assessing Zosano’s compliance with the ALZA Agreement;

provided, however , that, if a Party is required to make a disclosure of the other Party’s Confidential Information pursuant to this Section 15.3 it shall, except where impracticable, give reasonable advance notice to the other Party of such disclosure request or requirement so that the other Party may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions of this Agreement. The Party that is required to make the disclosure shall reasonably cooperate with the other Party (at such other Party’s sole cost and expense) to obtain such a protective order or other remedy. If such order or other remedy is not obtained, or the other Party waives compliance with the provisions of this Agreement, then such Party shall only disclose that portion of the Confidential Information which it is advised by counsel that it is legally required to so disclose and shall use reasonable efforts to obtain reliable assurance (at the other Party’s sole cost and expense) that confidential treatment will be accorded the Confidential Information so disclosed. Without limiting the generality of the foregoing, the Parties shall consult with each other on the provisions of this Agreement to be redacted in any filings made by either Party with the U.S. Securities and Exchange Commission or foreign counterpart or as otherwise required by law.

 

  15.4. Publications . If either Party proposes to publish or present on any results or data related to the development, manufacture or use of the Licensed Product or Licensed Technology (excluding publications or presentations which include only a standard source reference to Licensed Technology, consistent with scientific journal publication practices), then the other Party shall have the right to review and comment on any material proposed for such publication or presentation, such as by oral presentation at scientific conferences or seminars, scientific journal manuscripts or abstracts. Before any such material is submitted for publication or presentation, the proposing Party shall deliver a complete copy of such material to the other Party at least thirty (30) days prior to the proposed submission for publication or presentation, and such other Party shall use reasonable efforts to give its comments to the proposing Party within thirty (30) days following delivery of such material. With respect to oral presentation materials and abstracts, such other Party shall use reasonable efforts to expedite review of such material and to provide comments (if any) to the proposing Party within twenty (20) days following the date of delivery of such material to such other Party. The proposing Party shall (a) give due consideration to any editorial comments of the other Party, (b) comply with the other Party’s request to delete references to such Party’s

 

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  Confidential Information in any such material, and (c) delay any submission for publication or presentation for a period of up to an additional ninety (90) days for the purpose of preparing and filing appropriate patent applications in accordance with the terms of Section 11.2 hereof.

 

  15.5. Announcements . Except as expressly permitted in this Agreement, neither Party shall issue any public announcement, press release or other public disclosure regarding this Agreement or its subject matter, or use the name of the other Party in any publicity, advertising or announcement, without the other Party’s prior written consent, except for any such disclosure that is, in the opinion of counsel to the Party proposing to make such disclosure, required or advisable by law or the rules, regulations or guidance of the U.S. Securities and Exchange Commission or of a stock exchange on which the securities of such Party are listed, provided that unless prohibited by law, the disclosing party will make the proposed disclosure available for review and comment by the other Party and such disclosure is subject to the proviso in Section 15.3.4 to the extent practicable. Notwithstanding anything to the contrary contained in this Agreement:

 

  15.5.1. each Party may disclose the terms of this Agreement (but not other Confidential Information received from the other Party) to its legal, accounting and tax advisors, in each case who are bound to obligations of confidentiality and non-use substantially equivalent in scope to those set forth in this Section 15; and

 

  15.5.2. As soon as practicable after the Effective Date, Zosano may issue a press release after obtaining Lilly’s written approval.

 

  15.6. Term of Confidentiality . The confidentiality and non-use obligations imposed on each Party under this Section 15 shall continue with respect to a particular item of Confidential Information of the other Party until ten (10) years after the expiration or termination of this Agreement.

 

16. Miscellaneous Provisions

 

  16.1. Dispute Resolution . Each Party shall have the right to refer a dispute, controversy or claim in connection with this Agreement, including, without limitation, if related to compliance with the terms of this Agreement, or the validity, breach, termination or interpretation of this Agreement, to the senior management within each Party for resolution. Disputes will be referred to the Alliance Managers to seek resolution. If the Alliance Managers are unable to achieve resolution within 10 days of the matter being referred to them, then the Alliance Managers will notify the JCC Chair who will convene a JCC meeting. The senior management shall have thirty (30) days in which to meet in good faith to resolve the dispute, controversy or claim, except for those matters for which a Party has final decision-making authority under Sections 3, 3.3.1, 4, 5 and 6. If the JCC is unable to resolve the matter within thirty (30) days, then the dispute, controversy or claim, shall be submitted promptly to the Chief Executive Officer of Zosano or its delegate and the Business Unit President for Lilly or their delegate for resolution. If either Party does not comply with the above, or such senior

 

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  officers are unable to resolve the dispute, controversy or claim within thirty (30) days, then the dispute, controversy or claim may be pursued by either Party under applicable law

 

  16.2. Compliance with Anti-Corruption Laws. In connection with this Agreement, the Parties, including their Affiliates and Subcontractors, have complied and will comply with all applicable local, national, and international laws, regulations, and industry codes dealing with government procurement, conflicts of interest, corruption or bribery, including, if applicable, the U.S. Foreign Corrupt Practices Act of 1977 (“ FCPA ”), as amended.

 

  16.2.1. In connection with this Agreement, the Parties have not made, offered, given, promised to give, or authorized, and will not make, offer, give, promise to give, or authorize, any bribe, kickback, payment or transfer of anything of value, directly or indirectly, to any person or to any Government or Public Official for the purpose of: (i) improperly influencing any act or decision of the person or Government or Public Official; (ii) inducing the person or Government or Public Official to do or omit to do an act in violation of a lawful or otherwise required duty; (iii) securing any improper advantage; or (iv) inducing the person or Government or Public Official to improperly influence the act or decision of any organization, including any government or government instrumentality, in order to assist Zosano or Lilly in obtaining or retaining business.

 

  16.2.2. Each Party agrees that breach of this section of the Agreement shall be considered a material breach of the Agreement and that the non-breaching Party may immediately seek all remedies available under law and equity including termination of this Agreement if it believes, in good faith, that a provision of this section of the Agreement has been breached.

 

  16.2.3. Each Party agrees that it will maintain accurate and complete records of its receipts and expenses having to do with payments to any Government or Public Officials in connection with this Agreement, in accordance with generally accepted accounting principles, during the term of this Agreement and for a period of five (5) years thereafter. Each Party further agrees that it will maintain adequate internal controls and will not make or permit any off-the-books accounts, inadequately identified transactions, recording of non-existent expenditures, entry of liabilities with incorrect identification of their object, or the use of false documents, in connection with this Agreement. Each Party will make such books and accounting records available for review by the other Party, or an independent party nominated by the requesting Party, not more than once each year, at their request.

 

  16.3. Governing Law . This Agreement shall be governed in all respects by the laws of the State of New York without regard to its choice of law provisions.

 

  16.4. Equitable Relief . Each Party hereto acknowledges that the remedies at law of the other Party for a breach or threatened breach of this Agreement may be inadequate and, in recognition of this fact, either Party to this Agreement, without posting any

 

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  bond, and in addition to all other remedies that may be available, shall be entitled to seek equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy in a court of competent jurisdiction that may then be available.

 

  16.5. Entire Agreement; Modification . This Agreement (including the Development Plan and the other Schedules and Exhibits hereto) constitutes a final expression of the Parties’ agreement and a complete and exclusive statement with respect to all of its respective terms. This Agreement supersedes all prior and contemporaneous agreements and communications between the Parties, whether oral, written or otherwise, concerning any and all matters contained herein. No trade customs, courses of dealing or courses of performance by the Parties shall be relevant to modify, supplement or explain any terms used in this Agreement. In the event of any inconsistency or conflict between the terms of this Agreement and the Development Plan the terms of this Agreement shall govern, unless such conflicting provision is expressly identified and disclaimed in the Development Plan. This Agreement may not be modified or supplemented by any purchase order, change order, acknowledgment, order acceptance, standard terms of sale, invoice or the like. This Agreement may only be modified, amended or supplemented in writing signed by the Parties to this Agreement.

 

  16.6. Relationship Between the Parties . The Parties’ relationship, as established by this Agreement, is solely that of independent contractors. This Agreement does not create any partnership, joint venture or similar business relationship between the Parties. Neither Party is a legal representative of the other Party. Neither Party can assume or create any obligation, representation, warranty or guarantee, express or implied, on behalf of the other Party for any purpose whatsoever.

 

  16.7. Non-Waiver . The failure of a Party to insist upon strict performance of any provision of this Agreement or to exercise any right arising out of this Agreement shall neither impair that provision or right nor constitute a waiver of that provision or right, in whole or in part, in that instance or in any other instance. Any waiver by a Party of a particular provision or right shall be in writing, shall be as to a particular matter and, if applicable, for a particular period of time and shall be signed by such Party.

 

  16.8. Assignment. Except as expressly provided hereunder, neither this Agreement nor any rights or obligations hereunder may be assigned or otherwise transferred by either Party without the prior written consent of the other Party (which consent shall not be unreasonably withheld); provided, however , that (a) either Party may assign this Agreement, and its rights and obligations hereunder, to an Affiliate, provided that such Party shall remain liable and responsible to the other Party for the performance and observance of all such duties and obligations by such Affiliate; and (b) either Party may assign this Agreement, and its rights and obligations hereunder, to a Third Party in connection with the transfer or sale of all or substantially all of the business of such Party to which this Agreement relates, whether by merger, sale of stock, sales of assets or otherwise. The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void.

 

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  16.9. No Third Party Beneficiaries . This Agreement is neither expressly nor impliedly made for the benefit of any party other than those executing it.

 

  16.10. Severability . If, for any reason, any part of this Agreement is adjudicated invalid, unenforceable or illegal by a court of competent jurisdiction, then such adjudication shall not affect or impair, in whole or in part, the validity, enforceability or legality of any remaining portions of this Agreement. All remaining portions shall remain in full force and effect as if the original Agreement had been executed without the invalidated, unenforceable or illegal part.

 

  16.11. Notices . Any notice to be given under this Agreement must be in writing and delivered either (a) in person, (b) by any method of mail (postage prepaid) requiring return receipt, (c) by overnight courier confirmed thereafter to the Party to be notified at its addresses given below, or at any address such Party has previously designated by prior written notice to the other Party, or (d) by sending it by facsimile or email followed by delivery via one of the methods set forth in (a), (b) or (c) above. Notice shall be deemed sufficiently given for all purposes upon the earlier of: (x) the date of actual receipt; (y) if mailed, five business days after the date of postmark; or (z) if delivered by overnight courier, the next business day the overnight courier regularly makes deliveries.

If to Lilly, notices must be addressed to:

Eli Lilly and Company

Lilly Corporate Center

Indianapolis, IN 46285

Attention: President, Bio-Medicines Business Unit

With a copy to:

Eli Lilly and Company

Lilly Corporate Center

Indianapolis, IN 46285

Attention: General Counsel

If to Zosano, notices must be addressed to:

ZP Opco, Inc., c/o Zosano Pharma Corporation

34790 Ardentech Court

Fremont, California 94555

Attention: Chief Executive Officer

Facsimile: 1-510-742-6288

 

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With a copy to:

Foley Hoag LLP

155 Seaport Blvd

Boston, MA 02210

Attention: Jeff Quillen

Facsimile: 1-617-832-7000

 

  16.12. Force Majeure . Except for the obligation to make payment when due, each Party shall be excused from liability for the failure or delay in performance of any obligation under this Agreement by reason of any event beyond such Party’s reasonable control, including, but not limited to, acts of God, fire, flood, explosion, earthquake, or other natural forces, war, civil unrest, terrorism, accident, destruction or other casualty, any lack or failure of transportation facilities, any lack or failure of supply of raw materials, any strike or labor disturbance, or any other event similar to those enumerated above. Such excuse from liability shall be effective only to the extent and duration of the events causing the failure or delay in performance, provided that the Party has not caused such event(s) to occur. Notice of a Party’s failure or delay in performance due to force majeure shall be given to the other Party within thirty (30) days after its occurrence. All delivery dates under this Agreement that have been affected by force majeure shall be tolled for the duration of such force majeure.

 

  16.13. No Use of Names . Except as otherwise provided herein, nothing contained in this Agreement shall be construed as conferring any right on either Party to use in advertising, publicity or other promotional activities any name, trade name, trademark or other designation of the other Party, including any contraction, abbreviation or simulation of any of the foregoing, unless the express written permission of such other Party has been obtained or unless in the good faith determination of a Party, complies with securities disclosure rules and guidance.

 

  16.14. Interpretation . In this Agreement headings are for convenience only and do not affect interpretation, and unless the context indicates a contrary intention:

 

  16.14.1. Any schedule, attachment or Exhibit to this Agreement forms a part of this Agreement, but if there is inconsistency between this Agreement and any schedule, attachment or Exhibit hereto, then this Agreement shall prevail unless the Parties have agreed otherwise in writing;

 

  16.14.2. a reference to “includes” in any form is not a word of limitation;

 

  16.14.3. captions and headings of Sections contained in this Agreement preceding the text of the Sections, sections, subsections and paragraphs hereof are inserted solely for convenience and ease of reference only and shall not constitute any part of this Agreement, or have any effect on its interpretation or construction;

 

  16.14.4. references to days shall mean calendar days, unless otherwise specified;

 

  16.14.5. the words “shall” and “will” have the same meaning and are used interchangeably; and

 

  16.14.6. “USD” is a reference to U.S. dollars.

 

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  16.15. Counterparts . This Agreement may be executed in two counterparts, each of which shall be deemed an original document, and all of which, together with this writing, shall be deemed one instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or by email of a scanned copy will be effective as delivery of an original executed counterpart of this Agreement.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement as of the Effective Date.

 

ZP Opco, Inc.
By:  

/s/ Vikram Lamba

Name:   Vikram Lamba
Title:   President and Chief Executive Officer
Eli Lilly and Company
By:  

/s/ David A. Ricks

Name:   David A. Ricks
Title:   Senior V.P. and President Lilly Bio-Medicines

 

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Appendix 1.1

Definitions

Affiliate ” means, with respect to a Party, any corporation, company, partnership, joint venture or other entity, which controls, is controlled by, or is under common control with such Party. For the purpose of this definition, “control” of an entity means the ownership, directly or indirectly, of more than fifty percent (50%) of the outstanding voting securities or capital stock of such entity, or the legal power to direct or cause the direction of the general management and policies of the entity in question.

ALZA Agreement ” means the Intellectual Property License Agreement dated as of October 5, 2006 by and between ALZA Corporation and The Macroflux Corporation (predecessor in interest to Zosano) and the letter agreement dated February 22, 2011 between ALZA Corporation and Zosano, as amended and from time to time in effect.

Commercialize ” or “ Commercialization ” means any and all activities directly and specifically relating to marketing, promoting, detailing, distributing, importing, offering for sale, having sold and/or selling a Licensed Product in the Field in the Territory, but excluding Development and Manufacturing.

Confidential Information ” of a Party means trade secrets or confidential or proprietary information, whether written, oral or in any other form, including, without limitation, business, technical, scientific and commercial information, Know-How, materials, reports, notes, documents, analyses and data. The Licensed Technology, information received by Zosano pursuant to the ALZA Agreement, whether or not marked or otherwise identified as trade secrets or confidential or proprietary information and all data and results arising from Development activities shall be deemed to be Zosano Confidential Information. “Confidential Information” shall also include confidential or proprietary information exchanged prior to the date hereof in connection with the transactions set forth in this Agreement. The terms of this Agreement shall be deemed to be the Confidential Information of both Parties.

Control ” or “ Controlled ” means with respect to a particular item, material, information or Intellectual Property, the possession of the right (whether through ownership or license (other than by operation of this Agreement) or control over an Affiliate with such right) to grant licenses or sublicenses as provided herein to the other Party without violating the terms of any agreement with any Third Party.

Cover ” or “ Covered by ” means, with respect to Licensed Product, in the absence of ownership of, or a license granted under, a Valid Patent Claim, that the manufacture, use, offer for sale, sale or importation of such Licensed Product would infringe such Valid Patent Claim.

Daily Product ” means a Product Patch which is intended to deliver PTH formulations to a patient one time each day.

 

 

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Develop ” or “ Development ” means research and development of a product or process, including, without limitation, (i) stability testing, toxicology, pharmacology, formulation, drug delivery, device or delivery technology development, quality assurance/quality control development, pharmacokinetic studies and clinical studies, in each case, leading up to the preparation, submission and filing of a Regulatory Approval and (ii) the preparation, submission and filing of a Regulatory Approval.

Development Plan ” means the plan set forth as Exhibit A attached hereto setting forth including but not limited to the planning, implementation, control and funding, clinical design protocol and specifications for devices for Development of the Daily Product for the United States and Japan.

FDA ” means the United States Food and Drug Administration, or any successor agency thereto.

Field ” means all uses of PTH.

First Commercial Sale ” means, in a country, the first commercial sale in that country by Lilly or its Affiliates or a sublicensee of a Licensed Product to a Third Party following receipt of marketing approval to sell such Licensed Product in such country.

“FTE Rate” means, for the period commencing on the Effective Date until such time as the Parties agree otherwise, a rate of [**] per annum, based on the yearly time for a FTE [**], to be pro-rated on a hourly basis at [**]. The FTE Rate will be increased or decreased on each anniversary of the Effective Date by a percentage equivalent to the change over the preceding twelve month period in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The FTE Rate shall include costs of salaries, benefits, supplies, travel, other employee costs, and supporting general and administration allocations. For clarity, the FTE Rate will not apply to any employee that performs activities related to manufacturing, and any costs related to such employee will be included only to the extent consistent with the definition of Manufacturing Costs.

“Government or Public Official” means: (i) any official, officer, employee, representative, or anyone acting in an official capacity on behalf of: (a) any government or any department or agency thereof; (b) any public international organization (such as the United Nations, the International Monetary Fund, the International Red Cross, or the World Health Organization), or any department, agency, or institution thereof; or (c) any government-owned or controlled company, institution, or other entity, including a government-owned hospital or university; (ii) any political party or party official; and (iii) any candidate for political office.

Insolvency Event ” means a Party becomes insolvent, is dissolved or liquidated, files or has filed against it a petition in bankruptcy, reorganization, dissolution or liquidation or similar action filed by or against it, is adjudicated as bankrupt, or has a receiver appointed for its business occur.

Intellectual Property ” or “ Intellectual Property Rights ” means Know-How and Patent Rights.

 

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JCC ” means the Joint Collaboration Committee as defined in Section 7.1 and as further described in Section 7.

Know-How ” means ideas, concepts, discoveries, inventions, developments, trade secrets, know-how, techniques, methodologies, modifications, innovations, improvements, designs and design concepts, technical information, expertise, processes, specifications, formulas, procedures, protocols, and data, results and other information proprietary to the relevant Party.

Label Approval ” means the approval by the FDA or PMDA of a label substantially in the form attached hereto as Exhibit C .

Laws ” means any law, statute, rule, regulation, order, judgment or ordinance of any governmental authority or Regulatory Authority.

Licensed Know-How ” means all Know-How that is (a) Controlled by Zosano as of the Effective Date or at any time during the term of this Agreement that is not generally known, even though parts thereof may be generally known, and (b) necessary or useful to make, use, sell, offer for sale and import Licensed Products for use in the Field, including without limitation any Know-How arising from activities performed under the Development Plan. Licensed Know-How does not include Licensed Patent Rights.

Licensed Patents ” means any Patent Rights Controlled by Zosano or its Affiliates as of the Effective Date or at any time during the term of this Agreement that cover or claim technology that is necessary or useful to make, have made, use, sell, offer for sale and import Licensed Products for use in the Field, including without limitation any Patent Rights arising from activities under the Development Plan. Licensed Patents do not include Licensed Know-How.

Licensed Products ” means the Daily Product and any Product Patch with a New Dosing Duration.

Licensed Technology ” means the Licensed Patents and the Licensed Know-How.

Manufacture ” or “ Manufacturing ” means to make, produce, manufacture, process, fill, finish, package, label, perform quality assurance testing, release, ship or store a Product Patch or any component thereof. When used as a noun, “Manufacture” or “Manufacturing” means any and all activities involved in Manufacturing Product Patch or any component thereof.

“Manufacturing Costs” means the fully-burdened aggregate direct and indirect costs and expenses incurred and recorded by Zosano in manufacturing in accordance with U.S. GAAP consisting solely of: (a) direct labor costs (salaries, wages, employee benefits, overtime costs and shift premiums); (b) direct materials (including raw materials and intermediates and packaging) costs; (c) operating costs of facilities and equipment (including start up and cleaning costs of production); (d) quality, release and in-process control costs; (e) charges for reasonable spoilage, scrap or rework costs; (f) amounts (without markup) that are paid to a Third Party; and (g) the reasonable allocation of facility overhead, both fixed and variable, to such manufacturing operation (including the allocable costs of administrators and managers overseeing

 

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manufacturing and production), in each case ((a) through (g)), to the extent specifically identifiable to the manufacture of Product as determined in accordance with the applicable Accounting Standards.

Net Sales ” means the gross amount invoiced by Lilly, its Affiliates or their respective sublicensees, to Third Parties for the Daily Product in the Territory less:

 

  a) Trade, quantity and cash discounts allowed;

 

  b) Discounts, refunds, rebates, chargebacks, and retroactive price adjustments, and any other allowance which effectively reduces the net selling price in accordance with U. S. Generally Accepted Accounting Principles (U.S. GAAP);

 

  c) Daily Product returns;

 

  d) Any tax imposed on the production, sale, delivery or use of the Daily Product, including, without limitation, sales, use, excise or value added taxes, in each case to the extent added to the sale price;

 

  e) Wholesaler inventory management fees;

 

  f) The compulsory annual fee imposed on the pharmaceutical manufacturers by the U.S. government;

 

  g) Allowance for distribution expenses; and

 

  h) Any other similar and customary deductions which are in accordance with U. S. Generally Accepted Accounting Principles (U.S. GAAP).

Such amounts shall be determined from the books and records of Lilly or sublicensee, maintained in accordance with U.S. GAAP or, in the case of sublicensees, such similar accounting principles, consistently applied. Lilly further agrees in determining such amounts, it will use Lilly’s then current standard procedures and methodology, including Lilly’s then current standard exchange rate methodology for the translation of foreign currency sales into U.S. Dollars or, in the case of sublicensees, such similar methodology, consistently applied.

New Dosing Duration ” shall be any dosing duration, other than once daily, with respect to a Product Patch or Licensed Product. For example, if a Licensed Product has an administration once daily, then a once weekly administration would be a New Dosing Duration.

Party ” means Zosano or Lilly. If either Party assigns this Agreement to any of its Affiliates in accordance with and subject to Section 16.8, “Party” shall include such Affiliate of such Party.

Patent Authority ” means a governmental, intergovernmental or government-authorized body responsible for receiving, examining, issuing, extending or maintaining patents.

Patent Rights ” means all patents and patent applications, and any and all continuations, continuations-in-part, divisionals, utility models, extensions, renewals, substitutions and additions thereof and all reissues, revalidations and re-examinations thereof, including any and all patents issuing there from and any and all foreign counterparts thereof.

Pen ” means the pre-filled cartridge pen device (i) currently marketed by Lilly to administer via injection once daily formulations of the Lilly’s recombinant human PTH analog (1-34) rhPTH (1-34) or (ii) manufactured by Lilly to administer a placebo.

 

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Phase 1 Clinical Trial ” means a human clinical trial that satisfies the requirements for a Phase 1 study as defined in 21 C.F.R. Part 312.21(a) (or its successor regulation) or the equivalent human clinical trial outside the U.S.

Phase 2 Clinical Trial ” means a human clinical trial that satisfies the requirements for a Phase 2 study as defined in 21 C.F.R. Part 312.21(b) (or its successor regulation) or the equivalent human clinical trial outside the U.S.

Phase 3 Clinical Trials ” means a human clinical trial that satisfies the requirements for a Phase 3 study as defined in 21 C.F.R. Part 312.21(c) (or its successor regulation) or the equivalent human clinical trial outside the U.S. For purposes of Section 3.2, a Phase 3 Clinical Trial shall include any pivotal trial that is officially designated as a Phase 3 trial with the Regulatory Authority having jurisdiction, or that is intended to serve to gather any of the pivotal data that (if favorable) would support Regulatory Approval (regardless of whether such trial is denominated “Phase 2”, “Phase 3”, “Phase 2/3” or otherwise denominated).

PMDA ” means the Pharmaceuticals and Medical Devices Agency of Japan and any successor agency thereto.

Product Patch ” means a microprojection array which pierces through the outmost (i.e., the stratum corneum) layer of the skin and either (i) in which the microprojections are coated with a formulation containing PTH as an active pharmaceutical ingredient, to deliver such active pharmaceutical ingredient into or through the skin, in a passive, diffusion-mediated manner, or (ii) to form pathways for diffusion-mediated delivery of PTH as an active pharmaceutical ingredient into or through the skin, in each of (i) or (ii) inclusive of an applicator device, API, patch and packaging. For purposes of clarity, the Product Patch shall include all dosage and timed release formulations of PTH.

“Reasonable Assistance” means the assistance that may be provided by one Party to the other at the sole discretion of the Party providing the assistance and at the requesting Party’s cost and expense after specifically defining the task and reaching mutual agreement regarding a set amount of time and number of persons (at the “FTE Rate”). The providing Party shall invoice the other Party on a quarterly basis and payment shall be due within thirty (30) days.

Regulatory Approval ” means any approvals (including price and reimbursement approvals), licenses, registrations or authorizations (including marketing authorizations) of a Regulatory Authority, including Label Approval.

Regulatory Authority ” means any national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity, whose approval or authorization is necessary for, or to whom notice must be given prior to, the manufacture, distribution, use, import, transport and/or sale of a Licensed Product in such jurisdiction.

Royalty Term ” shall have the meaning provided in Section 8.4.2.

Term ” shall have the meaning provided in Section 9.1.

 

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Territory ” means the world.

Third Party ” means any party other than the Parties and their Affiliates.

Valid Patent Claim ” means, on a country-by-country basis, a claim of (a) an issued patent within the Licensed Patents that has not (i) expired or been canceled, (ii) been declared invalid by an unreversed and unappealable decision of a court or other appropriate body of competent jurisdiction, (iii) been admitted to be invalid or unenforceable through reissue, disclaimer, or otherwise, or (iv) been abandoned, or (b) a patent application that has been pending for less than seven (7) years (i) from the Effective Date, for patent applications pending as of the Effective Date, or (ii) from the date of filing, for patent applications filed after the Effective Date. If a claim or a patent application that ceased to be a Valid Claim under clause (b) of the preceding sentence because of the passage of time later issues as a part of a patent within clause (a) of the preceding sentence, then it shall again be considered a Valid Claim effective as of the issuance of such patent.

 

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Exhibit A

Development Plan

 

1. Studies :

 

  a. Phase 3 Clinical Trial: See file named “Protocol Synopsis for Daily PTH Phase 3.pdf”

 

  b. Nonclinical Study: Zosano will complete a 30-day systemic toxicology study in rats prior to submission of the NDA to the FDA.

 

  c. Usability Study: Zosano will complete a final usability study on system design prior to first patient dosing in the Phase 3 Clinical Trial. The results of the usability study will comprise part of the NDA.

 

2. Specifications :

 

  a. Clinical Patch Release Specifications:

[**]

 

  b. Applicator Release Specifications:

[**]

 

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Exhibit B

Patient Preference Study

[**]

 

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Exhibit C

Label

 

Primary Indication    FDA- “Treatment of postmenopausal osteoporosis in women at high risk for fracture”
  

 

PMDA- “Treatment of osteoporotic patients who are at high risk for fractures”

Target Population    Same as for Forteo
Dosing & Administration    Single-use patch applied to abdomen using reusable applicator
  

 

Dosing: one patch administered daily

  

 

Patch application time 30 minutes

  

 

Duration of treatment: Comparable to Forteo - currently up to 24 months.

Primary Endpoints (Efficacy)    Percentage increase in spine BMD at 12 months non-inferior to Forteo
Safety/Tolerability   

•     No increase in hypercalcemia versus Forteo.

 

•     No new SAE’s compared with Forteo.

 

•     With regards to other AE’s, patch safety performance accepted as comparable versus Forteo by the regulatory authorities.

 

•     No new warnings compared to Forteo

  

•     Dermatologic tolerability and safety no worse than Forteo® label: administration site events include pain, swelling erythema, localized bruising, pruritus and minor bleeding at the injection site. However, if the results of the clinical study forming part of the Patient Preference Study (CSF 1) show tolerability of patches that is worse than the tolerability of Forteo, but Lilly informs Zosano in accordance with the Agreement that CSF 1 has been achieved, then the label language regarding dermatologic tolerability and safety shall be adjusted to reflect the performance of the Phase 3 patches.

How to Store Product (Shelf life)   

•     24 month room temperature stability at 25° Centigrade

 

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Schedule 3.3.1

Critical Success Factors

CSF 1: Patient Preference Study . (See benchmarks in Patient Preference Study per Exhibit B).

CSF 2: Regulatory Approval (includes Label Approval per Exhibit C) .

 

  1. Regulatory Approval for the Daily Product in [**] no later than [**]; and

Regulatory Approval for the Daily Product in [**] no later than [**].

 

  a. Approved CMC regulatory package for Daily Product for approval in [**] and/or [**], as applicable.

CSF 3: CMC/Manufacturing

 

  1) Process Development: Parties to agree upon process development plan within six months after the Effective Date. Low bio-burden or sterile process development plan executed as applicable for the relevant geographies, leading to a complete CMC package approved by Regulatory Agencies; established understanding and designation of critical process parameters, testing methods, and specifications.

 

  a. Key Performance Indicators

 

  i. Approved CMC Regulatory package.

 

  ii. Executed process development plan; robust process development package, including critical process parameters.

 

  iii. Equipment qualification, process validation, stability testing, etc. completed.

 

  iv. Parties to agree upon Device Development Plan within six months after the Effective Date. Device Design Control deliverables executed throughout the project per the Device Development Plan, audited by Lilly and remediated by Zosano.

 

  b. Activity Timing: Sufficiently ahead of regulatory submissions so as not to hold up filings.

 

  2) Lilly Approval of the Product Residual Risk Summary Report that complies with ISO 14971.

 

  a. Key Performance Indicators

 

  i. Review and Approval of Risk Management Plan and associated deliverables such as FMEA’s, Fault Tree Analysis, and Control Plans for the System.

 

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  3) Clinical Product Supply : Establishment and oversight by Zosano of a clinical supply chain meeting agency requirements and appropriately representative of commercial image product.

 

  a. Key Performance Indicators

 

  i. Successful CMO governance/oversight audits and reports by Zosano.

 

  ii. Successful clinical supply manufactured at launch site.

 

  iii. Patch supply meets PMDA/EMA and FDA (as required) requirement to have aseptic manufacturing conditions to carry out Phase 3 testing.

 

  b. Activity Timing: In time to support clinical trials without delay in key geographies.

 

  4) Commercial Supply Chain : Establishment and oversight by Zosano of an approved commercial supply chain capable of supplying annual market demands of Daily Product, inclusive of applicator and packaging, for the first three years, post-launch (as agreed upon by the Parties no later than six months after the Effective Date) and cost of product targets.

 

  a. Key Performance Indicators

 

  i. Commercial supply chain established at least 6 months prior to expected product approval date; allows for launch without delay, post-approval within 30 days.

 

  ii. Successful CMO governance/oversight audits and reports, including but not limited to, Lilly audits/assessments.

 

  iii. Quality systems established prior to Regulatory submission; successful regulatory pre-approval inspections.

 

  iv. Supply and Quality Agreements established with contract manufacturers.

 

  v. Sufficient installed capacity to meet demands for the first three years, post-launch.

 

  vi. Patch manufacturing.

 

  1. No refrigeration requirement for storage and supply chain.

 

  2. Meets USP content uniformity requirements.

 

  vii. Six month inventory build ahead of launch.

Activity Timing: Commercial supply chain in place in time to support Regulatory filings and inventory build ahead of launch.

 

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LOGO

PROTOCOL SYNOPSIS CP-2015-004

DRAFT

 

TITLE   Randomized double-blind multi-center study comparing the safety and efficacy of the Zosano Transdermal Teriparatide Patch System (ZP-PTH) to Forteo® for the treatment of postmenopausal osteoporosis
SPONSOR   Zosano Pharma, Inc.
CLINICAL PHASE   3
INDICATION   Postmenopausal osteoporosis
OBJECTIVES     To demonstrate non-inferior lumbar spine BMD changes over one year with ZP-PTH 30 µg and 40 µg compared to Forteo®
    To assess hip BMD changes over 12 months
    To assess the effect of ZP-PTH on biochemical markers of bone turnover
    To assess the safety of ZP-PTH 30 µg and 40 µg, relative to that of Forteo®
ENDPOINTS   Primary :
    Percent change in lumbar spine BMD (L1-L4) over 12 months
  Secondary :
    Percent change in total hip BMD over 12 months
    Percentage of responders in terms of lumbar spine BMD gains over 12 months
    Percent change in femoral neck BMD over 12 months
    Percent change in one-third radius BMD over 12 months
  Exploratory :
    Change in serum P1NP and CTX
  Safety :
    Maximal change in serum calcium within the first 10 hours of an administration (evaluated in a subgroup of patients)
    Incidence of adverse events
TRIAL DESIGN   Randomized, double-blind, double-dummy, active-controlled parallel group one-year multi-center study, with a six-month safety extension
INVESTIGATIONAL     ZP-PTH 30 µg patch, to be applied once a day for 30 minutes
TREATMENT     ZP-PTH 40 µg patch, to be applied once a day for 30 minutes
COMPARATOR     Forteo® (teriparatide) 20 µg s.c. injection once a day
BLINDING     Patients in the control group will receive sucrose-coated patches that are identical in gross appearance to the ZP-PTH patch
    Patients in the test (investigational treatment) group will receive a pen

 

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PROTOCOL SYNOPSIS CP-2015-004

DRAFT

 

    identical or similar to the Forteo® pen for daily injections. The active and placebo pens will have identical labels. If the pens are not identical, patients will be instructed in its use by a designated person at each site who is not involved in any of the study assessments.
    Because of their potential to unblind the study, the biochemical markers of bone turnover, pharmacokinetic samples and collected used patches will be centrally analyzed and the results will not be reported to the clinical sites; they will be reviewed by the sponsor without link to actual patient numbers or other patient data.
ADDITIONAL TREATMENT   Calcium supplement 500 mg QD (to be taken every day, including days preceding DXA examinations)
  Vitamin D supplement 400 - 1200 IU QD – Individual doses will be selected on the basis of national recommendations and local availability of supplements.
RANDOMIZATION   1:1:1
  Subjects will be stratified by prior use of bisphosphonates (any use vs. no use)
STUDY POPULATION   Postmenopausal women with prior osteoporotic fractures and low lumbar spine BMD
NUMBER OF SUBJECTS   1200 subjects (400 per group). Of these, at least 240 subjects will be from Japan or of Japanese ancestry.
ELIGIBILITY   Inclusion criteria :
  1.   Women, age 50 years or older at the time of randomization
  2.   Postmenopausal, as defined by:
      No menstrual periods for at least 12 consecutive months prior to randomization; for women under the age of 55 with a menstrual period within the past two years, a serum follicle-stimulating hormone (FSH) level ³ 40 IU/L; or
      Surgical menopause (bilateral oophorectomy with or without hysterectomy) ³ 12 months before randomization
  3.   Prior osteoporotic fracture defined as:
      History of an osteoporotic nonvertebral fracture (i.e. a fracture without high-energy trauma at any location other than face and skull after the age of 45) by self-report, OR
      At least one radiologically confirmed vertebral compression fracture (documented either by screening radiograph or prior radiological report)
  4.   Lumbar spine BMD T-score of £ -2.0, as determined by central imaging facility
  5.   The presence of at least three evaluable lumbar vertebrae (L1-L4) by DXA for BMD assessments as determined by the central imaging facility
  6.   Albumin-adjusted serum calcium, phosphate, uric acid within central lab normal range
  7.   Urinary calcium-creatinine ratio within lab normal range

 

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DRAFT

 

  8.   25-OH Vitamin D > 20 ng/ml; if between 12 ng/ml and 20 ng/ml, subject may be rescreened after vitamin D supplementation.
  9.   TSH within normal limits, irrespective of thyroid hormone replacement; or, if TSH is > ULN but £  3× ULN, and patient is clinically euthyroid, FT4 should be analyzed and must be within normal limit (treatment with thyroxine to normalize the TSH will not exclude the patient from randomization).
  10.   Body mass index less than 30 kg/m 2
  11.   Able to walk without assistance, and in good general health as determined by medical history, physical examination (PE), and laboratory tests
  12.   Able to self-administer study drug, a daily injection of FORTEO ® and apply the ZP-PTH patch, or have a qualified designee to administer the daily study drug
  13.   Reachable by telephone between study visits for follow-ups
  14.   Able to understand and provide written informed consent to participate in the study and understand that they are free to withdraw from the study at any time.
  Exclusion criteria :
  1.   A medical history or concurrent illnesses known to impact bone health, including: hyperparathyroidism or hypoparathyroidism, hyperthyroidism, Cushing’s disease
  2.   With the exception of osteoporosis, any metabolic bone disease, including osteomalacia, osteogenesis imperfecta, Paget’s disease, fibrous dysplasia, or any unexplained elevation of alkaline phosphatase,
  3.   Anemia (hemoglobin <10 g/dL) or known hematological blood disorders, such as hemophilia or multiple myeloma
  4.   History of urolithiasis or hypercalciuria within the past five years
  5.   Serum creatinine > 1.5 mg/dl,
  6.   Active hepatic disease or transaminase levels > 2xULN
  7.   Stage 4 CHF or any unstable cardiovascular or pulmonary disease
  8.   Any autoimmune diseases requiring chronic anti-inflammatory therapy (etanercept) or disease modifying agents (methotrexate) or glucocorticoids, including rheumatoid arthritis, inflammatory bowel disease, celiac disease, and psoriasis
  9.   History of contact dermatitis or known dermatological disorders that could interfere with the study procedures or assessments
  10.   Known allergy or sensitivity to tapes, adhesives, PTH, teriparatide or its analogs or excipients
  11.   Seizure disorders treated with phenobarbital or phenytoin
  12.   With the exception of fully resected squamous or basal cell carcinoma of the skin, any history of cancer within the previous five years or on-going cancer therapy, including external beam or implant radiation therapy

 

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DRAFT

 

  13.   History of bone metastases or prior external beam or implant radiation therapy involving the skeleton, or a history of skeletal malignancies
  14.   Any other previous or ongoing clinically significant illness, including any neurological or psychiatric disease, that, in the opinion of the investigator, would have interfered with the patient’s ability to comply with the study protocol or could have prevented the patient from completing the study;
  15.   Any condition or disease that may have interfered with the ability to have or the evaluation of a DXA scan, for example, severe osteoarthritis of the spine, spinal fusion, pedicle screws, history of vertebroplasty, or degenerative disease that resulted in insufficient number of evaluable lumbar vertebrae, or >1 lumbar vertebral fracture in L1-L4; bilateral hip replacements;
  16.   Known history of drug or alcohol abuse, or ongoing drug abuse
  17.   Randomized to study drug treatment in a prior Zosano PTH study
  18.   Medication history exclusions:
      Any investigational drug within 30 days of planned randomization
      Use of any PTH or PTH analog for ³ 3 months in total, and/or within six months of randomization (Week 0), and/or if there were any major side effects from its use
      Use of fluoride or strontium therapy for osteoporosis at any time
      Total bisphosphonate use for more than 24 months, or any use within 3 months prior to planned randomization; use for a duration between 3 months and 24 months is acceptable if followed by an off-period of at least the same duration. For long-acting bisphosphonates, especially IV ibandronate and zoledronate, the recommended dosing interval will be considered part of the on-treatment period.
      Estrogen or estrogen-related drugs, for example, tamoxifen, tibolone (oral or skin patch), or raloxifene within three months prior to planned randomization; vaginal estrogen creams are allowed
      Calcitonin within 3 month prior to planned randomization
      Denosumab within 1 year prior to planned randomization
      Current digoxin treatment
      Steroid Use:
        Anabolic steroids or androgens (within six months),
        Daily inhaled corticosteroids ³ 1200 µg/day of beclomethasone or equivalent (within three months),
        Oral or parenteral glucocorticoids ³ 5 mg prednisone or equivalent/day (within three months),

 

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DRAFT

 

CENTERS   Up to 100 centers in North America, Latin America, Asia, Europe and Africa
STUDY DURATION     Twelve-month (48-week) double-blind phase
    Six-month (24-week) open-label safety extension for patients in both treatment groups
EFFICACY ASSESSMENTS     DXA at the lumbar spine, hip, and forearm at screening, weeks 24, 48, and 72
 

 

 

 

Biochemical markers of bone turnover:

        Postprandial P1NP and CTX at, weeks 0, 12, 24, 48
        BSAP at screening, weeks 12, 24, 48
    Serum PTH at screening, weeks 12, 24, 48, and 72
    Spine radiographs only for the screening assessment of subjects without documented history of an osteoporotic fracture. The radiographs will be assessed locally.
SAFETY ASSESSMENTS     Physical exam
    Weight, height
    Vital signs including orthostatic heart rate and BP before treatment and at 10 and 30 min, and 60 min post-dose
    Routine lab: Chemistry, hematology, urinalysis
    Calcium metabolism: Serum calcium, phosphate, vitamin D, calcium/creatinine ratio
    Serial assessments of serum calcium (5-10 min after patch application, 30 min after injection, 4 hrs, 6 hrs , 10 hrs post-dose) in a subset of patients at selected sites (approximately 80 subjects)
    Pharmacokinetic assessment of PTH(1-34) in the same subset and at the same time points.
    Retention of patches for residual PTH analysis – in the same subset of patients
    Anti-PTH antibodies (weeks 0, 24, 48 and 72)
    12-lead ECGs (time point TBD)
    Assessment of concomitant medications
    Review of adverse events
    Patient topical assessment on a short questionnaire. If topical experience is limited to expected phenomena such as erythema, no additional adverse experience report is needed.
    Topical assessment by the investigator:
        Immediately after patch removal for patch applications performed at the site
        Assessment of the application site of the prior day (to be marked by patients)
        Modified Draize scale will be used

 

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DRAFT

 

STUDY PROCEDURES  

Up to two screening visits

 

Initial treatment visit

 

Interim visits at weeks 4, 8, 12, 24, 36, 48, 60

 

Termination visit at week 72

 

Phone calls to foster compliance every two weeks between visits central evaluation and quality control of DXA scans

 

Archiving of blood samples to allow for analysis of additional markers of bone turnover

STATISTICAL ANALYSES  

The primary endpoint of the study, percent change in lumbar spine BMD, will be assessed in the per-protocol population. Non-inferiority of the investigational regimen to the comparator regimen will be concluded if the upper limit of the two-sided 95% confidence interval for the difference between the comparator and the test regimen is not greater than 1.5% (margin of non-inferiority).

 

No alpha adjustment for multiple testing will be necessary because a sequential testing procedure will be applied: The test for non-inferiority of the 30 µg dose will be performed only if non-inferiority of the 40 µg dose has been concluded.

 

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SCHEDULE OF ASSESSMENTS

 

     Screening
(up to 2
visits)
   Double-blind treatment    Extension
Week Number    -4    0    4    8    12    24    36    48    60    72
Visit Number    -1    2    3    4    5    6    7    8    9    10
Informed Consent    X                           
Inclusion/Exclusion Criteria    X    X                        
Medical History    X                           
FSH, TSH    X                           
Randomization       X                        
Physical Exam    X    X                   X       X
Weight /Height    X    X             X       X       X
Vital Signs including orthostatic BP & HR 10 and 30 min post-dose    X    X    X    X    X    X    X    X    X    X
Investigator Topical Assessments       X    X    X    X    X    X    X    X    X
Review of AE reports and patient topical assessment       X    X    X    X    X    X    X    X    X
Concomitant meds/therapies    X    X    X    X    X    X    X    X    X    X
Review used patches/study drug          X    X    X    X    X    X    X    X
Chemistry & Hematology    X    X             X       X       X
Urinalysis    X    X                   X      
Intact PTH    X    X          X    X       X       X
Serum Vitamin D    X    X                   X      
Serum Total Calcium, Phosphate    X    X    X    X    X    X    X    X       X
Serial Calcium, Phosphate and retention of patches for residual PTH analysis – subset of patients       X    X    X    X    X    X    X    X    X
PTH(1-34) Pharmacokinetic sampling – subset of patients          X          X            
Bone-specific alkaline phos (BSAP)    X             X    X       X      
Serum P1NP, CTX       X          X    X       X      
Anti-PTH antibodies       X             X       X       X
DXA (BMD)    X    X             X       X       X
Spine radiographs (unless fracture criterion is otherwise satisfied)    X                           
12-lead ECG    X       X          X       X       X
Dispense Ca/Vit D supplements    X    X             X       X      
Dispense Study Drug       X    X    X    X    X    X    X    X   

 

Zosano Pharma, Inc.    Page 7 of 7    Confidential

Exhibit 10.42

Execution Version

COMMON STOCK PURCHASE AGREEMENT

This COMMON STOCK PURCHASE AGREEMENT (this “ Agreement ”) dated as of November 21, 2014 (the “ Effective Date ”), is made by and between Zosano Pharma Corporation, a Delaware corporation (the “ Company ”), and Eli Lilly and Company, an Indiana corporation (“ Purchaser ”).

WHEREAS, Purchaser desires to purchase from the Company, and the Company desires to sell and issue to Purchaser, shares of the common stock, $0.0001 par value per share, of the Company (“ Common Stock ”) having an aggregate purchase price equal to the Purchase Amount (as defined below), concurrently with the consummation of the Company’s first underwritten public offering of its Common Stock (the “ IPO ”), at a purchase price per share equal to the price per share of Common Stock sold to the public in the IPO (the “ IPO Price ”) (such IPO consummation time and IPO Price as set forth on the cover of the Final Prospectus (as defined below) to be filed with the Securities and Exchange Commission (the “ SEC ”) pursuant to Rule 424 promulgated under the Securities Act of 1933, as amended (the “ Securities Act ”)), subject to the terms and conditions set forth in this Agreement; and

WHEREAS, the parties hereto have executed this Agreement on the Effective Date, which is prior to the effectiveness of the registration statement on Form S-1 (File No. 333-196983), as amended, filed by the Company with the SEC under the Securities Act, relating to the IPO (the “ Registration Statement ”);

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereby agree as follows:

1. Purchase and Sale of Shares . Subject to the terms and conditions of this Agreement, at the Closing (as defined below), the Company agrees to issue and sell to Purchaser the number of shares of Common Stock (the “ Shares ”) equal to that whole number which, when multiplied by the IPO Price, is equal to (or as close as possible to, but no more than) $15,000,000.00 (or such lesser amount in order to give effect to the proviso at the end of this sentence) (the “ Purchase Amount ”); provided, however , that in no event shall Purchaser be required to purchase those shares of the Common Stock that would cause Purchaser’s beneficial ownership of the total number of outstanding shares of the Common Stock, pro forma for the consummation of the IPO and the issuance of the Shares pursuant to this Section 1, to be in excess of 18%. Purchaser agrees to purchase the Shares from the Company at the Closing, for an aggregate purchase price equal to the Purchase Amount, free and clear of any liens or encumbrances.

2. Closing . Subject to the satisfaction or waiver of each of the conditions set forth in Sections 6 and 7 (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions), the closing of the sale and purchase of the Shares (the “ Closing ”) shall take place concurrently with the closing of the IPO, remotely via the exchange of documents and signatures, or at such other location as may be agreed upon by the Company and Purchaser. At the Closing, the Company shall issue and deliver to Purchaser or its designated affiliate a certificate for shares of Common Stock,


registered in the name of Purchaser or its designated affiliate (or, in the event the Common Stock is issued in an uncertificated form, such other evidence of ownership), in the amount representing the number of Shares, as determined pursuant to Section 1, against payment by Purchaser or its designated affiliate to the Company of the Purchase Amount, in the form of a wire transfer of immediately available funds to a bank account designated by the Company.

3. Representations and Warranties of the Company . The Company represents and warrants to Purchaser as follows:

(a) Organization . The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and to carry out the transactions contemplated by this Agreement. The Company is duly qualified as a foreign corporation and is in good standing in all such jurisdictions in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that any failure to be so qualified would not materially and adversely affect the Company’s financial condition, business or operations.

(b) Capitalization . Immediately prior to the Closing and without giving effect to the issuance, purchase and sale of the Shares, the Company’s capitalization shall be as set forth in the Registration Statement.

(c) Authorization of this Agreement . The execution, delivery and performance by the Company of this Agreement have been duly authorized by all requisite corporate action of the Company. The Company has duly executed and delivered this Agreement, and this Agreement constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms (except as enforceability may be limited by (x) applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors’ rights generally and (y) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law)).

(d) Authorization of the Shares . The issuance, sale and delivery of the Shares hereunder by the Company have been duly authorized by all requisite corporate action of the Company, and, when so issued, sold and delivered, the Shares will be validly issued, free and clear of all liens and encumbrances, fully paid and nonassessable, and not subject to preemptive rights of the stockholders of the Company or others.

(e) No Governmental Consent or Approval Required . No authorization, consent, approval or other order of, declaration to, or filing with, any governmental agency or body is required to be made or obtained by the Company for or in connection with the valid and lawful authorization, execution and delivery by the Company of this Agreement or for or in connection with the valid and lawful authorization, issuance, sale and delivery of the Shares, except exemptive filings under applicable securities laws, which are not required to be made until after the Closing and which shall be made on a timely basis.

(f) No Conflict . The Company is not in violation or default in any material respect of any provision of its Certificate of Incorporation or Bylaws, each as amended to date,

 

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or of any instrument, judgment, order, writ or decree to which it is a party or by which it is bound, or, to its knowledge, of any provision of any federal or state statute, rule or regulation applicable to the Company, except for such violations or defaults of any federal or state statute, rule or regulation that could not reasonably be expected to result, either individually or in the aggregate, in a material adverse effect on the Company’s financial condition, business or operations. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or default or constitute, with or without the passage of time and giving of notice, an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization or approval applicable to the Company, in each case, which could reasonably be expected to result, either individually or in the aggregate, in a material adverse effect on the Company’s financial condition, business or operations.

(g) No Registration . Assuming the accuracy of the representations and warranties of Purchaser in Section 4 herein, the issuance of Shares to Purchaser is exempt from registration pursuant to Section 4(a)(2) of the Securities Act.

(h) Financial Reporting Requirements . Following the Closing, (i) a nationally recognized independent certified public accounting firm that is registered and in good standing with the Public Company Accounting Oversight Board will audit the financial statements of the Company for each year and (ii) for so long as Lilly continues to own at least fifty percent (50%) of the Shares it purchases under this Agreement, the Company shall deliver to Lilly the audited annual report within 90 days following the close of the Company’s fiscal year and quarterly unaudited reports of the Company’s operations within 45 days following the close of each of the first three quarters of each fiscal year.

4. Representations and Warranties of Purchaser . Purchaser represents and warrants to the Company as follows:

(a) Purchase for Investment . Purchaser is acquiring the Shares purchasable by it hereunder for its own account, for investment and not for, with a view to, or in connection with, any distribution or public offering thereof within the meaning of the Securities Act.

(b) Unregistered Securities; Legend . Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act or any state securities law, by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act and such rules and regulations thereunder, that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act and such state securities laws or a subsequent disposition thereof is exempt from registration, that the certificate(s) for the Shares shall bear a legend as set forth in Section 8(d) (unless and until such legend is removed in accordance with Section 5(b)), and that appropriate stop transfer instructions may be issued. Purchaser further understands that such exemption depends upon, among other things, the bona fide nature of Purchaser’s investment intent expressed herein.

(c) Status of Purchaser . Purchaser has not been formed for the specific purpose of acquiring the Shares pursuant to this Agreement. Purchaser understands the term

 

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“accredited investor” as used in Regulation D promulgated under the Securities Act and represents and warrants to the Company that Purchaser is an “accredited investor” for purposes of acquiring the Shares purchasable by it hereunder.

(d) Knowledge and Experience; Economic Risk . Purchaser has sufficient knowledge and experience in business and financial matters and with respect to investment in securities of privately held companies so as to enable it to analyze and evaluate the merits and risks of the investment contemplated hereby and is capable of protecting its interest in connection with this transaction. Purchaser is able to bear the economic risk of such investment, including a complete loss of the investment.

(e) Access to Information . Purchaser acknowledges that it and its representatives have had the opportunity to ask questions and receive answers from officers and representatives of the Company concerning the Company and its business and the transactions contemplated by this Agreement, and to obtain any additional information which the Company possesses or can acquire that is necessary to verify the accuracy of the information regarding the Company herein set forth or otherwise desired in connection with Purchaser’s purchase of the Shares purchasable by it hereunder.

(f) Place of Business . Purchaser has listed its principal place of business under its name on the signature page hereto.

(g) Authorization of this Agreement . Purchaser has duly authorized, executed and delivered this Agreement, and this Agreement constitutes the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms (except as enforceability may be limited by (x) applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors’ rights generally and (y) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law)).

5. Covenants of the Company .

(a) NASDAQ Listing . The Company shall use its reasonable efforts to cause the Common Stock subject to the IPO to be listed on the NASDAQ Global Market at the Closing, subject to official notice of issuance.

(b) Removal of Legends . It is understood and agreed by the Company that the restrictive legends and stop transfer instructions described in Section 4(b) will be removed at the time the Shares are registered under the Securities Act and sold pursuant to such registration, or are sold or to be sold under Rule 144 under the Securities Act, or otherwise in connection with a transfer pursuant to an exemption from registration under the Securities Act.

6. Conditions Precedent to Closing by Purchaser . The obligation of Purchaser to purchase and pay for the Shares at the Closing is subject to the satisfaction (or waiver by Purchaser) at or before the Closing of the following conditions:

(a) Representations and Warranties Correct . Each of the representations and warranties of the Company contained in Section 3 shall be true and correct in all material respects as of the Closing with the same force and effect as if they had been made at the Closing,

 

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except for (i) those representations and warranties that address matters only as of a particular date (which shall remain true and correct as of such particular date) and (ii) those representations and warranties which (x) are qualified as to materiality or (y) provide that the Company’s failure to comply with such representation or warranty would not result in a material adverse effect (which shall be true and correct in all respects as of the Closing).

(b) Closing of IPO . The IPO shall have closed and the underwriters shall have purchased, concurrently with the purchase and sale of the Shares hereunder, the number of shares set forth on the cover of the Final Prospectus at the IPO Price (less any underwriting discounts or commissions) on or before March 31, 2015. “ Final Prospectus ” means the prospectus of the Company filed pursuant to Rule 424 under the Securities Act that discloses the public offering price, other information included pursuant to Rule 430A and other final terms of the Common Stock and otherwise satisfies Section 10(a) of the Securities Act.

(c) NASDAQ Listing . The Common Stock subject to the IPO shall have been approved for listing on the NASDAQ Global Market, subject to official notice of issuance.

(d) Qualifications . All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective as of the Closing.

7. Conditions Precedent to Closing by the Company . The obligation of the Company to issue and sell the Shares being sold to Purchaser at the Closing is subject to the satisfaction (or waiver by the Company) at or before the Closing of the condition that the representations and warranties made by Purchaser in Section 4 shall be true and correct in all material respects as of the Closing with the same force and effect as if they had been made at the Closing.

8. Miscellaneous .

(a) Fees and Expenses . Each party to this Agreement shall bear all of its own fees and expenses incurred in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated hereby, including all fees of such party’s legal counsel.

(b) Remedies . In the event that the Company breaches any one or more of its representations, warranties, covenants or agreements set forth in this Agreement, Purchaser may proceed to protect and enforce its rights either by suit in equity or by action at law, including, but not limited to, an action for damages as a result of any such breach or an action for specific performance of any such covenant or agreement contained in this Agreement.

(c) Survival of Representations, Warranties and Agreements . The covenants, representations and warranties of the parties contained herein shall survive any Closing hereunder. Each of the parties may rely on such covenants, representations and warranties irrespective of any investigation made, or notice or knowledge held by, it or any other person.

 

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(d) Legend . It is understood that the certificate(s) evidencing the Shares may bear the following legend (or substantially similar legends) until the time set forth in Section 5(b):

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE “BLUE SKY” LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION, QUALIFICATION AND FILING REQUIREMENTS OF ALL APPLICABLE JURISDICTIONS HAVE BEEN SATISFIED OR THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION, QUALIFICATION, AND FILINGS IN ALL SUCH JURISDICTIONS.”

(e) Entire Agreement; Effect on Prior Documents . This Agreement and the other documents referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the transactions contemplated hereby and supersede all prior negotiations, commitments, agreements and understandings among them with respect thereto.

(f) Notices . All notices, requests, consents and other communications hereunder (“ Notices ”) to any party shall be contained in a written instrument addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by the addressee to the addressor listing all parties and shall be deemed given (i) when delivered in person or duly sent by fax showing confirmation of receipt, (ii) three days after being duly sent by first class mail postage prepaid, or (iii) two days after being duly sent by Federal Express or other recognized express international courier service:

 

  (i) if to the Company, to:

Zosano Pharma Corporation

34790 Ardentech Court

Fremont, California 94555

Attn: Vikram Lamba, Chief Executive Officer

with a copy to:

Foley Hoag LLP

155 Seaport Boulevard

Boston, Massachusetts 02210

Attn: Jeffery L. Quillen, Esq.

Fax: (617) 832-7000

 

  (ii) if to Purchaser, to:

Eli Lilly and Company

 

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Lilly Corporate Center

Indianapolis, IN 46285

Attn: Office of the Treasurer

(g) Amendments; Waivers . This Agreement may be amended, and compliance with the provisions of this Agreement may be omitted or waived, only by the written agreement of the Company and Purchaser.

(h) Counterparts; Facsimile Signatures . This Agreement may be executed in any number of counterparts, each such counterpart shall be deemed to be an original instrument, and all such counterparts together shall constitute but one agreement. Any such counterpart may contain one or more signature pages. This Agreement may be executed and delivered by facsimile, or by email in portable document format (.pdf), and upon such delivery of the signature page by such method will be deemed to have the same effect as if the original signature had been delivered to the other party.

(i) Headings . The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement.

(j) Nouns and Pronouns . Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice-versa.

(k) Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the substantive laws of the State of New York without regard to its principles of conflicts of laws.

(l) Successors and Assigns . This Agreement shall be binding upon, and inure to the benefit of, each of the successors and assigns of the parties hereto and, except as otherwise expressly provided herein, each other person who shall become a registered holder named in a certificate evidencing Shares transferred to such holder by Purchaser or its permitted transferees, and (except as aforesaid) its legal representatives, successors and assigns.

(m) Severability . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

(n) Termination . This Agreement shall automatically terminate and be of no further effect if the IPO has not closed on or before March 31, 2015. The provisions of Sections 8(a), 8(e) through 8(g), and 8(i) through 8(m) shall survive any termination hereof pursuant to this Section 8(n).

[ signature page follows ]

 

7


IN WITNESS WHEREOF, the parties hereto have executed this Common Stock Purchase Agreement as of the date first above written.

 

ZOSANO PHARMA CORPORATION
By:  

/s/ Vikram Lamba

  Name: Vikram Lamba
  Title: President and Chief Executive Officer
ELI LILLY AND COMPANY
By:  

/s/ Derica W. Rice

 

Name: Derica W. Rice

 

Title: Executive V.P. and Chief Financial

 

Officer

Address:      

Lilly Corporate Center

Indianapolis, IN 46285

Exhibit 23.1

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT

We consent to the inclusion in this Amendment No. 5 to Form S-1 Registration Statement of Zosano Pharma Corporation (formerly known as ZP Holdings, Inc.) (Registration No. 333-196983) of our report dated May 13, 2014, except for the Reverse Stock Split paragraph of Note 2, as to which the date is July 16, 2014, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Zosano Pharma Corporation as of December 31, 2013 and 2012 and for the years then ended, which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.

/s/ Marcum LLP

Marcum LLP

San Francisco, CA

December 10, 2014