Table of Contents

As filed with the Securities and Exchange Commission on December 28, 2018

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

STEALTH BIOTHERAPEUTICS CORP

(Exact name of registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s Name into English)

 

 

 

Cayman Islands   2834   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Stealth BioTherapeutics Corp

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue, George Town

Grand Cayman

KY1-9005 Cayman Islands

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Stealth BioTherapeutics Inc.

275 Grove Street, Suite 3-107

Newton, MA 02466

(617) 600-6888

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

Copies to:

 

Steven D. Singer, Esq.

Rosemary G. Reilly, Esq.

Christopher D. Barnstable-Brown, Esq.

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

Telephone: (617) 526-6000

 

Brent B. Siler, Esq.

Divakar Gupta, Esq.

Richard C. Segal, Esq.

Cooley LLP

1114 Avenue of the Americas

New York, NY 10036

Telephone: (212) 479-6000

 

 

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, check the following box.  

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging Growth Company  

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF SECURITIES

TO BE REGISTERED (1)

 

PROPOSED MAXIMUM

    AGGREGATE OFFERING    

PRICE (2)

 

AMOUNT OF

    REGISTRATION FEE  (3)     

Ordinary shares, $0.0003 par value per share

  $86,250,000   $10,453.50

 

 

(1)   American depositary shares issuable upon deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-             ). Each American depositary share represents             ordinary shares.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the aggregate offering price of additional ordinary shares represented by American depositary shares that the underwriters have the option to purchase.
(3)   Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.

 

 

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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

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 jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                    ,         

 

PRELIMINARY PROSPECTUS

             American Depositary Shares

 

 

LOGO

Representing            Ordinary Shares

We are offering                American Depositary Shares, or ADSs, each representing                ordinary shares, $0.0003 par value per share, of Stealth BioTherapeutics Corp. This is our initial public offering, and no public market currently exists for our ADSs or ordinary shares. We expect the public offering price to be between $                and $                per ADS. We intend to apply to have the ADSs listed on The Nasdaq Global Market under the symbol “MITO.”

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and will be subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in the ADSs involves a high degree of risk. See the “ Risk Factors ” section beginning on page 14 of this prospectus.

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

 

 

 

     PER ADS      TOTAL  

Initial Public Offering Price

   $                  $              

Underwriting Discounts and Commissions (1)

   $      $  

Proceeds to Stealth BioTherapeutics Corp before expenses

   $      $  

 

 

(1)     See “Underwriting” beginning on page 190 for additional information regarding underwriting compensation.

Delivery of the ADSs is expected to be made on or about                    ,         . We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional                 ADSs. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                million, and the total proceeds to us, before expenses, will be $                million.

Joint Book-Running Managers

 

Jefferies   Evercore ISI   BMO Capital Markets

Lead Manager

Nomura Securities International

Prospectus dated                    ,         .


Table of Contents

TABLE OF CONTENTS

 

 

 

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     14  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     61  

USE OF PROCEEDS

     62  

DIVIDEND POLICY

     63  

CAPITALIZATION

     64  

DILUTION

     66  

SELECTED CONSOLIDATED FINANCIAL DATA

     68  

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

     70  

BUSINESS

     85  

MANAGEMENT

     145  

RELATED PARTY TRANSACTIONS

     158  

PRINCIPAL SHAREHOLDERS

     160  

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION

     162  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     173  

SHARES AND ADS ELIGIBLE FOR FUTURE SALE

     183  

TAXATION

     185  

UNDERWRITING

     190  

EXPENSES OF THIS OFFERING

     198  

LEGAL MATTERS

     199  

EXPERTS

     199  

ENFORCEMENT OF CIVIL LIABILITIES

     199  

WHERE YOU CAN FIND MORE INFORMATION

     200  

 

 

Through and including                 , 2019 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of ADSs. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus outside of the United States.

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability, and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or the SEC, we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” beginning on page 14. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “Stealth,” “the Company,” “we,” “us” and “our” refer to Stealth BioTherapeutics Corp and its consolidated subsidiaries, or any one or more of them as the context may require.

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

We are studying elamipretide in the following indications:

Primary mitochondrial myopathy . Primary mitochondrial myopathy, characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue, which we believe affects an estimated 40,000 diagnosed individuals in the United States. There are no therapies approved by the U.S. Food and Drug Administration, or the FDA, the European Medicines Agency, or the EMA, or the National Medical Products Association of China, or the NMPA, for the treatment of this indication. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. We are conducting a Phase 3 pivotal trial in North America and Europe and expect to have data from that trial by the end of 2019.

Barth . Barth syndrome, or Barth, characterized by heart muscle weakness, or cardiomyopathy, neutropenia, or low white blood cell count (which may lead to an increased risk for infections), skeletal muscle weakness, delayed growth, fatigue and varying degrees of physical disability, is estimated to affect between one in 300,000 to one in 400,000 births in the United States. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. In December 2018, we completed the placebo-controlled portion of a Phase 2/3 clinical trial in patients with Barth. While the trial did not reach its primary endpoints, we observed trends toward improvement in the subset of patients with lower ratios of monolysocardiolipin to tetralinoleylcardiolipin, which we believe are the patients most likely to respond to therapy. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019 to discuss a potential new drug application, or NDA, submission.

LHON . Leber’s hereditary optic neuropathy, or LHON, is characterized by central vision loss. We estimate that LHON affects approximately 10,000 individuals in the United States, of whom an estimated 70% have the genetic mutation, G11778A, that we are studying. There are no therapies approved by the FDA or NMPA for the treatment of LHON, and there is only one EMA-approved therapy. We have received Fast Track and Orphan Drug designations from the FDA for the development of elamipretide in this indication. We completed the placebo-controlled portion of a Phase 2 clinical trial during the first half of 2018, and continue to follow patients in open-label extension. While the trial did not reach its primary endpoint of change in best corrected



 

1


Table of Contents

visual acuity, we observed trends favoring elamipretide across a number of endpoints, and we are continuing to observe improvements in an ongoing open-label extension. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical trial sites in China in a potential Phase 3 clinical trial.

Dry AMD . Dry acute macular degeneration, or dry AMD, characterized by symptoms such as distorted vision, reduction in low light visual acuity, reduced overall visual acuity and blurred vision, is estimated to affect over 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. There are no therapies approved by the FDA, EMA or NMPA for the treatment of dry AMD. We completed a Phase 1 trial in patients with drusen, an early form of dry AMD, and geographic atrophy, an advanced form of dry AMD, in which we observed statistically significant improvement over baseline in various parameters of visual function in both the drusen and geographic atrophy cohorts. We received Fast Track designation from the FDA for the development of elamipretide for patients with dry AMD with geographic atrophy in November 2018. We plan to launch a Phase 2b clinical trial for the treatment of patients with geographic atrophy in the first quarter of 2019.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for rare disease indications, such as peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our internal discovery platform has generated a library of over 100 proprietary, differentiated compounds which could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our “carrier platform,” in which they could serve as scaffolds to deliver other beneficial compounds to the mitochondria.



 

2


Table of Contents

Our Pipeline

The following table summarizes our development pipeline, including preclinical studies and ongoing and planned clinical trials of our product candidates we have advanced, or expect to advance in the next year, to clinical development.

 

LOGO

 

*   Phase 1/2 clinical trial completed for evaluation of SBT-20 in subjects with early-stage Huntington’s disease; Phase 1 healthy volunteer study also completed.

Our Product Candidates

Elamipretide

Elamipretide is a first-in-class small peptide that targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. Elamipretide has been generally well-tolerated in over 750 people exposed to it systemically and 53 subjects exposed to it topically as of September 30, 2018.

We are evaluating elamipretide in primary mitochondrial diseases where there is a genetic basis for the underlying mitochondrial dysfunction and where we have the potential for expedited regulatory review, including primary mitochondrial myopathy, Barth and LHON. We also believe that elamipretide and our pipeline compounds may be able to address the significant unmet medical needs of larger populations affected by common diseases associated with aging. We are progressing our development of elamipretide for dry AMD, and we plan to evaluate clinical trials for other common age-related disease indications in conjunction with our pipeline compounds.

SBT-20

SBT-20 is a small peptide that, like elamipretide, targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. SBT-20 has been generally well-tolerated in 75 people exposed to it systemically as of November 30, 2018. Based on preclinical studies, we



 

3


Table of Contents

believe that SBT-20 readily penetrates cell membranes and targets and binds reversibly to the inner membrane of mitochondria, or IMM. We plan to evaluate SBT-20 for rare peripheral neuropathies.

SBT-272

SBT-272, our lead discovery pipeline compound, is among our novel peptides and peptidomimetics, which target the mitochondria and potentially improve mitochondrial function relative to our current product candidates as observed in non-clinical experiments. We are evaluating SBT-272 for rare neurodegenerative diseases, such as amyotrophic lateral sclerosis, or ALS.

Background on Mitochondrial Diseases

Mitochondria, found in almost all human cells, are the “powerhouse of the cell.” Normal mitochondrial function is essential for human life and for the proper functioning of many systems in our bodies. Mitochondria have their own DNA, called mitochondrial DNA, or mtDNA, which is inherited only from our mothers and is separate and distinct from nuclear DNA. Mitochondrial diseases arising from inherited genetic defects, called primary mitochondrial diseases, are typically rare diseases which can impact multiple organ systems within the body and may lead to reduced lifespan. Symptoms of primary mitochondrial disease, including chronic pain, vision problems, cardiovascular problems and kidney problems, may be compared to “accelerated aging” as described by individuals with the disease and their caregivers.

Although mtDNA is originally inherited from our mothers, it is replicated within cells as mitochondria reproduce and is highly susceptible to mutation within specific cells and organ systems as we age. Mitochondrial diseases arising from these spontaneous mutations in our mtDNA, called secondary mitochondrial diseases, include senescence, neurodegenerative diseases (such as Alzheimer’s disease, Parkinson’s disease and ALS), heart disease (such as heart failure and atherosclerosis), diabetes, ophthalmic conditions (such as AMD, glaucoma, diabetic retinopathy and diabetic macular edema), cancer, diabetes, skeletal muscle dysfunction (such as sarcopenia) and kidney diseases.

Mitochondrial dysfunction, whether inherited or acquired, often impacts high energy-demanding organs such as the skeletal muscle, cardiac, renal, visual, neurological, central nervous, circulatory or endocrine systems.

Our approach

Our product candidates target cardiolipin in the IMM, stabilizing it under conditions of oxidative stress. Cardiolipin is a conically shaped phospholipid that plays an important role in establishing the cristae architecture within the IMM and optimizing the function of the electron transport chain. Reduced and damaged cardiolipin content has been observed in many diseases, and a deficiency of normal cardiolipin is thought to be centrally involved in mitochondrial dysfunction.

Our lead product candidate, elamipretide, along with several of our pipeline compounds, target and bind reversibly to cardiolipin, stabilizing it under conditions of oxidative stress, thereby preserving the curved architecture of the IMM. We have focused our development efforts on diseases and conditions that affect the organs in the body that generate significant energy because of the high mitochondrial content found in the cells comprising these organs.



 

4


Table of Contents

Our Strategy

We aim to continue the development of mitochondrial medicine to improve the lives of patients with unmet medical needs. There are no treatments approved by the FDA, the EMA or the NMPA for primary mitochondrial myopathy, Barth or dry AMD, and there are no FDA or NMPA approved treatments for LHON. We are pioneering the development of treatments for these diseases with unmet medical needs and believe we are well-positioned to be among the first to address these largely untapped markets in the United States, Europe and China. Although our initial development focus is on rare primary mitochondrial diseases, we believe that over the longer term there could be significant opportunities with regard to common age-related diseases, including dry AMD. To achieve our objective, we intend to:

Rapidly advance the clinical development of elamipretide in rare mitochondrial diseases

We are developing elamipretide for rare mitochondrial diseases, including primary mitochondrial myopathy, Barth and LHON. We have received Fast Track and Orphan Drug designations in the United States for each of these indications. We are enrolling subjects into our ongoing Phase 3 clinical trial for the treatment of primary mitochondrial myopathy, which we expect to have fully enrolled during the first half of 2019. We have completed the placebo-controlled portion of a Phase 2/3 clinical trial for the treatment of Barth and are continuing to evaluate efficacy endpoints during an open-label extension, in which all subjects are eligible to continue receiving elamipretide. Eight subjects are continuing in the open-label extension phase. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of 2019 to discuss a potential NDA submission. We have completed the placebo-controlled portion of a Phase 2 clinical trial for the treatment of LHON and are continuing to evaluate efficacy endpoints during an open-label extension trial, in which all subjects are eligible to continue receiving the study drug. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical sites in China in a potential Phase 3 clinical trial, which we believe may help expedite clinical trial enrollment. We will continue to evaluate development of elamipretide for additional rare disease indications.

Accelerate the clinical development of elamipretide for dry AMD

We are advancing development of elamipretide for dry AMD, an age-related disease, which is the leading cause of blindness in older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. We received Fast Track designation in the United States for dry AMD with geographic atrophy in November 2018. Dry AMD would provide a significantly larger potential market size than our rare disease indications if we are able to successfully develop and commercialize elamipretide or one of our pipeline compounds for this indication. In our Phase 1 clinical trial of elamipretide, we observed evidence of clinical benefit for patients with dry AMD. We plan to initiate a Phase 2b placebo-controlled clinical trial for the treatment of patients with geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Expand clinical development efforts in China under new regulatory pathways

The prevalence of primary mitochondrial diseases, such as primary mitochondrial myopathy, Barth and LHON, is thought to be comparable in China to that in the United States because evidence suggests that prevalence does not vary by race or ethnicity for mitochondrial diseases. China has recently implemented policies to expedite regulatory pathways for rare diseases, including publication of a list of rare diseases that includes mitochondrial related diseases such as LHON. For primary mitochondrial myopathy, with respect to which we are currently conducting a pivotal trial in the United States and Europe, and Barth, we may apply to the NMPA for clinical trial waivers and expedited approval if and when we receive FDA approval for these indications. For LHON, we plan to submit a clinical trial application to the NMPA for the inclusion of Chinese clinical sites in our subsequent clinical trials, which may be used to support FDA approval. We believe that inclusion of Chinese sites may help expedite enrollment of clinical trials in rare diseases, as well as progress potential commercial collaboration opportunities for the China market for our product candidates, if approved.



 

5


Table of Contents

Advance the development of pipeline mitochondrial medicines in rare diseases

We believe that our mitochondrial targeted product candidates may be beneficial in rare diseases involving mitochondrial dysfunction and hope to nominate compounds from our pipeline for select rare disease indications. We plan to evaluate our second clinical product candidate, SBT-20, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are evaluating our lead pipeline compound, SBT-272, for rare neurodegenerative diseases, such as ALS. We expect to initiate a Phase 1 clinical safety trial for SBT-272 by the end of 2019.

Advance the development of pipeline mitochondrial medicines in common age-related diseases

We believe that mitochondrial medicine may be a promising approach for many common age-related diseases beyond AMD, including neurodegenerative diseases. We believe that the United States, Europe and China are important markets for the clinical development of age-related diseases, and we are evaluating further development of our product candidates and pipeline compounds for age-related indications in these markets.

Expand our carrier platform

We have extensive experience in optimizing delivery of our compounds to the mitochondria, which has been a challenge for other drug delivery technologies. We have demonstrated capability to deliver beneficial “payloads” to mitochondria by conjugating them with our proprietary compounds, which serve as vectors or carriers to the mitochondria, conferring organelle specificity to promising therapies. These payloads could include small molecules, proteins, oligonucleotides and complex formulations, such as DNA, siRNA and miRNA, nanoparticles and liposomes. This delivery platform, which we call our carrier platform, could enable delivery of missing proteins or even gene therapy to address inherited mitochondrial disorders.

Explore potential strategic partnerships and alliances to maximize the value of our development programs

We hold worldwide exclusive licenses from the Cornell Research Foundation, Inc. and the Institut de recherches cliniques de Montréal for our two clinical-stage assets, elamipretide and SBT-20. We have full ownership of our preclinical compound library, including SBT-272. We may explore select strategic partnerships and alliances to support our drug development programs, while preserving significant development and commercialization rights, if we believe that such alliances may allow us to leverage the financial support and therapeutic area expertise and resources of a strategic partner to accelerate the development and commercialization of our drug candidates, particularly in common disease indications. We plan to retain rights to lead the development and commercialization of elamipretide for primary mitochondrial myopathy, Barth, LHON and dry AMD in the United States but will consider collaborating in Europe and China.

Expand our intellectual property portfolio in the field of mitochondrial medicine

We continue to invest in our mitochondrial medicine discovery platform to identify new approaches to improve absorption, distribution, metabolism and excretion of active mitochondrial compounds. We have an active discovery and development program focused on novel compounds targeting mitochondria. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new compounds for mitochondrial targeting and activity characteristics, and our experience working with various models of mitochondrial dysfunction position us to be a leader in next generation development of mitochondrial product candidates that are improved relative to elamipretide and SBT-20. We intend to use our insight into mitochondrial biology to continue developing additional intellectual property as we pursue additional novel compounds that target mitochondrial disease. As of September 30, 2018, our intellectual property portfolio included 369 issued patents and 302 patent applications relating to mitochondrial medicine, either wholly-owned or in-licensed, in select commercially relevant jurisdictions, including the United States, key European countries, China, Japan and Canada.



 

6


Table of Contents

Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

   

We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability. As of September 30, 2018, we had an accumulated deficit of $399.7 million.

 

   

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our research and drug development programs or commercialization efforts. If we do raise additional capital, it may cause dilution to our shareholders.

 

   

We depend heavily on the success of elamipretide, our lead product candidate, and we cannot be certain that we will receive regulatory approval for elamipretide or if we will successfully commercialize elamipretide even if we receive such regulatory approval.

 

   

Our approach to the discovery and development of product candidates that target mitochondria is unproven, and we do not know whether we will be able to develop any drugs of commercial value.

 

   

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

   

We expect to depend on third parties for the development, marketing and/or commercialization of our product candidates in some cases. If those collaborations are not successful, we may not be able to capitalize on the market potential of our product candidates.

 

   

We hold exclusive licenses from Cornell Research Foundation and the Institut de recherches cliniques de Montréal for both of our clinical-stage product candidates, elamipretide and SBT-20. If these third parties terminate their agreements with us, our competitive position and our market share, will be harmed. For example, under our license agreement with Cornell, if we fail to commercialize a product by December 31, 2020, Cornell may terminate our license, subject to specified exceptions for causes due to scientific and regulatory events that are common in drug development, such as institutional review board delays, clinical trial recruitment, clinical trial results and regulatory delays, and other events over which we cannot exert direct control.

 

   

Following completion of this offering, Morningside Venture (I) Investments Limited will own approximately     % of our ordinary shares (or     % if the underwriters exercise their option to purchase additional ADSs in full), assuming that we sell the number of ADSs set forth on the cover page of this prospectus, and will therefore continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key decisions and transactions involving us, including a change of control.

 

   

Based on our cash balances, recurring losses and our projected spending in 2018, and without giving effect to the proceeds of this offering, there is a substantial doubt about our ability to continue as a going concern.

 

   

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and Nasdaq Stock Market, or Nasdaq, corporate governance rules and are permitted to file less information with the Securities and Exchange Commission, or the SEC, than U.S. companies. This may limit the information available to holders of the ADSs.

Corporate Information

Our registered office is located at c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, KY1-9005 Cayman Islands. We have three wholly-owned subsidiaries: Stealth BioTherapeutics, Inc., a Delaware company, which we refer to as Stealth Delaware; Stealth BioTherapeutics (HK) Limited, a company incorporated with limited liability under the laws of Hong Kong; and Stealth



 

7


Table of Contents

BioTherapeutics (Shanghai) Limited, a limited liability company established in the People’s Republic of China. Our agent for service of process in the United States is Stealth Delaware, and the executive offices of Stealth Delaware are located at 275 Grove Street, Suite 3-107, Newton, MA 02466, and the telephone number there is (617) 600-6888. Our website address is www.stealthbt.com . We have included our website address in this prospectus as an inactive textual reference only. The information contained in, or accessible through, our website does not constitute part of this prospectus.

Stealth BioTherapeutics Corp is a Cayman Islands company and we conduct our operations in the United States through Stealth Delaware. All of our employees are employed by Stealth Delaware.

“Stealth BioTherapeutics,” the Stealth BioTherapeutics logo and other trademarks or service marks of Stealth BioTherapeutics Corp appearing in this prospectus are the property of Stealth BioTherapeutics or our subsidiaries. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 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:

 

   

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;

 

   

reduced disclosure about our executive compensation arrangements;

 

   

exemption from the non-binding advisory votes on executive compensation, including golden parachute arrangements; and

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting.

Generally, 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 would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our shares held by non-affiliates or we issue more than $1.0 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 securities.

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 elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies.

Implications of Being a Foreign Private Issuer

Our status as a foreign private issuer also exempts us from compliance with certain laws and regulations of the SEC and certain regulations of The Nasdaq Stock Market. Consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our senior management and supervisory board members are exempt from



 

8


Table of Contents

the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.

We may take advantage of these exemptions until such time as we no longer qualify as a foreign private issuer. In order to maintain our current status as a foreign private issuer, either a majority of our shares must be directly or indirectly owned of record by non-residents of the United States, or a majority of our executive officers or directors may not be United States citizens or residents, more than 50% of our assets cannot be located in the United States and our business must be administered principally outside the United States.



 

9


Table of Contents

The Offering

 

ADSs offered by us


            ADSs

 

ADSs to be outstanding immediately following this offering


            ADSs

 

Ordinary shares to be outstanding immediately following this offering


            ordinary shares, or              ordinary shares if the underwriters exercise their option to purchase additional ADSs in full

 

Option to purchase additional ADSs

The underwriters have an option for a period of 30 days from the date of this prospectus to purchase up to             additional ADSs.

 

The ADSs

Each ADS represents              ordinary shares, par value $0.0003 per share. You will have the rights of an ADS holder or beneficial owner (as applicable) as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of our ADSs, see “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Depositary

Citibank, N.A.

 

Use of proceeds

We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund the continued development of elamipretide, to fund continued clinical development of discovery compounds, including SBT-272, and for working capital and other general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in the ADSs.

 

Concentration of Ownership

Following the completion of this offering, Morningside Venture (I) Investments Limited will own     % of our ordinary shares (or     % if the underwriters exercise their option to purchase additional ADSs in full), assuming that we sell the number of ADSs set forth on the cover page of this prospectus.

 

Proposed Nasdaq Global Market symbol

MITO

 

 

The number of ordinary shares to be outstanding after this offering is based on                 ordinary shares issued and outstanding as of November 30, 2018, giving effect to (i) the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares and (ii) the issuance of              ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $         million, or the 2018 Notes, assuming an initial public offering price of $         per ADS (the midpoint of the estimated



 

10


Table of Contents

price range set forth on the cover page of this prospectus), both of which will occur automatically upon the closing of this offering, and excluding:

 

   

11,719,418 ordinary shares issuable upon exercise of share options outstanding as of November 30, 2018 at a weighted-average exercise price of $0.94 per share;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 share incentive plan;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 employee share purchase plan; and

 

   

             ordinary shares issuable upon conversion of Series A convertible preferred shares issuable upon exercise of an outstanding warrant with an exercise price equal to (a) $2.30769 per ordinary share or (b) the initial public offering price per ADS in this offering.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

a one-for-three reverse share split that became effective on December 28, 2018

 

   

the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares;

 

   

conversion of the 2018 Notes;

 

   

no exercise of the outstanding options or warrant described above;

 

   

no exercise by the underwriters of their option to purchase additional ADSs; and

 

   

no purchases of ADSs by our existing shareholders in this offering.

Upon the closing of this offering, the number of shares issued upon conversion of the 2018 Notes will be based upon the initial public offering price per ADS. Based upon an assumed initial public offering price of $         per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus), and without giving effect to further accrued interest after             , 2019, the 2018 Notes will convert into an aggregate of              ordinary shares upon the closing of this offering. For illustrative purposes only, the table below shows the number of ordinary shares that would be issuable upon conversion of the 2018 Notes at various initial public offering prices per ADS and the resulting total number of outstanding ordinary shares, without giving effect to further accrued interest after             , 2019.

 

Assumed Initial Public
Offering Price per
ADS

   Ordinary Shares 
Issuable upon Conversion of
2018 Notes
   Total Ordinary Shares
Outstanding After this
Offering
$                  
$                  
$                  
$                  


 

11


Table of Contents

Summary Consolidated Financial Information

We have derived the following summary of consolidated statement of operations data for the years ended December 31, 2016 and 2017 and the summary consolidated balance sheet data as of December 31, 2017 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the following consolidated statements of operations data for the nine months ended September 30, 2017 and 2018 and the consolidated balance sheet data as of September 30, 2018 from unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements. Historical results are not necessarily indicative of the results that may be expected in the future, and the results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any other period. The summary consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the sections of this prospectus captioned “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

    YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
    2016     2017     2017     2018  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

       

Operating expenses:

       

Research and development

  $ 48,445     $ 63,220     $ 46,212     $ 41,758  

General and administrative

    13,403       16,500       12,937       12,541  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    61,848       79,720       59,149       54,299  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (61,848     (79,720     (59,149     (54,299

Other income (expense), net

    799       (3,190     (1,691     (15,824
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

  $ (61,049   $ (82,910   $ (60,840   $ (70,123
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted  (1)

  $ (0.90   $ (1.21   $ (0.89   $ (1.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

    68,165,325       68,472,262       68,471,469       68,474,614  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted (1)

    $ 0.52       $ 0.44  
   

 

 

     

 

 

 

Pro forma weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

      160,072,660         160,075,012  
   

 

 

     

 

 

 

 

 

(1)     Pro forma basic and diluted loss per share have been calculated assuming the automatic conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares. See notes 2 and 15 to our audited condensed consolidated financial statements and notes 2 and 13 to our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to ordinary shareholders and pro forma basic and diluted net loss per share attributable to ordinary shareholders.


 

12


Table of Contents

The following table sets forth summary consolidated balance sheet data as of September 30, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares; and

 

   

on a pro forma as adjusted basis to give further effect to (i) the issuance of              ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $         million, assuming an initial public offering price of $         per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus), both of which will occur automatically upon the closing of this offering and (ii) our issuance and sale of              ADSs in this offering at an assumed initial public offering price of $        per ADS, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     AS OF SEPTEMBER 30, 2018  
     ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED  (1)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 4,078     $ 4,078                     

Working capital

     (31,027     (31,027  

Net assets

     (149,076     (149,076  

Total assets

     11,630       11,630    

Total Series A convertible preferred shares

     211,377          

Total accumulated deficit

     (399,680     (399,680  

Total shareholders’ (deficit) equity

     (360,453     (149,076  

 

 

(1)     The pro forma as adjusted information provided above is illustrative only and will depend on the actual initial public offering price and other terms of our initial public offering determined in connection with the pricing of this offering. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per ADS, which is the midpoint of the 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 shareholders’ equity by $        million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million ADSs in the number of ADSs 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 shareholders’ equity by $        million, assuming no change in the assumed initial public offering price per ADS and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.


 

13


Table of Contents

RISK FACTORS

Investing in the ADSs involves a high degree of risk. Before you decide to invest in the ADSs, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of the ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since inception and expect to incur significant and increasing losses for at least the next several years. We may never achieve or maintain profitability.

We have incurred significant annual net operating losses in every year since our inception. Our net losses were $61.0 million, $82.9 million and $70.1 million for the years ended December 31, 2016 and 2017 and nine months ended September 30, 2018, respectively. As of September 30, 2018, we had an accumulated deficit of $399.7 million. We expect to continue to incur significant and increasing operating losses for the foreseeable future, and we do not know whether or when we will become profitable. We have not generated any revenues from product sales, have not completed the development of any product candidates and may never have a product candidate approved for commercialization. We have financed our operations to date through the issuance of our ordinary shares and Series A convertible preferred shares and debt financings and have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical development programs. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our shareholders’ deficit and working capital.

We anticipate that our expenses will increase substantially if and as we:

 

   

continue to develop and conduct clinical trials with respect to our lead product candidate, elamipretide, including our ongoing Phase 2 and 3 clinical trials, for the treatment of primary mitochondrial myopathy, Barth, LHON, and dry AMD and any future clinical trials;

 

   

initiate and continue research and preclinical and clinical development efforts for our other product candidates, including SBT-20 and SBT-272;

 

   

seek to identify and develop additional product candidates;

 

   

seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;

 

   

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval, if any;

 

   

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

hire and retain additional personnel, such as clinical, quality control and scientific personnel;

 

   

add operational, financial, management information systems and commercial personnel, including personnel to support our product development and help us comply with our obligations as a public company; and

 

   

add property, equipment and physical infrastructure to support our research and development programs in the United States, Europe and China.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or any future collaborator is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. This will require our, or any of our future collaborators’, success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those

 

14


Table of Contents

products for which we, or any of our future collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of increased expenses, and if or when we might achieve profitability. We and any future collaborators may never succeed in these activities and, even if we do, or any future collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We will need substantial additional funding. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a future collaborator. Furthermore, following the completion of this offering, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed and on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We plan to use the net proceeds of this offering primarily to fund our ongoing research and development efforts, including our clinical development of elamipretide for rare disease indications and for dry AMD. We will be required to expend significant funds in order to advance the development of elamipretide, as well as any other product candidates we may develop in the future. In addition, while we may seek one or more collaborators for future development of our product candidates, and, in particular, may conduct any large Phase 3 clinical trials of elamipretide, such as those we would likely be required to conduct for common diseases such as dry AMD, in collaboration with one or more partners that would finance most of the associated costs, we may not be able to enter into a collaboration for any of our product candidates on suitable terms, or at all. In any event, the net proceeds of this offering 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 the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements at least through              . Our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents, to be able to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

   

scope, progress, timing, costs and results of our current and future clinical trials;

 

   

research and preclinical development efforts for any future product candidates that we may develop;

 

   

our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;

 

   

number of future product candidates that we pursue and their development requirements;

 

15


Table of Contents
   

outcome, timing and costs of seeking regulatory approvals;

 

   

costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

   

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

   

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

   

costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

   

costs of operating as a public company.

We have no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

We began operations in 2006 and initiated our first clinical trial in 2010. Our operations to date have been limited to financing and staffing our company and developing our technology and conducting preclinical research and clinical trials for our product candidates. We have not demonstrated an ability to obtain marketing approvals, manufacture a commercial scale product, or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

Our recurring losses and negative cash flows have raised substantial doubt regarding our ability to continue as a going concern.

Based on our cash balances, recurring losses and our projected spending, there is a substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient capital in this offering, 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. If we are unable to continue as a going concern, we might have to liquidate our assets and, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements. Further, even if we successfully complete and receive net proceeds from this offering, given our planned expenditures for the next several years, including, without limitation, expenditures in connection with our clinical trials of elamipretide, SBT-20 and other new compounds, we may conclude, in connection with the issuance of our consolidated financial statements for the year ending December 31, 2018 or any other subsequent period, that there is substantial doubt regarding our ability to continue as a going concern. In addition, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect the price of the ADSs and our ability to raise new capital or to enter into critical contractual relations with third parties.

Raising additional capital may cause dilution to our shareholders, including purchasers of ADSs in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent that we raise additional capital through the sale of ordinary shares, ADSs, convertible securities or other equity securities, our existing shareholders’ ownership interest may be substantially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a holder of ADSs. Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares or declaring dividends, that could adversely impact our ability to conduct our business. For example, in connection with our term loan facility with Hercules Capital, Inc., or Hercules, we granted a security interest on all of our assets, excluding our intellectual property, and agreed to a negative pledge on our intellectual property. The term loan facility also contains restrictive covenants including, subject to certain exceptions, covenants that prohibit us from incurring additional indebtedness, creating any lien on our property, making investments, paying dividends or

 

16


Table of Contents

redeeming shares, transferring any material portion of our assets, merging with or acquiring another entity, entering into a transaction that will result in a change of control and making certain other corporate changes. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.

As of September 30, 2018, we had $20.0 million of outstanding principal under our term loan facility with Hercules and an additional $20.0 million of available borrowings, subject to achievement of specified milestones. Beginning in December 2018, we are required to repay principal and interest on these borrowings in monthly installments through January 2021. Subject to the restrictions in this existing facility, we could incur additional indebtedness beyond our borrowings from Hercules.

Our outstanding indebtedness, including any additional indebtedness beyond our borrowings from Hercules, combined with our other financial obligations and contractual commitments, could have significant adverse consequences, including:

 

   

requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;

 

   

increasing our vulnerability to adverse changes in general economic, industry and market conditions;

 

   

subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

 

   

placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

We may not have sufficient funds and may be unable to arrange for additional financing to pay the amounts due under our existing debt instruments. Failure to make payments or comply with other covenants under our existing debt instruments could result in an event of default and acceleration of amounts due. Additionally, under our loan and security agreement with Hercules, an occurrence that has a material adverse effect on our business, operations, properties, assets or financial condition, on the collateral, liens or priority of such liens or on our ability to perform under the terms of the loan or associated agreements is an event of default. If an event of default occurs and the lenders accelerate the amounts due, we may not be able to make accelerated payments, and the lenders could seek to enforce security interests in the collateral securing such indebtedness, which includes substantially all of our assets other than our intellectual property. In addition, the covenants under our credit facility, the pledge of our assets as collateral and the negative pledge with respect to our intellectual property could limit our ability to obtain additional debt financing.

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

Our approach to the discovery and development of product candidates and the development of therapies targeting mitochondria generally are unproven, and we do not know whether we will be able to develop any products of commercial value.

We are focused on discovering and developing therapies for diseases involving mitochondrial dysfunction, particularly by developing therapies that target mitochondria in order to normalize the function of dysfunctional

 

17


Table of Contents

mitochondria. While we believe that our approach may ultimately enable drug research and clinical development for mitochondrial diseases across a wide range of therapeutic areas, this approach is unproven. We have not yet succeeded and may never succeed in demonstrating efficacy and safety for any of our product candidates in later stage clinical trials or in obtaining marketing approval thereafter. For example, although we have conducted Phase 1 and Phase 2 clinical trials, we have not yet completed a Phase 3 clinical trial.

In addition, there are over 250 genetic mutations underlying numerous rare diseases collectively known as primary mitochondrial diseases. Our clinical trials for the treatment of primary mitochondrial myopathy required that subjects have genetic confirmation of primary mitochondrial disease. Participants in our ongoing Phase 3 clinical trial may have a different mix of genotypes than the subjects of our prior clinical trials, which could have an impact on the results of our Phase 3 clinical trial. However, we have agreed with the FDA that we will stratify patients in our ongoing Phase 3 clinical trial according to certain categories of genetic mutation, so that patients within the agreed categories of mutations will be evenly balanced as between elamipretide and placebo treatment. Furthermore, no products or therapies targeting mitochondrial dysfunction have ever obtained marketing approval from the FDA or the NMPA, and the EMA has approved one therapy to treat LHON (Raxone, or idebenone, made by Santhera Pharmaceuticals), which is the only approved therapy to treat any primary mitochondrial disease.

If we are unable to successfully discover and develop product candidates, our business prospects will be substantially harmed.

We are dependent on the success of elamipretide, our lead product candidate. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize this product candidate, either alone or with a collaborator, or if we experience significant delays in doing so, our business could be substantially harmed.

We have no products approved for sale and are investing a significant portion of our efforts and financial resources in the development of elamipretide for the treatment of rare primary mitochondrial diseases. Our prospects are substantially dependent on our ability, or the ability of any future collaborator, to develop, obtain marketing approval for and successfully commercialize elamipretide.

The success of elamipretide will depend on several factors, including the following:

 

   

successful recruitment of subjects, enrollment in and completion of our ongoing clinical trials;

 

   

initiation and successful recruitment of subjects, enrollment in and completion of additional clinical trials;

 

   

safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority for marketing approval;

 

   

our ability to identify success criteria and endpoints for our clinical trials such that the FDA and other regulatory authorities will be able to determine the clinical efficacy and safety profile of any product candidates we may develop;

 

   

timely receipt of marketing approvals from applicable regulatory authorities;

 

   

the performance of our future collaborators, if any;

 

   

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

 

   

establishment of supply arrangements with third-party raw materials suppliers and manufacturers;

 

   

establishment of arrangements with third-party manufacturers to obtain finished drug products that are appropriately packaged for sale;

 

   

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

   

protection of our rights in our intellectual property portfolio;

 

   

successful launch of commercial sales following any marketing approval;

 

   

a continued acceptable safety profile following any marketing approval;

 

   

accuracy of the estimates of the current and future number of patients with mitochondrial associated or inherited mitochondrial diseases;

 

   

commercial acceptance by patients, the medical community and third-party payors following any marketing approval; and

 

   

our ability to compete with other therapies targeting inherited mitochondrial diseases.

 

18


Table of Contents

Many of these factors—including with respect to clinical development, the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing and sales efforts of any future collaborator—are beyond our control, and clinical development of product candidates is inherently risky and uncertain. For example, although we observed trends towards improvement in a certain subset of patients, our Phase 2/3 clinical trial in Barth failed to reach its primary efficacy endpoints. If we are unable to develop, receive marketing approval for and successfully commercialize elamipretide, on our own or with any future collaborator, or experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.

Additionally, we are developing elamipretide for certain indications of the eye, including LHON and dry AMD. Our clinical trial for the treatment of LHON involved administration of elamipretide by use of topical drops, and our clinical trial for the treatment of dry AMD involved administration of elamipretide by subcutaneous injection. We are cognizant of the challenges of targeting back of eye diseases with topical drops. The human eye has evolved to protect itself by washing foreign substances such as eye drops from the surface, with tears capable of removing as much as 95% of an eye drop. The vitreous in the interior of the eye also poses a barrier to delivery of therapies from the front of the eye to the retina. Based on the results of our Phase 2 clinical trial of elamipretide for the treatment of LHON, which did not meet its primary endpoint of change in best corrected visual acuity over the 12-month double-blind portion of the trial, we will still consider topical drops for back of eye indications and may need to conduct additional studies to determine the appropriate dose.

We may not be successful in our efforts to identify or discover and develop additional potential product candidates.

A significant portion of the research that we are conducting involves the development of new therapeutic compounds targeting the mitochondria. The results we obtain in preclinical testing and early clinical trials may not be predictive of results that are obtained in later studies, and we may suffer significant setbacks in advanced clinical trials, even after seeing promising results in earlier studies. The drug discovery that we are conducting may not be successful in identifying compounds that have commercial value or therapeutic utility. Our discovery platform may initially show promise in identifying potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization for a number of reasons, including:

 

   

compounds we develop may not demonstrate improved efficacy, safety or tolerability;

 

   

potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to receive marketing approval and achieve market acceptance;

 

   

competitors may develop alternative therapies that render our potential product candidates non-competitive or less attractive; or

 

   

a potential product candidate may not be capable of being produced at an acceptable cost.

Our research programs to identify new product candidates will require substantial technical, financial and human resources, and we may be unsuccessful in our efforts to identify new product candidates. If we are unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact the price of the ADSs.

We have never obtained marketing approval for a product candidate and we may be unable to obtain, or may be delayed in obtaining, marketing approval for any of our product candidates.

We have never obtained marketing approval for a product candidate. It is possible that the FDA may refuse to accept for substantive review any new drug applications, or NDAs, that we submit for our product candidates or may conclude after review of our data that our application is insufficient to obtain marketing approval of our product candidates. If the FDA does not accept or approve our NDAs for either of our most advanced product candidates, it may require that we conduct additional clinical, nonclinical or manufacturing validation studies and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA-required studies, approval of any NDA or application that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDAs.

Any delay in obtaining, or an inability to obtain, any marketing approvals would prevent us from commercializing our product candidates, generating revenues and achieving and sustaining profitability. If any of these outcomes occur,

 

19


Table of Contents

we may be forced to abandon our development efforts for our product candidates, which could significantly and materially harm our business.

Results of preclinical studies and early clinical trials may not be predictive of results of future clinical trials.

The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks. 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. If our trial designs are not sufficient, our ophthalmic programs may be delayed or we may decide to terminate one or more of such programs.

We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. During the regulatory review process, we will need to identify success criteria and endpoints at the time of the initiation of the trial such that the FDA or other regulatory authorities will be able to determine the clinical efficacy and safety profile of any product candidates we may develop, and the resulting clinical data and results may be difficult to analyze. Even if the FDA or other regulatory authorities were to find our success criteria to be sufficiently validated and clinically meaningful, we may not achieve the pre-specified endpoints to a degree of statistical significance. Many companies that believed that their product candidates had performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain marketing approval of their product candidates. Even if we, or any future collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. Specifically, the clinical trials we have completed to date have enrolled only small numbers of subjects, we have experienced dropout among participants and we have not always successfully achieved our pre-specified clinical trial endpoints to a degree of statistical significance.

To date, we have conducted small Phase 1 and Phase 2 clinical trials, many of which have been undertaken to help inform our clinical strategy and develop later stage clinical trials intended to assess efficacy. While the endpoints and populations for these later stage clinical trials, including Phase 3 clinical trials that we are planning, are derived from results of our earlier trials and medical literature, in our prior clinical trials we did not demonstrate a statistically significant effect in the population and on the efficacy endpoints prospectively described in the clinical trial protocol. The lack of statistical significance could be attributed to various factors, including the lack of power to demonstrate significance, the design of the studies or the lack of a treatment benefit from our product candidate. In some cases, we conducted post hoc, retrospective analyses of data subsets and have designed, and expect to design planned, later clinical trials based on the results of such post hoc analyses. For example, in our Phase 2 clinical trial for the treatment of primary mitochondrial myopathy, in the elamipretide-treated group, we observed an improvement on the primary endpoint of improvement in distance walked in six minutes (the six minute walk test, or 6MWT) relative to the placebo-treated group, which was not statistically significant, and our Phase 1/2 clinical trial for the treatment of primary mitochondrial myopathy did not demonstrate statistically significant changes in the high-dose versus placebo comparison of 6MWT results at day five pursuant to the primary statistical analysis model specified in the statistical analysis plan. We conducted an exploratory post hoc analysis of the results from this Phase 1/2 clinical trial primarily to assess, among other things, whether there was a potentially confounding cohort effect in the placebo group, which could occur if subjects randomized to placebo within higher-dose cohorts performed better due to the placebo effect of knowing they were randomized within a higher-dose cohort. This post hoc analysis showed a significant mean improvement from baseline in six-minute walk distance after five days of treatment, as adjusted for gender and baseline distance, for individuals treated with the high dose of elamipretide compared to placebo-treated individuals. The design of our Phase 3 clinical trial for the treatment of mitochondrial myopathy was informed, in part, by the results of this post hoc analysis.

 

20


Table of Contents

If we fail to receive positive results in clinical trials of our product candidates and do not achieve statistical significance for the prospectively specified primary endpoints in our planned Phase 3 clinical trials, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects, would be negatively impacted.

Because we are developing elamipretide for the treatment of several indications for which regulatory authorities have not issued definitive guidance as to how to measure and demonstrate efficacy, there is substantial risk that the design or outcomes of our clinical trials will not be satisfactory to support marketing approval.

We are developing elamipretide for several indications for which there is currently no approved therapy in the United States, China or the European Union, including primary mitochondrial myopathy, Barth, and dry AMD. We are developing elamipretide for LHON, for which there are no currently approved therapies in the United States or China and only one therapy approved in Europe. Furthermore, there has been limited historical clinical trial experience for the development of drugs to treat many of these indications. As a result, the design and conduct of clinical trials for these indications is subject to substantial risk. In particular, regulatory authorities in the United States and in other jurisdictions, including Europe and China, have not issued definitive guidance as to how to measure and demonstrate efficacy for primary mitochondrial myopathy, Barth, LHON or dry AMD and, as a result, there is substantial risk that the design or outcomes of our clinical trials will not be satisfactory to support marketing approval. For example, the endpoints in our Phase 2/3 clinical trial of elamipretide for the treatment of Barth syndrome included change in six-minute walk distance and change in a total fatigue scale, or BTHSA Total Fatigue, from the Barth symptom assessment, or BTHSA, a newly developed patient reported outcome measure, which has not been utilized in prior trials and may not be accepted by regulators as a basis for approval. Even if this type of novel endpoint is accepted as a basis for approval in the United States, we cannot be certain that regulators outside of the United States will accept such endpoints or will not require us to conduct additional validation studies to support the suitability of such endpoints for approval in these jurisdictions.

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

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential.

Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. 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 the product candidate.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, or at all. The clinical development of our product candidates is susceptible to the risk of failure at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. For example, Phase 3 clinical trials for common diseases associated with aging, such as dry AMD, would likely require a large number of subjects to be enrolled, which would cause any such trial to be very expensive. Moreover, it is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case. Many companies in the pharmaceutical and biotechnology industries have suffered

 

21


Table of Contents

significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face additional setbacks. It is possible that any of our development programs may be placed on full or partial clinical hold by regulatory authorities at any point, which would delay and possibly prevent further development of our product candidates.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other comparable foreign regulators, we, or any future collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, and any future collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Comparable foreign regulatory authorities impose similar restrictions. We, and any future collaborators, may never receive such approvals. We, and any future collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we, or they, will be able to obtain these approvals.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. Any inability to complete preclinical and clinical development successfully could result in additional costs to us, or any future collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Moreover, if (i) we, or any future collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we or they contemplate, (ii) we, or any future collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (iii) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (iv) there are unacceptable safety concerns associated with our product candidates, we, or any future collaborators, may:

 

   

be delayed in obtaining marketing approval for our product 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 significant safety warnings, including boxed warnings;

 

   

be subject to additional post-marketing testing or other requirements; or

 

   

be required to remove the product from the market after obtaining marketing approval.

Adverse events or undesirable side effects caused by, or other unexpected properties of, any of our product candidates may be identified during development that could delay or prevent their marketing approval or limit their use.

Adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, any future collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable regulatory authorities. If any of our product candidates is associated with adverse events or undesirable side effects or has properties that are unexpected, we, or any future collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. For example, subjects in certain of our clinical trials have reported adverse events arising from reaction at the injection site and some subjects have withdrawn as a result. Moreover, laboratory findings have demonstrated mild to moderate elevations in eosinophils beginning at approximately three to four weeks after initiation of elamipretide treatment, although these have not been reported to be associated with any systemic clinical manifestations of eosinophilia and in general were demonstrated to have returned to within normal range or to baseline levels after withdrawal of elamipretide therapy and, in most subjects, to decrease to within normal range after approximately 16 weeks of elamipretide therapy (and without withdrawal of therapy). In addition, we observed a mean increase in certain liver enzymes in subjects who received the highest dose of SBT-20 in our Phase 1 clinical trial, although the principal investigator determined that no individual increases in such liver enzymes were clinically significant and although similar increases were not observed in the highest dose cohort of a prior Phase 1/2 clinical trial of SBT-20. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of

 

22


Table of Contents

the compound. If we, or any future collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or any future collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval or commercialization of our product candidates, including:

 

   

clinical trials of our product candidates may produce unfavorable or inconclusive results;

 

   

we, or any future collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;

 

   

the number of subjects required for clinical trials of our product candidates may be larger than we, or any future collaborators, anticipate, subject enrollment in these clinical trials may be slower than we, or any future collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or any future collaborators, anticipate;

 

   

the cost of planned clinical trials of our product candidates may be greater than we anticipate;

 

   

our third-party contractors or those of any future collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of any future collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or any future collaborators in a timely manner, or at all;

 

   

regulators or institutional review boards may not authorize us, any future collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

   

we, or any future collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

   

subjects that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the subjects from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

 

   

we, or any future collaborators, may have to delay, suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

 

   

regulators or institutional review boards may require that we, or any future collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;

 

   

the FDA or comparable regulatory authorities may disagree with our, or any future collaborators’, clinical trial designs or our or their interpretation of data from preclinical studies and clinical trials;

 

   

the FDA or comparable regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third-party manufacturers with which we, or any future collaborators, enter into agreements for clinical and commercial supplies;

 

   

the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and

 

   

the approval policies or regulations of the FDA or comparable regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.

Product development costs for us, or any future collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured, or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we, or any future collaborators, may have the exclusive right to commercialize our product candidates or allow our

 

23


Table of Contents

competitors, or the competitors of any future collaborators, to bring products to market before we, or any future collaborators, do and impair our ability, or the ability of any future collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

If we, or any future collaborators, experience delays or difficulties in the enrollment of subjects in clinical trials, our or their receipt of necessary regulatory approvals could be delayed or prevented.

We, or any future collaborators, may not be able to initiate or continue clinical trials for any of our product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible subjects to participate in clinical trials as required by the FDA or comparable regulatory authorities. For example, we are developing elamipretide for the treatment of several rare diseases with small patient populations, such as Barth. Enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

 

   

the size and nature of the patient population;

 

   

the severity of the disease under investigation;

 

   

the proximity of subjects to clinical sites;

 

   

the eligibility criteria for the trial;

 

   

the design of the clinical trial;

 

   

efforts to facilitate timely enrollment;

 

   

competing clinical trials; and

 

   

clinician and patient perception as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

Our inability, or the inability of any future collaborators, to enroll a sufficient number of subjects for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. For example, our Phase 2a clinical trial of elamipretide in subjects pre-treated prior to a renal angioplasty was terminated early due to recruitment challenges after enrolling only 14 subjects of the 28 originally planned. In our Phase 3 clinical trial of elamipretide for the treatment of primary mitachondrial myopathy, we aim to enroll 200 subjects, all of whom were required to be enrolled in our pre-trial registry. Of the over 400 subjects in the pre-trial registry, 69 are located in Italy, where we are in discussions with regulators for authorization to use our pen injector in the Phase 3 clinical trial. If we are unable to obtain such authorization, the enrollment in our Phase 3 clinical trial may be delayed or otherwise adversely impacted. Enrollment delays in clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or any future collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline.

If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability, or that of any future collaborators, to market the drug could be compromised.

Clinical trials of our product candidates are conducted in carefully defined subsets of subjects who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials, or those of any future collaborator, may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. In particular, because our product candidates will require chronic dosing over the lifetime of the patient, there may be undesirable side effects as a result of long-term exposure to the drug that were not observed in our clinical trials. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

   

regulatory authorities may withdraw their approval of the drug or seize the drug;

 

   

we, or any future collaborators, may be required to recall the drug, change the way the drug is administered or conduct additional clinical trials;

 

   

additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular drug;

 

24


Table of Contents
   

we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

 

   

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

   

we, or any future collaborators, may be required to create a medication guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

   

we, or any future collaborators, could be sued and held liable for harm caused to patients;

 

   

the drug may become less competitive; and

 

   

our reputation may suffer.

Any of these events could have a material and adverse effect on our operations and business and could adversely impact the price of the ADSs.

Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

We have never commercialized a product. Even if one of our product candidates is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

Efforts to inform the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

   

the efficacy and safety of the product;

 

   

the potential advantages of the product compared to alternative treatments;

 

   

the prevalence and severity of any side effects;

 

   

the clinical indications for which the product is approved;

 

   

whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;

 

   

limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;

 

   

our ability, or the ability of any future collaborators, to offer the product for sale at competitive prices;

 

   

the product’s convenience and ease of administration compared to alternative treatments;

 

   

the willingness of the target patient population to try, and of physicians to prescribe, the product;

 

   

the strength of sales, marketing and distribution support;

 

   

the approval of other new products for the same indications;

 

   

changes in the standard of care for the targeted indications for the product;

 

   

the timing of market introduction of our approved products as well as competitive products;

 

   

availability of coverage and the adequacy of reimbursement from government payors, managed care plans and other third-party payors;

 

   

adverse publicity about the product or favorable publicity about competitive products; and

 

   

potential product liability claims.

The potential market opportunities for our product candidates are difficult to estimate precisely. Our estimates of the potential market opportunities are predicated on many assumptions, including industry knowledge and publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, these

 

25


Table of Contents

assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates of the potential market opportunities.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to use a combination of focused in-house sales and marketing capabilities and third-party collaboration, licensing and distribution arrangements to sell any of our products that receive marketing approval.

We generally plan to retain rights to participate in commercialization in the United States, particularly for products that we can commercialize with a specialized sales force and by building a focused sales and marketing organization in the United States to sell our products. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a sales force that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.

We hope to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We plan to commercialize our products outside the United States through collaboration, licensing and distribution arrangements with third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.

If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.

We have recently modified our manufacturing processes so that we will be able to produce sufficient quantities of elamipretide for commercial distribution. Interruptions in this process could delay anticipated marketing authorization applications.

Solid-phase peptide synthesis was previously used to produce elamipretide acetate batches for all completed and certain ongoing preclinical and clinical trials. Due to a lack of scalability, we deemed this process undesirable for production of commercial quantities of elamipretide and have implemented a new solution-phase process. It is typical during the years prior to gaining approval for new drugs to continue to develop manufacturing processes to achieve larger scale production with a typical goal of implementing essentially the commercial process prior to supplying pivotal clinical trials. However, our transition to a solution-phase process is recent, and any interruption in continued production of supply needed to meet potential commercial demands could delay anticipated marketing authorization applications, including NDAs, and/ or significantly impact the anticipated cost of commercial production, if our product candidates are approved for sale.

 

26


Table of Contents

To simplify the daily injection of elamipretide for patients, we have recently developed a multi-dose cartridge suitable for use in a pen injector, but we are still evaluating whether the cartridge will meet performance specifications.

For Phase 1/2 clinical trials, we developed a ready-to-use sterile solution drug product suitable for subcutaneous administration. This ready-to-use solution drug product consists of 1.5 mL of a simple sterile solution of elamipretide acetate containing sodium chloride for tonicity, packaged in a single-use 5-mL vial. This product has been administered clinically using a disposable needle and syringe. To simplify the daily injection of elamipretide for patients with primary mitochondrial myopathy, a multi-dose cartridge, suitable for use in a pen injector, has been developed for use in the most recent clinical trials, including the pivotal clinical trial for primary mitochondrial myopathy, and for commercial distribution, if elamipretide is approved for sale for this indication. Development of this multi-dose cartridge has necessitated that a preservative be added to the formulation to inhibit bacterial growth during the five-day intended-use period, and a buffer has been added to maintain a pH suitable for injection; these formulation changes also apply to the multi-use vial which will be supplied to Barth patients if elamipretide is approved for sale for Barth. The preservative and buffer salt are common in similar types of formulations administered by subcutaneous injection. The specific preservative and the level contained in the drug products have been the subject of meetings seeking scientific advice from EU competent authorities and an end-of-Phase 2 meeting with FDA. No issues were raised in either case that would prevent us from continuing as planned with the commercialization of the formulation.

In addition, we have limited experience with the cartridge as a primary container for the drug product and have not demonstrated that the packaged product is stable for extended periods or that the cartridge meets the performance specifications in the pen injector after prolonged storage. Failure in any of these key stability measures could limit the shelf-life of elamipretide. The pen injector has not been submitted for approval in the United States or certain other markets that are key to the projected commercial value of the product, if it is approved for sale. However, we have discussed the pen injector with the FDA and other regulatory authorities and we have received authorization to utilize the pen injector and multi-use cartridge in our Phase 3 clinical trial in countries including the United States, Canada, Denmark, Hungary and the United Kingdom. We are continuing discussions with regulators in Italy, which does not have a clear path for utilizing a device such as our pen injector in clinical trials. It is possible that we will not receive approval to utilize the device at our Italian sites, which account for 69 of the 407 subjects enrolled in our pre-trial registry. With respect to FDA, the comments received to date have been primarily to address human factors testing (ease of use), which we have addressed in our responses.

We face substantial competition from other pharmaceutical and biotechnology companies, and our operating results may suffer if we fail to compete effectively.

The development and commercialization of new drug products is highly competitive. We expect that we, and any future collaborators, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to any of our product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key indications of our most advanced programs.

We are initially developing elamipretide for the treatment of rare primary mitochondrial diseases and common diseases of aging in which mitochondrial function is impaired. There are several companies developing treatments that target mitochondria or mitochondria-associated diseases. The majority of these efforts is in preclinical development, is focused on gene therapy or is proposing the use of generic compounds. To our knowledge, none of these is focused on cardiolipin remodeling. Our competitors include: NeuroVive Pharmaceutical AB, Reata Pharmaceuticals, Inc., BioElectron Technology Corporation (formerly Edison Pharmaceuticals Inc.), LumiThera, Inc. and Santhera Pharmaceuticals Holding. In addition to competition from competitors who are developing treatments that seek to improve mitochondrial function or otherwise target the mitochondria, we also face competition from therapies that target the indications we are studying, particularly for diseases of aging such as dry AMD. Such competitors who are developing or who have developed competing therapies include Allegro Ophthalmics, LLC, Apellis Pharmaceuticals, Astellas Pharma Inc., Hemera Biosciences Inc., Ionis Pharmaceuticals, Inc. and Ophthotech Corporation.

 

27


Table of Contents

Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we, or any future collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or any future collaborators, are able to obtain approval for ours, which could result in our competitors establishing a strong market position before we, or any future collaborators, are able to enter the market.

Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

If the FDA or comparable regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.

Once an NDA is approved, the product covered thereby becomes a “reference-listed drug” in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference-listed drugs through submission of abbreviated new drug applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference-listed drug and that the generic version is bioequivalent to the reference-listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference-listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference-listed drug may be typically lost to the generic product.

The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference-listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity, or NCE. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference-listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference-listed drug. We have an issued composition of matter patent on elamipretide. As such, the active ingredient will be treated as an NCE and any products containing elamipretide will be granted exclusivity based on that patent expiry date and other contributing factors. It is unclear whether the FDA will treat the active ingredients in our other product candidates as NCEs and, therefore, afford them five years of NCE data exclusivity if they are approved. If any product we develop does not receive five years of NCE exclusivity, the FDA may approve generic versions of such product three years after its date of approval. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.

Competition that our products, if any, may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

 

28


Table of Contents

Even if we, or any future collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives that could harm our business.

The commercial success of our product candidates in key potential markets will depend substantially on the extent to which the costs of our product candidates will be paid by third-party payors, including government health administration authorities and private health coverage insurers. If coverage and reimbursement is not available, or reimbursement is available only to limited levels, we, or any future collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or any future collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments.

There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or any future collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the ability of any future collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval. Moreover, in the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement for products in the United States can differ significantly from payor to payor.

Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore, our ability, and the ability of any future collaborators, to commercialize any of our product candidates will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from third-party payors. Third-party payors decide which medications they will cover and establish reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and worldwide. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of any future collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of any future collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or any future collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if governmental and other third-party payors do not provide coverage or adequate reimbursement, our prospects for revenue and profitability will suffer.

There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or comparable regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.

In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We cannot be sure that coverage will be available for any product candidate that we, or any future collaborator, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they

 

29


Table of Contents

may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any of our product candidates for which we, or any future collaborator, obtain marketing approval could significantly harm our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants. We will face an even greater risk if we or any future collaborators commercially sell any product that we or they may develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our product candidates or products that we may develop;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial subjects;

 

   

significant costs to defend resulting litigation;

 

   

substantial monetary awards to trial subjects or patients;

 

   

loss of revenue;

 

   

reduced resources of our management to pursue our business strategy; and

 

   

the inability to commercialize any products that we may develop.

Although we believe we maintain adequate general and clinical trial liability insurance for a company at our stage, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Dependence on Third Parties

We expect to seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We expect to continue to seek one or more collaborators for the development and commercialization of one or more of our product candidates. For example, we hold worldwide rights for elamipretide and SBT-20 and we own our new pipeline compounds, including SBT-272. We expect to retain rights to control the commercialization of elamipretide in rare primary mitochondrial conditions in the United States, and we may explore partnerships for development of elamipretide, SBT-20 and one or more of our pipeline compounds, including SBT-272, in selected other indications and territories. Likely collaborators may include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. In addition, if we are able to obtain marketing approval for any of our product candidates from foreign regulatory authorities, we intend to enter into strategic relationships with international biotechnology or pharmaceutical companies for the commercialization of such product candidates outside of the United States.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise,

 

30


Table of Contents

the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from competing product candidates, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the potential of competing products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such collaboration could be more attractive than the one with us for our product candidate.

Collaborations are complex and time-consuming to negotiate and document. Further, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

If we enter into collaborations with third parties for the development and commercialization of our product candidates, our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.

We may enter into collaborations for the development and commercialization of certain of our product candidates. If we enter into such collaborations, we will have limited control over the amount and timing of resources that our collaborators will dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on any future collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, any future collaborators may have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.

Collaborations involving our product candidates pose a number of risks, including the following:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

   

collaborators may not perform their obligations as expected;

 

   

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;

 

   

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

 

   

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

   

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

 

   

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

 

31


Table of Contents
   

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

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. If any future collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.

We rely on third parties to conduct our clinical trials. If they do not perform satisfactorily, our business could be significantly harmed.

We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us under certain circumstances. We may not be able to enter into alternative arrangements or do so on commercially reasonable terms. In addition, there is a natural transition period when a new contract research organization begins work. As a result, delays would likely occur, which could materially impact our ability to meet our expected clinical development timelines and harm our business, financial condition and prospects.

Further, our reliance on these third parties for clinical development activities limits our control over these activities, but we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we 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 current Good Clinical Practices, or cGCPs, 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 cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third-party contractors fail to comply with applicable cGCPs, 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 our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. Similar regulatory requirements apply outside the United States, including the International Council for Harmonization of Technical Requirements for the Registration of Pharmaceuticals for Human Use, or ICH. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be impaired.

We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving us of potential product revenue.

 

32


Table of Contents

We contract with third parties for the manufacture and distribution of our product candidates for clinical trials and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers to produce both drug substance and drug product required for our clinical trials. We plan to continue to rely upon contract manufacturers, and potentially collaboration partners, to manufacture commercial quantities of our product candidates and, if approved, products. Reliance on such third-party contractors entails risks, including:

 

   

manufacturing delays if our third-party contractors give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreements between us and them;

 

   

the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;

 

   

the possible breach by the third-party contractors of our agreements with them;

 

   

the failure of third-party contractors to comply with applicable regulatory requirements;

 

   

the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;

 

   

the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and

 

   

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical studies and clinical trials, as well as for commercial manufacture if our product candidates receive marketing approval. To date, we, or our partners on our behalf, have obtained materials for elamipretide and SBT-20 from third party manufacturers. If any of our existing manufacturers should become unavailable to us for any reason, we may incur some delay in identifying or qualifying replacements.

Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations, delay our clinical trials and, if our products are approved for sale, result in lost sales. Any reliance on suppliers may involve several risks, including a potential inability to obtain critical materials and reduced control over production costs, delivery schedules, reliability and quality. Any unanticipated disruption to future contract manufacture caused by problems at suppliers could delay shipment of our product candidates, increase our cost of goods sold and result in lost sales.

If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third-party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third-party manufacturers on satisfactory terms, which could delay our commercialization efforts.

Third-party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States, such as the ICH. Facilities used by our third-party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on our third-party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA, and of any applicable foreign regulatory authority, we will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find

 

33


Table of Contents

alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.

In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could adversely affect supplies of our product candidates and significantly harm our business, financial condition and results of operations.

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to commercialize our product candidates successfully may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary product candidates. If we do not adequately protect our intellectual property, competitors may be able to erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroad related to our novel product candidates that are important to our business. The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability, term and commercial value of our patent rights are highly uncertain.

Our pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications. Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. 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 were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

Moreover, because the issuance of a patent is not conclusive as to its inventorship, scope, validity, term or enforceability, our patents or pending patent applications may be challenged in the courts or patent offices in the United States and abroad. For example, we may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or become involved in post-grant review procedures, oppositions, derivations, reexaminations, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Moreover, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it

 

34


Table of Contents

could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. In addition, 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. Furthermore, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. As a result, the inventorship or ownership of our intellectual property may be challenged in the future.

Our pending and future patent applications may not result in patents being issued which protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive products. Our issued patents or any patents that may issue in the future may be invalidated or interpreted narrowly, such that they fail to provide us with any significant competitive advantage. 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. In addition, the laws of foreign countries may not protect our rights to the same extent or in the same manner as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does.

Even if our patent applications have issued or do 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 patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.

While we have obtained composition of matter patents with respect to our clinical-stage product candidates through an application family in-licensed from Cornell Research Foundation, Inc., a subsidiary of Cornell University, or Cornell, and Institut de recherches cliniques de Montréal, or the IRCM, we also rely on trade secret protection for certain aspects of our discovery platform. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, consultants, independent contractors, advisors, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees, certain consultants, contractors and collaborators. To our knowledge, such agreements have been entered into with all relevant parties; however we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, 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, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third-party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be misappropriated or disclosed to, or independently developed by, a competitor, our business and competitive position could be harmed.

 

35


Table of Contents

Certain aspects of our product candidates and technology are protected by patents exclusively licensed from academic institutions. If these third parties terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in the markets for any of our approved products will be harmed.

We are a party to license agreements and certain aspects of our business depend on patents and/or patent applications owned by third parties. In particular, we hold exclusive licenses from Cornell and the IRCM for elamipretide and SBT-20 as well as for other compounds and certain methods. We may enter into additional license agreements as part of the development of our business in the future. If we are unable to maintain these patent rights or our license to these patent rights for any reason, or if we are unable to maintain any future material license we may enter into, our ability to develop and commercialize our product candidates could be materially harmed.

Our licensors may not successfully prosecute certain patent applications under which we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third party infringers, may fail to prove infringement, or may fail to defend against counterclaims of patent invalidity or unenforceability. For example, under our license agreement with Cornell, we have the first right to enforce the licensed patents against third party infringement. However, our first right to enforce is subject to Cornell’s consent.

Risks with respect to parties from whom we have obtained intellectual property rights may also arise out of circumstances beyond our control. Despite our best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements, thereby removing our ability to obtain regulatory approval and to market products covered by these license agreements. For example, under our license agreements with Cornell and the IRCM, if we fail to commercialize a product by December 31, 2020, Cornell may terminate the license, subject to specified exceptions for causes due to scientific and regulatory events that are common in drug development, such as institutional review board delays, clinical trial recruitment, clinical trial results and regulatory delays, and other events over which we cannot exert direct control. If our license agreements are terminated, or if the underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products similar or identical to ours. Moreover, if our license agreements are terminated, our former licensors and/or assignors may be able to prevent us from utilizing the technology covered by the licensed or assigned patents and patent applications. This could have a material adverse effect on our competitive business position and our business prospects.

Our license agreements with Cornell and the IRCM impose, and future license agreements we may enter into may impose, various diligence, milestone payment, royalty and other obligations on us. For example, our license agreements with Cornell and the IRCM include an obligation to pay royalties on the net sales of product candidates or related technologies to the extent they are covered by the agreement. If we fail to comply with our obligations under our license agreement with Cornell and the IRCM or future license agreements, and if no such exceptions apply, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market any product that is covered by the agreement or face other penalties under the agreement, such as loss of exclusivity. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

Moreover, disputes may arise regarding intellectual property subject to a licensing agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

the sublicensing of patent and other rights under our collaborative development relationships;

 

   

our diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

36


Table of Contents
   

the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and

 

   

the priority of invention of patented technology.

In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations, and prospects.

Some of our intellectual property that was discovered through government-funded programs may be subject to federal regulation such as “march-in” rights, certain reporting requirements, and a preference for United States industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements and limit our ability to contract with foreign manufacturers.

Some of our intellectual property with respect to our product candidates has been funded, at least in part, by the U.S. government and, therefore, would be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. For example, under the “march-in” provisions of the Bayh-Dole Act, the government may have the right under limited circumstances to require the patent owners to grant exclusive, partially exclusive or non-exclusive rights to third parties for intellectual property discovered through the government-funded program. The government can exercise its march-in rights if it determines that action is necessary because the patent owner fails to achieve practical application of the new invention or because action is necessary to alleviate health concerns or address the safety needs of the public. Intellectual property discovered under the government-funded program is also subject to certain reporting requirements, compliance with which may require us or our licensors to expend substantial resources. Such intellectual property is also subject to a preference for U.S. industry, which may limit our ability to contract with foreign product manufacturers for products covered by such intellectual property. We may apply for additional U.S. government funding, and it is possible that we may discover additional compounds or product candidates as a result of such funding. Intellectual property under such discoveries would be subject to the applicable provisions of the Bayh-Dole Act. Similarly, intellectual property that we license in the future may have been made using government funding and may be subject to the provisions of the Bayh-Dole Act.

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

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. We may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

 

37


Table of Contents

Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. 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 litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of the ADSs. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.

In addition, we may from time to time become involved in disputes, including litigation, with respect to intellectual property. For example, in August 2013, a former vendor commenced an arbitration proceeding against us regarding a disputed license to the vendor’s technology. In July 2014, the vendor commenced a lawsuit against one of our service providers, whom we had previously agreed to indemnify for certain liabilities. In February 2016, we entered into a settlement agreement that provided for mutual releases and dismissal with prejudice of each of the pending arbitration and litigation claims. In connection with the settlement, we paid $725,000 to the vendor and agreed to withdraw and/or not refile certain pending patent applications in satisfaction of all of our obligations under the settlement agreement.

If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time-consuming and could prevent or delay us from developing or commercializing our product candidates.

Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates without infringing the intellectual property and other proprietary rights of third parties. Third parties have U.S. and non-U.S. issued patents and pending patent applications relating to compounds and methods of use for the treatment of key indications for our priority programs, and we may be subject to claims that our research, development and commercialization activities infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. If any third-party patents or patent applications are found to cover our product candidates or their methods of use, we may not be free to manufacture or market our product candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at all.

There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including derivation or interference proceedings, post grant and inter partes reviews, opposition proceedings, and the like in the US and in other jurisdictions. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we were sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could significantly harm our business and operating results. In addition, we may not have sufficient resources to bring these actions to a successful conclusion. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.

If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we

 

38


Table of Contents

may be required to obtain a license from such third-party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonable terms, or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

Changes to the patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time consuming and inherently uncertain. Patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, signed into law in September 2011, could increase those uncertainties and costs. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of patents. In addition, the Leahy-Smith Act has transformed the U.S. patent system into a “first to file” system. The first-to-file provisions, however, only became effective in March 2013. Accordingly, it is not yet 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 make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our or our collaboration partners’ patent applications and the enforcement or defense of our or our collaboration partners’ issued patents, all of which could harm our business, results of operations and financial condition.

The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. Additionally, there have been recent proposals for additional changes to the patent laws of the United States and other countries that, if adopted, could impact our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our product candidates, our competitive position would be adversely affected.

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

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly in developing countries. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection, but where patent enforcement is not as strong as that in the United States. These

 

39


Table of Contents

products may compete with our products in jurisdictions where we do not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Moreover, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws. Additionally, laws of some countries outside of the United States and Europe do not afford intellectual property protection to the same extent as the laws of the United States and Europe. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, including China, India and other developing countries, do not favor the enforcement of patents and other intellectual property rights. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in certain countries outside the United States and Europe. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, if our ability to enforce our patents to stop infringing activities is inadequate. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and resources from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in major markets for our products, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. 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.

If we do not obtain patent term extension and data exclusivity for any product candidates we may develop, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidates we may develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and the extension only applies to those claims covering the approved drug, a method for using it, or a method for manufacturing it. However, we may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed. Furthermore, in the United States, only a single patent can be extended for each qualifying FDA approval, and any patent can be extended only once and only for a single product. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws governing the ability to obtain multiple patents from a single patent family. Because both elamipretide and SBT-20 compositions-of-matter are protected by a single family

 

40


Table of Contents

of patents and applications, we may not be able to secure patent term extensions for both of these product candidates in all jurisdictions where these product candidates are or may be approved, including the United States.

We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

Many of our employees and our licensors’ employees, including our senior management, were previously employed by others, including universities and other biotechnology and pharmaceutical companies, some of which are our competitors or potential competitors. Some of these employees, including each member of our senior management, executed proprietary rights, non-disclosure and non-competition agreements, or similar agreements, in connection with such previous employment. 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 these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such third party. Litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms, or at all. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while we typically require our employees, consultants and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our senior management and scientific personnel.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

Even if we complete the necessary preclinical and clinical studies, the marketing approval process is expensive, time consuming and uncertain and may prevent us or any future collaborators from obtaining approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or any future collaborators, will obtain marketing approval to commercialize a product candidate.

The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by the FDA and comparable foreign regulatory authorities, which regulations differ from country to country. We, and any future collaborators, are not permitted to market our product candidates in the United States or in other countries until we, or they, receive approval of an NDA from the FDA or marketing approval from applicable regulatory authorities outside the United States. Our product candidates are in various stages of development and are subject to the risks of failure inherent in drug development. We have not submitted an application for or received marketing approval for any of our product candidates in the United States or in any other jurisdiction. We have limited experience in conducting and managing the clinical trials necessary to obtain marketing approvals, including FDA approval of an NDA.

The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved.

In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we, or any future collaborators, ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

41


Table of Contents

Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of any future collaborators to generate revenue from the particular product candidate, which likely would result in significant harm to our financial position.

Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed abroad.

In order to market and sell our products in key potential markets, we, and any future collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We, and any future collaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.

On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the referendum could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals in the United Kingdom, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and reduce our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom for our product candidates, which could significantly and materially harm our business.

Furthermore, other European countries may seek to conduct referenda with respect to continuing membership with the European Union. We do not know to what extent Brexit or other comparable initiatives, or any resulting changes, would affect our ability to conduct clinical trials or obtain marketing approval in these jurisdictions, and each could materially impact our ability to conduct clinical trials or obtain marketing approval on a timely basis, or at all.

We have obtained Fast Track designation from the FDA for elamipretide for the treatment of primary mitochondrial myopathy, Barth, LHON and dry AMD with geographic atrophy. However, Fast Track designation may not actually lead to a faster development, regulatory review or approval process.

If a product is intended for the treatment of a serious or life-threatening condition and the product candidate demonstrates the potential to address unmet needs for this condition, the treatment sponsor may apply for FDA Fast Track designation. If the Fast Track designation is obtained, the FDA may initiate review of sections of an NDA, before the application is complete. This “rolling review” is available if the applicant provides, and the FDA approves, a schedule for submission of the individual sections of the application. In December 2015, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of primary mitochondrial myopathy, in November 2017, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of Barth and LHON and in November 2018, the FDA notified us that we had obtained Fast Track designation for elamipretide for the treatment of patients with geographic atrophy, an advanced form of dry AMD. Fast Track designation does not ensure that we will experience a faster development, regulatory review or approval process compared to conventional FDA procedures or that we will ultimately obtain regulatory approval of elamipretide. Additionally, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program.

We have obtained orphan drug designation from the FDA for elamipretide for the treatment of primary mitochondrial myopathy, Barth and LHON. However, we, or any future collaborators, may not be able to obtain orphan drug designation or orphan drug exclusivity for our other product candidates.

Regulatory authorities in some jurisdictions, including the United States, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan

 

42


Table of Contents

drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. We have received orphan drug designation for elamipretide for primary mitochondrial myopathy, Barth and LHON. We, or any future collaborators, may seek orphan drug designations for other product candidates or in other jurisdictions and may be unable to obtain such designations.

Even for product candidates for which we, or any future collaborators, may obtain orphan drug designation, we, or they, may not be able to obtain orphan drug exclusivity for that product candidate. Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes FDA from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the applicable exclusivity period. The applicable period is seven years in the United States. The exclusivity period in the United States can be extended by six months if the sponsor submits pediatric data that fairly respond to a written request from FDA for such data. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if we, or any future collaborators, obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. In the United States, even after an orphan drug is approved, FDA may subsequently approve another drug for the same condition if FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In the European Union, marketing authorization may be granted to a similar medicinal product for the same orphan indication if:

 

   

the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

 

   

the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

 

   

the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.

Even if we, or any future collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.

Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and any future collaborators, must therefore comply with requirements concerning advertising and promotion for any of our product candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we and any future collaborators will not be able to promote any products we develop for indications or uses for which they are not approved.

In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, any future collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.

Accordingly, assuming we, or any future collaborators, receive marketing approval for one or more of our product candidates, we, and any future collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.

 

43


Table of Contents

If we, or any of our future collaborators, are not able to comply with post-approval regulatory requirements, we, and any such future collaborators, could have the marketing approvals for our products withdrawn by regulatory authorities and our, or any future collaborators’, ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.

Any of our product candidates for which we, or any future collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions or withdrawal from the market and we, or any future collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following approval.

Any of our product candidates for which we, or any future collaborators, obtain marketing approval in the future, as well as the manufacturing processes, post-approval studies and measures, labeling, advertising and promotional activities for such product, among other things, 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, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy.

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed and distributed 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, or any future collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws, which violations can result in the imposition of significant administrative, civil and criminal penalties.

In addition, later discovery of previously unknown adverse events or other problems with our products or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

   

restrictions on such products, manufacturers or manufacturing processes;

 

   

restrictions on the labeling or marketing of a product;

 

   

restrictions on product distribution or use;

 

   

requirements to conduct post-marketing studies or clinical trials;

 

   

warning letters 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;

 

   

restrictions on coverage by third-party payors;

 

   

fines, restitution or disgorgement of profits or revenues;

 

   

suspension or withdrawal of marketing approvals;

 

   

refusal to permit the import or export of products;

 

   

product seizure; or

 

   

injunctions or the imposition of civil or criminal penalties.

 

44


Table of Contents

Healthcare legislative reform measures may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of any future collaborators, to profitably sell any products for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that will be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any future collaborators, may receive for any approved products.

For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the Affordable Care Act, became law in 2010 and includes the following provisions of potential importance to our product candidates:

 

   

an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;

 

   

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

   

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics that are inhaled, infused, instilled, implanted or injected;

 

   

expansion of federal healthcare fraud and abuse laws, including the False Claims Act and the federal healthcare Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

 

   

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70% commencing January 1, 2019) point-of-sale discounts off negotiated prices;

 

   

extension of manufacturers’ Medicaid rebate liability;

 

   

expansion of eligibility criteria for Medicaid programs;

 

   

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

   

new requirements to report financial arrangements with physicians and teaching hospitals;

 

   

a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;

 

   

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

   

establishment of a Center for Medicare Innovation at the Centers for Medicare and Medicaid Services, or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending; and

 

   

establishment a licensure framework for follow on biologic products.

Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017, or the Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the

 

45


Table of Contents

implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is an inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well. While the Trump Administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision and subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act and our business.

The timing and scope of any potential future legislation to repeal and replace Affordable Care Act provisions is highly uncertain in many respects. Such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop or commercialize product candidates. We expect that the Affordable Care Act, if retained in its current form, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product and/or the level of reimbursement physicians receive for administering any approved product we might bring to market. Reductions in reimbursement levels may negatively impact the prices we receive or the frequency with which our products are prescribed or administered by physicians. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and due to legislative amendments to the statute, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Moreover, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The U.S. Department of Health and Human Services has already started the process of soliciting feedback

 

46


Table of Contents

on certain of these measures and, additionally, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. Although a number of these, and other potential, proposals will require authorization through additional legislation to become effective, Congress and the executive branch have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

Legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent product labeling and post-marketing testing and other requirements.

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

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

Anti-Kickback Statute.  The federal healthcare Anti-Kickback Statute prohibits, among other things, persons and entities 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 recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

False Claims Laws.  The federal civil and criminal false claims laws, including the False Claims Act, and civil monetary penalties laws, which provides for civil whistleblower or qui tam actions, prohibit, among other things, individuals and entities from knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal healthcare 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;

HIPAA.  The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations, also imposes obligations, including mandatory contractual terms and physical, administrative and technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;

 

47


Table of Contents

Transparency Requirements.  The federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs, biologics, devices and supplies to report payments and other transfers of value to physicians and teaching hospitals and ownership and investment interests by physicians; and

Analogous State and Foreign Laws.  Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws, which may be broader in scope, can apply to our business activities, including sales or marketing arrangements, and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and are generally broad and are enforced by many different federal and state agencies as well as through private actions. 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 and require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. Certain state and local laws require the registration of pharmaceutical sales representatives. State and foreign 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 pre-empted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations 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, disgorgement, individual imprisonment, exclusion of products from government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.

Regulatory or legislative developments regarding privacy and data security matters could adversely affect our ability to conduct our business.

We are subject to data privacy and security regulation in the jurisdictions in which we conduct our business, particularly in light of increased regulatory scrutiny of and user expectations regarding the processing, collection, use, storage, dissemination, transfer and disposal of user data. The regulatory frameworks regarding privacy issues in many jurisdictions are constantly evolving and can be subject to significant changes from time to time, and therefore we may not be able to comprehensively assess the scope and extent of our compliance responsibility at a global level. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. Data privacy concerns may result in increased costs of operations and threats of lawsuits, enforcement actions and related liabilities, including financial penalties.

Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

Our internal computer systems and those of our current and any future collaborators and other contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such systems may be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Cyber-attacks also could include phishing attempts or e-mail fraud to cause payments or information to be transmitted to an unintended recipient.

While we have not experienced a system failure, accident, cyber-attack or security breach that has resulted in a material interruption in our operations to date, if such an event were to occur, it could result in a material disruption

 

48


Table of Contents

of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

Additionally, any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, cause us not to comply with federal and/or state breach notification laws and foreign law equivalents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information. Security breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business and the further development of our product candidates could be delayed.

The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the EU General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, responding to data subject requests, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to 20.0 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR will be a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with any European activities.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could significantly harm our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Although we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. However, we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

 

49


Table of Contents

In the future, if we decide to market our products outside of the United States, such as in the European Union or China, we would need to obtain additional approvals and comply with additional regulatory requirements.

Our primary regulatory strategy is to apply first for approvals in the United States for our rare disease programs. We intend to seek approvals in China commencing in 2019. We may in the future apply for approvals in Europe, or clinical trial waivers in China, following receipt of marketing authorization in the United States. However, as we also plan to consider collaboration for commercialization efforts in Europe and China, we anticipate that potential commercialization partners may have input into regulatory strategies in those jurisdictions. To date, we have focused our regulatory efforts primarily on achieving approvals and marketing authorization in the United States. In order to market any product outside of the United States, we need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not we obtain FDA approval for a product, we or our collaborators would need to obtain the necessary approvals by the comparable foreign regulatory authorities before marketing the product in those countries or jurisdictions. We cannot be sure whether and when we would be able to obtain the necessary approvals, which could adversely affect our business and prospects.

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

In some countries, 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 reimbursement or pricing approval in some countries, we, or any future collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.

Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable regulatory authorities, provide accurate information to the FDA or comparable regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards 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 and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion of products from government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.

Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on Reenie McCarthy, our Chief Executive Officer and a Director, as well as the other principal members of our management and scientific teams. Ms. McCarthy is employed “at will,” meaning we or she may terminate the employment relationship at any time. In the future, we may be dependent on other members of our management, scientific and development team. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Our industry has experienced a high rate of turnover of management personnel in recent years. If we lose one or more of our executive officers or other key employees, our ability to implement our business

 

50


Table of Contents

strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key employees on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions.

We rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by other entities and may have commitments under consulting or advisory contracts with those entities that may limit their availability to us. If we are unable to continue to attract and retain highly qualified personnel, our ability to develop and commercialize our product candidates will be limited.

We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug manufacturing, regulatory affairs and sales, marketing and distribution. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Our management may need to devote a disproportionate amount of its attention to managing these growth activities. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or identify, recruit and train additional qualified personnel. Our inability to manage the expansion of our operations effectively may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could also require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If we are unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy, including the successful commercialization of our product candidates.

Risks Related to this Offering and Ownership of ADSs

After this offering, Morningside Venture (I) Investments Limited will continue to have a controlling ownership interest in our ordinary shares and the ability to determine all matters submitted to shareholders for approval.

Assuming the sale by us of              ADSs (or              ADSs if the underwriters exercise their option to purchase additional ADSs in full), Morningside Venture (I) Investments Limited, or MVIL, will own     % of our ordinary shares (or     % if the underwriters exercise their option to purchase additional ADSs in full). As a result, MVIL will be able to control all matters submitted to our shareholders for approval, as well as our management and affairs. For example, MVIL would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

 

   

delay, defer or prevent a change in control;

 

   

entrench our management or the board of directors; or

 

   

impede a merger, consolidation, takeover or other business combination involving us that other shareholders may desire.

MVIL will own a controlling portion of our ordinary shares after this offering and may have conflicts of interest with us and other shareholders in the future.

MVIL will beneficially own approximately     % of our ordinary shares (or     % if the underwriters exercise their option to purchase additional ADSs in full) following the completion of this offering. The interests of MVIL may not always be consistent with the interests of our company or of our other shareholders. Accordingly, MVIL could cause us to enter into transactions or agreements of which other holders of our ordinary shares would not approve or make decisions with which such holders would disagree. Gerald L. Chan, one of our directors, is a co-founder of the Morningside group, a private investment group with venture, private equity and property investments. In addition,

 

51


Table of Contents

Reenie McCarthy, our Chief Executive Officer and a director, served as a member of the investment team at the Morningside group from 1993 through 2016, and remains a director of Morningside Technology Advisory, LLC, which provides advisory services to entities associated with the Morningside group.

Although Dr. Chan is not an officer, director or employee of MVIL and has neither voting nor dispositive control over the ordinary shares held by MVIL and does not otherwise beneficially own such shares, as a result of his ongoing relationship with the Morningside group, transactions between us and MVIL may present an actual or perceived conflict of interest. Although Ms. McCarthy is not an officer, director or employee of MVIL, and has neither voting nor dispositive control over our ordinary shares held by MVIL and does not otherwise beneficially own such shares, as a result of her historic relationship with the Morningside group and her ongoing relationship with Morningside Technology Advisory, LLC, transactions between us and MVIL may present an actual or perceived conflict of interest. Any actual or perceived conflicts of interest may lead Dr. Chan and Ms. McCarthy to recuse themselves from actions of our board of directors with respect to transactions involving MVIL and its affiliates. For example, in a situation in which MVIL is adverse to us, such as if it breaches an agreement with us, a conflict could arise. We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

MVIL is in the business of making investments in companies and could from time to time acquire and hold interests in businesses that compete with us. MVIL may also pursue acquisition opportunities that may be complementary to our business, and as a result, desirable acquisitions may not be available to us. So long as MVIL continues to own a significant amount of our equity, it will continue to be able to strongly influence or effectively control our decisions.

If you purchase ADSs in this offering, you will suffer immediate dilution in the net tangible book value of your investment.

The initial public offering price of the ADSs will be substantially higher than the net tangible book value per ADS. Therefore, if you purchase ADSs in this offering, you will pay a price per ADS that substantially exceeds our net tangible book value per ADS after this offering. Based on an assumed initial public offering price of $        per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $        per ADS, representing the difference between our pro forma as adjusted net tangible book value per ADS after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of ADSs in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our shares and will own approximately     % of our ordinary shares outstanding after this offering, excluding any ordinary shares that they may have acquired prior to this offering. Furthermore, if the underwriters exercise their option to purchase additional ADSs or our previously issued options to acquire ordinary shares at prices below the assumed initial public offering price are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

The price of the ADSs is likely to be highly volatile, which could result in substantial losses for purchasers of the ADSs in this offering.

The price of the ADSs is likely to be highly volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology 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, you may not be able to sell your ADSs at or above the initial public offering price and you may lose some or all of your investment. The market price for the ADSs may be influenced by many factors, including:

 

   

our ability to commercialize or obtain regulatory approval for our product candidates, or delays in commercializing or obtaining regulatory approval;

 

   

announcements relating to our clinical trials, including any periodic updates relating to enrollment of trial subjects, adverse events, site initiation, and timing of release of interim analyses and final trial results;

 

   

commencement or termination of collaborations for our development programs;

 

   

failure or discontinuation of any of our development programs;

 

   

results from, or any delays in, clinical trials relating to our product candidates, including our clinical trials for elamipretide;

 

   

any need to suspend or discontinue clinical trials due to side effects or other safety risks, or any need to conduct studies on the long-term effects associated with the use of our product candidates;

 

52


Table of Contents
   

manufacturing issues related to our product candidates for clinical trials or future products for commercialization;

 

   

commercial success and market acceptance of our product candidates following regulatory approval;

 

   

undesirable side effects caused by product candidates after they have entered the market;

 

   

ability to discover, develop and commercialize additional product candidates;

 

   

announcements relating to collaborations that we may enter into with respect to the development or commercialization of our product candidates;

 

   

success of our competitors in discovering, developing or commercializing products;

 

   

strategic transactions undertaken by us;

 

   

additions or departures of key personnel;

 

   

product liability claims related to our clinical trials or product candidates;

 

   

business disruptions caused by earthquakes or other natural disasters;

 

   

disputes concerning our intellectual property or other proprietary rights;

 

   

FDA, EMA, NMPA or other regulatory actions affecting us or our industry;

 

   

healthcare reform measures in the United States;

 

   

future sales or issuances of equity or debt securities by us;

 

   

fluctuations in our semi-annual operating results;

 

   

the issuance of new or changed securities analysts’ reports or recommendations regarding us;

 

   

announcement or expectation of additional financing efforts;

 

   

sales of our ordinary shares by us, our insiders or other shareholders;

 

   

actual and anticipated variations in our results of operations;

 

   

changes in securities analysts’ estimates or market perception of our financial performance;

 

   

announcements by us of significant acquisitions, disposals, strategic alliances or joint ventures;

 

   

recruitment or loss of key personnel by us or our competitors;

 

   

market developments affecting us or the markets in which we operate;

 

   

regulatory or legal developments, including litigation;

 

   

the operating and share price performance of companies that investors consider to be comparable to us;

 

   

the depth and liquidity of the market for the ADSs;

 

   

the release or expiry of lock-up or other transfer restrictions on our ordinary shares and ADSs;

 

   

general economic, political and stock market conditions in the United States and the countries in which we operate and elsewhere in the world; and

 

   

the other factors described in this “Risk Factors” section.

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

No public market for the ADSs currently exists, and an active trading market for the ADSs may not develop.

Prior to this offering, there has been no public market for the ADSs. The initial public offering price for the ADSs will be determined through negotiations with the underwriters. This price may not reflect the price at which investors in the market will be willing to buy and sell our ADSs following this offering. Although we intend to apply to have the ADSs listed on The Nasdaq Global Market, an active trading market for the ADSs may never develop or, if developed, be maintained following this offering. If an active market for the ADSs does not develop or is not maintained, it may be difficult for you to sell ADSs you purchase in this offering without depressing the market price for the ADSs, or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares or ADSs and may impair our ability to acquire other companies or technologies by using our shares or ADSs as consideration.

 

53


Table of Contents

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

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of the ADSs. The failure by our management to apply these funds effectively could result in financial losses that could significantly harm our business, cause the price of the ADSs to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make the ADSs 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 may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, 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 exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company and a foreign private issuer. We cannot predict whether investors will find the ADSs less attractive if we rely on these exemptions. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the price of the ADSs may be more volatile.

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 elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the Securities and Exchange Commission than U.S. companies. This may limit the information available to holders of the ADSs.

We are a “foreign private issuer,” as defined in the rules and regulations of the Securities and Exchange Commission, or the SEC, and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our senior management and supervisory board members are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly available information concerning our company than there is for U.S. public companies.

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

 

54


Table of Contents

We intend to rely on Nasdaq Stock Market rules that permit us to comply with applicable Cayman Islands corporate governance practices, rather than the corresponding domestic U.S. corporate governance practices, and therefore your rights as a shareholder will differ from the rights you would have as a shareholder of a domestic U.S. issuer.

As a foreign private issuer whose ADSs are listed on The Nasdaq Global Market, we are permitted in certain cases to follow Cayman Islands corporate governance practices instead of the corresponding requirements of the Nasdaq Stock Market rules. A foreign private issuer that elects to follow a home country practice instead of Nasdaq requirements must submit to Nasdaq in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed instead of any such requirement. In accordance with Cayman Islands law:

 

   

we do not require a majority of the board of directors to be independent directors;

 

   

we do not require an audit committee to have a written charter addressing the audit committee’s responsibilities and authority;

 

   

we do not require a remuneration committee to have a written charter addressing the remuneration committee’s responsibilities and authority;

 

   

we do not require an independent director oversight of director nominations and a formal written charter or board resolution addressing the nominations process;

 

   

we do not require a code of conduct applicable to all directors, officers and employees;

 

   

we do not require shareholder approval for certain issuances of shares, including shareholder approval of share option plans; and

 

   

we do not require the board of directors to have regularly scheduled meetings at which only independent directors are present.

For further information upon the differences between Delaware law and Cayman Islands law, please see “Description of Share Capital and Articles of Association—Differences in Corporate Law.”

We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our ordinary shares are directly or indirectly held by residents of the United States and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the Nasdaq listing rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors and more expensive to procure director and officer liability insurance.

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

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance

 

55


Table of Contents

practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to SOX Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe, or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

A significant portion of our total outstanding shares is restricted from immediate resale, but may be sold into the market in the near future, which could cause the market price of the ADSs to decline significantly, even if our business is doing well.

Sales of a substantial number of ADSs in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of ordinary shares intend to sell ADSs, could reduce the market price of the ADSs. After this offering and after giving effect to (i) the issuance of              shares upon the conversion of the 2018 Notes, assuming an initial public offering price of $         per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus), and (ii) the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares, both of which will occur automatically upon the closing of this offering, we will have              ordinary shares outstanding based on the 68,487,948 ordinary shares outstanding as of November 30, 2018 (or                  shares if the underwriters exercise their option to purchase additional ADSs in full).

All ADSs we are selling in this offering may be resold in the public market immediately, unless purchased by our affiliates. The remaining ordinary shares are currently restricted under securities laws or as a result of lock-up or other agreements, but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales. For additional information on applicable restrictions on sales of ordinary shares and ADSs after this offering, see the “Shares and ADS Eligible For Future Sale” section of this prospectus.

We, each of our directors, officers and holders of substantially all our outstanding equity securities have entered into lock-up agreements with the underwriters under which we and they have agreed, subject to certain exceptions described in the section titled “Underwriting”, not to, directly or indirectly, dispose of or hedge any ordinary shares, ADSs or securities convertible into or exchangeable for ordinary shares during the period from the date of the final prospectus for this offering continuing to and including 180 days after the date of the final prospectus for this offering without the prior written consent of Jefferies LLC and Evercore Group L.L.C. We refer to this period as the lock-up period. Upon the release of the foregoing restrictions, our securityholders subject to a lock-up agreement will be able to sell our shares in the public market. In addition, Jefferies LLC and Evercore Group L.L.C. may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the

 

56


Table of Contents

lock-up period. For a description of the lock-up agreements, see the ‘‘Underwriting’’ section of this prospectus. Sales of a substantial number of such shares upon early release or expiration of the lock-up period or the perception that such sales may occur could cause the market price of ADSs to decline or make it more difficult for you to sell your ADSs at a time and at a price that you deem appropriate. We plan to register all              ordinary shares that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described above and in the “Underwriting” section of this prospectus.

We do not anticipate paying any cash dividends on the ADSs in the foreseeable future. Accordingly, holders of ADSs must rely on capital appreciation, if any, for any return on their investment.

We have never declared nor paid cash dividends on our share capital. We currently plan to retain all of our future earnings, if any, to finance the operation, development and growth of our business. In addition, the terms of our existing loan and security agreement preclude us from paying cash dividends without the consent of our lender. As a result, capital appreciation, if any, of the ADSs will be your sole source of gain for the foreseeable future. However, if we do pay a cash dividend on our ordinary shares in the future, we may only pay such dividend out of our profits or share premium (subject to applicable solvency requirements) under Cayman Islands law.

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

The trading market for the ADSs will likely depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade the ADSs or change their opinion of the ADSs, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of the ADSs or trading volume to decline.

We may be classified as a passive foreign investment company for any taxable year, which may result in adverse U.S. federal income tax consequence to U.S. holders.

Based on our estimated gross income and average value of our gross assets, taking into account the initial public offering price of the ADSs in this offering and the expected price of the ADSs following this offering, and the nature of our business, we do not believe that we were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our tax year ended December 31, 2017 and do not expect to be a PFIC during our tax year ending December 31, 2018. A corporation organized outside the United States generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which at least 75% of its gross income is passive income or on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. Our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. The market value of our assets may be determined in large part by reference to the market price of the ADSs, which is likely to fluctuate after the offering, and may fluctuate considerably given that market prices of biotechnology companies have been especially volatile. If we were to be treated as a PFIC for any taxable year during which a U.S. holder held the ADSs, however, certain adverse U.S. federal income tax consequences could apply to the U.S. holder. See “Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company Rules” in this prospectus.

We may choose to list our ordinary shares on another securities exchange outside of the United States the ADSs following this offering, which may adversely affect the liquidity and value of our ADSs and subject us to additional obligations.

We have in the past considered, and may in the future seek to, list our ordinary shares on another exchange outside of the United States following this offering. If we decide to pursue a cross or dual listing of our ordinary shares, we cannot predict the effect any such listing would have on the value of our ordinary shares and ADSs. However, the cross listing of our ordinary shares and our ADSs may dilute the liquidity of these securities in one or both markets and may adversely affect the development of an active trading market for our ADSs in the United States. The price of our ADSs could also be adversely affected by trading in our ordinary shares on any other exchange. Furthermore, a

 

57


Table of Contents

listing on any other exchange could subject us to additional requirements and/or obligations, including financial and other reporting requirements, and could restrict our ability to undertake certain activities that would be beneficial for our shareholders and holders of our ADSs.

Holders of our ADSs have fewer rights than our shareholders and must act through the depositary to exercise their rights.

Holders of our ADSs do not have the same rights as our shareholders and may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Holders of the ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. When a general meeting is convened, if you hold ADSs, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the ordinary shares underlying your ADSs to allow you to vote directly with respect to any specific matter. We will make all commercially reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Furthermore, the depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting. See “Description of American Depositary Shares.”

Holders of our ADSs may face limitations on transfer and withdrawal of underlying ordinary shares.

Our ADSs, which may be evidenced by American Depositary Receipts, or ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares. Temporary delays in the cancellation of your ADSs and withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares. In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities. See “Description of American Depositary Shares.”

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including in respect of claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a court of the State of New York or a federal court, which have non-exclusive jurisdiction over matters arising under the deposit agreement, applying such law. In determining whether to enforce a jury trial waiver provision, New York courts and federal courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim (as opposed to a contract dispute), none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other

 

58


Table of Contents

holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with such matters, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims, and the venue of the hearing.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law and many of our directors reside outside of the United States.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs shall be governed by our Amended and Restated Memorandum and Articles of Association to be in effect upon the completion of this offering, referred to as our Articles of Association, the Companies Law (2018 Revision) of the Cayman Islands, referred to as the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. Similarly, the rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States, and some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. As a Cayman Islands exempted company, we may not have standing to initiate a derivative action in a federal court of the United States. As a result, you may be limited in your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

Shareholders of Cayman Islands exempted companies like us have very limited statutory rights under Cayman Islands law to inspect the corporate records of Cayman Islands exempted companies into which they are invested and have no statutory rights to obtain copies of registers of shareholders of Cayman Islands exempted companies. Although our shareholders may request access to our books and records, our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, certain of our corporate records may be inspected by our shareholders. Under the Companies Law, shareholders are entitled to view our Articles of Association. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is the jurisdiction of our incorporation, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow practice in the Cayman Islands with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

The Cayman Islands has no legislation specifically dedicated to the rights of investors in securities or statutorily defined private causes of action to investors in securities such as those found under the Securities Act of 1933, or the Securities Act, or the Exchange Act. Subject to limited exceptions, under Cayman Islands law, a shareholder is not entitled to bring a derivative action against the board of directors. U.S.-style class action lawsuits are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings in a similar fashion.

As a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by management, or members of the board of directors than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the

 

59


Table of Contents

Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital and Articles of Association—Material Differences in Corporate Law.”

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.

Our corporate affairs and the rights of holders of ordinary shares are governed by our Articles of Association, the Companies Law, and the common law of the Cayman Islands. Certain rights and responsibilities of our shareholders, ADS holders and members of our board of directors under Cayman Islands law are different from those that apply to a Delaware corporation.

Directors of Cayman Islands exempted companies are required to observe certain fiduciary duties. These fiduciary duties are owed to the Cayman Islands company and include the duty to act in the best interests of the company and the shareholders as a whole. However, the fiduciary duties of a director of a Cayman Islands exempted company may not be the same as the fiduciary duty of a director of a U.S. corporation.

In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while shareholders (including controlling shareholders) of Cayman Islands companies generally owe no fiduciary duties to the company or other shareholders.

The rights of our shareholders to bring shareholders’ suits against us or our board of directors under Cayman Islands law are much more limited than those of shareholders of a U.S. corporation. For example, under Cayman Islands law, a shareholder who wishes to bring a claim against a director would generally need to obtain permission from the Grand Court of the Cayman Islands, or Cayman Islands Court, to bring a derivative action, in the name of the company, against the director. This is because the director of a Cayman Islands exempted company owes duties to the company and not to individual shareholders. As a result, our shareholders, including holders of ADSs, may have more difficulty protecting their rights in connection with actions taken by our directors than they would as shareholders of a U.S. corporation.

Minority shareholders in a Cayman Islands exempted company have more limited rights than minority shareholders in a U.S. corporation in relation to mergers and similar transactions that the company may carry out. For example, if a merger under the Companies Law involving a Cayman Islands exempted company is approved by the requisite majority of shareholders, a dissenting minority shareholder would have the right to be paid the fair value of their shares (which, if not agreed between the parties, will, following the course of legal proceedings, be determined by the Cayman Islands Court) if the shareholders follow the statutorily prescribed procedure for initiating such proceedings, subject to certain exceptions. Such dissenter rights differ substantially from the appraisal rights, which would ordinarily be available to dissenting shareholders of Delaware corporations. Further, if a takeover offer is made to the shareholders of a Cayman Islands exempted company and accepted by holders of 90% of the shares affected, the offeror may require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Cayman Islands Court, but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion. A minority shareholder in this scenario would have no rights comparable to the appraisal rights which would generally be available to a dissenting shareholder of a U.S. corporation in similar circumstances. See the section of this prospectus titled “Description of Share Capital and Articles of Association” for a description of the principal differences between the provisions of Cayman Islands law applicable to us and the U.S. Delaware General Corporate Law relating to shareholders’ rights and protections.

 

60


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements regarding:

 

   

our plans to develop and commercialize elamipretide, SBT-20 and our other product candidates and to identify additional product candidates;

 

   

ongoing and planned clinical trials and preclinical studies for our product candidates, including SBT-272, including the timing of initiation of these trials and studies and the timing of the anticipated results;

 

   

our plans to possibly enter into collaborations for the development of product candidates and the potential benefits of any collaboration;

 

   

the timing of anticipated regulatory filings or regulatory approvals and plans and expectations for expedited regulatory review for our product candidates;

 

   

the potentials advantages and clinical utility of our product candidates;

 

   

our commercialization, marketing and manufacturing capabilities and strategy;

 

   

our intellectual property position and strategy;

 

   

our estimates regarding the potential market opportunity for our product candidates;

 

   

our expectations related to the use of proceeds from this offering; and

 

   

our estimates regarding expenses, future revenue, capital requirements, sufficiency of our current cash and cash equivalent and expected proceeds from this offering and our need for and ability to obtain additional funding.

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. Except as context otherwise requires, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

You should read this prospectus, the documents that we reference in 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. The forward-looking statements contained in this prospectus are made as of the date of this prospectus and 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 applicable law.

This prospectus includes statistical and other industry and market data, which we obtained from our own internal estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies, reports and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

 

61


Table of Contents

USE OF PROCEEDS

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

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per ADS would increase (decrease) the net proceeds to us from this offering by $        million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million ADSs in the number of ADSs offered by us, as set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $        million, assuming no change in the assumed initial public offering price per ADS and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

As of September 30, 2018, we had cash and cash equivalents of $4.1 million. We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

   

approximately $        million to fund the continued clinical development of elamipretide for the treatment of primary mitochondrial myopathy through pivotal data from a Phase 3 clinical trial;

 

   

approximately $        million to fund the continued clinical development of elamipretide for the treatment of dry AMD through initiation of a Phase 2b clinical trial;

 

   

approximately $        million to fund the continued preclinical development of SBT-272 through IND-enabling studies and to fund a Phase 1 safety trial; and

 

   

the balance for working capital and other general corporate purposes, including advancement of our pipeline of discovery compounds.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development of product candidates, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

We anticipate that, assuming our current operating plan, the net proceeds from this offering, together with our existing cash and cash equivalents, will only be sufficient to allow us to complete a Phase 3 clinical trial for elamiptretide for primary mitochondrial myopathy, to initiate but not complete our planned Phase 2b clinical trial for the treatment of dry AMD, and to conduct a Phase 1 trial of SBT-272. Based on our current operating plan, we will require additional capital to advance elamipretide through pivotal trials for indications other than primary mitochondrial myopathy and to advance our other product candidates through later-stage clinical development, as well as to commercialize any of our product candidates if we receive regulatory approval. We have based these estimates on assumptions that may prove to be wrong, including assumptions regarding the clinical trials necessary for FDA approval of our product candidates, and we could use our capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with product development, including risks and uncertainties with respect to successful enrollment and completion of clinical trials, at this time we cannot reasonably estimate the amount of additional funding that will be necessary to complete the clinical development of any of our product candidates. If we receive regulatory approval for elamipretide, SBT-20 or any of our other product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources.

Pending use of the proceeds as described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

 

62


Table of Contents

DIVIDEND POLICY

We have never declared or paid any cash dividends on our share capital. We intend to retain all of our future earnings, if any, to finance the growth and development of our business, and we do not intend to pay cash dividends to the holders of our ordinary shares for the foreseeable future. In addition, the terms of our existing loan and security agreement preclude us from paying cash dividends without the consent of our lender. However, if we do pay a cash dividend on our ordinary shares in the future, we may only pay such dividend out of our profits or share premium (subject to applicable solvency requirements) under Cayman Islands law.

 

63


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to (i) the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares and (ii) the effectiveness of our Amended and Restated Memorandum and Articles of Association upon the completion of this offering; and

 

   

on a pro forma as adjusted basis giving additional effect to (i) the issuance of              ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $         million, assuming an initial public offering price of $         per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus) and (ii) the sale of ADSs offered in this offering, assuming an initial public offering price of $        per ADS, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this information in conjunction with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, the “Selected Consolidated Financial Data” section and other financial information contained in this prospectus.

 

 

 

     AS OF SEPTEMBER 30, 2018  
     ACTUAL     PRO FORMA     PRO FORMA
AS ADJUSTED
 
     (in thousands, except share data)  

Cash and cash equivalents

   $ 4,078     $ 4,078     $                
  

 

 

   

 

 

   

 

 

 

Convertible notes payable

   $ 102,357     $ 102,357     $    

Long-term debt, less current portion

     12,467       12,467    

Series A convertible preferred shares, $0.0003 par value; 106,666,667 shares authorized, 91,600,398 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     211,377          

Shareholders’ (deficit) equity:

      

Ordinary Shares, $0.0003 par value; 203,333,333 shares authorized,                  shares issued and outstanding, actual;                  shares authorized,                  shares issued and outstanding, pro forma;                  shares authorized,                  shares issued and outstanding, pro forma as adjusted

     21       48    

Additional paid-in capital

     39,206       250,556    

Accumulated deficit

     (399,680     (399,680  
  

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (360,453     (149,076  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (34,252   $ (34,252   $    
  

 

 

   

 

 

   

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per ADS, which is the midpoint of the 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, total shareholders’ equity and total capitalization by $        million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million ADSs in the number of ADSs offered by us at the assumed initial public offering price would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents,

 

64


Table of Contents

total shareholders’ equity and total capitalization by $        million, assuming an initial public offering price of $        per ADS, which is the midpoint of the 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 table above does not include:

 

   

11,427,608 ordinary shares issuable upon exercise of share options outstanding as of September 30, 2018 at a weighted-average exercise price of $0.94 per share;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 share incentive plan;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 employee share purchase plan; and

 

   

                 ordinary shares issuable upon conversion of Series A convertible preferred shares issuable upon exercise of an outstanding warrant with an exercise price of (a) $2.30769 per share or (b) the initial public offering price per ADS in this offering.

 

65


Table of Contents

DILUTION

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

Our historical net tangible book value as of September 30, 2018 was approximately $(149.1) million, or $(2.18) per ordinary share and $         per ADS. Each ADS represents              ordinary shares. Our historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding as of September 30, 2018.

Our pro forma net tangible book value as of September 30, 2018 was $              million, or $        per ordinary share and $         per ADS. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding after giving effect to the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares, both of which will occur automatically upon the closing of this offering.

After giving further effect to (i) the issuance of              ordinary shares upon the conversion of our outstanding 2018 Notes in an aggregate principal amount of $         million assuming an initial public offering price of $        per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus) and (ii) the sale of              ADSs in this offering at an assumed initial public offering price of $        per ADS, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2018 would have been $        million, or $         per share and $        per ADS. This amount represents an immediate increase in pro forma net tangible book value of $        per share and $         per ADS to our existing shareholders and an immediate dilution in pro forma net tangible book value of $        per share and $         per ADS to new investors purchasing ADSs in this offering.

The following table illustrates dilution on a per ADS basis:

 

 

 

Assumed initial public offering price per ADS

      $                

Historical net tangible book value per ADS as of September 30, 2018

   $                   
  

 

 

    

Pro forma net tangible book value per ADS as of September 30, 2018

     

Increase in pro forma as adjusted net tangible book value attributable to investors purchasing ADSs in this offering

     
  

 

 

    

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

     
     

 

 

 

Dilution per ADS to new investors

      $    
     

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per ADS would increase (decrease) the pro forma as adjusted net tangible book value by $        million, the pro forma as adjusted net tangible book value per ADS by $         and the dilution per ADS to investors in this offering by $        per ADS, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us. An increase of 1.0 million ADSs in the number of ADSs offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per ADS after this offering by $        and decrease the dilution per ADS to investors in this offering by $        , assuming no change in the assumed initial public offering price per ADS and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A decrease of 1.0 million ADSs in the number of ADSs offered by us, as set forth on the cover page of this prospectus, would decrease our pro forma as adjusted net tangible book value per ADS after this offering by $        and increase the dilution per ADS to investors in this offering by $        , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

66


Table of Contents

If the underwriters exercise their option to purchase additional ADSs in full in this offering, the pro forma as adjusted net tangible book value per ADS would be $        , the increase in pro forma net tangible book value per ADS to existing shareholders would be $        and the dilution per ADS to new investors would be $        , in each case based on an assumed initial public offering price of $        per ADS.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2018, the differences between the number of shares (including in the form of ADSs) purchased from us, the total consideration in respect of such shares and the average price per share paid by existing shareholders and to be paid by new investors. The calculation below is based on an assumed initial public offering price of $        per ADS, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     ORDINARY SHARES
PURCHASED
    TOTAL
CONSIDERATION
    AVERAGE PRICE
PER SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT  

Existing shareholders

                                    $                             $                

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $          100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

If the underwriters exercise their option to purchase additional ADSs in full:

 

   

the percentage of ordinary shares held by existing shareholders will decrease to             % of the total number of ordinary shares outstanding after this offering; and

 

   

the number of shares (including in the form of ADSs) held by new investors will increase to                  shares, or     % of the total number of ordinary shares outstanding after this offering.

The foregoing tables and calculations are based on the number of ordinary shares outstanding as of September 30, 2018, after giving effect to (i) the issuance of              ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $         million, assuming an initial public offering price of $         per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), and (ii) the conversion of all outstanding Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares upon the closing of this offering, and exclude:

 

   

11,427,608 ordinary shares issuable upon exercise of share options outstanding as of September 30, 2018 at a weighted-average exercise price of $0.94 per share;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 share incentive plan;

 

   

             ordinary shares reserved for issuance, as of the closing of this offering, under our 2019 employee share purchase plan; and

 

   

             ordinary shares issuable upon conversion of Series A convertible preferred shares issuable upon exercise of an outstanding warrant with an exercise price of (a) $2.30769 per share or (b) the initial public offering price per share in this offering.

 

67


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the following selected of consolidated statement of operations data for the fiscal years ended December 31, 2016 and 2017 and the summary consolidated balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2017 and 2018 and the consolidated balance sheet data as of September 30, 2018 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that should be expected for any future period. The selected consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

     YEAR ENDED DECEMBER 31,     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2016     2017     2017     2018  
     (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

        

Operating expenses:

        

Research and development

   $ 48,445     $ 63,220     $ 46,212     $ 41,758  

General and administrative

     13,403       16,500       12,937       12,541  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     61,848       79,720       59,149       54,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (61,848     (79,720     (59,149     (54,299
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

     799       (3,190     (1,691     (15,824
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

   $ (61,049   $ (82,910   $ (60,840   $ (70,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted (1)

   $ 0.90     $ 1.21     $ 0.89     $ 1.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (1)

     68,165,325       68,472,262       68,471,469       68,474,614  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to ordinary shareholders—basic and diluted (unaudited) (1)

     $ (0.52     $ (0.44
    

 

 

     

 

 

 

Pro forma weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted (unaudited) (1)

       160,072,660         160,075,012  
    

 

 

     

 

 

 

 

 

(1)   Pro forma basic and diluted net loss per share have been calculated assuming the automatic conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares. See notes 2 and 15 to our audited condensed consolidated financial statements and notes 2 and 13 to our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to ordinary shareholders and pro forma basic and diluted net loss per share attributable to ordinary shareholders.

 

68


Table of Contents

 

 

     AS OF
DECEMBER 31,
    AS OF
SEPTEMBER 30,

2018
 
     2016     2017  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 9,710     $ 4,119     $ 4,078  

Working capital deficit

     (338     (18,675     (31,027

Net assets

     1,546       (79,909     (149,076

Total assets

     13,322       7,155       11,630  

Total Series A convertible preferred shares

     211,377       211,377       211,377  

Total accumulated deficit

     (246,647     (329,557     (399,680

Total shareholders’ deficit

     (209,831     (291,286     (360,453

 

 

 

69


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

We are studying elamipretide in the following indications:

Primary mitochondrial myopathy.   Primary mitochondrial myopathy, characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue, which we believe affects an estimated 40,000 diagnosed individuals in the United States. There are no therapies approved by the FDA, the EMA or the NMPA, for the treatment of this indication. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. We are conducting a Phase 3 pivotal trial in North America and in Europe and expect to have data from that trial by the end of 2019.

Barth.   Barth, characterized by heart muscle weakness, or cardiomyopathy, neutropenia, or low white blood cell count (which may lead to an increased risk for infections), skeletal muscle weakness, delayed growth, fatigue and varying degrees of physical disability, is estimated to affect between one in 300,000 to one in 400,000 births in the United States. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. In December 2018, we completed the placebo-controlled portion of a Phase 2/3 clinical trial in patients with Barth. While the trial did not reach its primary endpoints, we observed trends toward improvement in the subset of patients with lower ratios of monolysocardiolipin to tetralinoleylcardiolipin, which we believe are the patients most likely to respond to therapy. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019 to discuss a potential NDA submission.

LHON. LHON is characterized by central vision loss. We estimate that LHON affects approximately 10,000 individuals in the United States, of whom an estimated 70% have the genetic mutation, G11778A, that we are studying. There are no therapies approved by the FDA or NMPA for the treatment of LHON, and there is only one EMA-approved therapy. We have received Fast Track and Orphan Drug designation from the FDA for the development of elamipretide in this indication. We completed the placebo-controlled portion of a Phase 2 clinical trial during the first half of 2018, and continue to follow patients in open-label extension. While the trial did not reach its primary endpoint of change in best corrected visual acuity, we observed trends favoring elamipretide across a number of endpoints, and we are continuing to observe improvements in an ongoing open-label extension. We plan to meet with the FDA for an end-of-Phase 2 meeting during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for inclusion of clinical trial sites in China in a potential Phase 3 clinical trial.

Dry AMD.   Dry AMD, characterized by symptoms such as distorted vision, reduction in low light visual acuity, reduced overall visual acuity and blurred vision, is estimated to affect over 10 million individuals in the United States,

 

70


Table of Contents

representing 90% of all individuals with AMD in the United States, and is the leading cause of blindness among older adults in the developed world. There are no therapies approved by the FDA, EMA or NMPA for the treatment of dry AMD. We completed a Phase 1 trial in patients with drusen, an early form of dry AMD, and geographic atrophy, an advanced form of dry AMD, in which we observed statistically significant improvement over baseline in various parameters of visual function in both the drusen and geographic atrophy cohorts. We received Fast Track designation from the FDA for the development of elamipretide for patients with Dry AMD with geographic atrophy in November 2018. We plan to launch a Phase 2b clinical trial for the treatment of patients with geographic atrophy in the first quarter of 2019.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for rare disease indications, such as peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our internal discovery platform has generated a library of over 100 proprietary, differentiated compounds which could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our carrier platform, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.

Since our inception in 2006, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary technology, identifying potential product candidates and conducting preclinical and clinical studies of our product candidates. We have not generated any product revenue and have financed our operations primarily through the private placement of Series A convertible preferred shares and convertible notes and borrowings under a term loan. As of September 30, 2018, we have raised an aggregate of $362.6 million in gross proceeds from private placements of our securities and borrowings under the term loan. As of September 30, 2018, our principal source of liquidity was cash and cash equivalents, which totaled $4.1 million.

As of September 30, 2018, we had an accumulated deficit of $399.7 million. Our net loss was $61.0 million and $82.9 million for the years ended December 31, 2016 and 2017, respectively, and $70.1 million for the nine months ended September 30, 2018. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

 

   

continue to advance our clinical programs and initiate additional clinical programs;

 

   

continue our current research programs and development activities;

 

   

seek to identify additional research programs and additional product candidates;

 

   

initiate preclinical testing and clinical trials for any product candidates we identify;

 

   

develop, maintain, expand and protect our intellectual property portfolio;

 

   

hire additional research, clinical and scientific personnel; and

 

   

incur additional costs associated with operating as a public company, including expanding our operational, finance and management teams.

We believe that our available funds subsequent to this offering will be sufficient to fund our operations through        . We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which is subject to significant uncertainty. We currently use contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our preclinical and clinical development activities, and we do not yet have a commercial organization. If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may seek to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms, if at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed.

 

71


Table of Contents

Without giving effect to the anticipated net proceeds from this offering, we expect that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2019. Beyond that point, we will need to raise additional capital to finance our operations, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern within one year after the issuance date of our consolidated financial statements for the nine-months ended September 30, 2018. See Note 1 to our unaudited interim condensed consolidated financial statements appearing at the end of this prospectus for additional information on our assessment.

Similarly, in its report on our consolidated financial statements for the year ended December 31, 2017, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern.

Financial Overview

Revenue

We have not generated any revenue from product sales or otherwise and do not expect to do so in the near future. We expect that any revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenues for any product candidate for which we receive regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including development of our preclinical and clinical product candidates, which include:

 

   

employee-related expenses, including salaries, benefits and share-based compensation expense;

 

   

expenses incurred under agreements with CROs, CMOs and independent contractors that conduct research and development, preclinical and clinical activities on our behalf;

 

   

costs of purchasing lab supplies and non-capital equipment used in our preclinical activities and in manufacturing preclinical study and clinical trial materials;

 

   

consulting, licensing and professional fees related to research and development activities; and

 

   

facility costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as preclinical studies and clinical trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors such as patient enrollment or clinical site activations for services received and efforts expended.

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

 

72


Table of Contents

We track certain external research and development expenses for our lead product candidates. We manage certain activities, such as contract research and manufacturing of our product candidates and our discovery programs, through our third-party vendors and have captured the costs of these activities on an individual product basis from our financial records. We use our employee, consultant and infrastructure resources across our development programs and do not track and do not allocate the cost of these activities on a program-by-program basis. The following summarizes our research and development expenses:

 

 

 

     YEAR ENDED
DECEMBER 31,
     NINE MONTHS
ENDED SEPTEMBER 30,
 
     2016      2017            2017                  2018        
    

(in thousands)

 

Product expenses:

           

Elamipretide

   $ 30,775      $ 40,530      $ 30,365      $ 26,115  

SBT-20

     1,090        1,697        1,261        615  

SBT-272

                          332  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs directly allocated to products

     31,865        42,227        31,626        27,062  
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses not directly allocated to products:

           

Research and development programs

     4,468        6,179        3,296        2,563  

Consultants and professional expenses

     3,921        4,457        3,706        4,094  

Employee expenses, including cash compensation, benefits and share-based compensation

     8,191        10,357        7,584        8,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses not directly allocated to products

     16,580        20,993        14,586        14,696  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 48,445      $ 63,220      $ 46,212      $ 41,758  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:

 

   

successful completion of preclinical studies and investigational new drug-enabling studies;

 

   

successful enrollment in and completion of clinical trials;

 

   

receipt of marketing approvals from applicable regulatory authorities;

 

   

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

   

obtaining and maintaining patent and trade secret protection and non-patent exclusivity;

 

   

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

 

   

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

 

   

effectively competing with other therapies and treatment options;

 

   

continued acceptable safety profile following approval;

 

   

enforcing and defending intellectual property and proprietary rights and claims; and

 

   

achieving desirable therapeutic properties for the intended indications.

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or

 

73


Table of Contents

enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and share-based compensation for personnel in executive, finance, pre-commercial, facility operations and administrative functions. Significant costs are incurred in our pre-commercial activities including market research, public relations, patient advocacy, advisory boards and conferences and professional consulting. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to intellectual property and patent prosecution and maintenance, other legal fees and fees for accounting, tax and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. We expect the increased costs associated with being a public company to include expenses related to services associated with maintaining compliance with the requirements of Nasdaq and the SEC, director and officer insurance and investor and public relations costs.

Other Income (Expense), Net

Other income (expense), net, primarily consists of interest expense incurred on convertible notes payable and incurred on our term loan facility, interest income earned on a shareholder demand note receivable and on cash and cash equivalents and changes in the fair value of our warrant liability.

Results of Operations

Comparison of the Nine Months Ended September 30, 2017 and 2018

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2018, together with the dollar change in those items:

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
    DOLLAR
CHANGE
 
     2017     2018  
     (in thousands)  

Operating expenses:

      

Research and development

   $ 46,212     $ 41,758     $ (4,454

General and administrative

     12,937       12,541       (396
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     59,149       54,299       (4,850

Loss from operations

     (59,149     (54,299     4,850  

Other income/(expense), net

     (1,691     (15,824     (14,133
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (60,840   $ (70,123   $ (9,283
  

 

 

   

 

 

   

 

 

 

 

 

Research and Development Expenses

Research and development expenses decreased by $4.4 million to $41.8 million for the nine months ended September 30, 2018 from $46.2 million for the nine months ended September 30, 2017. This decrease was primarily due to a $3.6 million net decrease in clinical trial related costs as several trials ended in 2018, offset by increased costs associated with our Phase 3 primary mitochondrial myopathy trial, which was active for only a small portion of the nine months ended September 30, 2017. Consulting and professional services increased by $1.0 million as we began integrated safety summary reporting and new drug application initiatives.

General and Administrative Expenses

General and administrative expenses decreased by $0.4 million to $12.5 million for the nine months ended September 30, 2018 from $12.9 million for the nine months ended September 30, 2017. The decrease in general and administrative expenses was primarily attributable to a $1.3 million reduction in legal and professional costs

 

74


Table of Contents

partially offset by an increase in intellectual property expenses of $0.6 million and an increase in pre-commercial activities of $0.3 million.

Other Income (Expense)

Other expense increased by $14.1 million to $15.8 million for the nine months ended September 30, 2018 from $1.7 million for the nine months ended September 30, 2017. This increase was driven by (i) interest expense recorded as a result of the debt discount on the convertible debt of $7.8 million, (ii) an increase in interest expense of $4.8 million due to the debt being for the full nine month period in 2018 and (iii) interest expense on additional convertible debt and an additional advance on our term loan facility. The change in valuation of our warrant liability was $1.7 million. This increase in other expense was partially offset by increased interest income of $0.1 million, as we had greater bank balances in 2018, and a $0.1 million gain on the change in the warrant liability valuation.

 

 

Comparison of the Years Ended December 31, 2016 and 2017

The following table summarizes our results of operations for the years ended December 31, 2016 and 2017, together with the dollar change in those items:

 

 

 

     YEAR ENDED
DECEMBER 31,
    DOLLAR
CHANGE
 
     2016     2017  
     (in thousands)  

Operating expenses:

  

Research and development

   $ 48,445     $ 63,220     $ 14,775  

General and administrative

     13,403       16,500       3,097  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     61,848       79,720       17,872  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (61,848     (79,720     (17,872

Other income (expense), net

     799       (3,190     (3,989
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (61,049   $ (82,910   $ (21,861
  

 

 

   

 

 

   

 

 

 

 

 

Research and Development Expenses

Research and development expenses increased by $14.8 million to $63.2 million for the year ended December 31, 2017 from $48.4 million for the year ended December 31, 2016. This increase was primarily due to a $10.2 million increase in clinical trial related costs, mainly relating to our primary mitochondrial myopathy program, which increased by $4.4 million due to initiation of our pre-Phase 3 trial registry and Phase 3 clinical trial, a $2.9 million increase in manufacturing costs for elamipretide and a $1.6 million increase in employee-related costs as we expanded our team to support later stage clinical development.

General and Administrative Expenses

General and administrative expenses increased by $3.1 million to $16.5 million for the year ended December 31, 2017 from $13.4 million for the year ended December 31, 2016. The increase in administrative expenses was primarily attributable to an increase of $2.8 million in legal and professional costs related to a potential financing initiative that was deferred to 2018 due to market considerations, as well as an increase of approximately $0.3 million in market research activities.

Other Income (Expense)

Other income (expense) was $3.2 million of other expense for the year ended December 31, 2017, consisting primarily of interest expense in connection with convertible promissory notes issued in 2017 and interest expense related to our term loan facility, which we entered into in June 2017. Other income (expense) was $0.8 million in other income for the year ended December 31, 2016, consisting of interest received on a note receivable, which was repaid in full by the end of 2016.

 

75


Table of Contents

Liquidity and Capital Resources

Overview

We have funded our operations from inception through September 30, 2018 primarily through gross proceeds of $362.6 million from the sale of Series A convertible preferred shares, the issuance of convertible promissory notes, and a term loan. As of September 30, 2018, we had cash and cash equivalents of $4.1 million.

Indebtedness

Term Loan Facility

On June 30, 2017, we entered into a loan and security agreement providing for a $40.0 million term loan facility with Hercules Capital, Inc., or Hercules, which we refer to as the term loan facility. The loan and security agreement was amended in March 2018, July 2018 and October 2018.

Borrowings under the term loan facility bear interest at a floating per annum rate equal to the greater of (i) the Wall Street Journal prime rate plus 5.50% or (ii) 9.50%. In an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 4.0%. Interest payments are due monthly in arrears. Under the term loan facility, as amended, we make interest only payments through November 30, 2018, at which time payments are made in equal monthly installments of principal and interest, continuing through the scheduled maturity date of January 1, 2021.

We may voluntarily prepay all, but not less than all, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, which ranges from 0.5% to 3.0% of the outstanding principal depending on when the prepayment is made. A final payment of $1.25 million is due upon the earlier to occur of the maturity of the loan, the acceleration or prepayment of all outstanding principal or the termination of the term loan facility.

Borrowings under the term loan facility are secured by a first priority lien on all of our assets, excluding our intellectual property. We have agreed to a negative pledge on our intellectual property. The term loan facility contains customary events of default and affirmative and negative covenants, including restrictions on our ability to pay dividends and incur additional debt, but does not contain any financial covenants. An event of default had not occurred as of September 30, 2018.

In connection with our entry into the term loan facility, we issued to Hercules a warrant to purchase our ordinary shares. See “Description of Share Capital and Articles of Association—Warrant” for a description of the warrant.

Convertible Notes

During 2017, pursuant to a note purchase agreement with Morningside Venture (I) Investments Limited, or MVIL, as the same was amended and restated, we issued convertible promissory notes to MVIL in an aggregate principal amount of $50.0 million, or the 2017 Shareholder Notes. In January 2018, we entered into a note exchange agreement with MVIL pursuant to which MVIL exchanged the 2017 Shareholder Notes for a new convertible note in the principal amount of $52.4 million, representing the aggregate principal amount of the 2017 Shareholder Notes plus accrued interest, or the January 2018 Shareholder Note. The exchange terminated the existing 2017 Shareholder Notes. The January 2018 Shareholder Note has substantially the same terms as the notes described in the following paragraph.

In January 2018, we entered into a note purchase agreement with new investors, or the 2018 Note Purchase Agreement. Under the 2018 Note Purchase Agreement, as subsequently amended, we issued convertible promissory notes in the aggregate principal amount of $50.0 million, or the 2018 New Investor Notes. The 2018 New Investor Notes accrue interest at 7% per annum, which compounds annually, and upon such compounding, is added to the outstanding principal amount. The 2018 New Investor Notes are convertible upon a qualified financing, which means (i) the closing of an initial public offering or (ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing at the same price per share. Unless earlier repaid, retired, discharged, or automatically converted into our shares, all amounts outstanding become due and payable on the later of (i) January 10, 2020 and (ii) five business days after the date on which the term loan with Hercules is repaid, terminated and discharged in full.

 

76


Table of Contents

In October 2018, we entered into an additional note purchase agreement with MVIL, under which we may borrow an aggregate principal amount of up to $30.0 million. We borrowed $15.0 million under this note purchase agreement in October 2018 and issued a note in that amount, or the October 2018 Shareholder Note. We borrowed an additional $10.0 million under this note purchase agreement in December 2018 and issued a note in that amount, or the December 2018 Shareholder Note. The October 2018 Shareholder Note and the December 2018 Shareholder Note are convertible upon a qualified initial public offering, or qualified IPO, in the United States at the qualified IPO price per share giving effect to any applicable ratio of ADS to ordinary shares. A qualified IPO is defined under these notes as firm commitment underwritten public offering of ordinary shares or ADSs in which aggregate gross proceeds equal or exceed $35 million pursuant to an effective registration statement under the Securities Act. Effective upon the closing of a qualified IPO, the outstanding principal and accrued interest plus a 25% premium of such principal and interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified IPO. The October 2018 Shareholder Note and the December 2018 Shareholder Note accrue interest at 7% per annum and accrued interest compounds annually, and upon such compounding, is added to the outstanding principal amount. Unless earlier converted into shares, the October 2018 Shareholder Note and the December 2018 Shareholder Note become due and payable on the later of (i) October 3, 2020 and (ii) five business days after the date on which the term loan facility with Hercules is repaid, terminated and discharged in full.

We refer to the January 2018 Shareholder Note, the 2018 New Investor Notes, the October 2018 Shareholder Note and the December 2018 Shareholder Note collectively as the 2018 Notes.

Cash Flows

The following table provides information regarding our cash flows for each of the periods presented:

 

 

 

     YEAR ENDED
DECEMBER 31,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
     2016     2017     2017     2018  
    

(in thousands)

 

Net cash (used in) provided by:

      

Operating activities

   $ (54,020   $ (69,836   $ (51,366   $ (50,915

Investing activities

     (183     (173     (140     (12

Financing activities

     50,292       64,418       64,418       50,886  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (3,911   $ (5,591   $ 12,912     $ (41
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Net Cash Used in Operating Activities

The use of cash for operating activities in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities decreased by $0.5 million to $50.9 million during the nine months ended September 30, 2018 from $51.4 million during the nine months ended September 30, 2017. Cash used in operating activities during the nine months ended September 30, 2018 consisted of our net loss of $70.1 million, partially offset by non-cash charges including $4.8 million in non-cash interest expense and $1.0 million in share-based compensation, and changes in operating assets and liabilities including $1.4 million in increases in accounts payable, accrued expenses and other current liabilities and a $0.9 million decrease in prepaid expenses and other current assets. Cash used in operating activities during the nine months ended September 30, 2017 consisted of our net loss of $60.8 million, partially offset by non-cash charges including $1.3 million in non-cash interest expense and $1.0 million in share-based compensation, as well as changes in operating assets and liabilities including $7.1 million in increases in accounts payable, accrued expenses and other current liabilities.

Net cash used in operating activities was $69.8 million during the year ended December 31, 2017, compared to $54.0 million during the year ended December 31, 2016. Cash used in operating activities during the year ended December 31, 2017 consisted of our net loss of $82.9 million, partially offset by non-cash charges including $2.5 million in non-cash interest expense and $1.3 million in share-based compensation, and changes in operating

 

77


Table of Contents

assets and liabilities including $8.2 million in increases in accounts payable, accrued expenses and other current liabilities. Cash used in operating activities during the year ended December 31, 2016 consisted of our net loss of $61.0 million, partially offset by non-cash charges of $1.8 million in share-based compensation and $0.3 million in depreciation and amortization, and changes in operating assets and liabilities including $3.3 million in increases in accounts payable, accrued expenses and other current liabilities and $1.5 million in decreases in prepaid expenses and other current assets.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.1 million during the nine months ended September 30, 2017. Net cash used in investing activities was $0.2 million during the years ended December 31, 2016 and 2017.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $64.4 million during the nine months ended September 30, 2017, compared to $50.9 million during the nine months ended September 30, 2018. Cash provided by financing activities in the nine months ended September 30, 2017 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to a shareholder, as well as $14.4 million related to net proceeds from the term loan facility. Cash provided by financing activities in the nine months ended September 30, 2018 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to new investors and $5.0 million in net proceeds from the term loan facility offset by deferred public offering costs of $4.1 million.

Net cash provided by financing activities was $64.4 million during the year ended December 31, 2017, compared to $50.3 million during the year ended December 31, 2016. Cash provided by financing activities in the year ended December 31, 2017 was attributable to net proceeds of $50.0 million in connection with the issuance of convertible promissory notes to a shareholder, as well as $14.4 million related to net proceeds from the term loan facility. Cash provided by financing activities in the year ended December 31, 2016 was attributable to net proceeds of $50.7 million related to a demand note receivable offset by deferred public offering costs of $0.4 million.

Funding Requirements

We expect our expenses to increase in connection with our ongoing clinical activities, particularly as we continue to develop and conduct clinical trials with respect to elamipretide and new compounds, including our ongoing and planned clinical trials; advance the development of pipeline programs; initiate new research and preclinical development efforts; and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements at least through        .

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:

 

   

scope, progress, timing, costs and results of our current and future clinical trials;

 

   

research and preclinical development efforts for any future product candidates that we may develop;

 

   

our ability to enter into and the terms and timing of any collaborations, licensing agreements or other arrangements;

 

   

number of future product candidates that we pursue and their development requirements;

 

78


Table of Contents
   

outcome, timing and costs of seeking regulatory approvals;

 

   

costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

   

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;

 

   

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

   

costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

   

costs of operating as a public company.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Until such time, if ever, that we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of ADSs. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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

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 consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future financial performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and we could have used different estimates which also would have been reasonable. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to

 

79


Table of Contents

identify services that have been performed for us 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 the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

   

CROs in connection with clinical trials;

 

   

CMOs with respect to clinical materials, intermediates, drug substance and drug product;

 

   

vendors in connection with research and preclinical development activities; and

 

   

vendors related to manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of subjects and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. To date, there have been no material differences from our estimates to the amounts actually incurred.

Share-based Compensation

We account for share-based compensation awards in the consolidated statements of operations based on their grant-date fair value. We recognize compensation costs related to employees based on the estimated fair value of the awards on the date of grant and over the associated service periods, using the straight-line method. The options vest in accordance with the terms of the applicable agreements and expire no later than ten years after the date of grant. Compensation expense is recognized for the fair value of the consideration received, or the equity instruments issued, whichever is more reliably measurable. We measure share-based awards granted to non-employees based on the fair value of the award on the date on which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our ordinary shares and updated assumption inputs in the Black-Scholes option-pricing model, or Black-Scholes.

We estimate the fair value of our share-based awards to employees and non-employees using Black-Scholes, which requires the input of assumptions, some of which are highly subjective, including:

 

   

expected volatility of our ordinary shares;

 

   

expected term of the award;

 

   

risk-free interest rate;

 

   

expected dividends; and

 

   

estimated fair value of our ordinary shares on the measurement date.

Due to the lack of a public market for the trading of our ordinary shares and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of comparable companies that are publicly traded. For these analyses, we selected representative companies from the life sciences industry with characteristics similar to ours, including enterprise value, risk profiles, position within the industry and historical share price information, sufficient to meet the expected life of the share-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our share-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available.

 

80


Table of Contents

We use a dividend yield of 0% based on the fact that we have never declared cash dividends and have no current intention of paying cash dividends over the expected term of the option.

The expected term of options granted represents the weighted average of previously transacted awards plus the minimum and maximum expected life of the outstanding awards based on vest and expiry. For non-employee options, we have determined the expected life based on the respective contractual life. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted and with maturity dates equivalent to the expected term of the options.

The fair value of each share option granted to employees and directors was estimated on the date of grant using Black-Scholes, with the following assumptions:

 

 

 
     YEAR ENDED DECEMBER 31,     NINE MONTHS
ENDED
SEPTEMBER 30,
2017
 
     2016     2017  

Risk free interest rate

     1.23%-2.42     1.89%-2.83     2.65%-3.02

Expected dividend yield

                  

Expected term (in years)

     6.4       6.0       6.1  

Expected volatility

     50     57     59

Underlying fair value of ordinary shares

     $1.14       $1.38       1.53  

 

 

 

We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from the estimates. The estimation of the number of awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised.

The following table presents information regarding share options granted from October 1, 2017 through the date of this prospectus, along with the corresponding exercise price for each option grant and our current estimate of the fair value per share of our ordinary shares on each grant date, which we utilized to calculate share-based compensation expense:

 

 

 

DATE OF GRANT

   NUMBER OF SHARES
UNDERLYING OPTIONS
GRANTED
     EXERCISE
PRICE
PER
SHARE
     FAIR VALUE OF
ORDINARY
SHARES
ON GRANT
DATE
     PER SHARE
ESTIMATED
FAIR VALUE OF
AWARD ON
GRANT DATE  (1)
 

October 22, 2017

     255,000      $ 1.38      $ 1.38      $ 0.75  

February 28, 2018

     1,138,750      $ 1.20      $ 1.20      $ 0.69  

June 10, 2018

     210,833      $ 2.22      $ 2.22      $ 1.29 (3)   

June 27, 2018

     175,000      $ 2.22      $ 2.22      $ 1.29 (3)   

October 19, 2018

     251,667      $ 1.53      $ 1.53      $ 0.87  

December 13, 2018

     83,333      $ 1.53      $ 1.53      $ 0.87  

 

 

(1)     Reflects the fair value of options as estimated at the date of grant using Black-Scholes.
(2)     In October 2018, the exercise price per share of these options was reduced from $2.22 to $1.53 per share.
(3)     As a result of the repricing of these options in October 2018, the per share estimated fair value of these awards will be adjusted as of the date of the repricing using Black-Scholes.

Share-based compensation totaled $1.8 million and $1.3 million for the years ended December 31, 2016 and 2017, respectively, and $1.0 million and $1.0 million for the nine months ended September 30, 2017 and 2018, respectively. As of December 31, 2017 and September 30, 2018, unrecognized compensation expense related to non-vested options, net of related forfeiture estimates, was $1.8 million and $2.0 million, respectively. We expect to

 

81


Table of Contents

recognize our remaining share-based compensation expense as of December 31, 2017 over a weighted-average remaining vesting period of approximately 2.6 years. We expect our share-based compensation expense to increase in future periods due to the potential increase in the value of our ordinary shares and future option grants to new and current employees, directors and consultants.

Determination of the Fair Value of Ordinary Shares on Grant Dates

Following the consummation of this offering, the fair value of our ordinary shares will be determined based on the quoted market price of our ADSs. We have historically granted share options at exercise prices not less than the fair value of our ordinary shares. Our board of directors has determined the fair value of our ordinary shares considering, in part, the work of an independent valuation specialist. Our board of directors determined the estimated per share fair value of our ordinary shares at various dates considering contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-held Company Equity Securities Issued as Compensation , or the Practice Aid.

Our ordinary share valuations were prepared using the Hybrid Method. The Hybrid Method is a hybrid between the Probability Weighted Expected Returns Method and the option-pricing method, or OPM. It is used to estimate the probability weighted value across multiple scenarios, but uses OPM to estimate the allocation of value within one or more of those scenarios. The market approach was selected to determine our enterprise value under various initial public offering, or IPO, and merger and acquisition, or M&A, scenarios, and OPM was utilized to allocate the value between the share classes under an M&A scenario, resulting in a value for the ordinary shares.

The ordinary share value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available, as well as the rights of each class of security. The estimated future value under each outcome is discounted back to the valuation date at an appropriate risk- adjusted discount rate and probability weighted to arrive at an indication of value for an ordinary share. OPM treats common and preferred shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, an ordinary share has value only if the funds available for distribution to equity holders exceeds the value of the preferred security liquidation preference at the time of the liquidity event, such as a strategic sale or a merger.

Each valuation of our ordinary shares depends upon judgments and estimates. The underlying ordinary share value could vary based on changes in these judgments and estimates. Accordingly, investors are cautioned not to place reliance on the foregoing valuation methodologies as an indicator of future share prices. We performed ordinary share valuation, with the assistance of an independent valuation specialist as of: December 15, 2016, resulting in a valuation of $1.38 per share; December 31, 2017, resulting in a valuation of $1.20 per share; May 31, 2018, resulting in a valuation of $2.22 per share; and September 30, 2018, resulting in a valuation of $1.53 per share. In conducting the valuations, the independent valuation specialist considered objective and subjective factors that it believed to be relevant for each valuation conducted in accordance with the Practice Aid, including our best estimate of our business condition, prospects and operating performance at each valuation date. Other significant factors included:

 

   

the prices of our convertible preferred shares sold to investors and the rights, preferences and privileges of our preferred shares, including the liquidation preferences of our convertible preferred shares, as compared to those of our ordinary shares;

 

   

our stage of development and business strategy and the material risks related to our business and industry;

 

   

valuations of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed M&A of guideline companies;

 

   

our results of operations and financial position;

 

   

the composition of and changes to our management team and board of directors;

 

   

the lack of liquidity of our ordinary shares;

 

   

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

   

the likelihood of achieving a liquidity event for the holders of our ordinary shares and share options, such as an IPO or M&A, given prevailing market conditions; and

 

   

the state of the IPO market for similarly situated privately held life sciences companies.

 

82


Table of Contents

The dates of our contemporaneous valuations have not always coincided with the dates of our share option grants. In determining the exercise prices of the share options set forth in the table above, our board of directors considered, among other things, the most recent valuation of our ordinary shares and their assessment of additional objective and subjective factors that were relevant as of the grant dates. The estimates of fair value of our ordinary shares are highly complex and subjective. There are significant judgments and estimates inherent in the determination of the fair value of our ordinary shares. These judgments and estimates include assumptions regarding our future operating performance, the time to complete an IPO or other liquidity event, the related valuations associated with these events, and the determinations of the appropriate valuation methods at each valuation date. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. If we had made different assumptions, our share-based compensation expense, net loss and net loss per share applicable to holders of ordinary shares could have been materially different.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at December 31, 2017:

 

 

 

     TOTAL      LESS THAN
1 YEAR
     1 TO 3 YEARS      3 TO 5 YEARS      MORE THAN
5 YEARS
 
     (in thousands)  

Convertible promissory notes (1)

   $ 50,000      $      $ 50,000      $      $     —  

Operating leases

     1,813        608        1,205                

Term loan facility (2)

     15,000        2,242        12,160        598         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,813      $ 2,850      $ 63,365      $ 598      $  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)     Represents principal amount of convertible notes outstanding as of December 31, 2017. In January 2018, such notes were exchanged for a convertible promissory note in the aggregate amount of $52.4 million. Also in January 2018, we entered into a note purchase agreement pursuant to which we issued convertible promissory notes in an aggregate principal amount of $50.0 million, and in October 2018, we entered into a note purchase agreement pursuant to which we issued convertible promissory notes in an aggregate principal amount of $25.0 million.
(2)     In March 2018, we drew an additional $5.0 million under the term loan facility.

We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants and other vendors for clinical supply, manufacturing or other services. These contracts are not included in the table above as they provide for termination on notice and, therefore, are cancelable contracts and do not include any minimum purchase commitments.

We have entered into several license agreements with Cornell and the IRCM, pursuant to which Cornell and IRCM granted us an exclusive, worldwide rights under patents related to elamipretide, SBT-20 and other technology. In connection with the licenses granted under the original Cornell agreement, we issued Cornell 2,000,000 ordinary shares. With respect to the other Cornell license agreements, we are obligated to pay Cornell upfront license fees of $55,000 and royalties on net sales, if any, by us and our sublicensees of any licensed product. Subject to specified reductions and royalty offsets, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that for licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single-digit to sub-teen double-digit percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the later of the expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale of such licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then, for each unit of product, royalties will only be due under the original Cornell agreement.

We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining the licensed patents, except for

 

83


Table of Contents

any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license maintenance fees in dollars in the mid-five-digits for the original Cornell agreement, and mid-four-digits for each of the other Cornell license agreements starting on the date specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.

Off-balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations of the SEC.

Recent Accounting Pronouncements

Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to the consolidated financial statements includes a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during 2017 that had a material effect on our consolidated financial statements.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies. As a result, our financial statements may not be comparable to the financial statements of reporting companies that are required to comply with the effective dates for new or revised accounting standards that are otherwise applicable to public companies.

Qualitative and Quantitative Disclosures about Market Risk

We are minimally exposed to market risk related to changes in interest rates. As of September 30, 2018, we had cash and cash equivalents of $4.1 million, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are held in short-term money market funds. We do not believe we are materially at risk to sudden drops in interest rates based on the amounts subject to these potential changes.

 

84


Table of Contents

BUSINESS

Overview

We are a clinical-stage biotechnology company focused on the discovery, development and commercialization of novel therapies for diseases involving mitochondrial dysfunction. Mitochondria, found in nearly every cell in the body, are the body’s main source of energy production and are critical for normal organ function. Dysfunctional mitochondria characterize a number of rare genetic diseases, collectively known as primary mitochondrial diseases, and are also involved in many common age-related diseases. We believe our lead product candidate, elamipretide, has the potential to treat both rare genetic and common age-related mitochondrial diseases. We are studying elamipretide in the following primary mitochondrial diseases: primary mitochondrial myopathy, Barth and LHON. We are also studying elamipretide in dry AMD. Our other pipeline candidates include SBT-20, which we are evaluating for rare peripheral neuropathies, and SBT-272, which we are evaluating for rare neurodegenerative disease indications. We have optimized our discovery platform to identify novel mitochondrial targeted compounds, which may be nominated as therapeutic product candidates or utilized as scaffolds to deliver other compounds to mitochondria. Our mission is to be the leader in mitochondrial medicine, and we have assembled a highly experienced management team, board of directors and group of scientific advisors to help us achieve this mission.

Elamipretide is a first-in-class small peptide that targets and binds reversibly to cardiolipin, an essential structural element of mitochondria, stabilizing it under conditions of oxidative stress. This novel mechanism of action has shown potential clinical benefit in both rare genetic and common age-related mitochondrial diseases. We are studying elamipretide in the following indications:

 

   

primary mitochondrial myopathy, for which we are conducting a Phase 3 pivotal clinical trial in North America and in Europe;

 

   

Barth, for which we have conducted a Phase 2/3 clinical trial in the United States;

 

   

LHON, for which we have conducted a Phase 2 clinical trial in the United States and plan to apply for approval to open clinical sites in China in conjunction with a potential Phase 3 clinical trial; and

 

   

dry AMD, for which we have conducted a Phase 1 clinical trial in the United States and plan to initiate a Phase 2b clinical trial in the United States for geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Elamipretide has been generally well-tolerated in over 750 subjects exposed to it systemically and 53 subjects exposed to it topically as of September 30, 2018.

In addition to our clinical development programs for elamipretide, we plan to evaluate SBT-20, our second clinical-stage product candidate, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are developing SBT-272, a preclinical-stage product candidate, for rare neurodegenerative diseases. In addition, our in-house discovery platform has generated a library of over 100 proprietary, differentiated compounds that could have clinical benefit for diseases related to mitochondrial dysfunction and from which we plan to designate potential product candidates. We may also utilize certain of these compounds as part of our carrier platform, in which they could potentially serve as scaffolds to deliver other beneficial compounds to the mitochondria.

As of September 30, 2018, we held exclusive world-wide rights or an option for exclusive world-wide rights under 369 issued patents and 302 patent applications to protect our platform and product candidates. Since licensing elamipretide and SBT-20, we and our collaborators have published approximately 100 peer-reviewed articles highlighting the activity of our compounds in several disease models, including heart failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases. Our compounds have been evaluated in pre-clinical and clinical studies at academic and clinical institutions, including Charité Berlin, Children’s Hospital of Philadelphia, Columbia University, Cornell University, Duke University, Massachusetts General Hospital, Mayo Clinic, Stanford University, University of California Los Angeles, University of California San Diego and University of Washington.

 

85


Table of Contents

Our Pipeline

The following table summarizes our development pipeline, including preclinical studies and ongoing and planned clinical trials of our product candidates we have advanced, or expect to advance in the next year, to clinical development.

 

 

LOGO

 

*   Phase 1/2 clinical trial completed for evaluation of SBT-20 in subjects with early-stage Huntington’s disease; Phase 1 healthy volunteer study also completed.

Our Strategy

We aim to continue the development of mitochondrial medicine to improve the lives of patients with unmet medical needs. There are no treatments approved by the FDA, the EMA or the NMPA for primary mitochondrial myopathy, Barth or dry AMD, and there are no FDA or the NMPA approved treatments for LHON. We are pioneering the development of treatments for these diseases with unmet medical needs and believe we are well-positioned to be among the first to address these largely untapped markets in the United States, Europe and China. Although our initial development focus is on rare primary mitochondrial diseases, we believe that over the longer term there could be significant opportunities with regard to common age-related diseases, including dry AMD. Our strategies include:

Rapidly advance the clinical development of elamipretide in rare mitochondrial diseases

We are developing elamipretide for rare mitochondrial diseases, including primary mitochondrial myopathy, Barth and LHON. We have received Fast Track and Orphan Drug designations in the United States for each of these indications. We are enrolling subjects into our ongoing Phase 3 clinical trial for the treatment of primary mitochondrial myopathy, which we expect to have fully enrolled during the first half of 2019. We have completed the placebo-controlled portion of a Phase 2/3 clinical trial for the treatment of Barth, which did not meet its primary efficacy endpoints, and are continuing to evaluate efficacy endpoints during an open-label extension, in which all subjects are eligible to continue receiving elamipretide. Eight subjects are continuing in the open-label extension phase. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of 2019 to discuss a potential NDA submission. We have completed the placebo-controlled portion of a Phase 2

 

86


Table of Contents

clinical trial for the treatment of LHON, which did not meet its primary efficacy endpoints, and are continuing to evaluate efficacy endpoints during an open-label extension trial, in which all subjects are eligible to continue receiving the study drug. We plan to meet with the FDA for an end-of-Phase 2 meeting regarding this program during the first half of 2019. Following that meeting, we plan to submit a clinical trial application to the NMPA for the inclusion of clinical sites in China in a potential Phase 3 clinical trial, which we believe may help expedite clinical trial enrollment. We will continue to evaluate development of elamipretide for additional rare disease indications.

Accelerate the clinical development of elamipretide for dry AMD

We are advancing development of elamipretide for dry AMD, an age-related disease, which is the leading cause of blindness in older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. We received Fast Track designation in the United States for dry AMD with geographic atrophy in November 2018. Dry AMD would provide a significantly larger potential market size than our rare disease indications if we are able to successfully develop and commercialize elamipretide or one of our pipeline compounds for this indication. In our Phase 1 clinical trial of elamipretide, we observed evidence of clinical benefit for patients with dry AMD. We plan to initiate a Phase 2b placebo-controlled clinical trial for the treatment of patients with geographic atrophy, an advanced form of dry AMD, in the first quarter of 2019.

Expand clinical development efforts in China under new regulatory pathways

The prevalence of primary mitochondrial diseases, such as primary mitochondrial myopathy, Barth and LHON, is thought to be comparable in China to that in the United States because evidence suggests that prevalence does not vary by race or ethnicity for mitochondrial diseases. China has recently implemented policies to expedite regulatory pathways for rare diseases, including publication of a list of rare diseases that includes mitochondrial related diseases such as LHON. For primary mitochondrial myopathy, with respect to which we are currently conducting a pivotal trial in the United States and Europe, and Barth, we may apply to the NMPA for clinical trial waivers and expedited approval if and when we receive FDA approval for these indications. For LHON, we plan to submit a clinical trial application to the NMPA for the inclusion of Chinese clinical sites in our subsequent clinical trials, which may be used to support FDA approval. We believe that inclusion of Chinese sites may help expedite enrollment of clinical trials in rare diseases, as well as progress potential commercial collaboration opportunities for the China market for our product candidates, if approved.

Advance the development of pipeline mitochondrial medicines in rare diseases

We believe that our mitochondrial targeted product candidates may be beneficial in rare diseases involving mitochondrial dysfunction and hope to nominate compounds from our pipeline for select rare disease indications. We plan to evaluate our second clinical product candidate, SBT-20, for which we have completed two Phase 1 clinical safety trials in healthy volunteers, for rare peripheral neuropathies. We are evaluating our lead pipeline compound, SBT-272, for rare neurodegenerative diseases, such as amyotrophic lateral sclerosis, or ALS. We expect to initiate a Phase 1 clinical safety trial for SBT-272 by the end of 2019.

Advance the development of pipeline mitochondrial medicines in common age-related diseases

We believe that mitochondrial medicine may be a promising approach for many common age-related diseases beyond AMD, including neurodegenerative diseases. We believe that the United States, Europe and China are important markets for the clinical development of age-related diseases, and we are evaluating further development of our product candidates and pipeline compounds for age-related indications in these markets.

Expand our carrier platform

We have extensive experience in optimizing delivery of our compounds to the mitochondria, which has been a challenge for other drug delivery technologies. We have demonstrated capability to deliver beneficial payloads to mitochondria by conjugating them with our proprietary compounds, which serve as vectors or carriers to the mitochondria, conferring organelle specificity to promising therapies. These payloads could include small molecules, proteins, oligonucleotides and complex formulations, such as DNA, siRNA and miRNA, nanoparticles and liposomes. This delivery platform, which we call our carrier platform, could enable delivery of missing proteins or even gene therapy to address inherited mitochondrial disorders.

 

87


Table of Contents

Explore potential strategic partnerships and alliances to maximize the value of our development programs

We hold worldwide exclusive rights for our two clinical-stage assets, elamipretide and SBT-20, from the Cornell Research Foundation, Inc. and the Institut de recherches cliniques de Montréal. We have full ownership of our preclinical compound library, including SBT-272. We may explore select strategic partnerships and alliances to support our drug development programs, while preserving significant development and commercialization rights, if we believe that such alliances may allow us to leverage the financial support and therapeutic area expertise and resources of a strategic partner to accelerate the development and commercialization of our drug candidates, particularly in common disease indications. We plan to retain rights to lead the development and commercialization of elamipretide for primary mitochondrial myopathy, Barth, LHON and dry AMD in the United States but will consider collaborating in Europe and China.

Expand our intellectual property portfolio in the field of mitochondrial medicine

We continue to invest in our mitochondrial medicine discovery platform to identify new approaches to improve absorption, distribution, metabolism and excretion of active mitochondrial compounds. We have an active discovery and development program focused on novel compounds targeting mitochondria. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new compounds for mitochondrial targeting and activity characteristics, and our experience working with various models of mitochondrial dysfunction position us to be a leader in next generation development of mitochondrial product candidates that are improved relative to elamipretide and SBT-20. We intend to use our insight into mitochondrial biology to continue developing additional intellectual property as we pursue additional novel therapeutic compounds that target mitochondrial disease. As of September 30, 2018, our intellectual property portfolio included 369 issued patents and 302 patent applications relating to mitochondrial medicine, either wholly-owned or in-licensed, in select commercially relevant jurisdictions, including the United States, key European countries, China, Japan and Canada.

Our Team

We have assembled a highly experienced leadership team with decades of experience leading drug discovery and development programs, including at GlaxoSmithKline, Novo Nordisk, Pfizer and Sanofi Genzyme. Our largest shareholder is a member of the Morningside group, a worldwide investment group.

Background

Mitochondria

Mitochondria, found in almost all human cells, are the “powerhouse of the cell.” Mitochondria produce 90% of our energy by converting food into adenosine triphosphate, or ATP, a molecule that carries energy within cells. Mitochondria produce approximately our body weight in ATP daily, providing the energy that allows cardiac muscles, for example, to beat an estimated 100,000 times every 24 hours, or 2.5 billion times by age 70, without stopping. Our skeletal muscle, heart, kidney, eyes and brains are among the highest producers and users of mitochondrial ATP in our bodies, as ATP is required for their critical functions such as the contraction of skeletal, cardiac, vasculature

 

88


Table of Contents

and lung muscle, maintenance of cell membrane potential, cellular transport and secretion of hormones and neurotransmitters. Normal mitochondrial function is essential for human life and for the proper functioning of many systems in our bodies, as illustrated below.

 

 

 

LOGO

Mitochondria are highly specialized structures. They have their own DNA, called mitochondrial DNA, or mtDNA, which is inherited only from our mothers and is separate and distinct from nuclear DNA, or nDNA. Mitochondria are located within the cell, which is protected by the cell membrane, and they also have their own inner and outer membrane, which create further barriers to the effective delivery of therapeutics to these specialized organelles. In normal mitochondria, the inner mitochondrial membrane, or IMM, is highly folded, creating curves, called cristae. The cristae house the electron transport chain, or ETC, which is composed of five protein complexes responsible for mitochondrial ATP production through a process known as oxidative phosphorylation. The curved architecture of the cristae in the IMM is essential to keep the electron transport chain complexes in optimal close configuration for normal oxidative phosphorylation. Our product candidates target and bind to cardiolipin, an important structural component of the cristae and the IMM, stabilizing it from degradation due to dysfunction caused by inherited or acquired mutations in mtDNA or nDNA. An illustration of a healthy mitochondria and its curved cristae structure is shown below.

 

 

LOGO

Mitochondrial Dysfunction, Aging and Human Disease

Mitochondrial dysfunction most often arises from mutations in mtDNA or nDNA, that can either be inherited or, in the case of mtDNA mutations, can occur as we age. Dysfunctional mitochondria not only produce less ATP, which impairs the normal functioning of our major organ systems, but they also generate unhealthy levels of reactive oxygen

 

89


Table of Contents

species, or ROS, which damages cardiolipin. ROS-mediated damage of cardiolipin can lead to pathological oxidative stress, causing the inflammation, fibrosis and cell death which are causal or contributory to the process of human aging, as illustrated below.

 

 

LOGO

Mitochondrial diseases arising from inherited genetic defects, called primary mitochondrial diseases, are typically rare diseases which can impact multiple organ systems within the body and may lead to reduced lifespan. Symptoms of primary mitochondrial disease, including chronic pain, vision problems, cardiovascular problems and kidney problems, may be compared to “accelerated aging” as described by individuals with the disease and their caregivers.

Although mtDNA is originally inherited from our mothers, it is replicated within cells as mitochondria reproduce and is highly susceptible to mutation within specific cells and organ systems as we age. Mitochondrial diseases arising from these spontaneous mutations in our mtDNA, called secondary mitochondrial diseases, include senescence, neurodegenerative diseases (such as Alzheimer’s, Parkinson’s and amyotrophic lateral sclerosis), heart disease (such as heart failure and atherosclerosis), diabetes, ophthalmic conditions (such as age-related macular degeneration, glaucoma, diabetic retinopathy and diabetic macular edema), cancer, diabetes, skeletal muscle dysfunction (such as sarcopenia) and kidney diseases.

Mitochondrial dysfunction, whether inherited or acquired, often impacts high energy-demanding organs such as the skeletal muscle, cardiac, renal, visual, neurological, central nervous, circulatory or endocrine systems.

Targeting Mitochondrial Dysfunction: Role of Cardiolipin

Our product candidates target cardiolipin in the IMM, stabilizing it under conditions of oxidative stress.

Cardiolipin is a conically shaped phospholipid that plays an important role in establishing the cristae architecture within the IMM and optimizing the function of the ETC. Reduced and damaged cardiolipin content has been observed in many diseases, and a deficiency of normal cardiolipin is thought to be centrally involved in mitochondrial dysfunction.

Cardiolipin is essential for normal oxidative phosphorylation, the process by which ATP is made. Cardiolipin congregates in and around the cristae of the IMM. Cardiolipin’s conical shape is responsible for creating the curved architecture of the cristae. This curvature helps to keep the electron transport chain complexes in close association with one another, increasing the efficiency of ATP production and minimizing the electron leak that leads to oxidative stress, as illustrated below.

 

LOGO

 

90


Table of Contents

Cardiolipin is embedded within the complexes of the ETC, as can be seen above, and its interaction with the ETC complexes facilitates super-complex association, a process by which electron transport chain complexes selectively associate with, or merge with, one another, to optimize the efficiency of the oxidative phosphorylation process.

Correct mitochondrial morphology is also essential for mitochondrial network connectivity and function. Mitochondrial networks exhibit coordination of inner mitochondrial membrane cristae at inter-mitochondrial junctions, as illustrated below.

 

 

LOGO

Mitochondrial network connectivity is associated with cellular signaling pathways, including:

 

   

fusion, in which mitochondria join to spread metabolites, enzymes, and mitochondrial gene products through the mitochondrial network, optimizing mitochondrial function and counteracting the accumulation of mitochondrial mutations during aging;

 

   

fission, or the division of mitochondria, which plays an important role in the removal of damaged organelles;

 

   

mitophagy, a mechanism to remove damaged mitochondria;

 

   

ROS-mediated pathways, including the PI3K/Akt pathway, an intracellular signaling pathway important in regulating the cell cycle, and the tumor necrosis factor alpha (TNF a ) signaling pathway, a proinflammatory pathway involved in various biological processes including regulation of cell proliferation, differentiation, apoptosis and immune response;

 

   

calcium regulation, entailing the transfer of calcium from the endoplasmic reticulum to the mitochondrial to facilitate mitochondrial respiration;

 

   

various transcription factors, which are proteins that control the rate of transcription of genetic information from DNA to messenger RNA; and

 

   

certain protein kinase C (PKC) signaling pathways that can affect cardiomyocyte function and are involved in the induction of mitophagy.

Cardiolipin is susceptible to peroxidation, or degradation, by oxidative stress produced by dysfunctional mitochondria. When cardiolipin is degraded, it can lose its conical shape, compromising the structural integrity of the IMM by leading to a relaxation of the cristae and a drifting apart of the electron transport chain complexes. Shuttling of electrons through the electron transport chain becomes less efficient with the complexes further apart from one another, resulting in lower ATP production and higher ROS generation. Disruption of mitochondrial morphology also impairs fission and fusion, impacting signaling pathways including mitophagy. This can trigger the

 

91


Table of Contents

cellular and extra- cellular cascades involving inflammation, fibrosis and cell death that underlie many diseases. The images below show healthy mitochondria, on the left, with normal cardiolipin content and cristae structure, and unhealthy mitochondria, on the right, with reduced cardiolipin content and collapsed cristae.

 

 

LOGO

Various diseases alter cardiolipin composition and reduce cardiolipin content within the mitochondria. Biopsies from patients with primary mitochondrial disease arising from mitochondrial encephalitis, lactic acidosis and stroke-like episodes, or MELAS, and multiple mitochondrial DNA deletions were found to have approximately 15% less normal cardiolipin composition than normal. Experiments in Barth patient-derived lymphoblastoid cell lines showed 50%-60% less cardiolipin than control cell lines, and work done in Barth patient-derived cardiomyocytes showed up to 75% less cardiolipin than control cardiomyocytes. Aging has also been shown to decrease cardiolipin content in high energy-demanding organs, such as the heart, brain, liver and kidney, as well as the epidermis. Studies suggest that oxidative stress and peroxidation of cardiolipin may contribute to the overall loss of cardiolipin content in these diseases.

Our Approach to Mitochondrial Medicine

We have exclusive worldwide rights to elamipretide and SBT-20, both of which we licensed from Cornell and IRCM, in 2006. The unique mitochondrial activity of elamipretide was first published in The Journal of Biological Chemistry in August 2004. Since licensing elamipretide and SBT-20, we and our collaborators have published approximately 100 peer-reviewed articles highlighting the activity of our compounds in several disease models, including heart failure, kidney disease, skeletal muscle weakness, diabetic retinopathy and neurodegenerative diseases. We have discovered and own over 100 new compounds that also target the mitochondria and form the basis of our broad proprietary pipeline of mitochondrial targeted product candidates. We have focused our development efforts on diseases and conditions that affect the organs in the body that generate significant energy because of the high mitochondrial content found in the cells comprising these organs.

Our lead product candidate, elamipretide, along with several of our pipeline compounds, target and bind reversibly to cardiolipin, stabilizing it under conditions of oxidative stress, thereby preserving the curved architecture of the IMM, as illustrated below.

 

 

LOGO

 

92


Table of Contents

In preclinical studies or clinical trials, we have observed that elamipretide normalized function in dysfunctional mitochondria, including as outlined in the table below. The below table references p-values, which is a conventional statistical method for measuring the statistical significance of clinical trial results. A p-value of 0.05 or less represents statistical significance, meaning that there is a 1-in-20 or less statistical probability that the observed results occurred by chance.

 

FUNCTIONAL FINDING

  

PRECLINICAL STUDY

Reduced peroxidation of, or damage to, cardiolipin    In a study of dogs with induced heart failure published in Circulation: Heart Failure in February 2016, researchers at Henry Ford Health System observed that cardiolipin content was restored to near-normal levels in seven dogs treated with elamipretide versus seven dogs treated with placebo once daily subcutaneous injections for three months (p<0.05).
Increased mitochondrial respiration, the process in which mitochondria produce energy    In a study of human heart tissue explanted from 21 heart transplant subjects with heart failure conducted by researchers at the University of Colorado and presented in 2017, researchers observed that elamipretide significantly improved mitochondrial respiration and increased it to levels comparable to those measured in healthy heart tissue levels, as compared to placebo (p<0.0005).
Improved ATP levels    In a preclinical study at the University of Washington published in Aging Cell in October 2013, two groups of between five and seven 27-months old (equivalent to 80-year-old human) and five-month old (equivalent to 30-year-old human) mice were injected with a single dose of 3 mg/kg of elamipretide or placebo. In the older mice, researchers observed that a single dose of elamipretide significantly increased the maximum capacity of the mitochondria to produce ATP, called ATPmax, to near normal levels, as compared to placebo (p<0.01).
Reduced formation of ROS, or oxidative stress    Researchers at the University of Florida conducted a study, published in the Journal of Applied Physiology in August 2011, of 72 mice, 24 of which received no treatment, 24 of which received placebo and hind limb immobilization to induce muscle atrophy (cast), and 24 of which received 1.5 mg/kg subcutaneous once daily elamipretide and hind limb immobilization (cast), in each case for 14 days. Researchers observed that elamipretide-treated immobilized mice had significantly lower levels of mitochondrial ROS production than the placebo-treated immobilized mice (p<0.05), as well as significantly reduced levels of H2O2, a precursor of ROS, in the soleus and plantaris calf muscles as compared to placebo (p<0.05).
Reduced inflammation, fibrosis and cell death    In a preclinical study at the Mayo Clinic, published in the Journal of the American Heart Association in May 2016, two groups of seven pigs—each with unilateral renal artery stenosis—were injected with a 0.1 mg/kg dose of elamipretide for five consecutive days per week for four weeks or placebo, following percutaneous transluminal renal angioplasty, or PRTA. Four weeks later, researchers observed that elamipretide treated animals demonstrated significantly improved diastolic function, mitochondrial biogenesis improvement and oxidative stress and fibrosis reduction relative to placebo. In a separate preclinical study of pigs with unilateral renal artery stenosis published in the Journal of Hypertension in January 2014, researchers at the Mayo Clinic observed improvements in cardiac function and oxygenation and reductions in apoptosis, oxidative stress, inflammation (p<0.05) and fibrosis (P<0.05), each as compared to placebo, four weeks following PTRA concurrent with a continuous 0.05 mg/kg intravenous infusion of elamipretide.
No observed effect on normal mitochondria    An important safety aspect of elamipretide is that it has not had any observed effect on normal mitochondria. In the study of explanted human heart tissue

 

93


Table of Contents

FUNCTIONAL FINDING

  

PRECLINICAL STUDY

   described above, mitochondrial respiration in the normal donor heart tissue was unchanged following exposure to elamipretide. In the study of young and old mice described above, ATPmax levels in the young mice were unchanged following treatment with elamipretide.

Following treatment with elamipretide and SBT-20, we observed normalization of mitochondrial morphology across various disease models, including models of diabetic retinopathy, as illustrated by the electron microscopic images below, and kidney reperfusion injury, each of which were published in Clinical Pharmacology  & Therapeutics in December 2014.

 

 

LOGO

Our Product Candidates

We believe that our product candidates have significant potential to address the various diseases associated with mitochondrial dysfunction. In addition to our focus on rare diseases, including primary mitochondrial myopathy, Barth and LHON, we have conducted preclinical studies and Phase 1 clinical trials on common diseases and conditions that affect the organs in the body that have significant mitochondrial content to meet their high energy needs; these include the heart, the kidney, the brain (inclusive of the visual system), and active skeletal muscle. We believe that our product candidates may be most relevant for these organs, which are highly dependent on mitochondrial bioenergetics, and we expect these to be key focus areas with respect to some of our pipeline compounds.

We believe that there is significant potential for mitochondrial medicine beyond the indications we are currently studying, including with respect to common diseases associated with aging. In addition to our lead product candidate, we have a growing pipeline of over 100 new compounds in preclinical testing that have been screened for mitochondrial activity, including in some cases preferential mitochondrial targeting characteristics and improved tissue distribution in targeted tissues, such as the heart and brain. Some of these compounds, including SBT-272, may be suitable for oral formulations, and we believe they may be more appropriate for development for common diseases associated with aging. We have also designed proprietary compounds, which we refer to as carriers, that can potentially deliver beneficial payloads to mitochondria; for example, if genetic mutations impact the production of certain proteins necessary for proper mitochondrial function, this proprietary technology might help us deliver those missing proteins to mitochondria.

Elamipretide

Elamipretide is a first-in-class small peptide that targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. Elamipretide has been reported to be well-tolerated in over 750 people exposed to it systemically and 53 subjects exposed to it topically as of September 30, 2018. See “— Elamipretide Safety Data ” below. We are evaluating elamipretide in primary mitochondrial diseases where there is a genetic basis for the underlying mitochondrial dysfunction and where we have the potential for expedited regulatory review, including primary mitochondrial myopathy, Barth and LHON, for which we have received Fast

 

94


Table of Contents

Track and Orphan Drug designations from the FDA. We also believe that elamipretide and our pipeline compounds may be able to address the significant unmet medical needs of larger populations affected by common diseases associated with aging. We are progressing our development of elamipretide for dry AMD with geographic atrophy, for which we have received Fast Track designation from the FDA, and we plan to evaluate clinical trials for other common age-related disease indications in conjunction with our pipeline compounds.

Elamipretide Clinical Programs—Primary Mitochondrial Diseases

We are studying the effect of elamipretide in an ongoing Phase 3 pivotal trial for the treatment of primary mitochondrial myopathy. We plan to meet with the FDA during the first half of 2019 for end-of-Phase 2 meetings to discuss data from the recently completed placebo-controlled portion of our Phase 2/3 clinical trial for the treatment of Barth, which ended in December 2018, and from our Phase 2 clinical trial for the treatment of LHON. Individuals with these primary mitochondrial diseases are born with a genetic mutation that causes mitochondrial dysfunction, leading to clinical signs and symptoms of disease. These diseases can result in reduced lifespan, as in Barth and, in some cases, mitochondrial myopathy, and can impair vital organ functions, such as vision, in the case of LHON, skeletal muscle function, in the case of primary mitochondrial myopathy and Barth, and cardiac function, in the case of Barth.

Primary mitochondrial myopathy (MMPOWER Trials)

We estimate that approximately 40,000 individuals in the United States have mitochondrial myopathy. There are no therapies approved by the FDA, EMA or NMPA for the treatment of primary mitochondrial myopathy. We have received Fast Track designation and Orphan Drug designation from the FDA for the development of elamipretide in this indication.

Primary mitochondrial myopathy is characterized by debilitating skeletal muscle weakness, exercise intolerance and fatigue accompanied by a confirmed molecular genetic diagnosis of primary mitochondrial disease. Individuals with this disease may experience muscle pain, muscle wasting, muscle cramps, rhabdomyolysis, or breakdown of muscle, progressive external ophthalmoplegia characterized by drooping of the eyelids, which often impairs vision, abnormal tilting of the head due to shortening of the neck muscles, difficulty swallowing, low muscle tone (also known as floppy infant syndrome), respiratory insufficiency and reduced deep tendon reflexes. These symptoms can result in significant deterioration of quality of life, such that routine activities of daily living (such as walking, climbing stairs, vacuuming, reaching, driving, reading or carrying out normal job functions) are limited by poor endurance and easy fatigue. Severely impacted individuals can lose their ability to walk entirely.

Morphology of mitochondria in individuals with primary mitochondrial myopathy is abnormal, and, unlike mitochondria in normal skeletal muscle cells, as shown below on the left, can be characterized by inclusion of abnormal rectangular-shaped, crystal-like structures, as shown below on the right.

 

 

  LOGO      LOGO
  Normal skeletal muscle mitochondria      Mitochondrial myopathy mitochondria

We are assessing elamipretide in subjects with primary mitochondrial myopathy irrespective of their specific primary mitochondrial disease genotype. This strategy offers us the potential to treat all individuals with genetic mitochondrial disease who experience myopathic symptoms, estimated at greater than 90% of the primary mitochondrial disease population, which is a much larger target market than any specific genetic mutation or syndrome within it.

 

95


Table of Contents

We are currently enrolling subjects with primary mitochondrial myopathy in MMPOWER-3, a Phase 3 clinical trial, in which we have enrolled 86 out of a targeted 202 subjects in the United States, Canada and Europe as of September 30, 2018. We have established a pre-trial registry for MMPOWER-3 at our Phase 3 sites, and have registered over 400 subjects who have been pre-screened for eligibility for MMPOWER-3. We expect that this registry will expedite timely enrollment of MMPOWER-3 since many eligible subjects are already identified.

We have completed two clinical trials in this indication, MMPOWER, completed in April 2016, and MMPOWER-2, completed in March 2017. In MMPOWER, we observed an improvement in the distance walked in six minutes (the six-minute walk test, or 6MWT) in subjects treated with elamipretide—a primary efficacy endpoint of the study and a standard accepted test of functional exercise capacity. In MMPOWER-2, we observed an improvement in the 6MWT in subjects treated with elamipretide, a primary efficacy endpoint of the study, and in secondary efficacy endpoints, including several endpoints measuring fatigue, a hallmark symptom of primary mitochondrial myopathy. Twenty-four subjects remain enrolled in an ongoing open-label extension trial, in which they continue to receive once daily elamipretide and during which we continue to collect safety and select efficacy data, primarily to add to our safety database.

MMPOWER-3

MMPOWER-3 is a Phase 3, double-blind, placebo-controlled, parallel group trial enrolling an estimated 202 subjects ranging from 16 to 80 years old, with primary mitochondrial myopathy at up to 28 sites in North America and Europe, including the United States, Canada, Denmark, Hungary, Italy, Germany and the United Kingdom to evaluate the efficacy and safety of once daily subcutaneous injections of elamipretide. Subjects are randomized in a one-to-one ratio to either 40 mg once daily subcutaneous elamipretide or placebo injection for an initial treatment period of 24 weeks, following which subjects will be eligible to participate in an open-label extension trial.

The objectives of the trial are to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with primary mitochondrial myopathy. Subjects will complete assessments including the 6MWT, at initial screening, at baseline (prior to receiving the first dose), at week four, at week 12 and at week 24, which is the end of treatment. In addition, the primary mitochondrial myopathy symptom assessment, or PMMSA, a patient reported outcome questionnaire developed based upon interviews of individuals with primary mitochondrial disease to measure the fatigue and muscle weakness that are hallmark symptoms of the disease, will be completed daily. Based on observations from our MMPOWER-2 clinical trial and post-hoc observations from our MMPOWER clinical trial, which suggest that subjects walking more than 100 meters (because lesser distances may be indicative of co-morbidities in this population) and less than 450 meters (because an above 500 meter 6MWT distance is not indicative of impairment) at baseline on the 6MWT are more likely to improve in meters walked following elamipretide treatment, we have endeavored to enrich our Phase 3 population by excluding individuals who walk less than 100 meters or more than 450 meters at their screening or baseline visits.

The primary efficacy analysis will compare mean changes as between the elamipretide and placebo treatment groups in:

 

(i)

distance walked on the 6MWT from baseline to the week 24 visit, and

 

(ii)

PMMSA Total Fatigue score, measuring tiredness at rest, tiredness during activities, muscle weakness at rest and muscle weakness during activities, from baseline to the week 24 visit.

The 6MWT and PMMSA Total Fatigue score together comprise a family of primary endpoints. The trial design contemplates a statistical analysis under which we will meet our primary endpoint if both endpoints are met at the p < 0.05 level of significance, or if one of the two is met at the p < 0.025 level of significance. The PMMSA Total Fatigue score not only measures improvements in the fatigue and weakness, which are the hallmark clinical symptoms of the disease, but it was also highly sensitive to change (p=0.0006) in our prior 30-patient Phase 2 clinical trial, MMPOWER-2.

 

96


Table of Contents

Secondary endpoints include the following, listed in order of interest:

 

ASSESSMENT

  

DESCRIPTION

Neuro-QoL Fatigue Short- Form (Neuro-QoL Fatigue)    A standard questionnaire developed by the National Institutes of Health to assess fatigue in neuromuscular indications, with respect to which a reduction in score indicates reduced fatigue.
PMMSA Most Bothersome Symptom    The first-time subjects complete the PMMSA, they are asked to identify which of the 10 items on the questionnaire is the “most bothersome” symptom of their disease; this is then assessed at trial completion to ascertain any changes in this symptom of interest. A similar endpoint approach is endorsed in the FDA’s Guidance on Developing Drugs for Acute Treatment of Migraine (2014). By focusing on the most severe symptoms for each subject, there is inherent clinical relevance in the individualized symptom endpoint.
Patient global impression scale of change    A single question allowing the patient to assess his or her general health.
Clinical global impression scale of change    A single question allowing the physician or caregiver to assess the patient’s general health.
PMMSA Total Fatigue During Activities    Comprised of two questions from the PMMSA, assessing tiredness during activities and muscle weakness during activities.
Neuro-QoL Activities of Daily Living    Specific questions from the Neuro-QoL Fatigue long-form questionnaire, a 19-question questionnaire developed by the National Institutes of Health, which assess the impact of fatigue on subjects’ activities of daily living. The FDA requested that we include activities of daily living questions in MMPOWER-3, and indicated that it would be appropriate for us to utilize the activities of daily living questions from the Neuro-QoL which were responsive to change in MMPOWER-2, including questions 4 (I was too tired to do my household chores), 6 (I was frustrated by being too tired to do the things I wanted to do), 8 (I had to limit my social activity because I was tired), 9 (I needed help doing my usual activities because of my fatigue), 12 (I had trouble finishing things because I was too tired), 13 (I was too tired to take a short walk), 18 (I had to limit my social activity because of weakness) and 19 (I had to force myself to get up and do things because I was physically too weak).

We have registered over 400 subjects with signs and symptoms of primary mitochondrial myopathy in a multi-national pre-trial registry, participation in which is a prerequisite to participation in MMPOWER-3. As of September 30, 2018, 86 subjects were enrolled in MMPOWER-3, and 11 sites in the United States, one site in Canada and two sites in Europe, out of an anticipated 28 sites, were initiated for enrollment. Our goal is to achieve full enrollment in the trial in early 2019.

MMPOWER-2

We initiated MMPOWER-2, our second clinical trial for the treatment of individuals with primary mitochondrial myopathy, with the goals of understanding whether subjects with primary mitochondrial myopathy would tolerate once daily subcutaneous dosing of elamipretide, and exploring efficacy endpoints in addition to the 6MWT that we could use to assess potential benefit in our Phase 3 pivotal trial.

MMPOWER-2 was a Phase 2, double-blind, placebo-controlled crossover trial to evaluate the safety and efficacy of once daily subcutaneous administration of elamipretide in subjects previously enrolled in MMPOWER. The trial was conducted at Massachusetts General Hospital, University of California-San Diego, University of Pittsburgh Medical Center and Akron Children’s Hospital. Thirty of the 36 MMPOWER subjects enrolled in MMPOWER-2, although one subject discontinued the trial in the second four-week treatment period due to injection site pain. Subjects were randomized in a one-to-one ratio to either 40 mg once daily subcutaneous elamipretide, which is slightly lower than the average dose exposure achieved in the high dose cohort in MMPOWER and equivalent to the dose we are testing

 

97


Table of Contents

in MMPOWER-3, or placebo injection for an initial treatment period of four weeks. After treatment period one, treatment was discontinued for a four-week wash-out period. The subjects were then crossed over to the other treatment arm for a second four-week treatment period. After finishing both treatment periods, subjects were eligible to continue on elamipretide during an open-label extension trial, in which we continue to assess safety to support a potential regulatory submission and conduct limited efficacy assessments.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with primary mitochondrial myopathy. Subjects completed assessments, including the 6MWT, at initial screening, at baseline (prior to receiving the first dose) at week four, the last visit for the first treatment period at week eight, the beginning of the second treatment period at week 12, the end of the second treatment period and at week 14.

Efficacy endpoints were assessed by comparing values for subjects randomized to elamipretide at the end of each treatment period to values for subjects randomized to placebo at the end of each treatment period; exploratory biomarkers and activity counts were also evaluated. Although the primary efficacy endpoint was difference in the 6MWT from end of treatment on elamipretide to end of treatment on placebo, an important objective in conducting this trial was to identify other efficacy endpoints which might be sensitive to change, which we have now brought forward into MMPOWER-3.

We saw concordance of the evidence favoring elamipretide across multiple endpoints, as shown on the forest plot below, in which the treatment effect across various primary and secondary endpoints was rescaled to a common standard error unit of one. Where the lines showing treatment effect extend to the right of the dotted vertical line, those endpoints moved favorably in response to elamipretide treatment. We believe it is informative to present the data in this fashion because we understand that regulatory agencies, such as the FDA, may perceive that concordance of benefit across endpoints may provide more persuasive evidence of a treatment effect. As shown below, most endpoints favored elamipretide.

 

 

LOGO

In the elamipretide-treated group, we observed a 19.8-meter improvement on the distance walked on the 6MWT relative to the placebo-treated group, although this was not statistically significant (p=0.0833).

We observed that the subjects who were more impaired on the 6MWT at baseline, walking under 450 meters, may derive greater benefit from elamipretide treatment, as shown below. We incorporated this observation into our

 

98


Table of Contents

MMPOWER-3 trial by excluding subjects who walk 450 meters or more on the 6MWT at screening or baseline, which we believe may enrich MMPOWER-3 trial for subjects more likely to respond on this endpoint.

 

 

 

BASELINE WALK DISTANCE

   CHANGE (LEAST-SQUARED-MEANS DIFFERENCE)
ELAMIPRETIDE VS. PLACEBO

Low Walker (under 450m) (n=22)

   24.3 meters

High Walker (at/over 450m) (n=8)

     8.6 meters

 

 

The PMMSA Total Fatigue score was designed to assess the fatigue and weakness that are the hallmark symptoms of primary mitochondrial myopathy. The worst (most fatigued) possible score was 16; the best (least fatigued) possible score was four. Subjects treated with elamipretide reported a clinically meaningful reduction in total fatigue from their baseline values (2.2 point, or 19%, reduction relative to baseline) and as compared to placebo (1.7 point reduction relative to placebo)(p=0.0006). Notably, subjects did not report meaningful changes in their fatigue while on placebo (0.1 points) and, for subjects on elamipretide, their fatigue levels increased toward baseline levels after withdrawal of elamipretide, as shown below.

 

 

LOGO

 

99


Table of Contents

Our interpretation of the other secondary endpoints is summarized below.

 

ENDPOINT

   P-VALUE   

INTERPRETATION

Neuro-QoL

Fatigue

   0.0115    The Neuro-QoL Fatigue Short-Form showed a reduction in fatigue in the elamipretide-treated population, with a least-squared-means difference T-score, a converted standardized score, of (-4) (p=0.0115) relative to placebo.

PMMSA Fatigue

During

Activities

   0.0018    The worst (most fatigued) possible score was an 8; the best (least fatigued) possible score was a 2. Comparing the values from the final week of treatment period 1 and the final week of treatment period 2, elamipretide-treated subjects reported lower Total Fatigue During Activities relative to placebo- treated subjects, scoring a least-squared-means difference of (-0.8).
PMMSA Most Bothersome Symptom    0.0111    We observed an improvement in the subjects’ “most bothersome” symptom of their disease.
Triple Time Up and Go Test (TUG)    0.8423    The TUG showed no difference between those treated with elamipretide and those receiving placebo; however, subjects were not found to be significantly impaired on this assessment at baseline relative to healthy historic controls. This assessment was also completed in less than one-minute, which may be sub-optimal for measuring endurance-related skeletal muscle weakness and fatigue.
Patient global impression scale    0.0421    Elamipretide-treated subjects reported a least-squared-means (-0.28) improvement in their general health relative to placebo.
Physician global impression scale    0.0636    Physicians reported a least-squared means (-0.26) improvement in subject’s general health, however this was not statistically significant.

Based on FDA feedback, we developed our Phase 3 secondary endpoint, the Neuro-QoL Activities of Daily Living, consisting of the following activities of daily living questions from the Neuro-QoL questionnaire developed by the National Institutes of Health which were responsive to change in MMPOWER-2, as shown below.

 

 

 

QUESTION

   ELAMIPRETIDE
(N =30)
     PLACEBO
(N = 30)
     P-VALUE  

I was too tired to do my household chores

     2.6        3.2        0.0025  

I was frustrated by being too tired to do the things I wanted to do

     2.8        3.3        0.0296  

I had to limit my social activity because I was tired

     2.6        2.9        0.1652  

I needed help doing my usual activities because of my fatigue

     2.3        2.7        0.0520  

I had trouble finishing things because I was too tired

     2.5        3.0        0.0189  

I was too tired to take a short walk

     2.4        3.0        0.0025  

I had to limit my social activity because of weakness

     2.2        2.7        0.0145  

I had to force myself to get up and do things because I  was physically too weak

     2.2        2.8        0.0260  

 

 

Twenty-seven of the 29 subjects who completed MMPOWER and/or MMPOWER-2 enrolled in MMPOWER-OLE, an open-label extension trial we are conducting which will contribute to our safety database in this population and includes periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. In addition, one of the subjects from MMPOWER who did not participate in MMPOWER-2 has subsequently enrolled in MMPOWER-OLE. While we have not observed meaningful changes in 6MWT during ongoing assessments, we have observed maintenance of the reduced PMMSA Total Fatigue through 12-months of therapy (which 24 subjects have now completed) during this open-label extension trial.

MMPOWER

MMPOWER was a Phase 1/2, multiple ascending dose, double-blind, placebo-controlled trial with 36 subjects between the ages of 16 and 65 with genetic confirmation of mitochondrial disease and a clinical diagnosis of primary mitochondrial myopathy. The trial was conducted at Massachusetts General Hospital, University of

 

100


Table of Contents

California-San Diego, University of Pittsburgh Medical Center and Akron Children’s Hospital. Nine subjects received a low dose of elamipretide (0.01 mg/kg hour, for an average actual drug exposure of 1.4 mg), nine subjects received a mid-dose of elamipretide (0.10 mg/kg hour, for an average actual drug exposure of 12.7 mg), nine subjects received a high dose of elamipretide (0.25 mg/kg hour, for an average actual drug exposure of 29.6 mg) and nine subjects received a placebo dose once daily by two-hour IV infusion over a treatment period of five days. The high dose of elamipretide tested in MMPOWER is slightly lower than the 40mg subcutaneous dose we tested in MMPOWER-2 and are testing in MMPOWER-3.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of elamipretide in individuals with primary mitochondrial myopathy. Subjects completed efficacy assessments, including the 6MWT (the primary efficacy endpoint) at initial screening, at baseline (prior to receiving the first dose), on the fifth day (after the last dose), and on the seventh day (two days after the last dose).

We observed a dose-dependent increase in six-minute walk distance (p=0.0142 by linear trend test) after five days of treatment. The data showed that subjects who received the high dose of elamipretide, which was the primary dose of interest, walked an average of 64.5 meters further after five days of treatment with elamipretide than they walked before receiving elamipretide. As adjusted for the 20.4 meter improvement observed in the placebo-treated group, this represents a 44.1-meter least-squares mean improvement relative to placebo (p=0.053). A post-hoc adjustment for gender and baseline distance walked, the factors most responsible for variability within the data, as published in Neurology in March 2018 by our principal investigators, demonstrated a 51.2-meter least-squares mean improvement relative to placebo (p=0.03), as depicted below.

 

 

LOGO

As noted above, a post-hoc analysis of the data revealed that subjects’ performance on the 6MWT at baseline was predictive of how much they may improve after elamipretide treatment (a treatment by baseline interaction, with an R-squared value of 0.42, meaning approximately 42% of the variability in the data as a whole is explained by the model). This analysis demonstrated that the more impaired subjects, walking less than 450 meters at baseline, were more likely to improve with elamipretide, whereas less impaired subjects, walking more than 450 meters at baseline, had less potential for improvement. A healthy individual can typically walk between 500 and 600 meters on the 6MWT, which may suggest that those walking over 450 meters at baseline are not substantially impaired in their ability to perform this assessment. As discussed above, we observed similar preferential benefit for more impaired subjects in MMPOWER-2 and have accordingly enriched our MMPOWER-3 trial population by excluding subjects who walk more than 450 meters on the 6MWT at screening or baseline.

We explored other secondary and exploratory efficacy endpoints in MMPOWER, including questionnaires and biomarkers, but we did not observe meaningful findings in these other endpoints.

Elamipretide Clinical Programs—Barth Syndrome

Barth is estimated to affect between one in 300,000 to one in 400,000 births in the United States. There are no therapies approved by the FDA, EMA or NMPA for the treatment of Barth. We have received Fast Track designation and Orphan Drug designation from the FDA for the development of elamipretide in Barth.

 

101


Table of Contents

Barth typically presents in infancy or early childhood. The disease is characterized by reduced muscle tone, muscle weakness, undeveloped skeletal muscles, delayed growth, fatigue, varying degrees of physical disability, heart muscle weakness, or cardiomyopathy, which makes it harder for the heart to pump blood to the rest of the body, and low white blood cell count, or neutropenia, which can compromise the body’s ability to fight off infections. Some individuals with Barth require one or more heart transplants, including during infancy. Implantable cardioverter defibrillators may be used to prevent sudden death due to life-threatening ventricular arrhythmias, and other heart failure medications including ACE-inhibitors and beta blockers may also be used to help manage cardiac symptoms. In addition to medical and surgical intervention, individuals with Barth may require physiotherapists and occupational therapists, speech and language therapists, psychologists and educational support workers. Barth can be a lethal infantile and early childhood disease, and mortality is highest in the first four years of life. Although improvements in the management of the disease have increased survival for some patients, with reports of individuals with Barth living into their late 40s and a single individual with Barth reported as surviving to age 51, the disease nevertheless is associated with premature death.

Barth is caused by a genetic mutation in the TAZ gene that leads to decreased production of tafazzin, an enzyme required to assemble cardiolipin; as a result there is an abnormal composition of cardiolipin, particularly in the heart and skeletal muscle mitochondria in individuals with Barth. Barth patients have less tetralinoleylcardiolipin, or L4-CL, and increased amounts of monolysocardiolipin, or MLCL, than healthy subjects, and the disease can be diagnosed by the ratio of MLCL to L4-CL, called the MLCL:CL ratio or genetic testing. MLCL, a phospholipid found in the inner mitochondrial membrane, is considered to be an immature form of cardiolipin. As illustrated below, MLCL is structurally differentiated from L4-CL due to its lack of a fourth acyl chain, which alters the typical conical structure of the lipid causing alterations to mitochondrial morphology. These morphological alterations result in destabilization of respiratory chain supercomplexes and increased oxidative stress. Studies have shown increased susceptibility of cardiolipin to peroxidation in Barth patient derived pluripotent stem cells, leading to increased accumulation of MLCL.

 

102


Table of Contents

The images of lymphoblast mitochondria below indicate that, compared to normal mitochondria, the mitochondria of individuals with Barth have unhealthy morphology, including a lack of inner membranes, a poor alignment of cristae, which are the curves of the IMM, and swollen or collapsed segments of cristae.

 

 

LOGO

The Barth Syndrome Foundation, an advocacy group for Barth awareness and research, asked us to conduct a clinical trial of elamipretide for Barth. As the mechanism of elamipretide is to bind reversibly to cardiolipin, which is deficient in individuals with Barth, we undertook preclinical work to better characterize the safety profile of elamipretide for Barth as well as to gain insight into whether there would be adequate target engagement for elamipretide given the severe depletion of cardiolipin that characterizes this disease. Analyses of cardiolipin levels in Barth patient-derived lymphoblasts have shown up to 60% lower levels of cardiolipin than in healthy control cells, as shown below; this cardiolipin deficit has been found to range to up to 95% in other Barth cell lines or animal models.

 

LOGO

 

103


Table of Contents

Preliminary preclinical results from a study in mice in which the TAZ gene was “knocked down” did not indicate any safety concerns.

Additionally, as shown below, ex vivo studies of elamipretide in cardiomyocytes, or heart cells, derived from individuals with Barth demonstrated elamipretide’s potential to improve Barth oxygen consumption rate, or OCR, an indicator of mitochondrial respiration, despite an approximate 80% reduction in cardiolipin levels. In this study, the ‘resting’ period, which represents a ‘basal’ state, is when substrates required for ATP production are present and respiration and ATP production is occurring. Then, oligomycin, an ATP synthase inhibitor, is added to block ATP production. At this stage, respiration represents requirements to keep the mitochondrial membrane potential in place without energy required to synthesize ATP. Next, inhibitors (Antimycin and Rotenone) are added to block respiration completely. Maximal respiration was achieved by the addition of carbonilcyanide p-triflouromethoxyphenylhydrazone, or FCCP, an uncoupler of mitochondrial oxidative phosphorylation which stimulates increased respiration.

 

 

LOGO

In laboratory experiments, elamipretide interacted with the abnormal MLCL found in Barth cardiac and skeletal muscle tissue in a similar ratio as it interacted with normal cardiolipin, which is believed to be a two cardiolipin to one elamipretide molar ratio. In another experiment, lipid vesicles that model the IMM were synthesized, and the effect of membrane lipid composition on membrane structure (area) was determined. Cardiolipin comprises approximately 20% of inner membrane lipids, and the addition of cardiolipin was observed to increase membrane area, consistent with the cone-shaped structure of cardiolipin. Losses of cardiolipin were modeled based on changes typically seen in diseases including heart failure and renal disease and the loss of cardiolipin was associated with decreased membrane area. We observed that elamipretide-mediated aggregation of cardiolipin ameliorated the loss by acutely restoring the membrane area. In diseases characterized by pronounced loss of cardiolipin such as Barth, there is a profound decrease in membrane structure that was attenuated with elamipretide. These observations suggest that elamipretide’s therapeutic benefit may be more pronounced or more rapidly observed in subjects with more moderate cardiolipin loss.

While Barth patients have some normal cardiolipin, the ratio of abnormal MLCL to normal cardiolipin (the MLCL:CL ratio) may vary from patient to patient. For example, in the study we conducted with Barth patient-derived cardiomyocytes, described above, we observed an approximate 80% reduction in normal cardiolipin, whereas other studies of patient-derived lymphoblasts have shown an approximate 60% reduction in normal cardiolipin, as discussed above. Up to 95% reduction has, at times, been reported in the literature.

The MLCL:CL ratio has been observed to correlate with functional impairment; patients with a lower MLCL:CL ratio are typically less impaired than those with a higher MLCL:CL ratio. For example, a prior observational study of 34 Barth patients suggests that the MLCL:CL ratio is inversely correlated with performance on the 6MWT (p=0.00014). Accordingly, if elamipretide’s reaction to normal cardiolipin is critical to therapeutic effect, such therapeutic effect may also vary among patients, and as a result may only benefit a subset of such patients.

We initiated TAZPOWER, a clinical trial of elamipretide for individuals diagnosed with Barth, in the third quarter of 2017 at Johns Hopkins. TAZPOWER is a double-blind, placebo-controlled cross-over trial to evaluate the efficacy of

 

104


Table of Contents

once daily subcutaneous administration of elamipretide in 12 individuals who are 12 years of age or older and have been diagnosed with Barth. Subjects were randomized in a one-to-one ratio to either 40 mg elamipretide administered daily by subcutaneous injection or placebo for an initial 12-week treatment period. After this initial treatment period, treatment is discontinued for a four-week wash-out period, following which the subjects cross over to the other treatment arm for a second 12-week treatment period.

Subjects enrolled in TAZPOWER are eligible for participation in an optional open-label extension trial that will contribute to our safety database and may include periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. We have completed the placebo-controlled portion of TAZPOWER, and are continuing to assess efficacy endpoints during the open-label extension phase, in which eight subjects are currently enrolled.

The objectives of the trial were to evaluate the safety, tolerability and efficacy of once daily subcutaneous elamipretide injections in individuals with Barth. During each of treatment periods one and two, subjects completed assessments including the 6MWT at the beginning of each treatment period, four weeks into each treatment period, and at the end of each treatment period; certain assessments were also conducted at initial screening, and at a follow-up visit, four weeks following the end of the second treatment period. In addition, the Barth Syndrome Symptom Assessment, or BTHSA, a patient reported outcome questionnaire developed based upon interviews of individuals with Barth to measure the fatigue and muscle weakness associated with the disease, was completed by subjects daily, and assessed based on the average of seven days of daily values preceding the assessment date.

Elamipretide was reported to be well-tolerated by patients with Barth. Other than injection site reactions, which were experienced in both groups but with higher frequency in the elamipretide treatment group, there were overall less events reported during the elamipretide treatment periods of the trial, as compared to the placebo treatment periods.

TAZPOWER did not meet its primary efficacy endpoints of (i) change in the 6MWT between end of treatment on elamipretide and end of treatment on placebo or (ii) change in Total Fatigue on the BTHSA, which is composed of three questions from the BTHSA, assessing tiredness at rest and during activities and muscle weakness during activities, between end of treatment on elamipretide and end of treatment on placebo. With respect to the Clinical Global Impression of Change, a secondary endpoint involving an overall assessment by the investigator of each subject’s Barth symptoms, we observed an improvement between end of treatment on elamipretide and end of treatment on placebo, with the investigator reporting positive change for nine out of the 12 patients over the elamipretide treatment period. Additionally, eight of 11 caregivers completing the Caregiver’s Global Impression of Change also reported positive changes in Barth symptoms during the elamipretide treatment period.

 

105


Table of Contents

We conducted a prespecified subgroup analysis intended to assess whether elamipretide’s association with normal cardiolipin is related to therapeutic effect, that is, whether elamipretide may provide greater benefit to a subset of Barth patients who have lower MLCL:CL ratios. This entailed an assessment of the six patients above (“high ratio subjects”) and six patients below (“low ratio subjects”) the median MLCL:CL ratio of the subjects enrolled in TAZPOWER, which was 17.3. In this subgroup analysis, we observed a correlation between improvements in 6MWT and baseline ratios, as shown below. We believe this suggests that elamipretide therapy may preferentially affect low ratio subjects.

 

LOGO

We assessed performance between high ratio and low ratio subjects on other key efficacy endpoints. From this analysis, we observed that low ratio subjects showed overall greater improvement on elamipretide therapy than on placebo, particularly as compared to high ratio subjects, as reflected below. We believe these signals, coupled with data from the ongoing open-label extension portion of the trial, may support submission of an NDA for this indication. We plan to discuss a potential NDA submission with the FDA at our end-of-Phase 2 meeting during the first half of 2019.

 

LOGO

The 21st Century Cures Act, or the Cures Act, elevates the role of the patient in the development of drugs, giving patients a greater voice when developing treatments for their diseases. Under this Act, sponsors are encouraged to incorporate the patient experience in their regulatory submissions. Accordingly, all subjects participating in the TAZPOWER trial were eligible to participate in a qualitative study in which we conducted videotaped interviews with trial participants through a smartphone application to explore their experiences during and after the trial and to

 

106


Table of Contents

better understand the treatment outcomes that are meaningful to them. For subjects participating in open-label extension, interviews were conducted after three-months of open-label extension therapy, unless sooner terminated. As of November 30, 2018, nine of the 12 TAZPOWER subjects and/or their caregivers have participated in this study. Interview questions addressed life before elamipretide injections (shots), daily life today (i.e., as of the date of each participant’s interview), fatigue and weakness today, other aspects of Barth today, shots: round 1, stopping the shots, and shots: round 2. Eight of the nine participating subjects reported improvement while on elamipretide therapy during open-label extension, and six of those eight subjects correctly identified during which of the two double-blind treatment periods they were receiving elamipretide.

Subjects characterized the improvement in fatigue in relation to their activities of daily living and quality of life. For example, one subject was able to go swimming and hiking with his friends at Boy Scout camp, which he had not previously been able to do. Another subject was able to walk his dog without stopping to rest and required less recovery time from that exertion. Two subjects reported being able to participate in physical education class at school instead of having to sit out. Several subjects reported increased appetite.

Two of the four study participants randomized to elamipretide in the placebo-controlled portion of the TAZPOWER trial reported reversion to their baseline symptoms quickly after withdrawal of therapy during the washout period. One reported a perceived decline in quality of life less than 48 hours from stopping therapy, which he characterized as depressing. Another reported that his grades declined because he found it harder to focus and was falling asleep at school again.

We are observing continued improvement in distance walked on the 6MWT during the open-label extension portion of the TAZPOWER trial, in which 10 subjects enrolled and two subjects have completed 36 weeks of treatment, an additional five subjects have completed 24 weeks of treatment, and an additional two subjects have completed 12 weeks of treatment, as shown below. We are conducting a review of the natural history of Barth to evaluate this and any other longitudinal trends we may observe during open-label treatment. This will be a retrospective, non-interventional, descriptive chart review study to characterize the clinical characteristics, course of disease progression, and healthcare utilization for patients diagnosed with Barth and to estimate historical control data for non-elamipretide treated individuals, including the natural history of TAZPOWER subjects.

 

 

LOGO

We plan to request an end-of-Phase 2 meeting with the FDA, which we expect to have during the first half of 2019. The objective of the meeting will be to discuss our plan to submit an NDA for elamipretide for the treatment of Barth and to seek alignment regarding our regulatory path forward. We believe the data from our MMPOWER program may be supportive of our Barth development efforts. We also believe our development efforts in Barth may support the development of elamipretide in primary mitochondrial myopathy, given that patients with Barth have even lower levels of cardiolipin and we have still seen evidence of target engagement. We also believe that our experience from a compassionate use protocol for an infant with Sengers syndrome may provide further support.

Elamipretide Compassionate Use – Sengers syndrome

Sengers syndrome (Sengers) is an autosomal recessive mitochondrial disorder characterized by early onset hypertrophic cardiomyopathy, congenital cataracts and hypotonia. The prevalence of Sengers is unknown, with

 

107


Table of Contents

approximately 40 cases having been reported worldwide as of November 30, 2018. Approximately half of the patients diagnosed with Sengers die within the first year of life due to cardiac failure associated with a fatal neonatal form of the disease. Sengers and Barth are thought to have overlapping phenotypes since both lead to depletion of mitochondrial cardiolipin and both are known to cause severe hypertrophic cardiomyopathy.

In June 2018, we collaborated with doctors at the Department of Pediatrics, Barnaspitali Hringsins and the Department of Genetics and Molecular Medicine, Landspitali University Hospital, both in Reykjavik, Iceland, and the McKusick-Nathans Institute of Genetics Medicine at Johns Hopkins University to implement an elamipretide compassionate care protocol for a 3-month old infant diagnosed with the neonatal form of Sengers being treated at the neonatal intensive care unit at Landspitali University Hospital. In the first few months of life, the child was noted to have severe hypertrophic cardiomyopathy, bilateral cataracts and significant hypotonia. Average published survival of children presenting at this age is approximately 4.2 months.

The child received 0.25 mg/kg/day of elamipretide intravenously for the first six weeks, and thereafter received 0.5 mg/kg/day elamipretide therapy once daily. The patient’s cardiac function improved in the first few weeks of treatment and remained stable through November 30, 2018, with a 53% increase in left ventricular internal dimension in end-diastole and stabilization of left ventricle septal and posterior wall thickness despite a 40% weight gain due to normal growth. After approximately six months of elamipretide therapy, the patient improved from markedly ill to borderline ill as reported by a clinical global impression of severity of illness assessment, as shown below. This assessment, which is based on weekly evaluations, suggests that the patient improved at over 60% of the evaluations conducted since starting elamipretide therapy and was only thought to worsen on one occasion. The patient was subsequently discharged to home. Elamipretide appeared to be well-tolerated by this patient with no obvious associated side effects. The treating physician expressed a belief that elamipretide contributed to the patient’s disease stabilization.

After a surgical procedure in December 2018, prior to which the patient had been stable, the patient experienced severe cardiac decompensation and multi-organ failure and succumbed to his disease at approximately nine months of age.

 

LOGO

Elamipretide Clinical Programs—LHON

We estimate that approximately 10,000 individuals in the United States have LHON. Currently, there are no treatments approved by the FDA or the NMPA for the treatment of LHON. Raxone (idebenone), a synthetic form of Coenzyme Q10, has been approved by the EMA for the treatment of LHON, although actual availability varies by

 

108


Table of Contents

country. Raxone has orphan designation, and its marketing authorization was granted by the EMA under its authority to grant marketing authorization under “exceptional circumstances” due to the lack of comprehensive data on efficacy and safety.

We have received Fast Track status and Orphan Drug designation from the FDA for the development of elamipretide for this indication. China has recently included LHON as an orphan disease on its published list of orphan diseases.

We have conducted a Phase 1 clinical trial of elamipretide topical ophthalmic drops for this indication, in which we observed some trends in response rates suggestive of therapeutic effect, for which we are continuing to assess efficacy data in an ongoing open-label extension trial. We plan to expand the open-label portion of this trial to include additional patients in the United States and China. We have engaged regulatory advisors in China to begin preparation for this expansion and expect to file our pre-clinical trial application to the NMPA by the end of 2018.

LHON is a mitochondrially inherited genetic disorder passed from a mother carrying the mutation to her children. LHON causes degeneration of the optic nerve in the back of the eye and leads to bilateral blindness, and primarily affects young men between the ages of 18 and 30, although it can affect women as well as younger children. The initial clinical expression of LHON is often a sudden, painless, acute or sub-acute central vision loss, often accompanied by loss of color vision and reduced visual acuity. A typical presentation involves a young man experiencing increased oxidative stress, sometimes from increased alcohol and/or tobacco consumption, leading to sudden vision loss in one eye that typically progresses within six months of onset to bilateral blindness. The disease has a substantial impact on day-to-day functioning, making it difficult to read and perform everyday activities, including employment-related activities and driving. The disease has a severe negative impact on quality of life and LHON individuals may require social services, occupational rehabilitation and visual aids.

A subclass of LHON patients also present symptoms, including muscle weakness, poor coordination, and numbness, tremors and abnormalities of the electrical signals that control the heartbeat (cardiac conduction defects). Some families have particularly severe manifestations, including ataxia, juvenile onset encephalopathy, spastic dystonia and psychiatric disturbances. These phenotypes have been called “LHON plus syndromes.”

Mitochondria are central to retinal cell function and survival and dysfunctional mitochondria may lead to death of retinal ganglion cells, which are neurons located near the inner surface of the retina. Mitochondrial dysfunction is a key factor in LHON and other genetic optic neuropathies characterized by loss of visual function resulting from impaired cellular energetics within retinal ganglion cells and the optic nerve.

Electron microscopy imaging of mitochondria from LHON subjects shows abnormal morphology suggestive of dysfunctional mitochondria. This abnormal mitochondrial morphology has also been observed in the retinal ganglion cells in a mouse model of LHON. The images below show retinal ganglion cells from a wild-type mouse, left, and an LHON mutant mouse model, middle. The image on the right shows an enlarged image of the mitochondria in the retinal ganglion cells of the mutant mouse.

 

 

LOGO

We believe based on pre-clinical and early clinical findings that systemic elamipretide may be beneficial for subjects with LHON and LHON plus, in which the mitochondrial dysfunction is the result of a mutation in a subunit of Complex I of the electron transport chain which impacts the retinal ganglion cells and the optic nerve. Preclinically, elamipretide has been observed to improve mitochondrial function under oxidative stress conditions in mouse-derived

 

109


Table of Contents

retinal ganglion cells, the type of cells most affected by LHON, by dose-dependently reducing ROS production, mitochondrial depolarization, cytochrome c release, morphological change, apoptosis and cell death. Ongoing experiments in a mouse model of acute traumatic optic neuropathy also suggest that systemic administration of elamipretide post-trauma may improve retinal ganglion cell survival and visual function, supporting the plausibility of therapeutic benefit in the presence of LHON associated, oxidative-stress mediated damage of the optic nerve.

In our MMPOWER and MMPOWER-2 clinical trials, in which most subjects are believed to have had some degree of Complex I dysfunction, we observed clinical benefit following systemic elamipretide administration. One LHON plus subject who enrolled in both studies and continues to receive elamipretide during the open-label extension trial experienced improvement in various disease symptoms, including improvement in vision such that the subject received medical clearance to drive for the first time in seven years. In addition, we believe we are observing trends suggestive of potential clinical benefit in our ReSIGHT Phase 2 clinical trial of topical ophthalmic drops for patients with the G11778A mutation of LHON, in which subjects are continuing treatment with elamipretide during an open-label extension trial.

ReSIGHT, our first clinical trial of elamipretide for the treatment of LHON, was a 52-week, randomized, double-masked, vehicle-controlled clinical trial of elamipretide topical ophthalmic drops in 12 subjects with LHON. Subjects were randomized to a single drop of elamipretide 1.0% ophthalmic solution or placebo, twice daily, with four subjects receiving elamipretide dosed in both eyes and eight subjects receiving elamipretide in one eye and placebo in the other eye. The endpoints were safety, tolerability and efficacy. The primary efficacy endpoint was change in best corrected visual acuity, or BCVA, during the period from week 20 through the end of treatment at week 52; secondary endpoints included changes in color vision, changes in photopic negative response electroretinography, a biomarker measuring the response of the retinal ganglion cells to light, changes in the retinal nerve fiber layer and retinal ganglion layer thickness, and changes in visual field, or field of vision, as measured by the Humphrey visual field score, which is the expanse of space visible at a given instant without moving the eyes. Subjects enrolled in ReSIGHT were eligible for participation in an optional open-label extension trial that will both contribute to our safety database and include periodic efficacy assessments to support the durability of any effects observed in the controlled phase of the trial. Eleven of the 12 subjects are currently participating in the open-label extension trial.

ReSIGHT enrolled individuals with the G11778A LHON genetic mutation who experienced loss of vision in both eyes of greater than one year and less than ten years, because the degree of visual impairment in these patients was expected to remain stable absent therapeutic intervention. It is considered unlikely that individuals with the G11778A genetic mutation will experience visual recovery spontaneously, meaning without any therapeutic intervention; the partial recovery rate, most commonly occurring within the first year following vision loss, has been reported to be between 4% and 33% for these individuals.

 

110


Table of Contents

We observed trends suggestive of therapeutic effect in ReSIGHT, but the trial did not meet its primary endpoint of change in BCVA over the 12-month double-blind portion of the study. We believe this was largely due to unexpected variability in the placebo group, in which two subjects experienced gains in BCVA of more than 20 letters on a standard eye chart and one subject experienced a loss of more than 20 letters, resulting in no change overall between elamipretide and placebo treated groups. However, improvement in elamipretide-treated eyes was observed across a number of other endpoints over the treatment period, as shown below.

The following chart sets out certain data with respect to the ReSIGHT clinical trial, measuring the endpoints from baseline to week 52.

 

 

LOGO

The below further summarizes certain post hoc analysis of the data from ReSIGHT, which was conducted with a central field analysis.

 

LOGO

 

All subjects participating for at least three months in the open-label extension part of the ReSIGHT trial were eligible to participate in a qualitative study in which we conducted videotaped interviews with trial participants through a smartphone application to explore their vision experiences during and after the trial and to better understand the treatment outcomes that are meaningful to them. Nine of the 12 ReSIGHT subjects participated in this study. Interviews addressed aspects of changes in vision with respect to general vision, testing their eyes, screens and magnification, daily living, color and light and summary. A number of subjects reported improvements in visual function as well as quality of life, as summarized in the charts below, which were prepared by external evaluators who analyzed written transcripts of the interviews pursuant to pre-identified conceptual frameworks. With respect to improvements in activities of daily living, one subject reported being able to see the denomination of money better, another remarked that he can see faces better and now has the vision he needs to get to his classes independently, another remarked that he does not rely upon accessibility devices such as CCTV as much as he used to, and is able to see street crossing signs now. Another advised that he can now see when to cross the street from the distance of across the street, another reported he does not rely upon friends for help cooking or doing laundry as much as he used to, and another mentioned he can now ride his bike again and has experienced improvement in his activities of

 

111


Table of Contents

daily living. We believe these interviews help qualify the clinical relevance and meaningfulness of changes in endpoints observed during the ReSIGHT trial.

 

LOGO

 

LOGO

We also observed continued improvement in parameters of visual function, including BCVA, color sensitivity, contrast sensitivity and visual field, particularly central visual field, as illustrated below.

 

LOGO

 

112


Table of Contents

Our original discussions with the FDA presumed we would conduct a pivotal Phase 3 trial following ReSIGHT. We plan to discuss the results of the ReSIGHT trial with the FDA to inform next steps with respect to the regulatory path forward in the United States, including whether a second trial will be required to support approval and the design of any such trial. We have identified sites in China willing to participate in a subsequent trial, and are preparing our NMPA clinical trial application to submit following our end-of-Phase 2 meeting with the FDA. We may consider increasing the dose or frequency of administration of topical ophthalmic drops or administering elamipretide subcutaneously based upon the results of our discussions with the FDA and NMPA. If we decide to conduct a Phase 3 clinical trial, we expect it would include sites in the United States and China. We believe the inclusion of sites in China may help expedite enrollment.

Patient-focused Drug Development and 21 st Century Cures Act in the Context of Primary Mitochondrial Myopathy, Barth and LHON

The FDA’s Patient-Focused Drug Development initiative is an FDA commitment under the fifth authorization of the Prescription Drug User Fee Act to more systematically gather patients’ perspectives on their condition and available therapies to treat their condition. As part of this commitment, the FDA is holding a series of public meetings, each focused on a specific disease area. Pursuant to this initiative, the FDA met with Barth patients and advocates in July 2018, and has agreed to meet with primary mitochondrial myopathy patients and advocates in March 2019, in each case to hear directly from patients, patient caretakers and other patient representatives about their experiences with their debilitating conditions, including the disease symptoms and daily impacts that matter most to patients. At the Barth meeting, for example, patients and their caretakers spoke about the severe impact that fatigue has upon the quality of life for Barth patients. There was also a discussion of treatment options for Barth, during which a father of twin sons enrolled in our TAZPOWER trial remarked that he believed one of his sons was on elamipretide in treatment period one, and the other in treatment period two, before both went into open-label extension. He commented on his perceived positive impact of the study on his sons, including better appetites, improved energy levels and increased physical activity. We believe these meetings are important to educate the FDA about the significant clinical burden of these diseases and their devastating impact on patient’s activities of daily living, and we have supported advocacy groups’ efforts to prepare for these meetings. Other than educating regulators about the burden of these diseases in which we are studying elamipretide as a potential therapy, these meetings have no direct impact on our clinical development efforts.

The video protocols we conducted or are conducting as part of our MMPOWER-3, TAZPOWER and ReSIGHT programs will enable us to incorporate the patient experience in our regulatory submissions as encouraged by the Cures Act. Our approach to incorporate the patient voice under the Cures Act in this manner was informed by prior experience in our MMPOWER and MMPOWER-2 programs. In MMPOWER, certain of our clinical trial sites collected videotaped interviews of consenting subjects at baseline, before treatment commenced, at day five, which was the end of treatment, and at day seven, which was two days after treatment stopped. Our review of those interviews revealed important anecdotal learnings about certain subjects’ perceptions of changes in their symptoms over the course of the trial, as described in several examples below:

 

   

one subject reported that following five days of high dose elamipretide, he no longer needed to use his walker for support while ambulating and he was able to complete more daily activities, such as shaving, due to his increased strength; his clinician observed increases in his muscle tone;

 

   

one subject reported that following five days of mid-dose elamipretide, she experienced more energy and felt more sensations, such as being able to feel the air she inhaled when taking a deep breath, which she had not realized she was unable to feel before she received elamipretide treatment;

 

   

one subject reported improved ability to walk, including being able to go up hills without her legs burning and her heart racing, and to see, including improvements in her double vision and ability to read; and

 

   

one subject sent us videos chronicling her disease manifestation, diagnostic journey and perceived improvement during (i) MMPOWER, in which she progressed from needing a wheelchair or scooter to walk, at the beginning of the trial, to being able to walk without assistance, after five days of mid-dose elamipretide, (ii) MMPOWER-2, after which she was able to dance, was cleared to drive for the first time in seven years due to visual improvement and was able to reduce her pain medications, and (iii) the open-label extension trial, during which she reported continued improvement.

 

113


Table of Contents

Although reports of this nature are anecdotal in nature and not all subjects report improvements following treatment with elamipretide, we do think accounts of this nature will help encapsulate the patients’ perspective on any benefits they experience in our MMPOWER-3, TAZPOWER and ReSIGHT programs consistent with the Cures Act.

Elamipretide Clinical Programs—Diseases Associated with Aging

We believe that there is significant potential for mitochondrial medicine in diseases related to aging. We are evaluating the potential clinical utility of elamipretide in dry AMD, a disease associated with aging. We have also evaluated the potential clinical utility of elamipretide in proof-of-concept clinical trials in aging skeletal muscle weakness, acute kidney injury and heart failure, which are also associated with aging. Although we saw signs of clinical benefit in some of these studies, we do not plan to progress development of elamipretide for indications other than dry AMD in the United States. We may consider development of certain of these indications for other territories, including China, and we also believe that certain of these indications may be suitable for new pipeline compounds.

Ophthalmic Diseases

Normal mitochondria play a critical role for ocular function, and dysfunctional mitochondria are implicated in several common diseases of the eye, many of which are associated with aging. Ophthalmologic diseases that have not traditionally been considered to have obvious mitochondrial origins are increasingly recognized to result in part from impaired mitochondrial function, increased oxidative stress and increased apoptosis. As a high energy-demand organ, the eye is particularly susceptible to the consequences of mitochondrial damage. Oxidative damage that results over time from mtDNA instability leads to cumulative mitochondrial damage, which is recognized to be an important pathogenic factor in age-related ophthalmologic disorders such as diabetic retinopathy, glaucoma and dry AMD.

Delivery of therapeutic compounds to various sections of the human eye can be challenging. The eye has evolved to protect itself by washing foreign substances such as eye drops from the surface, with tears capable of removing as much as 95% of an eye drop. The vitreous in the interior of the eye also poses a barrier to delivery of therapies from the front of the eye to the retina. For systemic delivery, the blood—retinal barrier can prevent substances, particularly large molecules, from entering the tissue of the retina. We have evaluated both systemic and topical delivery of elamipretide in both preclinical studies and clinical trials.

Dry AMD

We are advancing development of elamipretide for dry AMD, an ophthalmic disease associated with aging and the leading cause of blindness among older adults. Dry AMD is estimated to impact approximately 10 million individuals in the United States and is the leading cause of blindness among older adults in the developed world. There are no treatments approved by the FDA, the EMA or the NMPA for the disease.

The earliest clinical manifestation of dry AMD is often a reduction in low luminance, or low light, visual acuity, which can make it challenging to conduct normal daily activities such as reading in artificial light, driving at dusk or at night and navigating indoors in low light. The disease may progress to entail blurred vision and loss of central vision, which can impair facial recognition, mobility, watching television and computer use, and can eventually lead to blindness. These limitations may impair the independence of older adults and have been associated with increased depression.

The pathophysiology of dry AMD includes the formation of cellular debris, called drusen, which disrupt the retinal pigment epithelium, a layer of cells between the retina, which collects light and converts it into neural signals to transmit to the brain, and the choroid, or vascular membrane, at the back of the eye. The disease may also involve the gradual deterioration, or geographic atrophy, of the central part of retina, known as the macula. The retinal pigment epithelium provides nutrition to the retina, which has a very active metabolism. The eye is the highest consumer of mitochondrial ATP in the central nervous system, due to the intensive bioenergetics required to support visual function. Preclinical studies suggest that diseases of the retinal pigment epithelium, such as dry AMD, may be exacerbated by light- induced mitochondrial dysfunction, and that mitochondrial DNA mutations appear to accumulate over time in diseased retinal pigment epithelium as a consequence of chronic and ongoing oxidative stress. Cigarette smoking and high fat diets, both of which contribute to mitochondrially deleterious oxidative stress, are known to be environmental risk factors for dry AMD onset and progression. These findings suggest a key role for mitochondrial dysfunction in the pathology of the disease.

 

114


Table of Contents

The table below provides a summary of our completed and planned trials for dry AMD.

 

TRIAL

  

INDICATION

  

STAGE;
STATUS

  

TRIAL DESIGN

ReCLAIM    dry AMD    Phase 1; completed in March 2018    Open label, single-center clinical trial involving 19 subjects with non-central geographic atrophy, which occurs when the photoreceptors no longer work and the patients develop a blind spot or spot of poor vision in the macula, and 21 subjects with high risk drusen, which are large deposits of debris located between the retina and the Bruch’s membrane, that can interfere with waste products getting removed from the macula. Subjects received once daily subcutaneous injections of elamipretide for 24 weeks.
ReCLAIM-2    dry AMD    Phase 2b; planning for start in the first quarter of 2019    Double-blind, placebo controlled, multi-center clinical trial involving approximately 160 subjects with non-central geographic atrophy, receiving once daily subcutaneous injections of either elamipretide or placebo for ~24 weeks.

In preclinical models of dry AMD, published in Retina Today in May/June 2015, researchers at Duke Eye Center observed that elamipretide prevented disease progression and reversed symptoms of disease. This study utilized hydroquinone, a toxic chemical in tobacco tar, to induce dry AMD-like symptoms in mice over a two-week course of exposure. Concurrent treatment with 3 mg/kg subcutaneous elamipretide during hydroquinone exposure protected against these symptoms, as evidenced by a reduction of the drusen-like deposit formation and maintenance of normal membrane thickness, mitochondrial morphology and ultrastructure of the retinal pigment endothelium cells in treated mice.

In another preclinical model of a 24-month old Alzheimer’s disease mouse (roughly equivalent to a human octogenarian) which, when fed a high fat diet, accumulated drusen-like deposits, one month of subcutaneous administration of elamipretide eliminated the drusen-like deposits and restored normal mitochondrial morphology and the ultrastructure of the retinal pigment endothelium cells. In addition, the animals treated with elamipretide were observed to have normalization of b-wave amplitudes on electroretinograms, which suggests an improvement in photoreceptor function reflecting improved visual acuity.

We conducted our ReCLAIM Phase 1 open-label clinical trial at Duke Eye Center to evaluate the safety, tolerability and efficacy of daily subcutaneous injections of 40 mg elamipretide given over 24 weeks to 40 individuals with intermediate characteristics of dry AMD. We enrolled 21 subjects who have high-risk drusen, the most common early signs of dry AMD, and 19 subjects who have non-central geographic atrophy, or areas of dysfunctional macula. Individuals with high-risk drusen typically have difficulty seeing in low light conditions and mild to moderate deficits in visual acuity under normal light condition, while those with non-central geographic atrophy have more advanced symptoms but are not yet blind. The primary endpoint was safety and tolerability, evaluated based on review of adverse events, or AEs, and compliance of self-administration of subcutaneous elamipretide, measured at 24 weeks compared to baseline. Secondary endpoints for both high-risk drusen subjects and subjects with non-central geographic atrophy included change from baseline in visual acuity in low light conditions, or low luminance visual acuity, or LLVA, a five-letter deficit in which was required for inclusion in the trial, visual acuity in standard light conditions, BCVA, reading speed and acuity in low light conditions and standard light conditions, drusen volume and patient reported outcome assessments. Assessments for most secondary endpoints occurred at baseline, week four, week eight, week 12 and week 16.

We analyzed the data for subjects in each cohort who completed 24 weeks of therapy, which included 19 subjects with high-risk drusen and 15 subjects with non-central geographic atrophy. We observed improvements in functional assessments across both cohorts, as summarized below. As noted above, a five-letter deficit in LLVA, which is among the first clinical symptoms of the disease, was a required inclusion criterion for the trial, and improvements in this

 

115


Table of Contents

endpoint were statistically significant across both the drusen (p=0.0055) and geographic atrophy (p=0.0186) cohorts.

 

 

 

ENDPOINT

   DRUSEN COHORT
(N=19)
  GEOGRAPHIC
ATROPHY COHORT
(N=15)

Best corrected visual acuity (regular light) mean letters gained/p value

   3.58   4.60
   (p=0.0253)   (p=0.0034)

Low luminance visual acuity mean letters gained/p value

   5.63   5.40
   (p=0.0055)   (p=0.0186)

Reading speed (regular light) mean reduction in time/p value

   -0.11   -0.02
   (p=0.0054)   (p=0.5501)

Low luminance reading speed mean reduction in time/p value

   -0.28   -0.52
   (p<0.0001)   p=0.0172

Visual function questionnaire composite score

   9.25   6.59
   (p=0.0004)   (p=0.0125)

Low luminance questionnaire general dim light vision score

   20.75   10.32
   (p=0.0003)   (p=0.027)

 

 

Since we did not have a placebo, or control group, in this study, we evaluated natural history data and prior placebo-controlled trials of subjects with similar disease burden to understand the likelihood that we would observe a learning or placebo effect in this study. In a number of other reported interventional studies conducted by others, including Chroma, Spectri and Filly (combined n>700), as well as in several natural history studies conducted by others, including Proxima, Holz and Ladd (combined n>250), BCVA was observed to decline in similar patient groups by four to six letters over an up to one-year period, and LLVA was observed to decline in similar patient groups by approximately two letters over a six-month to one-year period. This supports our belief that the improvements observed in the ReCLAIM trial are unlikely to be due to the natural variability of the disease.

While each subject in ReCLAIM had one eye designated as a study eye, which met the inclusion criteria for the trial, the other eye was not required to meet inclusion criteria. Fourteen subjects in the trial had neovascular age-related macular degeneration, or wet AMD, that was at the quiescent stage, meaning that it was stable on standard-of-care anti-vascular endothelial growth factor, or anti-vegF, therapy. While there is an improvement in visual acuity when some subjects are first dosed with anti-vegF therapy, improvement typically plateaus and even declines slightly when the disease reaches the quiescent state.  We observed that subjects with wet AMD experienced similar improvements in vision as was observed in the study eyes, with a 5.6 letter mean gain from baseline in BCVA, which was statistically significant at p=0.0027, and a 6.1 letter mean gain from baseline in LLVA, which was statistically significant at p=0.0012.

We also assessed the rate of progression of geographic atrophy in the non-central geographic atrophy cohort relative to what has been observed in other studies. The typical rate of geographic atrophy progression in dry AMD is well-understood from prior studies and the natural history, and we believe slowing of geographic atrophy progression could be a meaningful endpoint as we pursue approval by the FDA. This analysis was conducted using several types of imaging technologies including fundus auto- fluorescence, or FAF, an advanced imaging technique for observing the fundus, which is the interior surface of the eye opposite the lens including the retina, optic disk, macula, fovea and posterior pole, FAF squared, or FAF SQRT, a calculation performed to eliminate dependence of growth rates on lesion measurements, and optical coherence tomography, or OCT, a non-invasive imaging test which uses light waves to take cross-sectional pictures of the retina, also squared, or OCT SQRT, to eliminate dependence of growth rates on lesion measurements. Each of these imaging technologies showed that six months’ treatment with elamipretide was associated with slower progression of geographic atrophy than was observed in prior published studies conducted by others (assuming, for prior studies which were completed over a longer time period, a linear progression of geographic atrophy enabling calculation at the 6-month time point). FAF demonstrated mean growth of 0.50 mm 2 , versus 0.91 mm 2 mean observation from ten prior studies over a similar time period (assuming linear progression), FAF SQRT demonstrated mean growth of 0.14 mm, versus 0.19 mm mean observation from five prior studies over a

 

116


Table of Contents

similar time period (assuming linear progression), and OCT SQRT demonstrated mean growth of 0.11 mm, versus 0.18 mm mean observation from five prior published studies over a similar time period (assuming linear progression).

We plan to initiate ReCLAIM 2, a Phase 2b placebo-controlled clinical trial with once daily subcutaneous dosing in subjects with non-central geographic atrophy during the first quarter of 2019.

Although we believe that individuals experiencing a progressive decline in visual activity will be compliant with daily subcutaneous injections, we may consider a second Phase 2b placebo-controlled clinical trial using the drop formulation because it may be commercially advantageous to utilize a topical drop formulation. We observed signs of clinical benefit with elamipretide topical ophthalmic drops in our ReVEAL Phase 1/2 clinical trial enrolling subjects with Fuchs’ corneal endothelial dystrophy, or Fuchs, as well as in our ReSIGHT trial, and we are continuing to assess open-label efficacy data from our ReSIGHT study to inform the decision whether to pursue further development of the drop formulation.

Fuchs’ corneal endothelial dystrophy

Fuchs’ affects the endothelium, the thin layer of cells that line the back part of the cornea in the front of the eye. Endothelial cells are key to pumping excess water from the cornea, where it otherwise accumulates and results in corneal damage and cell death. When endothelial cells die, they cannot be regenerated. As more cells are lost, fluid builds up in the cornea and the tissue gradually thickens, resulting in a swollen and cloudy cornea. Fuchs’ is thought to be caused by oxidative stress in the endothelial cells, which in turn causes mtDNA damage and leads to morphological changes in the cells of the corneal epithelium. There are no non-surgical therapies approved for Fuchs’. In 2016, there were an estimated 28,000 corneal transplants in the United States for treatment of Fuchs’.

Our ReVEAL Phase 1/2 clinical trial was a randomized, double-masked, vehicle-controlled, two-part trial, with two separate 12-week treatment periods measuring two doses of elamipretide, intended to enroll 27 subjects at two sites in the United States. We completed the first part of ReVEAL, in which 16 individuals diagnosed with Fuchs’ and experiencing mild to moderate corneal edema received elamipretide 1.0% ophthalmic solution twice daily for up to 12 weeks in a randomly selected eye and a single drop of placebo twice daily to the control eye. We were unable to identify sufficient subjects to meet the enrollment criteria for the second part, in which an intended eight subjects were to receive elamipretide 3.0% ophthalmic solution twice daily in both eyes for up to 12 weeks, and three patients were to receive a single drop of placebo twice daily to each eye. We terminated the study early due to these enrollment challenges, enrolling only four of the intended 11 subjects in the second part.

In the fully enrolled, completed first part of the ReVEAL study, we observed significant differences in the primary efficacy endpoint of interest, which was central corneal thickness, in elamipretide-treated subjects relative to placebo-treated subjects (p=0.0293). This suggests that elamipretide may have reduced the degree of edema, or swelling, which contributes to corneal damage and endothelial cell death in this disease. We will evaluate this data in the context of our ongoing development of elamipretide for age-related diseases, but we do not currently plan to continue development of elamipretide for Fuchs based on our evaluation of the market potential in this indication.

Elamipretide Safety Data

We have a significant amount of clinical trial data indicating that elamipretide is generally well tolerated. As of September 30, 2018, 22 clinical trials had been completed with single and multiple intravenous and subcutaneous administrations of elamipretide at dose levels ranging from approximately 0.7 mg/day to 300 mg/day. These included 14 clinical pharmacology studies enrolling approximately 276 healthy subjects in which the primary objective was to assess safety rather than to treat a disease state, and 10 clinical trials enrolling approximately 498 subjects across multiple patient populations, including subjects with primary mitochondrial myopathy, skeletal muscle mitochondrial dysfunction, stable chronic heart failure, acute coronary syndrome and acute kidney injury. Additionally, data from two open-label clinical trials with the subcutaneous formulation in 49 subjects with primary mitochondrial myopathy and 40 subjects with dry AMD are available.

The following table summarizes, by dosing duration, the meaningful differences in systemic treatment-emergent adverse events reported in elamipretide-treated subjects versus placebo-treated subjects. For this purpose, we considered a difference of at least 2% to be meaningful. In addition, injection site reactions were reported in the

 

117


Table of Contents

majority of subjects receiving elamipretide by subcutaneous injection; most commonly these entailed mild redness, swelling and itchiness which usually resolved within four hours of dosing.

 

 

 

SUMMARY OF SYSTEMIC TREATMENT EMERGENT ADVERSE EVENTS (TEAEs) REPORTED IN GREATER FREQUENCY

( ³ 2% DIFFERENCE) IN ELAMIPRETIDE-TREATED SUBJECTS COMPARED TO PLACEBO-TREATED SUBJECTS

     ELAMIPRETIDE     PLACEBO    

DISCUSSION

Single Dose

     n=356       n=220    

Headache

     4.5     2.3  

Repeat dose £ 8 days

     n=186       n=46    

Dizziness

     2.2     0.0  

Repeat dose > 8 days (TEAEs ³ 5%)

     n=70       n=30    

Increased eosinophils/eosinophilia

     48.6     0.0   Mild to moderate increase in eosinophils, a variety of white blood cells that combat parasites and infections and control mechanisms associated with allergy and asthma, were observed in longer-term dosing regimens, with no associated clinical signs and symptoms. These appear to decrease to within normal limits with longer duration of elamipretide administration and return to pre-treatment levels after the end of elamipretide treatment.

Upper respiratory tract infection

     15.7         All 10 events of upper respiratory tract infection occurred in one open-label trial in an elderly population where there was no placebo-control group.

Increased blood immunoglobulin E

     10.0     0.0   No associated clinical signs and symptoms.

Dizziness

     8.6     1.4  

Headache

     8.6     2.9  

Urinary tract infection

     7.1     0.0  

Viral gastroenteritis

     5.7     0.0  

 

 

We have completed three clinical trials with topical ophthalmic elamipretide: ReSIGHT for the treatment of LHON, ReVEAL for the treatment of Fuchs’, and ReVIEW for the treatment of either diabetic macular edema, or DME, or dry AMD. In the ReSIGHT clinical trial, 12 subjects were treated with 1.0% ophthalmic solution twice daily for 52 weeks. There were no discontinuations in the ReSIGHT clinical trial. Ocular related TEAEs were reported in 56.3% of the elamipretide-treated and half of the placebo-treated eyes. In our ReVEAL clinical trial, 22 subjects were enrolled in one of two dosing cohorts, 1.0% ophthalmic solution or 3.0% ophthalmic solution, administered in the eye twice daily for 12 weeks. In this trial, there were two discontinuations, one of which was due to failure to meet inclusion criteria and one of which was due to a reported allergic reaction. Two unrelated systemic TEAEs were reported. In the 3.0% dose arm, two subjects reported ocular TEAEs of itching, foggy vision, redness and/or allergic conjunctivitis that led to discontinuation, each of which was deemed likely related to study drug. In the REVIEW clinical trial, 20 subjects were enrolled in one of two dosing cohorts, 0.3% ophthalmic solution or 1.0% ophthalmic solution, administered to one eye twice daily for 28 days. A total of four TEAEs were reported in the ReVIEW clinical trial and none were considered related to elamipretide by the investigator. There were no local tolerability issues reported, and there were no significant findings on physical examinations, ophthalmic examinations, vital signs or laboratory measurements.

Earlier Clinical Trials of Elamipretide

We have studied elamipretide in clinical trials in several diseases associated with aging, including studies enrolling subjects with reduced skeletal muscle mitochondrial function, subjects with heart failure with reduced ejection

 

118


Table of Contents

fraction, or HFrEF, subjects with heart failure with preserved ejection fraction, or HFpEF, subjects undergoing percutaneous transluminal renal angioplasty and subjects with acute coronary syndrome. These trials were designed as small proof-of-concept studies to inform our decision whether to progress later stage development in these indications, and as such were generally not well-powered to achieve statistical significance. Although we have decided not to independently progress development of elamipretide for these common disease indications, we saw signs of clinical benefit from treatment with elamipretide in several of these indications, which may help inform our future development of pipeline compounds for age-related diseases.

In April 2010, we submitted an investigational new drug application, or IND, to the FDA for purposes of conducting clinical trials of elamipretide for the prevention and treatment of ischemia reperfusion injury. In October 2014, we submitted an IND to the FDA for the purpose of conducting clinical trials of elamipretide for the treatment of primary mitochondrial myopathy. Although this IND was also intended to cover our Barth clinical trial, when the FDA granted Fast-Track Status to this program they recommended we file a new IND covering Barth, which we have done. Additionally, in October 2014, we submitted an IND for purposes of conducting clinical trials of elamipretide for the treatment of diabetic macular edema and dry AMD; this IND also covers our clinical trials of Fuchs’ and LHON. The initial study under this IND was a Phase 1/2 safety study in 15 patients with diabetic macular edema and 5 patients with dry AMD, in which elamipretide topical ophthalmic drops at concentrations of 0.3% and 1% were well-tolerated over four weeks of dosing. We were the sponsor for each of those INDs.

MOTION—reduced skeletal muscle mitochondrial function . Our Phase 2 MOTION clinical trial was a double-blind, placebo-controlled trial involving 38 elderly subjects with reduced mitochondrial function in the thenar muscle group, between the thumb and pointer finger, as measured by nuclear magnetic resonance technology, or P31 NMR, a magnet that can measure phosphorous peaks as it associates and de-associates with adenosine, a purine nucleoside found in every human cell, during the oxidative phosphorylation process. Subjects were randomized one-to-one to a single two-hour IV of 0.25 mg/kg elamipretide or placebo. We measured the maximum capacity of the mitochondria to produce ATP in vivo using P31 NMR on the infusion day and seven days post- infusion. A sustained hand fatigue test determined the effect of increasing ATPmax on exercise tolerance.

Although our pre-specified analysis did not show a statistically significant benefit in this population, our investigator conducted a post-hoc sensitivity analysis excluding one subject in the placebo group whose ATPmax value was believe to be an erroneous measurement that did not meet the quality control criteria. The post-hoc analysis excluding this subject showed that two hours after the start of a single IV, elamipretide-treated subjects experienced a 30% improvement in ATPmax compared to a 12.5% improvement in the placebo-treated subjects (p=0.0555). This improvement was reduced to near baseline levels seven days following treatment. The increase in ATPmax was statistically significantly correlated with functional improvement measured by force time integral (p=0.0041), a test of muscle endurance, two hours after the start of the infusion, with mean increases approximately two to four times greater in subjects treated with elamipretide compared to placebo. This post hoc finding suggests that increasing skeletal muscle mitochondrial capacity may increase skeletal muscle function.

PREVIEW-HF—heart failure . PREVIEW-HF was a Phase 1/2 randomized, double-blind, placebo-controlled, single ascending dose trial of elamipretide in 36 subjects aged 45 to 80 years with stable Class 2/3 chronic heart failure, or mild to moderate symptoms of heart failure, who were receiving concomitant standard of care pharmacologic therapy. The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function assessed by serial two dimensional echocardiograms of a single four-hour IV of elamipretide (0.005 mg/kg/hour, or low dose (n=8), 0.05 mg/kg/hr, or mid-dose (n=8), 0.25 mg/kg/hour, or high-dose (n=8)) or placebo (n=12). We observed that the highest dose of elamipretide significantly reduced mean left ventricular end-systolic volume (absolute change from baseline -11 mL versus 2.8 mL for placebo; mean difference = -13.7 mL; p=0.005) and mean left ventricular end-diastolic volume (absolute change from baseline -15 mL versus 2.9 mL for placebo; mean difference = -17.9 mL; p=0.009) at the end of a four- hour infusion. Volume measurements such as end-systolic volume and end-diastolic volume are viewed as the best predictor of an improvement in morbidity and mortality in heart failure subjects.

We also observed that, as compared to subjects in the placebo cohort, subjects in the high-dose arm had reduced left atrial volume at all time points, as well as an increase in right ventricular fractional area change at all time points. Finally, right-ventricular systolic pressure appeared to be reduced at most time points in both the medium

 

119


Table of Contents

and high-dose elamipretide-treated subjects, as compared to placebo. We also observed reductions in urinary 8-OH-2-deoxyguanosine and urinary 8-isoprostane, production of both of which is well-documented to increase in direct proportion to oxidative stress, six hours after the start of a four-hour infusion of elamipretide.

PROGRESS-HF—heart failure with reduced ejection fraction . PROGRESS-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 71 subjects with Stage C heart failure with reduced ejection fraction, or HFrEF, randomized to receive 28-days of once daily subcutaneous injections of 4mg elamipretide (low dose) (n=23) or 40mg elamipretide (high dose) (n=24) or placebo (n=24) injections. The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function of elamipretide assessed by cardiac magnetic resonance imaging, or MRI. The trial did not meet its primary efficacy endpoints of change from baseline in left ventricular ejection fraction and change from baseline in left ventricular end systolic volume, both assessed by cardiac MRI. NT-proBNP levels appeared to be consistently reduced in the elamipretide-treated subjects that received 40mg versus the placebo-treated group, an effect that appeared to be more pronounced in the subgroup where the NT-proBNP levels were highest at baseline. Although these values did not reach statistical significance, it may be suggestive of preferential benefit for more impaired subjects.

IDDEA-HF—acute heart failure with reduced ejection fraction. IDDEA-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 308 subjects with acute decompensated heart failure, which affects patients with advanced heart failure with HFrEF and is associated with severe congestion of multiple organs by fluid that is inadequately circulated by the failing heart. Subjects were randomized to receive 20 mg elamipretide in normal saline or placebo, dosed once daily over seven days by intravenous administration.

The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function of elamipretide assessed by NT-pro-BNP, a marker in the blood for brain natriuretic peptide, or BNP, which is a biomarker of cardiac function. Although NT-pro-BNP levels were significantly reduced from baseline in the elamipretide treated group (p<0.0001), when adjusted for reductions from baseline in the placebo treated group the change was not significant and so the trial did not meet its primary efficacy endpoint. We observed trends toward improvement in biomarkers of kidney function in patients who received elamipretide relative to placebo, and we also observed that fewer patients who received elamipretide relative to placebo died or were readmitted to the hospital during the 40-day follow-up period.

ReSTORE-HF—heart failure with preserved ejection fraction. ReSTORE-HF was a Phase 2 randomized, double-blind, placebo-controlled trial, involving 47 subjects ranging between 45 and 80 years of age presenting with symptomatic heart failure with preserved ejection fraction, or HFpEF, randomized to receive 28 days of once daily subcutaneous injections of 40 mg elamipretide or placebo.

The trial evaluated the safety, tolerability, pharmacokinetics, pharmacodynamics and the effect on heart function of elamipretide assessed by echocardiogram. Although ReSTORE-HF failed to meet its primary efficacy endpoint of change in left ventricular filling pressures at rest (placebo adjusted change of (-1.13) favored elamipretide, but failed to meet statistical significance (p=0.31)), trends favoring elamipretide were observed across various endpoints, particularly on assessments conducted during sub maximal exercise when clinical symptoms most commonly present in this patient population. A key secondary endpoint of change in left ventricular filling pressures during submaximal exercise improved (-2.44; p=0.09) ), as did the change during submaximal stress in left ventricular systolic global longitudinal strain (-3.63; p=0.09). Notably, left ventricular end systolic volume, an important functional parameter in this disease in which the heart is not filling to its full potential, also improved (p=0.06).

EVOLVE—percutaneous transluminal renal angioplasty. EVOLVE was a Phase 2a randomized, double-blind, placebo-controlled trial, involving 14 subjects pre-treated with elamipretide or placebo prior to undergoing percutaneous transluminal renal angioplasty. We initiated EVOLVE in January 2013. In January 2014, the CORAL trial, a 947-subject clinical trial sponsored by the Baim Institute for Clinical Research, concluded that renal-artery stenting did not confer a significant benefit with respect to the prevention of clinical events when added to comprehensive, multifactorial medical therapy in people with atherosclerotic renal-artery stenosis and hypertension or chronic kidney disease. This made recruitment in our EVOLVE trial challenging, and we terminated the trial in 2016 after enrolling only 14 of the anticipated 28 subjects. Although the primary endpoint of improvement in glomerular filtration rate

 

120


Table of Contents

assessed by iothalamate clearance did not show statistical significance when comparing elamipretide- and placebo-treated subjects, possibly because the trial was underpowered due to early termination, treatment with elamipretide was suggestive of other beneficial effects.

Subjects who received elamipretide were protected from a temporary lack of oxygen to kidney tissue, known as transient hypoxia. In contrast, subjects in the placebo group developed hypoxia 24 hours after the procedure (p<0.05). We observed a statistically significant improvement in kidney blood flow at three-months post procedure (261 mL/min ± 115.0 as compared to baseline 202 mL/min ± 129.0; p<0.05), and a statistically significant improvement in cortical perfusion at three-months post procedure (2.9 mL/ min/tissue ± 1.04 at three months as compared to 1.99 mL/min/tissue ± 0.8 at baseline; p<0.05) in the elamipretide-treated group, as opposed to the placebo-controlled group where differences from baseline were not statistically significant for kidney blood flow at three months post procedure (234 mL/min ± 133.0 as compared to baseline 234 mL/min ± 99.0; p<0.05) or for cortical perfusion at three- months post procedure (2.66 mL/min/tissue ± 0.9 at three months as compared to 2.4 mL/min/tissue ± 0.4 at baseline; p<0.05). These results suggest a potential renal protective effect of elamipretide.

EMBRACE—acute coronary syndrome. EMBRACE was a Phase 2 double-blind placebo- controlled trial evaluating elamipretide in subjects with acute coronary syndrome. EMBRACE failed to meet its primary efficacy endpoint, intended to determine whether elamipretide could protect the heart from muscle damage that can occur when a previously blocked vessel is opened abruptly, as determined by measuring creatine-kinase-MB, or CK-MB, area under the curve, AUC, a cardiac marker of variants of the enzyme phosphocreatine kinase which is used to assist diagnoses of an acute myocardial infarction. Although CK-MB AUC in elamipretide-treated subjects was lower than placebo (6582 ng.h/mL versus 6738 ng.h/mL for placebo), this difference did not achieve statistical significance in the pre-specified primary analysis population of 118 subjects. We believe that, due to a higher than anticipated exclusion rate in our primary analysis population attributable to absence of complete arterial blockage in 179 of the 297 subjects enrolled, EMBRACE was not properly powered to achieve statistical significance on the primary endpoint in the treatment population. It is also possible that, given the exigency of interventional treatment in this patient population, around which there is ongoing debate regarding clinically appropriate speed of intervention relative to pretreatment modalities, it was challenging to implement the per-protocol timelines between dosing with elamipretide and intervention in a clinical setting.

SBT-20

Our second product candidate, SBT-20, is a small peptide that also targets and binds reversibly to cardiolipin, stabilizing mitochondrial structure and function under conditions of oxidative stress. SBT-20 has been generally well-tolerated in 75 people exposed to it systemically as of November 30, 2018. We plan to evaluate SBT-20 for rare peripheral neuropathies.

Based on preclinical studies, we believe that SBT-20 readily penetrates cell membranes and targets and binds reversibly to the inner membrane of mitochondria.

 

121


Table of Contents

SBT-20 has been observed to protect the normal morphology of the mitochondria from injury in a preclinical ischemic reperfusion model. In a preclinical study of rats treated with SBT-20 or placebo prior to occlusion and reperfusion of renal blood flow, published in the American Journal of Physiology—Renal Physiology in October 2014, researchers at Weill Cornell Medical College observed that SBT-20 preserved normal mitochondrial structure and function, including mitochondrial density, mitochondrial matrix density, mitochondrial respiration and ATP levels. In the images below, the left shows kidney mitochondria prior to the insult, the center shows kidney mitochondria of the placebo-treated animals post-insult and the right shows kidney mitochondria of the SBT-20-treated animals post-insult.

 

 

LOGO

We plan to evaluate SBT-20 for rare diseases entailing mitochondrial dysfunction, including rare peripheral neuropathies associated with mitochondrial dysfunction. Mitochondrial dysfunction is thought to be involved in peripheral neuropathies including chemotherapy-induced peripheral neuropathy, neuropathies associated with mitochondrial myopathy, neuropathy, and gastrointestinal encephalopathy, or MNGIE, and both the axonal and demyelinating forms of Charcot-Marie-Tooth disease, or CMT, the most common inherited neuromuscular disorder.

SBT-20 was observed to have a protective effect against the development of chemotherapy-induced peripheral neuropathy in a mouse model, in which the mitotoxic effects of cancer chemotherapeutic agents are believed to contribute to dysregulation of primary afferent sensory neurons resulting in pain. In an experiment in which nine mice were treated with SBT-20 5 mg/kg/day, 10 mice were treated with SBT-20 10 mg/kg/day (the high dose cohort) and six mice were treated with vehicle, or normal saline, for two days prior to and for a three-week period during which oxaliplatin, a mitotoxic chemotherapy agent, was administered once-weekly, SBT-20 treated mice in the high dose cohort exhibited significantly decreased neuropathic pain measured by paw sensitivity to mechanical stimuli (p=0.009 relative to vehicle) and cold stimuli (p<0.001 relative to vehicle). Additionally, the loss of intraepidermal nerve fibers in the hind paw was observed to be significantly reduced in SBT-20 treated mice in the high dose cohort (p=0.006 relative to vehicle).

We expect to initiate preclinical studies in animal models of CMT during the first half of 2019, with data expected by year-end, which will inform our further development plans for this indication.

SBT-20 Clinical Data

We have conducted two clinical safety studies of SBT-20, one of which, our CHALLENGE-HD trial, was a Phase 1/2 clinical trial for the treatment of subjects with early stage Huntington’s, and the other of which was a Phase 1 clinical trial involving healthy volunteers.

CHALLENGE-HD was a Phase 1/2 double-blind, placebo-controlled, multiple ascending dose trial evaluating the safety, tolerability and efficacy of daily subcutaneous injections of SBT-20 compared to placebo in 24 subjects with early stage Huntington’s. Subjects were randomized six to SBT-20 compared to two to placebo in three dose cohorts of 5mg, 15mg and 25mg SBT-20 for an initial seven days during part one of the study. Subjects were subsequently randomized on a double-blind one-to-one basis to 25mg SBT-20 or placebo administered by subcutaneous injection once daily over a follow-on four-week course of treatment, or part two of the study. One subject who received placebo in part one of the study was randomized to receive SBT-20 in part two of the study. The primary endpoints of the

 

122


Table of Contents

trial was safety and tolerability; the secondary objectives included efficacy assessments including improvements in mitochondrial membrane potential, a standard battery of neurological assessments and assessment of function of brain mitochondria by magnetic resonance spectroscopy. In part one of the study, we observed an improvement in mitochondrial membrane potential in the 25mg, or high dose, cohort relative to placebo (p=0.0356). An improvement in mitochondrial membrane potential was also observed in part two of the study. However, this did not reach statistical significance relative to placebo (p=0.1693).

In addition to our CHALLENGE-HD trial, we completed a Phase 1 clinical trial of SBT-20 in healthy volunteers. In this trial, 24 healthy adults were exposed to single subcutaneous doses of SBT-20 and 32 healthy adults were exposed to multiple subcutaneous doses of SBT-20, ranging from 5 mg to 30 mg. In the single ascending dose portion of the trial, the incidence of AEs increased slightly with dose; however, there was no apparent dose-related trend in the multiple ascending dose portion of the trial. Injection site reactions, such as erythema, swelling, itching, or pain, were the most frequently reported AEs. No subject experienced injection site reactions that were assessed as severe with one exception, which was also reported as clinically significant, although there were eight clinically significant injection site reactions reported as moderate experienced in six subjects.

We did not observe any clinically significant findings in any laboratory assessments, vital signs or ECGs. Although not clinically significant, we did observe a mean increase in liver enzymes alanine aminotranferease, or ALT, in five of eight subjects, and/or aspartate aminotransferase, or AST, in three of eight subjects, in each case from baseline to day eight (after seven days of dosing) in subjects administered SBT-20 at the highest dose of 30 mg per day. Three of the subjects with elevated ALT had greater than two times baseline at day eight, and two had 1.5 times baseline at day eight. Although two of eight subjects still had ALT levels above the reference range at the follow-up visits, these values were trending toward baseline levels. Two of the subjects with elevated AST had greater than two times baseline at day eight and one had approximately 1.5 times baseline at day eight. Three of five subjects with increased AST levels on day eight demonstrated a return towards baseline at the follow-up assessment. We did not observe increased ALT or AST levels in the 5, 10 or 20 mg/day dose cohorts in this study. We did not observe increased ALT levels in nonclinical toxicology studies.

Discovery Compounds

We have an active discovery and development program focused on novel compounds targeting mitochondria. Mitochondria have been an extremely challenging therapeutic target, due in part to difficulty in targeting delivery of drugs to mitochondria. Successful delivery requires traversing not only the cell membrane, which may have reduced membrane potential in disease states, but also achieving intracellular diffusion/transport to mitochondria and subsequent electrical potential across outer and IMM. We believe the differentiated mitochondrial targeting characteristics of our compounds, our development of proprietary assays to screen new compounds for mitochondrial targeting and activity characteristics, and our experience working with various models of mitochondrial dysfunction position us to lead next generation development of mitochondrial product candidates that are improved relative to elamipretide and SBT-20.

We have developed multiple series of novel compounds with improved pharmacokinetic properties. These include over 100 different compounds, including peptidomimetics, small molecules and novel peptides, that we are actively screening to broaden our existing mitochondrial product candidate portfolio. We are focused on producing agents with mitochondrial therapeutic potential with improved properties over our first-generation compounds, by altering the rate and extent of absorption, the bio-distribution and the routes of metabolism and excretion.

SBT-272

SBT-272, our lead pipeline compound, is among our novel peptides and peptidomimetics, which target the mitochondria and potentially improve mitochondrial function relative to our current product candidates as observed in early experiments. For example, SBT-272 and an analog have shown signs of biological activity in a rat model of kidney reperfusion injury, in which elamipretide, SBT-272, an analog of SBT-272 or vehicle is administered to a rat, the renal artery is clamped, restricting blood flow, and then released, permitting blood to flow back into the kidney. As illustrated below, treatment with SB-272 or its analog compounds resulted in greater reduction in plasma creatinine and blood urea nitrogen, biomarkers of kidney dysfunction, than treatment with vehicle or treatment with

 

123


Table of Contents

elamipretide. In the graph below, the sham columns represent rats that were not subjected to kidney reperfusion injury and not treated with any of the four alternatives.

Protection from acute ischemia reperfusion kidney injury in rats

 

 

LOGO    LOGO

SBT-272 has shown greater than six times higher mitochondrial uptake relative to elamipretide in cell-based assays of isolated mitochondria, and has also demonstrated improved oral bioavailability in early animal studies, suggesting it may be a promising candidate for oral dosing. SBT-272 has demonstrated approximately three times greater maximum concentration, or Cmax, in the brain of rats relative to elamipretide, in each case dosed 10 mg/kg subcutaneously. SBT-272 has demonstrated more than 25 times greater area under the drug concentration-time curve in the brain of rats relative to elamipretide, in each case dosed 10 mg/kg subcutaneously, suggesting significantly higher brain exposure and residence time.

We have commenced preclinical toxicology studies, or IND-enabling studies, with SBT-272 in preparation for filing an IND application in 2019. Subject to FDA review, this would enable us to commence Phase 1 clinical trials in healthy volunteers by the end of 2019.

SBT-20 has shown signs of benefit in a mouse model of Parkinson’s disease. Based on SBT-272’s preferential concentration and residence time in the cerebrospinal fluid we are evaluating SBT-272 for neurodegenerative indications characterized by mitochondrial dysfunction. Increasing evidence suggests that mitochondria are involved in age-related neurodegenerative diseases, including Alzheimer’s disease and Parkinson’s disease, as well as ALS. Age-related, mitochondrial-generated ROS is postulated to be one factor in the development and progression of late-onset neurodegenerative diseases. Moreover, mitochondrial dysfunction is a common cellular change observed during the disease process in inherited neurodegenerative diseases, including Parkinson’s, in which mtDNA mutations are implicated as a factor, and Huntington’s. We have initiated preclinical studies in an ALS animal model and expect to receive data in the first half of 2019 to inform our further development plans for this indication.

Carrier program

We have also conducted experiments in our carrier program in which we observed that we can use our proprietary compounds as vectors or carriers to selectively deliver various therapeutic payloads to the mitochondria, conferring organelle specificity to promising therapies. Many individuals diagnosed with primary mitochondrial disease, for which there are no therapies approved by the FDA, take a so-called “mito cocktail” of vitamins and supplements, usually in high doses and comprising up to 50 pills per day if not compounded. These may typically include co-enzyme Q-10, or Co Q-10, or its analogs, L-carnitine, B vitamins and antioxidants. The reason these are taken in such high doses is because delivery to the mitochondria is likely confounded by permeability challenges traversing the cell and outer mitochondrial membranes. By contrast, we have observed mitochondrial targeting capabilities of our proprietary compounds, and have also observed that we can conjugate payloads to our compounds and direct the conjoined carrier/payload to the mitochondria.

For example, idebenone is a Co Q-10 analog that introduces electrons into the electron transport chain downstream of complexes I and II, a promising mechanism for bypassing defective complexes in genetic diseases. Because idebenone is poorly absorbed and does not specifically target mitochondria, it has demonstrated limited pharmacologic activity even at high doses. Preliminary preclinical data shows that our idebenone-conjugated peptide

 

124


Table of Contents

was effective at stimulating complex III enzyme activity at a concentration of approximately 100 times lower than standard idebenone. We believe this is promising data supporting the potential of our carrier program, and we are actively evaluating other mitochondrial beneficial payloads for evaluation in this program.

Manufacturing

We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical studies and clinical trials, as well as for commercial manufacture if our product candidates receive marketing approval. We have also obtained key raw materials for elamipretide and SBT-20 from third-party manufacturers. For both elamipretide and SBT-20, we intend to identify and qualify a single manufacturer to provide the active pharmaceutical ingredient and fill-and-finish services prior to submission of an NDA to the FDA. This allows us to reduce the risk to NDA approval by preparing only one manufacturing site for active pharmaceutical ingredient and one for drug product for pre-approval inspections. We can sufficiently reduce the supply risk usually associated with a single source of product based on our capability to build pre-launch inventory and the relatively small demand for material projected for our rare disease indications.

All of our product candidates are small molecules and are manufactured in reliable and reproducible synthetic processes from readily available starting materials. The chemistry is amenable to scale up and does not require unusual equipment in the manufacturing process. Elamipretide has been produced historically by a solid-phase manufacturing process that has been commonly used to produce commercial peptides. Due to a lack of scalability, we deemed this process undesirable for production of commercial quantities of elamipretide. A new solution-phase process for producing elamipretide as a hydrochloride, or HCI, salt has been developed and implemented at a contract manufacturing site at a scale sufficient for supply of near-term clinical trials. The new process for manufacturing is proprietary to us, and the equipment and the unit operations used in the process are not unique to any particular contract manufacturer. We have transferred this process to contract manufacturing sites capable of using such processes to manufacture large quantities of similar drug substances, and we are now producing drug supply for pivotal clinical trials and progressing toward commercial production. Manufacturing at a higher production scale has led to a significant reduction in our cost-of-goods and provided us with the ability to respond to any need to supply large clinical trials or unanticipated commercial demand in the future. Following FDA review of test results demonstrating the same/similar identity, quality, purity and strength of product from the two processes, the FDA has stated that non-clinical and clinical trials with drug substance from the former process can be used to support further development and registration of elamipretide. As a result, we have filed the newly developed process with regulatory authorities and introduced drug substance batches from that process into our clinical trials.

We have active clinical programs for which our CMOs are routinely manufacturing a sterile solution product for subcutaneous injection or intravenous infusion and a solution product for topical administration to the eye. Our CMOs have successfully produced these products on a scale of tens of thousands of units and shown, using validated stability-indicating methods, that these products would meet specifications over a shelf-life typical of commercial products. We believe we are well-positioned to validate our manufacturing processes at one or more CMOs and support a commercial launch of these products. We have successfully filed regulatory applications to supply multi-use cartridges and pens for subcutaneous self-administration in our Phase 3 clinical trial for primary mitochondrial myopathy. We believe, based on these clinical cartridge and pen injector designs, that we can commercialize similar products successfully.

Intellectual Property

We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patent protection intended to cover our lead product candidates, elamipretide and SBT-20, and related compositions, our core clinical applications and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary or intellectual property rights worldwide. Our patent portfolio, which includes patents and patent applications that we own, as well as those that we have exclusively in-licensed, is structured to provide layers of protection for the proprietary technologies central to our business. Our portfolio includes claims to the elamipretide and SBT-20 peptides, compositions comprising the same, and use of the peptides for our core clinical applications. As of September 30, 2018, the patent portfolio included 369 granted patents (38 U.S., 331 foreign, which include individual national patents based on granted

 

125


Table of Contents

European patents) and 302 pending applications, including provisional applications (79 U.S., 219 foreign, four Patent Cooperation Treaty).

We also rely on trade secret protection, technical knowledge, and continuing technological innovation to develop and maintain our proprietary and intellectual property position. We seek to protect our proprietary information, in part, using confidentiality agreements with our collaborators, scientific advisors, employees and consultants, and invention assignment agreements with our employees.

We also have agreements with selected consultants, scientific advisors and collaborators requiring assignment of inventions or, in limited cases, the grant of an exclusive, worldwide license or option to license intellectual property rights developed in the course of their work with or for us. As with other biotechnology and pharmaceutical companies, our capacity to obtain, maintain and protect our proprietary and intellectual property positions for our products and technologies depends on our continued ability to obtain relevant patent rights and to enforce those patent rights, if necessary. However, patent applications that we may file or license from third parties may not necessarily result in the grant of rights. We also cannot predict the scope of rights that may be granted to us in the future, our desire or ability to seek enforcement of any granted rights, or the willingness of courts or other administrative bodies to uphold or enforce our rights.

In addition, any currently issued patents or any future patents, should they issue, may be challenged, invalidated, or circumvented, such as through district court proceedings or inter partes review. For example, we cannot be certain of the priority of inventions covered by pending third-party patent applications, and proceedings to establish our rights could result in substantial costs, even if the eventual outcome is favorable. Due to the extensive time required for clinical development and regulatory review, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or its term may have substantially run, leaving its remaining term in force for only a short period following commercialization. To the extent that occurs, the possible commercial advantage conferred by such patents would be reduced. Accordingly, we have attempted to design a patent portfolio with both breadth and depth of potential protection, with the goal of maximizing coverage for elamipretide and related peptides and their uses in commercially relevant countries.

Elamipretide

Patent rights relating to elamipretide peptide and compositions comprising elamipretide have been granted in Australia, Canada, China, Europe, Hong Kong, Japan and the United States. The U.S. patent has an adjusted statutory expiration date in 2026, which includes 717 days of patent term adjustment, or PTA, granted by the USPTO upon issue of the patent. The foreign patents have a statutory expiration date in 2024. We hold an exclusive license to these rights from Cornell and the IRCM.

Patent rights to the use of elamipretide as a carrier for the transport of therapeutic molecules into a cell as well as related compositions have been granted or allowed in Australia, Canada, China, Europe, Hong Kong, Japan, the United States and six other countries. The U.S. patent has an adjusted statutory expiration date in 2027, which includes 1,215 days of PTA granted by the USPTO upon issue of the patent. The foreign patents have a statutory expiration date in 2024. We hold an exclusive license to these patent rights from Cornell.

Patent rights related to compositions including elamipretide and a second therapeutic compound have also been granted. For example, claims directed to elamipretide-cyclosporine conjugates have been granted in the United States and are pending in Europe. The U.S. patent has a statutory expiration date in 2031, and any patent that may issue from the pending European application will similarly have a statutory expiration date in 2031. Each of these patent rights are owned exclusively by us. Additional patent rights related to compositions including elamipretide and glucagon-like peptide-1 are pending in applications filed in Canada, China, Europe, Japan and the United States and, if granted, these will have statutory expiration dates in 2033.

Patents directed to methods of treating or preventing various diseases and medical conditions by administering elamipretide have been granted to us, or have been in-licensed by us, in a number of countries. Where possible, the scope of granted claims has been tailored to provide broad generic support encompassing a wide range of conditions as well as specific disease states. By way of example, there are granted patents related to the use of elamipretide to treat basic, adverse cellular events that contribute to disease, such as mitochondrial permeability transition (MPT), and oxidative damage associated with a neurodegenerative disease.

 

126


Table of Contents

Patents related to MPT have been granted in Australia, Canada, China, Europe, Hong Kong, Japan and the United States. The U.S. patent has an adjusted statutory expiration date in 2026, and is the same patent referred to above as covering the composition of elamipretide. The foreign patents have statutory expiration dates in 2024. We hold exclusive rights to these patents by way of a license agreement with Cornell and the IRCM.

Our patent portfolio also protects or aims to protect the use of elamipretide to treat or prevent specific clinical indications. By way of example, our portfolio includes granted claims drawn to the use of elamipretide to treat diabetes, metabolic syndrome, renal diseases, certain cardiovascular diseases, ocular diseases, and neurodegenerative diseases (including Alzheimer’s disease, Huntington’s disease and ALS) that are in patents owned by us or in-licensed to us. Claims relating to the use of elamipretide to treat Barth, LHON, primary mitochondrial myopathy and mitochondrial diseases associated with certain gene mutations are pending in applications owned by us.

SBT-20

Claims drawn to the SBT-20 peptide and compositions comprising the SBT-20 peptide have been granted in Australia, Canada, Japan and the United States, and are pending in Europe. Claims drawn to a composition comprising SBT-20 together with a cargo molecule are granted in China. The U.S. patent has an adjusted statutory expiration date in 2026, which includes 717 days of PTA granted by the USPTO upon issue of the patent, and is the same patent described above as related to elamipretide peptide. The foreign patents have statutory expiration dates in 2024. We hold exclusive rights to the patents and applications by way of an exclusive agreement with either Cornell alone or Cornell in conjunction with the IRCM.

Patent rights directed to the use of the SBT-20 peptide as a carrier for the transport of therapeutic molecules into cells, as well as related compositions, have been granted or allowed in Australia, Canada, China, Europe, Hong Kong, Japan, the United States and six other countries. The U.S. patent has an adjusted statutory expiration date in 2027, which includes 1,215 days of PTA granted by the USPTO upon issue of the patent, and is the same patent described above as related to the use of elamipretide as a carrier. The foreign patents have a statutory expiration date in 2024. We hold exclusive rights to these patents by way of our license agreements with Cornell and the IRCM.

Patent rights related to compositions comprising SBT-20-cyclosporine conjugates have been granted in the United States and are pending in Europe. The U.S. patent has a statutory expiration date in 2031, and any patent that may issue from the pending European application will similarly have a statutory expiration date in 2031. Each of these patent rights are owned exclusively by us.

Our patent portfolio also protects or aims to protect the use of SBT-20 to treat or prevent specific clinical indications. By way of example, our portfolio includes granted claims drawn to the use of SBT-20 to treat complications of diabetes, renal diseases, ocular diseases, and neurodegenerative diseases that are owned by us or in-licensed. Claims relating to the use of SBT-20 to treat Parkinson’s disease, Alzheimer’s disease, Huntington’s, and ALS are granted in Australia, in a patent in-licensed to us with a statutory expiration date in 2024.

We hold patent rights to additional pipeline compounds in the portfolio, and are continuing to expand coverage in the United States and commercially relevant foreign jurisdictions. Subject matter for new filings is expected to include, but will not necessarily be limited to, the use of peptides to treat additional disease indications, new combination therapies, new peptide formulations, new compositions and uses of the same.

The term of a patent depends upon the legal length of the term of patents in the jurisdiction in which it is issued. In most countries in which we file, the patent term is 20 years from the earliest date of filing of a non-provisional patent application. Patent term adjustment is a process of extending the term of a United States patent beyond the 20 year statutory patent term to accommodate for delays caused by the USPTO during prosecution. By contrast, a patentee or applicant may file a terminal disclaimer which disclaims or dedicates to the public the entire term or any terminal part of the term of a patent or patent to be granted.

In the United States, the term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the regularly scheduled expiration of a patent. The length of the patent term extension is related to the length of time the drug is

 

127


Table of Contents

under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval by the FDA, only one patent applicable to an approved drug may be extended, and a given patent can only be extended based on one approved drug. Similar provisions are available in Europe and certain other jurisdictions to extend the term of a patent that covers an approved drug. We anticipate that we will apply for patent term extensions for relevant U.S. patents, if and when our pharmaceutical products receive FDA approval. We also anticipate seeking patent term extensions for issued patents in any jurisdiction where patent term extension is available, however, there is no guarantee that the applicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and if granted, the length of such extensions. Unless specifically indicated, the above statutory patent terms refer to the 20-year base statutory term and do not include any patent term adjustment or extension that may be available in any jurisdiction.

Cornell License Agreements

We have entered into several license agreements with Cornell and the IRCM, pursuant to which Cornell granted us specified exclusive, worldwide rights under patents related to elamipretide, SBT-20, and other technology described below, which we refer to collectively as the licensed patents. The original Cornell agreement was entered into in with Cornell and the IRCM in April 2006, and subsequently amended in October 2010. Concurrent with our execution of the original Cornell agreement, we entered into a sponsored research agreement with Cornell in which we agreed to fund specified research at Cornell for three years. We retained the right to license inventions arising under such sponsored research agreement, as well as certain material transfer agreement entered into between us and Cornell, through entry into license agreements on substantially the same terms as the original Cornell agreement. Such subsequent agreements under which we obtained rights under additional patent families, which we refer to as other Cornell license agreements, and collectively with the original Cornell agreement as the Cornell license agreements, were entered into in November 2010, November 2011, December 2012 and August 2013. In each of the Cornell license agreements, Cornell granted us an exclusive, worldwide license under specified patents and patent application families claiming certain inventions, including inventions related to elamipretide, SBT-20, certain other peptides and/or specified uses of the foregoing, which we refer to collectively as the licensed patents, to make, use, sell, lease, import, export or otherwise dispose of products or services that incorporate, utilize or are otherwise described and claimed in the licensed patents, which we refer to as the licensed products, in any and all fields. Our rights under the Cornell license agreements are subject to the rights of the United States government and other applicable restrictions imposed by the Bayh-Dole Act and its implementing regulations, and the rights of Cornell, and in some cases certain other specified institutions, to practice the inventions claimed in the licensed patents for educational and research purposes.

We have agreed to use best efforts (as defined in each of the Cornell license agreements) to commercialize licensed products, and to achieve specified diligence milestones by specified target dates. We are also required to periodically set forth additional milestones until first commercial sale of a specified licensed product. We believe that to date we have met each diligence milestone with respect to our licensed products and the specific licensed indications and/or formulations which we are developing. If however we fail in the future to meet any diligence milestone within a specified period after the corresponding target date, our exclusive license under the applicable Cornell license agreement will convert to a non-exclusive license and, in the case of the original Cornell agreement, such conversion will occur only with respect to the peptide, indication and/or formulation that is subject of the unachieved milestone.

In connection with the licenses granted under the original Cornell agreement, we issued Cornell 666,667 ordinary shares and Cornell agreed to provide us with a right of first refusal in the event Cornell sought to sell its equity position at any time prior to an initial public offering. With respect to the other Cornell license agreements, we paid Cornell upfront license fees of $55,000 and royalties on net sales, if any, by us and our sublicensees of any licensed product, on a product-by-product and country-by-country basis. Subject to specified reductions and royalty offsets, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the Cornell license agreements, except that for licensed products under the original Cornell agreement, such royalties are calculated as a tiered, low single-digit to sub-teen percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Our obligation to pay royalties as to any licensed product extends until the later of the expiration of the last-to-expire valid claim of any licensed patent covering such licensed product or 15 years after the date of our first commercial sale of such licensed product. If a licensed product is covered by licenses granted under the original Cornell agreement and another Cornell license agreement, then, for each unit of product, royalties will only be due under the original Cornell agreement.

 

128


Table of Contents

We are obligated to pay Cornell a low double-digit percentage of specified payments we receive in connection with granting a sublicense under the Cornell license agreements. We have also agreed to reimburse Cornell for its out-of-pocket expenses incurred in preparing, filing, prosecuting and maintaining the licensed patents, except for any licensed patents as to which we elect to waive our licensed rights. We also have agreed to pay Cornell annual license maintenance fees in the mid-five-digits for the original Cornell agreement, and mid four-digits for each of the other Cornell license agreements starting on a date specified in each such agreement, in all cases until the first commercial sale of a specified type of licensed product under such agreement.

If Cornell identifies any licensed product that we are not actively developing or commercializing and we do not elect within a specified period to develop or commercialize such licensed product ourselves or through a sublicensee, or, if we do so elect, we do not then agree on reasonable diligence goals with Cornell or enter into an agreement with such a sublicensee within specified periods as to such licensed product, then Cornell may terminate our rights under the applicable Cornell license agreement for such licensed product.

Unless earlier terminated, each of the Cornell license agreements will remain in effect until the expiration or invalidation of the last of all licensed patents and as long as no licensed patent applications remain pending. Cornell (together with the IRCM in the case of the original Cornell agreement) can terminate a Cornell license agreement if we are in material breach of such license agreement or if we intentionally provide false reports, or if we are in default in our payment obligations, and fail to cure such breach, false report or default within a specified period. In addition, Cornell can terminate the original Cornell agreement and certain of the other Cornell license agreements if we fail to achieve first commercial sale of a therapeutic licensed product by the date specified in the respective agreement (which, with respect to the original Cornell agreement, is December 31, 2020); however, there are a number of exceptions to Cornell’s termination right, including:

 

   

delays due to clinical development, including clinical trial enrollment challenges or data read outs;

 

   

delays due to regulatory matters; or

 

   

delays due to other events over which we cannot exert direct control.

We can terminate any of the Cornell license agreements in its entirety or on a patent-by-patent, licensed product-by-licensed product or country-by-country basis if we have a reasonable basis for doing so by giving Cornell a specified number of days’ prior notice. We can transfer each of the Cornell license agreements with Cornell’s prior written approval (not to be unreasonably withheld) in the event of a sale of the Company, sale of assets or sale of shares, provided that such sale is not primarily for the benefit of creditors. If we fail to obtain Cornell’s prior written approval for such transfer, Cornell can terminate the respective agreement and require that the transfer of such agreement be voided. We cannot assign the Cornell license agreements without Cornell’s (and in the case of the original Cornell agreement, IRCM’s) written consent.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

We are initially developing elamipretide for the treatment of rare primary mitochondrial diseases and common diseases of aging in which mitochondrial function is impaired. There are several companies developing treatments that target mitochondria or mitochondria-associated diseases. The majority of these efforts are in preclinical development, are focused on gene therapy or are proposing the use of generic compounds. To our knowledge, none of these are focused on cardiolipin remodeling. Our competitors include NeuroVive Pharmaceutical AB, Reata Pharmaceuticals, Inc., BioElectron Technology Corporation (formerly Edison Pharmaceuticals Inc.), LumiThera, Inc. and Santhera Pharmaceuticals Holding. In addition to competition from competitors who are developing treatments that seek to improve mitochondrial function or otherwise target the mitochondria, we also face competition from

 

129


Table of Contents

therapies that target the indications we are studying, particularly for diseases of aging such as dry AMD. Such competitors who are developing or who have developed competing therapies include Allegro Ophthalmics, LLC, Apellis Pharmaceuticals, Astellas Pharma Inc., Hemera Biosciences Inc., Ionis Pharmaceuticals, Inc. and Ophthotech Corporation.

Many of the companies against which we are competing or against which we may compete in the future may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

The key competitive factors affecting the success of all of our therapeutic product candidates, if approved, are likely to be their efficacy, safety, tolerability, convenience and price and the availability of reimbursement from government and other third-party payors.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

Government Regulation and Product Approvals

Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, pricing, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of biopharmaceutical products. The processes for obtaining marketing approvals in the United States and in foreign countries and jurisdictions, along with compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and associated implementing regulations. The failure to comply with the FDCA and other applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice, or DOJ, or other governmental entities.

An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:

 

   

completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;

 

   

submission to the FDA of an IND, which must take effect before human clinical trials may begin in the United States;

 

   

approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;

 

   

performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the safety and efficacy of the proposed drug product for each indication;

 

130


Table of Contents
   

preparation and submission to the FDA of an NDA;

 

   

review of the product candidate by an FDA advisory committee, where appropriate or if applicable;

 

   

satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with current Good Manufacturing Practices, or cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;

 

   

satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;

 

   

payment of user fees and securing FDA approval of the NDA; and

 

   

compliance with any post-approval requirements, including Risk Evaluation and Mitigation Strategies, or REMS, where applicable, and post-approval studies required by the FDA.

Preclinical Studies

Preclinical studies include laboratory evaluation of the purity and stability of the manufactured drug substance or active pharmaceutical ingredient and the formulated drug or drug product, as well as in vitro and animal studies to assess the safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. Additional preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.

Human Clinical Trials in Support of an NDA

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the trial, inclusion and exclusion criteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin.

In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health for public dissemination on their ClinicalTrials.gov website.

Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

   

Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease (e.g., cancer) or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.

 

   

Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

 

   

Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

 

   

Phase 4. Post-approval studies may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

 

131


Table of Contents

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor or the data monitoring committee may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted.

In general, the FDA accepts foreign safety and efficacy studies that were not conducted under an IND provided that they are well designed, well conducted, performed by qualified investigators, and conducted in accordance with ethical principles acceptable to the world community. The conduct of these studies must meet at least minimum standards for assuring human subject protection. Therefore, for studies submitted in support of an NDA that were conducted outside the United States and not under an IND, the agency requires demonstration that such studies were conducted in accordance with GCP.

Submission of an NDA to the FDA

Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law, the submission of most NDAs is additionally subject to an application user fee and the sponsor of an approved NDA is also subject to annual program user fees. Certain exceptions and waivers are available for some of these fees, such as an exception from the application fee for drugs with orphan designation.

The FDA conducts a preliminary review of an NDA within 60 calendar days of its receipt and strives to inform the sponsor by the 74th day after the FDA’s receipt of the submission to determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accepting an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review.

The FDA has agreed to specified performance goals in the review process of NDAs. Under that agreement, 90% of applications seeking approval of New Molecular Entities, or NMEs, are meant to be reviewed within ten months from the date on which FDA accepts the NDA for filing, and 90% of applications for NMEs that have been designated for “priority review” are meant to be reviewed within six months of the filing date. For applications seeking approval of drugs that are not NMEs, the ten-month and six-month review periods run from the date that FDA receives the application. The review process may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-approval inspections cover all facilities associated with an NDA submission, including drug component manufacturing (such as active pharmaceutical ingredients), finished drug product manufacturing and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.

In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. REMS use risk minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the

 

132


Table of Contents

potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events and whether the product is a new molecular entity. REMS can include medication guides, physician communication plans for healthcare professionals and elements to assure safe use, or ETASU. ETASU may include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The FDA may require a REMS before approval or post-approval if it becomes aware of a serious risk associated with use of the product. The requirement for a REMS can materially affect the potential market and profitability of a product.

The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Fast Track, Breakthrough Therapy, Priority Review and Regenerative Advanced Therapy Designations

The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are Fast Track designation, breakthrough therapy designation, priority review designation and regenerative advanced therapy designation.

Specifically, the FDA may designate a product for Fast Track review if it is intended, whether alone or in combination with one or more other drugs, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs for such a disease or condition. For Fast Track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a Fast Track product’s NDA before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a Fast Track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a Fast Track application does not begin until the last section of the NDA is submitted. In addition, the Fast Track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.

Second, in 2012, Congress enacted the Food and Drug Administration Safety and Innovation Act, or FDASIA. This law established a new regulatory scheme allowing for expedited review of products designated as “breakthrough therapies.” A product may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.

Third, the FDA may designate a product for priority review if it is a drug that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed drug represents a significant improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting drug reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten months to six months.

Finally, with passage of the Cures Act in December 2016, Congress authorized the FDA to accelerate review and approval of products designated as regenerative advanced therapies. A product is eligible for this designation if it is

 

133


Table of Contents

a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition. The benefits of a regenerative advanced therapy designation include early interactions with FDA to expedite development and review, benefits available to breakthrough therapies, potential eligibility for priority review and accelerated approval based on surrogate or intermediate endpoints.

Accelerated Approval Pathway

The FDA may grant accelerated approval to a drug for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the drug has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for such a condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality and that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. Drugs granted accelerated approval must meet the same statutory standards for safety and effectiveness as those granted traditional approval.

For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a drug, such as an effect on irreversible morbidity or mortality. The FDA has limited experience with accelerated approvals based on intermediate clinical endpoints, but has indicated that such endpoints generally may support accelerated approval where the therapeutic effect measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a drug.

The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefit of a drug, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval of drugs for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large trials to demonstrate a clinical or survival benefit.

The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical benefit. As a result, a drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.

The FDA’s Decision on an NDA

On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and

 

134


Table of Contents

surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.

Post-Approval Requirements

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

 

   

restrictions on the marketing or manufacturing of the product, suspension of the approval, complete withdrawal of the product from the market or product recalls;

 

   

fines, warning letters or holds on post-approval clinical trials;

 

   

refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;

 

   

product seizure or detention, or refusal to permit the import or export of products; or

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, as well as the Drug Supply Chain Security Act, or DSCA, which regulate the distribution and tracing of prescription drugs and prescription drug samples at the federal level, and set minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution. The DSCA imposes requirements to ensure accountability in distribution and to identify and remove counterfeit and other illegitimate products from the market.

 

135


Table of Contents

Abbreviated New Drug Applications for Generic Drugs

In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an abbreviated new drug application, or ANDA, to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously approved under an NDA, known as the reference listed drug, or RLD.

Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form and the strength of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant difference from the rate and extent of absorption of the listed drug.”

Upon approval of an ANDA, the FDA indicates whether the generic product is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider a therapeutic equivalent generic drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of therapeutic equivalence often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.

Under the Hatch-Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drug containing a new chemical entity or NCE. An NCE is a drug that contains no active moiety that has previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion responsible for the physiological or pharmacological action of the drug substance. In cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product approval. The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication.

Hatch-Waxman Patent Certification and the 30-Month Stay

Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA or 505(b)(2) applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval.

Specifically, the ANDA or 505(b)(2) applicant must certify with respect to each patent whether:

 

   

the required patent information has not been filed;

 

   

the listed patent has expired;

 

   

the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or

 

   

the listed patent is invalid, unenforceable or will not be infringed by the new product.

A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the application will not be approved until all the listed patents claiming the referenced product have expired (other than method of use patents involving indications for which the ANDA applicant is not seeking approval).

 

136


Table of Contents

If the ANDA or 505(b)(2) 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 once the ANDA or 505(b)(2) application has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) application until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in the infringement case that is favorable to the ANDA applicant.

Pediatric Studies and Exclusivity

Under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the FDASIA in 2012, sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.

The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in the FDASIA. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.

Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application.

Orphan Drug Designation and Exclusivity

Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will receive orphan product exclusivity. Orphan product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years, except in certain limited circumstances. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity and may obtain approval for the same product but for a different indication. If a drug or drug product designated as an orphan product ultimately receives marketing approval for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity.

Patent Term Restoration and Extension

A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Amendments, which permit a patent restoration of up to five years for patent term lost during product development

 

137


Table of Contents

and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The U.S. Patent and Trademark Office reviews and approves the application for any patent term extension or restoration in consultation with the FDA.

Review and Approval of Drug Products in the European Union

In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of drug products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals from the comparable foreign regulatory authorities before we can commence clinical trials or marketing of any products in those countries or jurisdictions. The approval process ultimately varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.

Clinical Trial Approval in the European Union

Requirements for the conduct of clinical trials in the European Union including Good Clinical Practice, or GCP, are set forth in the Clinical Trials Directive 2001/20/EC and the GCP Directive 2005/28/EC. Pursuant to Directive 2001/20/EC and Directive 2005/28/EC, as amended, a system for the approval of clinical trials in the European Union has been implemented through national legislation of the European Union member states. Under this system, approval must be obtained from the competent national authority of each European Union member state in which a study is planned to be conducted. To this end, a CTA is submitted, which must be supported by an investigational medicinal product dossier, or IMPD, and further supporting information prescribed by Directive 2001/20/EC and Directive 2005/28/EC and other applicable guidance documents. Furthermore, a clinical trial may only be started after a competent ethics committee has issued a favorable opinion on the clinical trial application in that country.

In April 2014, the European Union passed the new Clinical Trials Regulation, (EU) No 536/2014, which will replace the current Clinical Trials Directive 2001/20/EC. To ensure that the rules for clinical trials are identical throughout the European Union, the new European Union clinical trials legislation was passed as a regulation that is directly applicable in all European Union member states. All clinical trials performed in the European Union are required to be conducted in accordance with the Clinical Trials Directive 2001/20/EC until the new Clinical Trials Regulation (EU) No 536/2014 becomes applicable. According to the current plans of EMA, the new Clinical Trials Regulation will become applicable in October 2018. The Clinical Trials Directive 2001/20/EC will, however, still apply three years from the date of entry into application of the Clinical Trials Regulation to (i) clinical trials applications submitted before the entry into application and (ii) clinical trials applications submitted within one year after the entry into application if the sponsor opts for old system.

The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trial in the European Union. The main characteristics of the regulation include: a streamlined application procedure via a single entry point, the European Union portal; a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures that will spare sponsors from submitting broadly identical information separately to various bodies and different member states; a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed jointly by all member states concerned. Part II is assessed separately by each member state concerned; strictly defined deadlines for the assessment of clinical trial applications; and the involvement of the ethics committees in the assessment procedure in accordance with the national law of the member state concerned but within the overall timelines defined by the Clinical Trials Regulation.

 

138


Table of Contents

Marketing Authorization in the European Union

To obtain marketing approval of a drug under European Union regulatory systems, an applicant must submit a marketing authorization application, or MAA, either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all European Union member states. The centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional.

Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the EMA, is responsible for conducting the initial assessment of a drug. The CHMP is also responsible for several post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. In this circumstance, the EMA ensures that the opinion of the CHMP is given within 150 days.

The decentralized procedure is available to applicants who wish to market a product in various European Union member states where such product has not received marketing approval in any European Union member states before. The decentralized procedure provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state designated by the applicant, known as the reference member state. Under this procedure, an applicant submits an application based on identical dossiers and related materials, including a draft summary of product characteristics, and draft labeling and package leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment report and drafts of the related materials within 210 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report and related materials, each concerned member state must decide whether to approve the assessment report and related materials.

If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points are subject to a dispute resolution mechanism and may eventually be referred to the European Commission, whose decision is binding on all member states.

Data and Market Exclusivity

In the European Union, NCEs qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from assessing a generic (abbreviated) application for eight years, after which generic marketing authorization can be submitted but not approved for two years. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be an NCE and the sponsor is able to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the drug if such company can complete a full MAA with a complete human clinical trial database and obtain marketing approval of its product.

Orphan Drug Designation and Exclusivity

Regulation 141/2000 provides that a drug shall be designated as an orphan drug if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the European Community when the application is made, or that the product is intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition in the European Community and that without incentives it is unlikely that the marketing of the drug in the European Community would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method

 

139


Table of Contents

of diagnosis, prevention or treatment of the condition in question that has been authorized in the European Community or, if such method exists, the drug will be of significant benefit to those affected by that condition.

Regulation 847/2000 sets out criteria and procedures governing designation of orphan drugs in the European Union. Specifically, an application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. Marketing authorization for an orphan drug leads to a ten-year period of market exclusivity. This period may, however, be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan drug designation, for example because the product is sufficiently profitable not to justify market exclusivity. Market exclusivity can be revoked only in very selected cases, such as consent from the marketing authorization holder, inability to supply sufficient quantities of the product, demonstration of “clinically relevant superiority” by a similar medicinal product, or, after a review by the Committee for Orphan Medicinal Products, requested by a member state in the fifth year of the marketing exclusivity period (if the designation criteria are believed to no longer apply). Medicinal products designated as orphan drugs pursuant to Regulation 141/2000 shall be eligible for incentives made available by the European Community and by the member states to support research into, and the development and availability of, orphan drugs.

Brexit and the Regulatory Framework in the United Kingdom

On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the United Kingdom. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in the United Kingdom.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of any approved products will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may also limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication.

In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement for products in the United States can differ significantly from payor to payor.

In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to maintain price levels high enough to realize an appropriate return on investment in product development.

The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices of drugs have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from

 

140


Table of Contents

the sale of any approved products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular drug candidate to currently available therapies, or so called health technology assessments, in order to obtain reimbursement or pricing approval. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits.

The downward pressure on health care costs in general, particularly prescription drugs, has become intense and there are high barriers to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.

Healthcare Law and Regulation

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws and regulations. Such restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

   

the federal healthcare Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;

 

   

the federal civil and criminal false claims laws, including the False Claims Act, and civil monetary penalties laws, which provide for civil whistleblower or qui tam actions, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and their respective implementing regulations, including the Final Omnibus Rule published in January 2013, 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;

 

   

the federal transparency requirements under the Affordable Care Act, known as the federal Physician Payments Sunshine Act, require manufacturers of drugs, devices, biologics and medical supplies to report to the Centers for Medicare & Medicaid Services, or CMS, within the Department of Health and Human Services, or HHS, information related to payments and other transfers of value to physicians and teaching hospitals and physician ownership and investment interests held by physicians and their immediate family members; and

 

141


Table of Contents
   

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.

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 local laws require the registration of pharmaceutical sales representatives and state and foreign 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 current and future business arrangements with third parties comply with applicable healthcare laws and regulations involves substantial costs. If operations are found to be in violation of any of these laws or any other governmental regulations that may apply to a business, the business may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion of products from government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of operations.

Healthcare Reform

A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States.

By way of example, the United States and state governments continue to propose and pass legislation designed to reduce the cost of healthcare. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the Affordable Care Act, was enacted which, among other things, includes changes to the coverage and payment for products under government health care programs. Among the provisions of the Affordable Care Act of importance to potential drug candidates are:

 

   

an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications;

 

   

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;

 

   

expansion of manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices and extending rebate liability to prescriptions for individuals enrolled in Medicare Advantage plans;

 

   

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

 

   

expanded types of entities eligible for the 340B drug discount program;

 

   

establishment of the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% (and 70% commencing January 1, 2019) point-of-sale-discount off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D;

 

   

establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

142


Table of Contents
   

establishment of the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending; and

 

   

a licensure framework for follow on biologic products.

Some of the provisions of the Affordable Care Act have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017, or the Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. In July 2018, CMS published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is an inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well. While the Trump Administration and CMS have both stated that the ruling will have no immediate effect, it is unclear how this decision and subsequent appeals, if any, and other efforts to repeal and replace the Affordable Care Act will impact the Affordable Care Act.

Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and due to legislative amendments to the statute, including the BBA, and will remain in effect through 2027 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Moreover, there has been heightened governmental scrutiny recently over pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients.

Further, the Trump administration released a “Blueprint” to lower drug prices and reduce out-of-pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of

 

143


Table of Contents

certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. HHS has already started the process of soliciting feedback on certain of these measures and, additionally, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. Although a number of these, and other potential, proposals will require authorization through additional legislation to become effective, Congress and the executive branch have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Additionally, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017 was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.

Facilities

Our operations are conducted at Stealth Delaware, which is located in Newton, Massachusetts, where it occupies 14,446 square feet of office space. The lease expires November 30, 2020.

Employees

As of November 30, 2018, we had 57 full-time employees, 37 of whom were primarily engaged in research and development activities and 16 of whom had a Ph.D. or Pharm.D. degree. All of our full-time employees are based in the United States.

Legal Proceedings

We are not currently a party to any legal proceedings.

 

144


Table of Contents

MANAGEMENT

Executive Officers and Directors

The following table sets forth the name and position of each of our directors of Stealth BioTherapeutics Corp and of the executive officers of Stealth Delaware and their ages as of November 30, 2018. Stealth BioTherapeutics Corp does not have any executive officers other than Reenie McCarthy, its Chief Executive Officer.

 

 

 

NAME

   AGE     

POSITION

Executive Officers

     

Irene (Reenie) McCarthy

     54      Chief Executive Officer, Director

Daniel E. Geffken

     61      Interim Chief Financial Officer

Mark J. Bamberger, Ph.D.

     66      Chief Scientific Officer

Brian D. Blakey, Pharm.D.

     56      Chief Business Officer

James R. Carr, Pharm.D.

     56      Chief Clinical Development Officer

Non-Employee Directors

     

Gerald L. Chan, Sc.D.

     67      Director, Chairman of the Board

Vincent Cheung (3)

     38      Director

Lu Huang, M.D. (2)

     45      Director

Francis W. Chen, Ph.D. (1)(3)

     70      Director

Stephen Law (1)(2)

     56      Director

Kevin F. McLaughlin (1)(3)

     62      Director

Edward P. Owens (2)

     72      Director

 

 

 

(1)  

Member of Audit Committee

(2)  

Member of Remuneration Committee

(3)  

Member of Nominating Committee

Executive Officers

Irene (Reenie) McCarthy has served as Chief Executive Officer of Stealth BioTherapeutics Corp since October 2018. She has served as Chief Executive Officer of Stealth Delaware since February 2016 and as President and Secretary of Stealth Delaware since August 2015. She was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. She has served as a director of Stealth Delaware since July 2009. Ms. McCarthy served as a member of Morningside Technology Advisory, LLC (and affiliates), a private advisory company, from January 2009 to April 2016. Ms. McCarthy remains a director of Morningside Technology Advisory, LLC. She has served as a director for numerous private biotechnology companies developing drugs across a broad spectrum of therapeutic focus areas. Ms. McCarthy was a director of Biovex Group, Inc., a biotechnology company developing an oncolytic vaccine for melanoma and head and neck cancer, from 2009 to 2011, when it was acquired by Amgen Inc. Prior to joining the Morningside group, Ms. McCarthy spent five years as a corporate lawyer with Richards & O’Neil LLP. She holds a J.D. from the University of Pennsylvania Law School and a B.A. in English and Political Science from Bates College. We believe that Ms. McCarthy is qualified to serve on our board of directors because of her extensive experience investing in life sciences companies, her service on several life science company boards and her almost decade of service to our company, as an investor, board member and officer.

Daniel E. Geffken has served as the interim Chief Financial Officer of Stealth Delaware since November 2016 through a consulting agreement entered into between the Company and Danforth Advisors LLC, or Danforth, on November 21, 2016, as amended. Mr. Geffken is a founder and managing director at Danforth, a management consulting firm, where he has served since 2011. Through Danforth, Mr. Geffken currently serves as Chief Financial Officer for Apic Bio, Inc., a pre-clinical stage gene therapy company, starting in March 2018 and ProMIS Neurosciences, a biotechnology company focused on the discovery and development of antibody therapeutics for neurodegenerative diseases and listed on the Toronto Stock Exchange, starting in March 2017, and served as Chief Financial Officer for Homology Medicines, Inc., a genetic medicines company, from April 2015 to June 2017, and

 

145


Table of Contents

Apellis Pharmaceuticals, Inc., a biotechnology company focused on neurodevelopmental disorders, from August 2015 to August 2017. From 2013 through 2017, Mr. Geffken served on the board of directors of Alcobra Ltd., a Nasdaq-listed biotechnology company. Alcobra Ltd. later merged with Arcturus Therapeutics, Inc. and from

November 2017 until May 2018, Mr. Geffken served on the board of directors of Arcturus Therapeutics, Inc., a Nasdaq-listed company. Mr. Geffken received an M.B.A from the Harvard Business School and a B.S. in economics from The Wharton School, University of Pennsylvania.

Mark J. Bamberger, Ph.D., has served as Chief Scientific Officer of Stealth Delaware since February 2014. Prior to joining us, Dr. Bamberger worked as an independent consultant from January 2008 to February 2014, including being a consultant for Stealth Delaware pursuant to a consulting agreement dated April 1, 2011, as amended, from April 2011 to February 2014. Mr. Bamberger was the Director of Cardiovascular and Metabolic Disease Research at Pfizer, Inc., a pharmaceutical company, from January 2004 to January 2008. He holds a Ph.D. in biochemistry from the Medical College of Pennsylvania and a B.S. in biology from St. Joseph’s University.

Brian D. Blakey, Pharm.D. , has served as Chief Business Officer of Stealth Delaware since February 2014. Previously, Dr. Blakey was the Chief Strategy and Operations Officer of Element Marketing Group, a medical marketing agency, from June 2010 to February 2014, and was the Vice President of Commercial Development at Salutria Pharmaceuticals, LLC (formerly AtheroGenics Inc.), a biotechnology company, from May 2006 to May 2010. He also worked in multiple roles at GlaxoSmithKline, plc, a pharmaceutical company, beginning in March 1998, ultimately serving in the position of director between July 2003 and February 2004. Dr. Blakey holds a Pharm.D. from the University of Florida.

James R. Carr, Pharm.D . , has served as Chief Clinical Development Officer of Stealth Delaware since January 2017 and previously served as our Vice President, Clinical Development since March 2014. Previously, Dr. Carr was the Executive Director in the Cardiovascular Metabolic Franchise at GlaxoSmithKline plc, a pharmaceutical company, from October 2010 to March 2014 and the Vice President of Clinical Development at ARCA biopharma, Inc., a pharmaceutical company, from May 2008 to November 2010. Dr. Carr holds a Pharm.D. and a B.S. in pharmacy from the University of Minnesota.

Non-Employee Directors

Gerald L. Chan, Sc.D. , was appointed as a Director of Stealth BioTherapeutics Corp and as Chairman of the Board in June 2018. He has served as a director of Stealth Delaware since October 2007. Dr. Chan co-founded the Morningside group in 1986. He has been a member of the board of directors of Hang Lung Group Limited since 1986, and Aduro Biotech Inc., a Nasdaq listed company, since 2014. Dr. Chan received a B.S. and M.S. in engineering from the University of California, Los Angeles, and a M.S. in medical radiological physics and an Sc.D. in radiation biology from Harvard University. He did his post-doctoral training at the Dana-Farber Cancer Institute as a fellow of the Leukemia Society of America. We believe that Dr. Chan is qualified to serve on our board of directors because of his extensive experience investing in and serving on the boards of directors of life sciences companies.

Vincent Sai Sing Cheung was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. Mr. Cheung is currently the Managing Director and the Chief Operating Officer of the Nan Fung Group, an international business conglomerate with global interests in property, financial investments and a diverse range of business partnerships. Mr. Cheung was appointed as a Non-executive Director of Forterra Real Estate Pte. Ltd. in August 2013. Forterra Real Estate Pte. Ltd. was acquired by Nan Fung International Holdings Limited in 2015. He also served as a Non-executive Director and Executive Director of Sino-Ocean Group Holding Limited from March 2011 to May 2014 and from May 2014 to August 2015, respectively. Mr. Cheung received a B.A. in molecular and cell biology from the University of California, Berkeley. We believe Mr. Cheung is qualified to serve on our board of directors because of his financial and business experience.

Lu Huang, M.D ., was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. Dr. Huang joined the Morningside group in October 2003 and leads the Morningside life science investment team in China. She has led over a dozen healthcare and life sciences investments in China and serves as a director in a number of portfolio companies including MicuRx Pharmaceuticals, Inc. Dr. Huang obtained her M.D. from Shanghai Jiao Tong University School of Medicine (formerly known as Shanghai Second Medical University) in China and subsequently worked at the Clinical Medical Centre of Shanghai Second Medical University. She holds an M.B.A. from St. John’s University.

 

146


Table of Contents

We believe Dr. Huang is qualified to serve on our board of directors because of her extensive experience serving on the boards of directors of life sciences companies and her medical insights.

Francis W. Chen, Ph.D. , was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since April 2006. In November 2011, he founded, and currently serves as the chairman of, SinoAmerican Partners Limited, an advisory services firm that specializes in cross-border transactions involving natural resources, transportation-based assets and related financial services. Dr. Chen was also a venture partner at WI Harper Group, an early-stage venture capital firm with investment activities in Silicon Valley and China from June 2009 to December 2012. He previously served on the board of directors of SPI Energy Co., Ltd. from November 2009 to August 2013. Dr. Chen has more than 20 years of prior management experience in the healthcare industry and has served on the board of directors of several private companies. Dr. Chen holds a Ph.D. in immunology from Harvard University and an M.S. and a B.S. in chemistry from Tufts University. We believe Dr. Chen is qualified to serve on our board of directors because of his extensive experience investing in and serving on the boards of directors of life science companies.

Cheuk Kin Stephen Law was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. Mr. Law has over 30 years of experience in accounting, corporate finance and investment. He is currently the Managing Director of ANS Capital Limited, a company principally engaged in investment and corporate finance. He also serves as an Independent Non-executive Director of China Everbright Limited since May 2018 and served as an Independent Non-executive Director of AAG Energy Holdings Limited, a clean energy company whose shares are listed on the Hong Kong Stock Exchange, between July 2016 and September 2018. He has been a board member of Hong Kong Business Accountants Association since August 2017. Since June 2016, Mr. Law has served as an expert consultant for the Ministry of Finance of the Peoples Republic of China to advise on finance and management accounting. Mr. Law previously served as the Finance Director and an executive director of MTR Corporation Ltd. between July 2013 and July 2016, where he was responsible for overseeing finance, investment control, treasury and other matters. Previously, he served as Chief Financial Officer at Guoco Group Limited, an investment holding company whose shares are listed on the Hong Kong Stock Exchange, from October 2012 to June 2013; as a principal and then a managing director of TPG Growth Funds, one of the largest global private equity funds, where he was responsible for private equity investments in Asia, from July 2006 to September 2012; served as a senior investment professional of Morningside Technologies Inc., a Cayman Islands company principally engaging in venture capital and private equity, from July 2000 to July 2006; and as an investment control manager of Wheelock Pacific Limited from February 1995 to July 1997 and worked in the corporate development and finance division of Wharf Cable Limited from July 1997 to July 2000. Mr. Law is a member of the Institute of Chartered Accountants in England and Wales, and of the Hong Kong Institute of Certified Public Accountants. He was a council member of Hong Kong Institute of Certified Public Accountants from 2010 to 2017. Mr. Law received a B.Sc. (Civil Engineering) from the University of Birmingham in the United Kingdom in July 1984. Mr. Law has been an adjunct professor of the Hong Kong Polytechnic University from October 2015 to August 2017. We believe Mr. Law is qualified to serve on our board of directors because of his significant investing experience, as well as his accounting and financial expertise.

Kevin F. McLaughlin was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since March 2017. Mr. McLaughlin is currently Senior Vice President, Chief Financial Officer and Treasurer of Acceleron Pharma, Inc., a biotechnology company, and has been since November 2010. Mr. McLaughlin has also served on the board of directors of Vericel Corporation, a biopharmaceutical company, since January 2015. He previously served as Senior Vice President and Chief Financial Officer of Qteros, Inc., a cellulosic biofuels company, from 2009 through 2010 and as co-founder, Chief Operating Officer and director of Aptius Education, Inc., a publishing company, from 2007 through 2009. Mr. McLaughlin held several executive positions with PRAECIS Pharmaceuticals, Inc., a biopharmaceutical company, from 1996 through 2007, initially as Chief Financial Officer, before becoming Chief Operating Officer and eventually President and Chief Executive Officer, and he served as a member of the board of directors. Mr. McLaughlin began his career in senior financial roles at Prime Computer and Computervision Corporation. Mr. McLaughlin received a B.S. in business from Northeastern University and an M.B.A. from Babson College. We believe Mr. McLaughlin is qualified to serve on our board of directors because of his extensive experience managing and serving on the boards of directors of life science companies.

Edward P. Owens was appointed as a Director of Stealth BioTherapeutics Corp in June 2018. He has served as a director of Stealth Delaware since May 2017. Mr. Owens has been a Director of Ironwood Pharmaceuticals, Inc., a

 

147


Table of Contents

Nasdaq-listed company, since March 2013. He is a retired Partner of Wellington Management Company LLP and the founding portfolio manager of Vanguard Health Care Fund, which he managed from 1984 until his retirement at the end of 2012. Mr. Owens holds a B.S. in Physics from the University of Virginia and an M.B.A. from Harvard Business School. We believe Mr. Owens is qualified to serve on our board of directors because of his experience in serving on the board of directors of life sciences companies, as well as his investment expertise.

Corporate Governance

We are a “foreign private issuer,” as defined by the SEC. As a result, in accordance with the rules and regulations of Nasdaq, we will comply with home country governance requirements and certain exemptions thereunder rather than complying with Nasdaq corporate governance standards. While we voluntarily follow most Nasdaq corporate governance rules, we may choose to take advantage of the following exemptions afforded to foreign private issuers:

 

   

Exemption from the requirement that a majority of our board of directors consists of independent directors.

 

   

Exemption from the requirement that our audit committee have a written charter addressing the audit committee’s responsibilities and authority as set forth in Nasdaq Rule 5605(c)(1).

 

   

Exemption from the requirement that our remuneration committee have a written charter addressing the remuneration committee’s responsibilities and authority as set forth in Nasdaq Rule 5605(d).

 

   

Exemption from the requirement to have independent director oversight of director nominations and a formal written charter or board resolution addressing the nominations process as set forth in Nasdaq Rule 5605(e).

 

   

Exemption from the requirement that we have a code of conduct applicable to all directors, officers and employees and from any requirement that we have a code of conduct in compliance with Section 406 of the Sarbanes-Oxley Act of 2002.

 

   

Exemption from the Nasdaq rules applicable to domestic issuers requiring disclosure within four business days of any determination to grant a waiver of the code of business conduct and ethics to directors and officers. Although we will require board approval of any such waiver, we may choose not to disclose the waiver in the manner set forth in the Nasdaq rules, as permitted by the foreign private issuer exemption.

 

   

Exemption from the requirement to obtain shareholder approval for certain issuances of securities, including shareholder approval of stock option plans.

 

   

Exemption from the requirements governing the review and oversight of all “related party transactions,” as defined in Item 7.B of Form 20-F.

 

   

Exemption from the requirement that our board of directors shall have regularly scheduled meetings at which only independent directors are present as set forth in Nasdaq Rule 5605(b)(2).

We intend to follow our home country practices in lieu of the foregoing requirements. Although we may rely on home country corporate governance practices in lieu of certain of the rules in the Nasdaq Rule 5600 Series and Rule 5250(d), we must comply with Nasdaq’s Notification of Noncompliance requirement (Rule 5625), the Voting Rights requirement (Rule 5640) and have an audit committee that satisfies Rule 5605(c)(3), consisting of committee members that meet the independence requirements of Rule 5605(c)(2)(A)(ii). Although we currently intend to comply with the Nasdaq corporate governance rules applicable other than as noted above, we may in the future decide to use the foreign private issuer exemption with respect to some or all the other Nasdaq corporate governance rules.

In addition, as a foreign private issuer, we expect to take advantage of the following exemptions from SEC reporting obligations:

 

   

Exemption from filing quarterly reports on Form 10-Q or provide current reports on Form 8-K, disclosing significant events within four days of their occurrence.

 

   

Exemption from Section 16 rules regarding sales of common shares by insiders, which will provide less data in this regard than shareholders of U.S. companies that are subject to the Exchange Act.

Accordingly, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq and the domestic reporting requirements of the SEC. We may utilize these exemptions for as long as we continue to qualify as a foreign private issuer.

 

148


Table of Contents

Board Composition

Our board of directors consists of Reenie McCarthy, Gerald L. Chan, Vincent Sai Sing Cheung, Dr. Lu Huang, Francis W. Chen, Cheuk Kin Stephen Law, Kevin F. McLaughlin and Edward P. Owens. Our directors will hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. As a foreign private issuer, under the listing requirements and rules of Nasdaq, we are not required to have independent directors on our board of directors, except that our audit committee is required to consist fully of independent directors, subject to certain phase-in schedules. However, our board of directors has determined that, of our eight directors, six do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of director and that each of these directors is “independent” as that term is defined under Nasdaq rules.

Board Committees

Prior to the closing of this offering, our board of directors will establish audit, remuneration and nominating committees.

Audit Committee

Effective upon this offering, the members of our audit committee will be Stephen Law, Francis W. Chen, and Kevin F. McLaughlin, and Kevin F. McLaughlin will be the chair of our audit committee. Our board of directors has determined that he is an “audit committee financial expert” as defined by applicable SEC rules. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements. Following this offering, our audit committee’s responsibilities will include:

 

   

appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;

 

   

overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;

 

   

reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

   

monitoring our internal control over financial reporting, disclosure controls and procedures, and code of business conduct and ethics;

 

   

overseeing our internal audit function, if any;

 

   

discussing our risk management policies;

 

   

establishing procedures for the receipt and retention of accounting-related complaints and concerns;

 

   

meeting independently with our internal auditing staff, our independent registered public accounting firm, and management;

 

   

reviewing and approving or ratifying any related person transactions; and

 

   

preparing the audit committee report required by SEC rules.

All audit services to be provided to us and all non-audit services, other than de minimis non-audit services, to be provided to us by our registered public accounting firm must be approved in advance by our audit committee.

We expect to satisfy the member independence requirements for the audit committee prior to the end of the transition period provided under current Nasdaq Listing Rules and SEC rules and regulations for companies completing their initial public offering.

Remuneration Committee

Effective upon this offering, the members of our remuneration committee will be Edward P. Owens, Stephen Law and Dr. Lu Huang, and Edward P. Owens will be the chair of our remuneration committee. Our remuneration committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. Following this offering, our remuneration committee’s responsibilities will include:

 

   

reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our Chief Executive Officer;

 

149


Table of Contents
   

reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our other executive officers;

 

   

overseeing the evaluation of our senior executives;

 

   

reviewing and making recommendations to our board of directors with respect to our incentive compensation and equity-based compensation plans;

 

   

overseeing and administering our equity-based plans;

 

   

reviewing and making recommendations to our board of directors with respect to director compensation;

 

   

reviewing and discussing with management our “Compensation Discussion and Analysis” disclosure to the extent such disclosure is required by SEC rules; and

 

   

preparing the remuneration committee report required by SEC rules.

Nominating Committee

Effective upon this offering, the members of our nominating committee will be Francis W. Chen, Kevin F. McLaughlin and Vincent Cheung, and Francis W. Chen will be the chair of our nominating committee. Upon the completion of this offering, our nominating committee’s responsibilities will include:

 

   

identifying individuals qualified to become members of our board of directors;

 

   

recommending to our board of directors the persons to be nominated for election as directors and to each of our board of directors’ committees;

 

   

developing and recommending to our board of directors corporate governance principles; and

 

   

overseeing periodic evaluations of our board of directors.

Compensation

For the year ended December 31, 2017, the aggregate compensation accrued or paid to our executive officers for services in all capacities was $2.0 million plus option awards exercisable for 2,719,322 ordinary shares at an exercise price of $1.38. Options for 231,989 shares expire on January 19, 2022, and the remaining 2,487,333 options expire on January 8, 2027. Except for the grant of share options to Messrs. McLaughlin and Owens upon their joining the Stealth Delaware board of directors in 2017, none of our non-employee directors received any compensation from us in the fiscal year ended December 31, 2017. The compensation that we pay to Reenie McCarthy, who is also our Chief Executive Officer, is received solely in her capacity as Chief Executive Officer.

In September 2018, we adopted a non-employee director compensation policy, to be effective upon closing of this offering, that provides to each non-employee director:

 

   

$40,000 per year for his or her service as a non-employee director;

 

   

$8,000 per year per committee for his or her service as the audit, remuneration and/or nomination committee chair;

 

   

$5,000 per year per committee for his or her service as an audit, remuneration and/or nomination committee member (other than for the committee chair); and

 

   

at the discretion of the board of directors, an annual grant of options or restricted share units in respect of ordinary shares.

 

150


Table of Contents

The following table sets forth information concerning outstanding equity awards for each of our non-employee directors as of December 31, 2017:

 

 

 

     OPTION AWARDS  

NAME

   NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE (#)
     NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE (#)
     OPTION
EXERCISE
PRICE ($)
     OPTION
EXPIRATION
DATE
 

Gerald L. Chan, Sc.D.

     2,500,000             $ 0.84        8/26/2024  

Francis W. Chen, Ph.D.

     50,000             $ 0.45        12/13/2022  

Vincent Cheung

                           

Lu Huang, M.D.

                           

Stephen Law

                           

Kevin F. McLaughlin

     9,375        40,625      $ 1.38        03/15/2027  

Edward P. Owens

            50,000      $ 1.38        05/23/2027  

 

 

We also reimburse our non-employee directors for reasonable travel and out-of-pocket expenses incurred in connection with attending our board of director and committee meetings.

Agreements with our Executive Officers

We have entered into offer letters with each of our executive officers, other than Mr. Geffken, that set forth the terms of the executive officer’s compensation, including his or her initial base salary and an annual cash bonus target percentage. The offer letters provide that the executive officers are eligible to participate in company-sponsored benefit programs that are available generally to all of our employees.

In addition, our offer letters with Dr. Blakey and Dr. Carr provide for the payment of six months base salary in the event that we terminate their employment without cause, subject to the execution of a release of claims. Under the letters, cause is defined as one or more of (i) willful malfeasant, dishonest or grossly negligent conduct that relates to us and causes us harm or damage, (ii) a continued breach of conduct required by the invention and non-disclosure agreement, including a material breach of any non-competition, non-solicitation or confidentiality covenant or under any applicable legal principle, (iii) a material breach of duty of loyalty to us, (iv) a commission of an act of fraud, theft, misappropriation or embezzlement, (v) the commission of an act of fraud, theft, misappropriation or embezzlement or (vi) a conviction of, or pleading nolo contendere to, a felony or any other crime involving moral turpitude. Severance payments to either of Dr. Blakey or Dr. Carr could be delayed for six months in certain circumstances for compliance with Section 409A of the Internal Revenue Code of 1986, as amended, or the Code.

The services of Mr. Geffken as interim CFO are provided pursuant to a consulting agreement with Danforth. See “Related Party Transactions—Consulting Agreement” for a further description of this agreement.

Equity and Non-Equity Incentive Plans

The three equity incentive plans described in this section are our 2006 share incentive plan, as amended to date, or the 2006 plan, our 2019 share incentive plan, or the 2019 plan and our 2019 employee share purchase plan, or ESPP. Prior to this offering, we granted awards to eligible participants under the 2006 plan. Following the closing of this offering, we expect to grant awards to eligible participants under the 2019 plan and the ESPP.

2006 Share Incentive Plan

In 2010, our board of directors adopted, and our shareholders approved, the 2006 plan. The 2006 plan provides for the grant of options, restricted shares and other awards that are valued in whole or in part by reference to, or are otherwise based on, ordinary shares or other property. Our employees, officers, directors, consultants and advisers are eligible to receive awards under our 2006 plan. Our board of directors administers the 2006 plan.

 

151


Table of Contents

The 2006 plan provides that a maximum of 25,544,054 ordinary shares are authorized for issuance under the plan. No awards may be granted under the 2006 plan after December 15, 2019. Our board of directors may amend, suspend or terminate the 2006 plan at any time.

In the event of any share split, reverse share split, share dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of ordinary shares other than an ordinary cash dividend, we shall appropriately adjust, to the extent determined by the board of directors:

 

   

the number and class of securities available under the 2006 plan;

 

   

the number and class of securities and exercise price per share of each outstanding option;

 

   

the repurchase price per share subject to each outstanding restricted share award; and

 

   

the terms of each other outstanding award under the 2006 plan.

In the event of any merger or consolidation of our company with or into another entity as a result of which all of our ordinary shares are converted into or exchanged for the right to receive cash, securities or other property or are cancelled; an exchange of all of our ordinary shares for cash, securities or other property pursuant to a share exchange transaction; or a liquidation or dissolution of our company, our board of directors shall, on such terms as our board of directors determines, take any one or more of the following actions pursuant to the 2006 plan, as to some or all outstanding awards, except as to restricted share awards:

 

   

provide that awards shall be assumed, or substantially equivalent awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof);

 

   

upon written notice to a plan participant, provide that the participant’s unexercised options or other awards shall be exercisable in full and will terminate immediately prior to the consummation of such event unless exercised by the participant within a specified period following the date of such notice;

 

   

provide that outstanding awards shall become realizable, or deliverable, or restrictions applicable to an award shall lapse, in whole or in part prior to or upon such event;

 

   

if under the terms of such event, holders of ordinary shares will receive upon consummation thereof a cash payment for each share surrendered in the event, make or provide for a cash payment to a plan participant in exchange for the termination of such awards;

 

   

provide that, in connection with a liquidation of dissolution of the company, awards shall convert into the right to receive liquidation proceeds; or

 

   

any combination of the foregoing.

In regards to the restricted share awards, should one of the events described above occur, other than a liquidation or dissolution of our company, than the repurchase and other rights under the restricted share award shall inure to the benefit of our successor and shall apply to the cash, securities or other property which the ordinary shares were converted into or exchanged for pursuant to such event in the same manner and to the same extent as they applied to the ordinary shares subject to such restricted share award. Upon the occurrence of a liquidation or dissolution of our company, except to the extent specifically provided to the contrary in such instrument evidencing any restrict share award or any other agreement between a plan participant and us, all restrictions and conditions on all restricted share awards then outstanding shall automatically be deemed terminated or satisfied.

Our board of directors is not obligated under the 2006 plan to issue all awards under identical terms or treat all plan participants uniformly. Our board of directors may amend, modify or terminate any outstanding award either with the consent of the plan participant or if in the board of director’s determination such action would not materially and adversely affect the plan participant.

2019 Share Incentive Plan

In                2019 our board of directors adopted, and our shareholders approved, the 2019 plan to become effective in connection with this offering. The 2019 plan provides for the grant of incentive share options, non-statutory share options, share appreciation rights, awards of restricted shares, restricted share units or other share-based awards. Upon the closing of this offering, the number of our ordinary shares that will be reserved for issuance under the 2019 plan will be the sum of                shares plus the number of shares reserved for issuance under the 2006 plan

 

152


Table of Contents

that remain available for future issuance immediately prior to the closing of this offering. Following the closing of this offering, the number of shares reserved for issuance under the 2019 plan will increase by (1) the number of our ordinary shares subject to outstanding awards under our 2006 plan upon the closing of this offering that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right and (2) an annual increase, to be added the first day of each fiscal year, beginning with the fiscal year ending                      and continuing until, and including, the fiscal year ending                     , equal to the lowest of                of our ordinary shares,    % of the number of ordinary shares outstanding on the first day of the fiscal year and an amount determined by our board of directors. Our employees, officers, directors, consultants and advisors will be eligible to receive awards under the 2019 plan; however, incentive share options may only be granted to our employees.

Pursuant to the terms of the 2019 plan, our board of directors (or a committee delegated by our board of directors) administers the 2019 plan and, subject to any limitations set forth in the 2019 plan, will select the recipients of awards and determine:

 

   

the number of ordinary shares covered by options and the dates upon which those options become exercisable;

 

   

the type of options to be granted;

 

   

the exercise price of options, which price must be at least equal to the fair market value of our ordinary shares on the date of grant;

 

   

the duration of options, which may not be in excess of 10 years;

 

   

the methods of payment of the exercise price of options; and

 

   

the number of our ordinary shares subject to and the terms of any share appreciation rights, awards of restricted share, restricted share units or other share-based awards and the terms and conditions of such awards, including the issue price, conditions for repurchase, repurchase price and performance conditions (though the measurement price of share appreciation rights must be at least equal to the fair market value of our ordinary shares on the date of grant and the duration of such awards may not be in excess of ten years), if any.

If our board of directors delegates authority to an executive officer to grant awards under the 2019 plan, the executive officer will have the power to make awards to all of our employees, except executive officers. Our board of directors will fix the terms of the awards to be granted by such executive officer and the maximum number of shares subject to awards that such executive officer may make.

In the event of any share split, reverse share split, share dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any dividend or distribution to holders of our ordinary shares other than an ordinary cash dividend, we are required by the 2019 plan to make equitable adjustments (or make substitute awards, if applicable), in a manner determined by our board, to:

 

   

the number and class of securities available under the 2019 plan;

 

   

the share counting rules under the 2019 plan;

 

   

the number and class of securities and exercise price per share of each outstanding option;

 

   

the share and per-share provisions and measurement price of each outstanding share appreciation right;

 

   

the number of shares and the repurchase price per share subject to each outstanding restricted share award or restricted share unit award; and

 

   

the share and per-share related provisions and purchase price, if any, of any outstanding other share-based award.

Upon a merger or other reorganization event (as defined in our 2019 plan), our board of directors, may, on such terms as our board determines (except to the extent specifically provided otherwise in an applicable award agreement or other agreement between the participant and us), take any one or more of the following actions pursuant to the 2019 plan, as to some or all outstanding awards, other than restricted share awards:

 

   

provide that all outstanding awards will be assumed or substantially equivalent awards will be substituted by the successor corporation (or an affiliate thereof);

 

153


Table of Contents
   

upon written notice to a participant, provide that the participant’s unvested and/or unexercised options or other awards will terminate immediately prior to the consummation of such transaction unless exercised by the participant;

 

   

provide that outstanding awards will become exercisable, realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon the reorganization event;

 

   

in the event of a reorganization event pursuant to which holders of our ordinary shares will receive a cash payment for each share surrendered in the reorganization event, make or provide for a cash payment to the participants with respect to each award held by a participant equal to (1) the number of shares of our ordinary shares subject to the vested portion of the award (after giving effect to any acceleration of vesting that occurs upon or immediately prior to such reorganization event) multiplied by (2) the excess, if any, of the cash payment for each share surrendered in the reorganization event over the exercise, measurement or purchase price of such award and any applicable tax withholdings, in exchange for the termination of such award;

 

   

provide that, in connection with a liquidation or dissolution, awards convert into the right to receive liquidation proceeds (if applicable, net of exercise, measurement or purchase price thereof and any applicable tax withholdings); or

 

   

any combination of the foregoing.

Our board of directors is not obligated by the 2019 plan to treat all awards, all awards held by a participant, or all awards of the same type, identically.

In the case of certain restricted share units, no assumption or substitution is permitted, and the restricted share units will instead be settled in accordance with the terms of the applicable restricted share unit agreement.

Upon the occurrence of a reorganization event other than a liquidation or dissolution, the repurchase and other rights under each outstanding restricted share award will continue for the benefit of the successor company and will, unless our board of directors may otherwise determine, apply to the cash, securities or other property which our ordinary shares are converted into or exchanged for pursuant to the reorganization event, unless our board provided for the termination or deemed satisfaction of such repurchase or other rights under the restricted share award agreement or any other agreement between the participant and us. Upon the occurrence of a reorganization event involving a liquidation or dissolution, all restrictions and conditions on each outstanding restricted share award will automatically be deemed terminated or satisfied, unless otherwise provided in the agreement evidencing the restricted share award or in any other agreement between the participant and us.

Our board of directors may at any time provide that any award under the 2019 plan shall become immediately exercisable in whole or in part, free of some or all restrictions or conditions, or otherwise realizable in whole or in part, as the case may be.

Except with respect to certain actions requiring shareholder approval under the Nasdaq Listing Rules and our Articles of Association, our board of directors may amend, modify or terminate any outstanding award under the 2019 plan, including but not limited to, substituting therefor another award of the same or a different type, changing the date of exercise or realization, and converting an incentive share option into a nonstatutory share option, subject to certain participant consent requirements. Unless our shareholders approve such action, the 2019 plan provides that we may not (except as otherwise permitted in connection with a change in capitalization or reorganization event):

 

   

amend any outstanding share option or share appreciation right granted under the 2019 plan to provide an exercise or measurement price per share that is lower than the then-current exercise or measurement price per share of such outstanding award;

 

   

cancel any outstanding option or share appreciation right (whether or not granted under the 2019 plan) and grant in substitution therefor new awards under the 2019 plan (other than substitute awards permitted in connection with a merger or consolidation of an entity with us or our acquisition of property or share of another entity) covering the same or a different number of our ordinary shares and having an exercise or measurement price per share lower than the then-current exercise or measurement price per share of the cancelled award;

 

154


Table of Contents
   

cancel in exchange for a cash payment any outstanding option or share appreciation right with an exercise or measurement price per share above the then-current fair market value of our ordinary shares; or

 

   

take any other action that constitutes a “repricing” within the meaning of the Nasdaq Listing Rules.

No award may be granted under the 2019 plan after 10 years from the effective date of this offering, but awards previously granted may extend beyond that date. Our board of directors may amend, suspend or terminate the 2019 plan at any time, except that shareholder approval will be required to comply with applicable law or stock market requirements.

2019 Employee Share Purchase Plan

In                      2019, our board of directors adopted, and we expect our shareholders to approve, the ESPP, to become effective upon the closing of this offering. The ESPP will be administered by our board of directors or by a committee appointed by our board of directors. The ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of                 ordinary shares. The number of ordinary shares reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year, beginning with the fiscal year ending                      and continuing until, and including, the fiscal year ending                     , equal to the lowest of (i)                ordinary shares, (ii)         % of the number of ordinary shares outstanding on the first day of the fiscal year and (iii) an amount determined by our board of directors.

All of our employees or employees of any designated subsidiary, as defined in the ESPP, are eligible to participate in the ESPP, provided that:

 

   

such person is customarily employed by us or a designated subsidiary for more than 20 hours a week and for more than six months in a calendar year;

 

   

such person has been employed by us or by a designated subsidiary for at least three months prior to enrolling in the ESPP; and

 

   

such person was our employee or an employee of a designated subsidiary on the first day of the applicable offering period under the ESPP.

No employee may purchase ordinary shares under the ESPP and any of our other employee share purchase plans in excess of $25,000 of the fair market value of our ordinary shares in any calendar year. In addition, no employee may purchase ordinary shares under the ESPP that would result in the employee owning 5% or more of the total combined voting power or value of our shares.

We expect to make one or more offerings to our eligible employees to purchase shares under the ESPP beginning at such time as our board of directors may determine. Each offering will consist of a six-month offering period during which payroll deductions will be made and held for the purchase of our ordinary shares at the end of the offering period. Our board of directors may, at its discretion, choose a different period of not more than 12 months for an offering.

On the commencement date of each offering period, each eligible employee may authorize up to a maximum of 15% of his or her compensation to be deducted by us during the offering period. Each employee who continues to be a participant in the ESPP on the last business day of the offering period will be deemed to have exercised an option to purchase from us the number of whole ordinary shares that his or her accumulated payroll deductions on such date will pay for, not in excess of the maximum numbers set forth above. Under the terms of the ESPP, the purchase price shall be determined by our board of directors for each offering period and will be at least 85% of the applicable closing price of our ordinary shares. If our board of directors does not make a determination of the purchase price, the purchase price will be 85% of the lesser of the closing price of our ordinary shares on the first business day of the offering period or on the last business day of the offering period.

An employee may for any reason withdraw from participation in an offering prior to the end of an offering period and permanently draw out the balance accumulated in the employee’s account. If an employee elects to discontinue his or her payroll deductions during an offering period but does not elect to withdraw his or her funds, funds previously deducted will be applied to the purchase of ordinary shares at the end of the offering period. If a participating employee’s employment ends before the last business day of an offering period, no additional payroll deductions will be made and the balance in the employee’s account will be paid to the employee.

 

155


Table of Contents

We will be required to make equitable adjustments to the number and class of securities available under the ESPP, the share limitations under the ESPP, and the purchase price for an offering period under the ESPP to reflect share splits, reverse share splits, share dividends, recapitalizations, combinations of shares, reclassifications of shares, spin-offs and other similar changes in capitalization or events or any dividends or distributions to holders of our ordinary shares other than ordinary cash dividends.

In connection with a merger or other reorganization event, as defined in the ESPP, our board of directors or a committee of our board of directors may take any one or more of the following actions as to outstanding options to purchase ordinary shares under the ESPP on such terms as our board or committee determines:

 

   

provide that options shall be assumed, or substantially equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof);

 

   

upon written notice to employees, provide that all outstanding options will be terminated immediately prior to the consummation of such reorganization event and that all such outstanding options will become exercisable to the extent of accumulated payroll deductions as of a date specified by our board or committee in such notice, which date shall not be less than ten days preceding the effective date of the reorganization event;

 

   

upon written notice to employees, provide that all outstanding options will be cancelled as of a date prior to the effective date of the reorganization event and that all accumulated payroll deductions will be returned to participating employees on such date;

 

   

in the event of a reorganization event under the terms of which holders of our ordinary shares will receive upon consummation thereof a cash payment for each share surrendered in the reorganization event, change the last day of the offering period to be the date of the consummation of the reorganization event and make or provide for a cash payment to each employee equal to (1) the cash payment for each share surrendered in the reorganization event times the number of ordinary shares that the employee’s accumulated payroll deductions as of immediately prior to the reorganization event could purchase at the applicable purchase price, where the acquisition price is treated as the fair market value of our ordinary shares on the last day of the applicable offering period for purposes of determining the purchase price and where the number of shares that could be purchased is subject to the applicable limitations under the ESPP minus (2) the result of multiplying such number of shares by the purchase price; and/or

 

   

provide that, in connection with our liquidation or dissolution, options shall convert into the right to receive liquidation proceeds (net of the purchase price thereof).

Our board of directors may at any time, and from time to time, amend or suspend the ESPP or any portion thereof. We will obtain shareholder approval for any amendment if such approval is required by Section 423 of the Code. Further, our board of directors may not make any amendment that would cause the ESPP to fail to comply with Section 423 of the Code. The ESPP may be terminated at any time by our board of directors. Upon termination, we will refund all amounts in the accounts of participating employees.

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 are eligible to participate. 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. We contribute up to 3% of an employee’s salary, subject to statutory limits.

Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell ordinary shares on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

 

156


Table of Contents

Code of Business Conduct and Ethics

In December 2018, our board of directors adopted a written code of business conduct and ethics, to be effective upon the completion of this offering, that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following this offering, a copy of the code will be posted on the Corporate Governance section of our website, which is located at www.stealthbt.com/investors. 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 or in a current report on Form 6-K.

Family Relationships

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

Insurance and Indemnification

Every director and officer is indemnified and secured harmless out of our assets and funds against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such director or officer (other than by reason of such director’s or officer’s own dishonesty, willful default or fraud as determined by a court of competent jurisdiction) in or about the conduct of our affairs or in the execution of such director or officer’s duties, powers, authorities or discretions, including any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning us or our affairs in any court whether Cayman Islands or elsewhere

Insofar as indemnification of liabilities arising under the Securities Act may be permitted to our board, executive officers, or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

157


Table of Contents

RELATED PARTY TRANSACTIONS

Since January 1, 2015 we have engaged in the following transactions with our directors, executive officers or holders of more than 5% of our outstanding share capital and their affiliates, which we refer to as our related parties.

Note Issuances

Between January and April 2015, we borrowed $35.0 million from Morningside Venture (I) Investments Limited, or MVIL, pursuant to a note purchase agreement, or the 2015 Note. Prior to this offering, MVIL beneficially owns     % of our ordinary shares.

In July 2015, we entered into an agreement with MVIL regarding the 2015 Note and other notes we previously issued to MVIL that were then outstanding, or the Conversion Notes. Under this agreement, we issued 54,333,699 Series A convertible preferred shares upon conversion of Conversion Notes in an aggregate principal amount of $115.0 million plus accrued interest. In addition, under this agreement, we issued 32,500,033 Series A convertible preferred shares to MVIL in exchange for a demand note issued to us by MVIL in an aggregate principal amount of $75.0 million, all of which was repaid between July 2015 and December 2016.

Between February and September 2017, pursuant to a note purchase agreement with MVIL, as the same was amended and restated, we issued convertible promissory notes to MVIL in an aggregate principal amount of $50.0 million, or the 2017 Shareholder Notes.

In January 2018, we entered into a note exchange agreement with MVIL pursuant to which MVIL exchanged the 2017 Shareholder Notes for a new convertible note in the principal amount of $52.4 million representing the aggregate principal amount of the 2017 Shareholder Notes plus accrued interest, or the January 2018 Shareholder Note. The January 2018 Shareholder Note accrues interest at 7% per annum, which compounds annually, and upon such compounding, is to be added to the outstanding principal amount. The January 2018 Shareholder Note is convertible upon (i) the closing of an initial public offering or (ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, will automatically convert into shares of the same class and series of our share capital issued to other investors in the qualified financing. Unless the outstanding amount of the notes are earlier repaid, retired, discharged, or automatically converted into our shares, all amounts outstanding become due and payable on the later of (i) January 10, 2020 and (ii) five business days after the date on which our term loan with Hercules is repaid, terminated and discharged in full.

In October 2018, we entered into a note purchase agreement with MVIL pursuant to which we issued to MVIL a note in the aggregate principal amount of $15.0 million, or the October 2018 Shareholder Note. In December 2018, under the same note purchase agreement, we issued a note to MVIL in the aggregate principal amount of $10.0 million, or the December 2018 Shareholder Note. The October 2018 Shareholder Note and the December 2018 Shareholder Note have substantially the same terms as the January 2018 Shareholder Note except that a qualified financing is limited to a U.S. initial public offering.

Warrant Exercise

In December 2009, in connection with our Series A convertible preferred share financing, we issued MVIL a warrant to purchase an aggregate of 333,333 ordinary shares at an exercise price of $0.03 per share. In November 2016, MVIL fully exercised this warrant.

Investor Agreements

In April 2006, we entered into a Subscription and Shareholders Agreement with MVIL and certain other shareholders pursuant to which we agreed to issue ordinary shares and Series A convertible preferred shares and granted certain information rights and observer rights that remain in effect. The Subscription and Shareholders Agreement will terminate upon the completion of this offering. In connection with the Subscription and Shareholders Agreement, we entered into a Registration Rights Agreement with certain of our shareholders, including MVIL, in April 2006 that provided for customary registration rights to holders of our ordinary shares. The Registration Rights Agreement will terminate immediately prior to effectiveness of the registration statement of which this prospectus forms a part.

 

158


Table of Contents

Employment Agreements

From January 1, 2014 through March 30, 2016, the services of our former chief executive officer and our current chief executive officer were provided pursuant to an agreement between Morningside Technology Advisory, LLC and us. Pursuant to this agreement, we reimbursed Morningside Technology Advisory, LLC an aggregate of $299,860 during 2015 and $107,500 during 2016. Morningside Technology Advisory, LLC is owned by our current chief executive officer, Ms. McCarthy. Ms. McCarthy and Dr. Chan are directors of our company and Morningside Technology Advisory, LLC.

See “Management—Agreements with Our Executive Officers” for information about agreements between us and our executive officers.

Consulting Agreement

In November 2016, we entered into a consulting agreement with Danforth, an affiliate of Mr. Geffken, our interim Chief Financial Officer. Pursuant to the agreement, Danforth provides us with the CFO services of Mr. Geffken in exchange for fees payable to Danforth. In accordance with the consulting agreement, in January 2017, we issued Danforth a warrant to purchase up to 231,989 ordinary shares at an exercise price of $1.38 per share, which warrant was amended in June 2018 to be an option granted to Mr. Geffken under the 2006 plan. The consulting agreement has been amended to extend the agreement through November 2019.

Indemnification of Officers and Directors

As more fully described in our Articles of Association, our Articles of Association provide that our board of directors and officers shall be indemnified from and against all liability which they incur in execution of their duty in their respective offices out of our assets and funds, except liability incurred by reason of such director’s or officer’s dishonesty, willful deceit or fraud. See the “Management—Insurance and Indemnification” section of this prospectus for a further discussion of these arrangements.

 

159


Table of Contents

PRINCIPAL SHAREHOLDERS

The following table sets forth information with respect to the beneficial ownership of the ordinary shares, as of November 30, 2018 by:

 

   

each of our directors;

 

   

each of our executive officers;

 

   

all of our directors and executive officers as a group; and

 

   

each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of the ordinary shares.

The percentage ownership calculations for beneficial ownership prior to the offering are based on a total of 160,088,346 ordinary shares outstanding as of November 30, 2018, after giving effect to the conversion of all outstanding Series A convertible preferred shares upon the closing of this offering into an aggregate of 91,600,398 ordinary shares. The column entitled “Percentage of Shares Beneficially Owned—After Offering” is based on ordinary shares to be outstanding after this offering, including the ordinary shares represented by the ADSs that we are selling in this offering, but not including (i) the issuance of             ordinary shares upon the conversion of our outstanding convertible notes in an aggregate principal amount of $ million, assuming an initial public offering price of $        per ADS (the midpoint of the estimated price range set forth on the cover page of this prospectus) and (ii) any additional shares issuable upon exercise of outstanding options.

The number of shares beneficially owned by each shareholder is determined under rules issued by the Securities and Exchange Commission and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, ordinary shares subject to options or other rights held by such person that are currently exercisable or will become exercisable within 60 days of November 30, 2018 are considered outstanding, although such shares subject to options or other rights are not considered outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated, the address of all listed shareholders is c/o Stealth BioTherapeutics Inc., 275 Grove Street, Suite 3-107, Newton, Massachusetts 02466. Each of the shareholders listed has sole voting and investment power with respect to the shares beneficially owned by the shareholder unless noted otherwise, subject to community property laws where applicable.

 

 

 

     SHARES
BENEFICIALLY
OWNED
     PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
 

NAME OF BENEFICIAL OWNER

   BEFORE
OFFERING
    AFTER
OFFERING
 

5% Shareholders

       

Morningside Venture (I) Investments Limited (1)

     157,880,373        95.3             

Executive Officers and Directors

       

Reenie McCarthy (2)

     2,729,861        1.7             

Daniel E. Geffken (3)

     231,989        *             

Mark J. Bamberger, Ph.D. (4)

     650,990        *             

Brian D. Blakey, Pharm.D. (5)

     1,029,431        *             

James R. Carr, Pharm.D. (6)

     592,538        *             

Gerald L. Chan, Sc.D. (7)

     2,500,000        1.5             

Francis W. Chen, Ph.D. (8)

     50,000        *             

Vincent Chueng

            *             

Lu Huang, M.D.

            *             

Stephen Law (9)

     7,292        *             

Kevin F. McLaughlin (10)

     22,917        *             

Edward P. Owens (11)

     20,833        *             

All executive officers and directors as a group (12 persons) (12)

     7,835,850        4.7             

 

 

 

160


Table of Contents
*   Less than 1% .
(1)   Consists of (i) 66,113,309 ordinary shares, (ii) 91,167,064 Series A convertible preferred shares and (iii) 600,000 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018. Louise Mary Garbarino, Jill Marie Franklin, Peter Stuart Allenby Edwards and Raymond Long Sing Tang, the directors of Morningside Venture (I) Investments Limited, or MVIL, share voting and dispositive control over the shares held by MVIL. As a result, Louise Mary Garbarino, Jill Marie Franklin, Peter Stuart Allenby Edwards and Raymond Long Sing Tang may be deemed to possess voting and investment control over, and may be deemed to have indirect beneficial ownership with respect to, all shares held by MVIL. Each of Louise Mary Garbarino, Jill Marie Franklin, Peter Stuart Allenby Edwards and Raymond Long Sing Tang disclaims beneficial ownership of such shares, except to the extent of their respective pecuniary interests therein. The address for MVIL is 2 nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC 98000, Monaco.
(2)   Consists of 2,729,861 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(3)   Consists of 231,989 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(4)   Consists of 650,990 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(5)   Consists of 1,029,431 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(6)   Consists of 592,538 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(7)   Consists of 2,500,000 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(8)   Consists of 50,000 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(9)   Consists of 7,292 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(10)   Includes 22,917 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(11)   Includes 20,833 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.
(12)   Includes 7,835,850 ordinary shares issuable upon the exercise of options exercisable within 60 days after November 30, 2018.

Holdings by U.S. Shareholders

As of November 30, 2018, approximately 3.0% of our outstanding ordinary shares were held by eight record holders in the United States and less than 1% of our outstanding Series A convertible preferred shares were held by one record holder in the United States.

 

161


Table of Contents

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION

The following describes our issued share capital, summarizes the material provisions of our Articles of Association and highlights certain differences in corporate law in the Cayman Islands and the United States.

General

We were incorporated in April 2006 under the name of Stealth Peptides International Inc as an exempted company incorporated with limited liability under the laws of the Cayman Islands, and we changed our name in June 2015 to Stealth BioTherapeutics Corp. Our affairs are governed by our Articles of Association, the Companies Law and the common law of the Cayman Islands. The following description of our share capital and provisions of our Articles of Association are summaries and are qualified by reference to the Articles of Association that will be in effect upon the closing of this offering. We have filed copies of these documents as exhibits to our registration statement of which this prospectus forms a part.

Issued Share Capital

Following the closing of this offering, our authorized share capital will be $             divided by              ordinary shares.

As of November 30, 2018, there were 68,487,948 ordinary shares outstanding, par value $0.0003 per share, and 91,600,398 Series A convertible preferred shares outstanding, par value $0.0003 per share.

Articles of Association

Subject to other provisions in our Articles of Association, our shareholders may by ordinary resolution increase our authorized share capital or by special resolution reduce the share capital and amend our Articles of Association.

General

All of our outstanding ordinary shares are fully paid and non-assessable. No share certificates will be issued in connection with the offering.

The ordinary shares issued upon the completion of the offering are not entitled to any preemptive conversion or redemption rights at the sole option of the holder of ordinary shares. Our shareholders may freely hold and vote their shares (subject to certain restrictions contained in our Articles of Association, such as the process for validly appointing a proxy).

Our board of directors may provide for other classes of shares, including classes of preferred shares, out of our authorized but unissued share capital, which could be utilized for a variety of corporate purposes, including future offerings to raise capital for corporate purposes or for use in employee benefit plans. Such additional classes of shares shall have such rights, restrictions, preferences, privileges and payment obligations as determined by our board of directors. If we issue any preferred shares, the rights, preferences and privileges of holders of our ordinary shares will be subject to, and may be adversely affected by, the rights of the holders of such preferred shares. See “—Variation of rights of Shares.”

Repurchase Rights

Any repurchase of our own shares by us as may be agreed with the relevant shareholders shall be approved by our board of directors in compliance with the Companies Law and our Articles of Association, and we may make a payment in respect of such repurchase in any manner authorized by the Companies Law and our Articles of Association, including out of our capital. A payment out of capital by a Cayman Islands company is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business. Only shares that are fully paid may be repurchased, and there must be at least one share remaining in issue following the repurchase.

Voting Rights

Voting at any meeting of shareholders is by a poll. Each ordinary share is entitled to one vote.

A quorum required for a meeting of shareholders consists of at least a number of shareholders present in person or by proxy and entitled to vote representing the holders of more than a majority of all of our issued voting share

 

162


Table of Contents

capital. Shareholders’ meetings are held annually and may otherwise be convened by our board of directors on its own initiative. Shareholders’ meetings shall also be convened on the requisition in writing of any shareholder or shareholders holding at least a majority of the issued voting share capital, subject to certain procedural requirements. Advance notice of at least 21 days is required for convening extraordinary general meetings.

Any ordinary resolution to be made by our shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in person or by proxy at a meeting of our shareholders. A special resolution requires the affirmative vote of not less than two-thirds of the votes cast in person or by proxy at a meeting of our shareholders. A special resolution is required for certain matters specified in the Companies Law as requiring approval by special resolution, including, without limitation, amending our Articles of Association, reducing our authorized share capital, changing our name, and appointing a voluntary liquidator.

An ordinary resolution or a special resolution may also be adopted by way of unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.

Dividends

With the exception of section 34 of the Companies Law, there are no statutory provisions relating to the payment of dividends in the Cayman Islands. Based upon English case law, which is regarded as persuasive in the Cayman Islands, dividends may be paid only out of profits. Section 34 of the Companies Law permits, subject to a solvency test and the provisions, if any, of the company’s memorandum and articles of association, the payment of dividends and distributions out of the share premium account.

Any dividends will be paid to the custodian of the ADSs being issued in this offering and shall be subject to further distribution to you as a beneficial owner of the underlying ordinary shares by the custodian. See “Description of American Depositary Shares—Dividends and Other Distributions.”

Liquidation

On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis.

Transfer of Shares

Subject to the restrictions of our Articles of Association and rules and regulations of Nasdaq, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form prescribed by Nasdaq or any other form approved by our board.

Subject to the rules of Nasdaq and any rights or restrictions for time being attached to any share, our board of directors may in their absolute discretion decline to register any transfer of shares. If our board of directors refuse to register a transfer of any share our secretary shall, within two months after the date on which the transfer request was lodged with us, send to the transferor and transferee notice of the refusal.

Subject to the rules of the Nasdaq and any rights or restrictions for time being attached to any share, the registration of transfers of shares may be suspended when our register of members is closed at such times and for such periods as our board of directors may from time to time determine.

Variation of Rights of Shares

The rights attached to any class of shares may, subject to any rights or restrictions attached to any class, be materially adversely varied or abrogated only with written consent of the holders of not less than two-thirds of the issued shares of the relevant class or with the sanction of a resolution passed at a separate meeting of the holders of the shares of such class by a majority of two-thirds of the votes cast at such a meeting.

The rights conferred upon the shareholders of any class (including, without limitation and for the avoidance of doubt, the ordinary shares) shall not, subject to any rights or restrictions attached to the shares of that class, be deemed to be materially adversely varied or abrogated by the creation, allotment or issuance of further shares ranking pari passu with or junior to such class or the redemption or purchase of any shares of any class by us.

 

163


Table of Contents

Inspection of Books and Records

Holders of our ordinary shares have no general right under the Companies Law to inspect or obtain copies of our register of members or our corporate records other than our Articles of Association.

Borrowing Power

Our board of directors may exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of us or of any third party.

Share Options

As of November 30, 2018, options to purchase 15,784,770 ordinary shares at a weighted-average exercise price of $1.05 per share were outstanding, of which options to purchase 11,719,418 ordinary shares were exercisable, at a weighted-average exercise price of $0.94 per share.

Warrants

In June 2017, we issued a warrant to Hercules to purchase              shares. The exercise price is (a) $2.30769 per share or (b) the initial public offering price per ADS in this offering.

Differences in Corporate Law

 

    

DELAWARE

  

CAYMAN ISLANDS

Title of Organizational Documents

   Certificate of Incorporation and Bylaws    Memorandum and Articles of Association

Duties of Directors

   Under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. The duty of care requires that directors act in an informed and deliberative manner and inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of care also requires that directors exercise care in overseeing and investigating the conduct of the corporation’s employees. The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which the director reasonably believes to be in the best interests of the shareholders.   

As a matter of Cayman Islands law, directors of Cayman Islands companies owe fiduciary duties to the company which include, amongst other things, a duty to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. Five core duties are:

 

   a duty to act in good faith in what the directors bona fide consider to be the best interests of the company (and in this regard, it should be noted that the duty is owed to the company and not to associate companies, subsidiaries or holding companies);

 

   a duty not to personally profit from opportunities that arise from the office of director (unless the company permits him to do so);

 

 

   a duty of trusteeship of the company’s assets;

 

   a duty to avoid conflicts of interest; and

 

   a duty to exercise powers for the purpose for which such powers were conferred.

 

164


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

     

 

A director of a Cayman Islands company also owes the company a duty to act with skill, care and diligence. A director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience.

Limitations on Personal Liability of Directors

  

Subject to the limitations described below, a certificate of incorporation may provide for the elimination or limitation of the personal liability of a director to the corporation or its shareholders for monetary damages for a breach of fiduciary duty as a director.

 

Such provision cannot limit liability for breach of loyalty, acts or omissions not in good faith, intentional misconduct, unlawful payment of dividends or unlawful share purchase or redemption. In addition, the certificate of incorporation cannot limit liability for any act or omission occurring prior to the date when such provision becomes effective.

   The Companies Law has no equivalent provision to Delaware law regarding the limitation of director’s liability. However, as a matter of public policy, Cayman Islands law will not allow the limitation of a director’s liability to the extent that the liability is a consequence of the director committing a crime or of the director’s own fraud, dishonesty or willful default.

Indemnification of Directors, Officers, Agents, and Others

   A corporation has the power to indemnify any director, officer, employee, or agent of the corporation who was, is, or is threatened to be made a party who acted in good faith and in a manner they believed to be in the best interests of the corporation, and if with respect to a criminal proceeding, had no reasonable cause to believe his conduct would be unlawful, against amounts actually and reasonably incurred.    Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of directors and officers, except to the extent any such provision may be held by the Cayman Islands Court to be contrary to public policy, such as to provide indemnification against the consequences of committing a crime, or against the indemnified person’s own fraud, dishonesty or willful default.

Interested Directors

   Under Delaware law, a transaction in which a director who has an interest is not void or voidable solely because such interested director is present at or participates in the meeting that authorizes the transaction if: (i) the material facts as to such interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum, (ii) such material facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the shareholders, or (iii) the transaction is    Under our Articles of Association, directors who are in any way, whether directly or indirectly, interested in a contract or proposed contract with our company must declare the nature of their interest at a meeting of the board of directors. Following such declaration, a director may vote in respect of any contract or proposed contract notwithstanding his interest; provided that, in exercising any such vote, such director’s duties remain as described above.

 

165


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

   fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, a director could be held liable for any transaction in which such director derived an improper personal benefit.   

Voting Requirements

  

The certificate of incorporation may include a provision requiring supermajority approval by the directors or shareholders for any corporate action.

 

In addition, under Delaware law, certain business combinations involving interested shareholders require approval by a supermajority of the non-interested shareholders.

  

As a matter of Cayman Islands law, certain matters must be approved by special resolution of the shareholders, including amending or adopting memorandum or articles of association of a Cayman Islands company, appointment of inspectors to examine company affairs, reduction of share capital (subject, in relevant circumstances, to court approval), change of name, authorization of a plan of merger or transfer by way of continuation to another jurisdiction or consolidation, voluntary winding up of the company or the recalling of the liquidation of the company.

 

The Companies Law requires that a special resolution be passed by a majority of at least two-thirds or such higher percentage as set forth in the articles of association, of shareholders being entitled to vote and do vote in person or by proxy at a general meeting, or by unanimous written consent of shareholders entitled to vote at a general meeting. Our Articles of Association does not provide for a higher threshold.

 

The Companies Law defines “special resolutions” only. A company’s articles of association can therefore tailor the definition of “ordinary resolutions” as a whole, or with respect to specific provisions. Our Articles of Association provide that an ordinary resolution is a resolution (i) passed by a simple majority of such shareholders as, being entitled to do so, vote in person (or, where proxies are allowed, by proxy) at a general meeting and regard shall be had in computing a majority to the number of votes to which each shareholder is entitled or (ii) approved in writing by all of the shareholders entitled to vote at a general meeting in one or more instruments each signed by one or more of the shareholders and the effective date of the resolution so adopted shall be the date on which the instrument (or the last of such instruments, if more than one) is executed.

 

166


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

Voting for Directors

   Under Delaware law, unless otherwise specified in the certificate of incorporation or bylaws of the corporation, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.    Our Articles of Association provide that at an annual general meeting where a resolution for the election of directors is proposed in accordance with our Articles of Association, a plurality of the votes cast shall be sufficient to elect a director.

Cumulative Voting

   No cumulative voting for the election of directors unless so provided in the certificate of incorporation.   

No cumulative voting for the election of directors unless so provided in the articles of association.

 

Our Articles of Association do not provide for cumulative voting on the election of the directors as described above.

Directors’ Powers Regarding Bylaws

   The certificate of incorporation may grant the directors the power to adopt, amend or repeal bylaws.    Our Articles of Association may only be amended by a special resolution of the shareholders.

Nomination and Removal of Directors and Filling Vacancies on Board

   Shareholders may generally nominate directors if they comply with advance notice provisions and other procedural requirements in company bylaws. Holders of a majority of the shares may remove a director with or without cause, except in certain cases involving a classified board or if the company uses cumulative voting. Unless otherwise provided for in the certificate of incorporation or bylaws, directorship vacancies are filled by a majority of the directors elected or then in office.   

Nomination and removal of directors and filling of board vacancies are governed by the terms of the articles of association.

 

Our Articles of Association provide that a director shall hold office until such time they resign upon the expiry of a full term of three years, if they are removed from office by ordinary resolution of the shareholders or otherwise in accordance with our Articles of Association.

Mergers and Similar Arrangements

  

Under Delaware law, with certain exceptions, a merger, consolidation, exchange or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration such shareholder would otherwise receive in the transaction.

 

Delaware law also provides that a parent corporation, by resolution of its board of directors, may merge with any subsidiary, of which it owns at least 90% of each class of

  

The Companies Law provides for the merger or consolidation of two or more companies into a single entity. The legislation makes a distinction between a “consolidation” and a “merger.” In a consolidation, a new entity is formed from the combination of each participating company, and the separate consolidating parties, as a consequence, cease to exist and are each stricken by the Registrar of Companies. In a merger, one company remains as the surviving entity, having in effect absorbed the other merging parties that then cease to exist.

 

Two or more Cayman Islands-registered companies may merge or consolidate. Cayman Islands-registered companies may also merge or consolidate with overseas companies provided that the laws of the foreign jurisdiction permit such merger or consolidation.

 

167


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

   capital stock without a vote by shareholders of such subsidiary. Upon any such merger, dissenting shareholders of the subsidiary would have appraisal rights.   

 

A plan of merger or consolidation shall be authorized by each constituent company by way of (i) a special resolution of the members of each such constituent company; and (ii) such other authorization, if any, as may be specified in such constituent company’s articles of association. If one of the constituent companies is an overseas company, a declaration from a director of the overseas company is required to confirm that the merger or consolidation is permitted or not prohibited by the constituent overseas company and by the laws of the jurisdiction in which the overseas company is existing, and that those constitutional documents have been or will be complied with.

 

Shareholder approval is not required where a parent company registered in the Cayman Islands seeks to merge with one or more of its subsidiaries registered in the Cayman Islands and a copy of the plan of merger is given to every member of each subsidiary company to be merged unless that member agrees otherwise.

 

Secured creditors must consent to the merger although application can be made to the Cayman Islands Court for such requirement to be waived if such secured creditor does not grant its consent to the merger. Where an overseas company wishes to merge with a Cayman Islands company, consent or approval to the transfer of any security interest granted by the overseas company to the resulting Cayman Islands entity in the transaction is required, unless otherwise released or waived by the secured party. If the merger plan is approved, it is then filed with the Cayman Islands General Registry along with a declaration by a director of each company. The Registrar of Companies will then issue a certificate of merger which shall be prima facie evidence of compliance with all requirements of the Companies Law in respect of the merger or consolidation.

 

The surviving or consolidated entity remains or becomes active while the other company or companies are automatically dissolved. Unless the shares of such shareholder are publicly listed or quoted, dissenting

 

168


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

     

shareholders in a merger or consolidation of this type are entitled to payment of the fair value of their shares if such shareholder provides a written objection before the vote on such merger or consolidation. With respect to shares that are listed or quoted, a shareholder shall have similar rights only if it is required by the terms of the merger or consolidation to accept for such shares property other than (i) shares (or depositary receipts in respect thereof) in the surviving or consolidated company; (ii) listed or quoted shares (or depositary receipts in respect thereof) of another company; (iii) cash in lieu of any fractions of shares or depositary receipts described at (i) and (ii); or (iv) any combination of shares, depositary receipts or cash described in (i)—(iii).

 

Cayman Islands companies may also be restructured or amalgamated under supervision of the Cayman Islands Court by way of a court-sanctioned “scheme of arrangement.” A scheme of arrangement is one of several transactional mechanisms available in the Cayman Islands for achieving a restructuring. Others include share capital exchange, merger (as described above), asset acquisition or control, through contractual arrangements, of an operating business. A Cayman Islands Court scheme of arrangement requires the approval of a majority in number, of each class of shareholders and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at the meeting summoned for that purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the Cayman Islands Court. While a dissenting shareholder would have the right to express to the Cayman Islands Court its view that the transaction ought not be approved, the Cayman Islands Court can be expected to approve the scheme of arrangement if it is satisfied that:

 

   the classes which are required to approve the scheme of arrangement have been properly constituted, so

 

169


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

     

that the members of such classes are properly represented;

 

   the meetings held by the company in relation to the approval of the scheme of arrangement by such classes have been convened and held in accordance with any directions given by the Cayman Islands Court;

 

   the scheme of arrangement has been properly explained to the shareholders or creditors so that they have been able to exercise an informed vote in respect of the scheme; the scheme of arrangement is one which an intelligent and honest man, who is a member of the relevant class and properly acting might approve.

 

When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period following the expiration of the said four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Cayman Islands Court but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion. If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

 

Our Articles of Association provide that we may by special resolution resolve to merge or consolidate in accordance with the Companies Law.

Shareholder Suits

   Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.    The rights of shareholders under Cayman Islands law are not as extensive as those under Delaware law. Class actions are generally not available to shareholders under Cayman Islands laws; historically, there have not been any reported instances of such class actions having been successfully brought before the Cayman Islands Court. In principle, we will normally be the proper

 

170


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

      plaintiff and a derivative action may be brought by a minority shareholder in only limited circumstances. In this regard, the Cayman Islands Court would ordinarily be expected to follow English case law precedent, which would permit a shareholder to commence an action in the company’s name to remedy a wrong done to the company where the act complained of cannot be ratified by the shareholders and where control of the company by the wrongdoer results in the company not pursuing a remedy itself. The case law shows that derivative actions have been permitted in respect of acts that are beyond the company’s corporate power, illegal, where the individual rights of the plaintiff shareholder have been infringed or are about to be infringed and acts that are alleged to constitute a “fraud on the minority.” The winning party in such an action generally would be able to recover a portion of attorney’s fees incurred in connection with such action.

Inspection of Corporate Records

   Under Delaware law, shareholders of a Delaware corporation have the right during normal business hours to inspect for any proper purpose, and to obtain copies of list(s) of shareholders and other books and records of the corporation and its subsidiaries, if any, to the extent the books and records of such subsidiaries are available to the corporation.   

Shareholders of a Cayman Islands exempted company have no general right under Cayman Islands law to inspect or obtain copies of the register of members or other corporate records (other than the register of mortgages or charges) of the company. However, these rights may be provided in the company’s articles of association.

Our Articles of Association provide that the holders of our ordinary shares will have no general right to inspect or obtain copies of our register of members or our corporate records other than our Articles of Association.

Shareholder Proposals

   Unless provided in the corporation’s certificate of incorporation or bylaws, Delaware law does not include a provision restricting the manner in which shareholders may bring business before a meeting.   

The Companies Law does not provide shareholders any right to bring business before a meeting or requisition a general meeting. However, these rights may be provided in the company’s articles of association.

 

Our Articles of Association provide for extraordinary general meeting to be convened on the requisition in writing of any shareholder(s) entitled to attend and vote at our extraordinary general meetings and to exercise at least a majority of the votes permitted to be exercised at any such

 

171


Table of Contents
    

DELAWARE

  

CAYMAN ISLANDS

      meeting subject to certain procedural requirements.

Approval of Corporate Matters by Written Consent

   Delaware law permits shareholders to take action by written consent signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting of shareholders.    The Companies Law allows a special resolution to be passed in writing only if signed by all the voting shareholders (if authorized by the articles of association).

Calling of Special Shareholders Meetings

   Delaware law permits the board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting of shareholders.   

The Companies Law does not have provisions governing the proceedings of shareholders meetings which are usually provided in the articles of association.

 

Our Articles of Association provide for an extraordinary general meeting to be convened on the requisition in writing of any shareholder(s) entitled to attend and vote at our extraordinary general meetings and to exercise at least a majority of the votes permitted to be exercised at any such meeting subject to certain procedural requirements.

Listing on The Nasdaq Global Market

We have applied to list the ADSs on The Nasdaq Global Market under the trading symbol “MITO.”

Registrar

Our register of members, or share register, reflects only record owners of our ordinary shares. Holders of our ADSs will not be treated as one of our shareholders and their names will therefore not be entered in our share register. The depositary, the custodian or their nominees will be the holder of the shares underlying our ADSs. For further discussion on our ADSs and ADS holder rights, see “Description of American Depositary Shares” in this prospectus.

 

172


Table of Contents

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Description of American Depositary Shares

Citibank, N.A., or Citibank, has agreed to act as the depositary for the ADSs. Citibank’s depositary offices are located at 388 Greenwich Street, New York, New York 10013. ADSs represent ownership interests in securities that are on deposit with the depositary. ADSs may be represented by certificates that are commonly known as American Depositary Receipts, or ADRs. The depositary typically appoints a custodian to safekeep the securities on deposit. In this case, the custodian is Citibank, N.A.—Hong Kong, located at 9/F, Citi Tower, One Bay East, 83 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong.

We have appointed Citibank as depositary pursuant to a deposit agreement. A copy of the deposit agreement will be on file with the SEC under cover of a registration statement on Form F-6. You may obtain a copy of the deposit agreement from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and from the SEC’s website (www.sec.gov). Please refer to registration number 333-                 when retrieving such copy.

We are providing you with a summary description of the material terms of the ADSs and of your material rights as an owner of ADSs. Please note that summaries by their nature lack the precision of the information summarized and the rights and obligations of an owner of ADSs will be determined by reference to the terms of the deposit agreement and not by this summary. We urge you to review the deposit agreement in its entirety. The portions of this summary that are italicized describe matters that may be relevant to ownership of ADSs but may not be contained in the deposit agreement.

Each ADS represents the right to receive, and to exercise the beneficial ownership interests in,                  ordinary shares that are on deposit with the depositary and/or custodian. An ADS also represents the right to receive, and to exercise the beneficial interests in, any other property received by the depositary or the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical considerations. We and the depositary may agree to change the ADS-to-ordinary shares ratio by amending the deposit agreement. This amendment may give rise to, or change, the depositary fees payable by ADS owners. The custodian, the depositary and their respective nominees will hold all deposited property for the benefit of the holders and beneficial owners of ADSs. The deposited property does not constitute the proprietary assets of the depositary, the custodian or their nominees. Beneficial ownership in the deposited property will under the terms of the deposit agreement be vested in the beneficial owners of the ADSs. The depositary, the custodian and their respective nominees will be the record holders of the deposited property represented by the ADSs for the benefit of the holders and beneficial owners of the corresponding ADSs. A beneficial owner of ADSs may or may not be the holder of ADSs. Beneficial owners of ADSs will be able to receive, and to exercise beneficial ownership interests in, the deposited property only through the registered holders of the ADSs, the registered holders of the ADSs (on behalf of the applicable ADS owners) only through the depositary, and the depositary (on behalf of the owners of the corresponding ADSs) directly, or indirectly, through the custodian or their respective nominees, in each case upon the terms of the deposit agreement.

If you become an owner of ADSs, you will become a party to the deposit agreement and therefore will be bound to its terms and to the terms of any ADR that represents your ADSs. The deposit agreement and the ADR specify our rights and obligations as well as your rights and obligations as owner of ADSs and those of the depositary. As an ADS holder you appoint the depositary to act on your behalf in certain circumstances. The deposit agreement and the ADRs are governed by New York law. However, our obligations to the holders of ordinary shares will continue to be governed by the laws of the Cayman Islands, which may be different from the laws of the United States.

In addition, applicable laws and regulations may require you to satisfy reporting requirements and obtain regulatory approvals in certain circumstances. You are solely responsible for complying with such reporting requirements and obtaining such approvals. Neither the depositary, the custodian, us or any of their or our respective agents or affiliates shall be required to take any actions whatsoever on your behalf to satisfy such reporting requirements or obtain such regulatory approvals under applicable laws and regulations.

As an owner of ADSs, we will not treat you as one of our shareholders and you will not have direct shareholder rights. The depositary will hold on your behalf the shareholder rights attached to the ordinary shares underlying your ADSs.

 

173


Table of Contents

As an owner of ADSs you will be able to exercise the shareholders rights for the ordinary shares represented by your ADSs through the depositary only to the extent contemplated in the deposit agreement. To exercise any shareholder rights not contemplated in the deposit agreement you will, as an ADS owner, need to arrange for the cancellation of your ADSs and become a direct shareholder.

The manner in which you own the ADSs (e.g., in a brokerage account vs. as registered holder, or as holder of certificated vs. uncertified ADSs) may affect your rights and obligations, and the manner in which, and extent to which, the depositary’s services are made available to you. As an owner of ADSs, you may hold your ADSs either by means of an ADR registered in your name, through a brokerage or safekeeping account, or through an account established by the depositary in your name reflecting the registration of uncertificated ADSs directly on the books of the depositary (commonly referred to as the direct registration system or DRS). The direct registration system reflects the uncertificated (book-entry) registration of ownership of ADSs by the depositary. Under the direct registration system, ownership of ADSs is evidenced by periodic statements issued by the depositary to the holders of the ADSs. The direct registration system includes automated transfers between the depositary and The Depository Trust Company, or DTC, the central book-entry clearing and settlement system for equity securities in the United States. If you decide to hold your ADSs through your brokerage or safekeeping account, you must rely on the procedures of your broker or bank to assert your rights as ADS owner. Banks and brokers typically hold securities such as the ADSs through clearing and settlement systems such as DTC. The procedures of such clearing and settlement systems may limit your ability to exercise your rights as an owner of ADSs. Please consult with your broker or bank if you have any questions concerning these limitations and procedures. All ADSs held through DTC will be registered in the name of a nominee of DTC. This summary description assumes you have opted to own the ADSs directly by means of an ADS registered in your name and, as such, we will refer to you as the “holder.” When we refer to “you,” we assume the reader owns ADSs and will own ADSs at the relevant time.

The registration of the ordinary shares in the name of the depositary or the custodian shall, to the maximum extent permitted by applicable law, vest in the depositary or the custodian the record ownership in the applicable ordinary shares with the beneficial ownership rights and interests in such ordinary shares being at all times vested with the beneficial owners of the ADSs representing the ordinary shares. The depositary or the custodian shall at all times be entitled to exercise the beneficial ownership rights in all deposited property, in each case only on behalf of the holders and beneficial owners of the ADSs representing the deposited property.

Dividends and Distributions

As a holder of ADSs, you generally have the right to receive the distributions we make on the securities deposited with the custodian. Your receipt of these distributions may be limited, however, by practical considerations and legal limitations. Holders of ADSs will receive such distributions under the terms of the deposit agreement in proportion to the number of ADSs held as of the specified record date, after deduction of the applicable fees, taxes and expenses.

Distributions of Cash

Whenever we make a cash distribution for the securities on deposit with the custodian, we will deposit the funds with the custodian. Upon receipt of confirmation of the deposit of the requisite funds, the depositary will arrange for the funds received in a currency other than U.S. dollars to be converted into U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to the laws and regulations of the Cayman Islands.

The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The depositary will apply the same method for distributing the proceeds of the sale of any property (such as undistributed rights) held by the custodian in respect of securities on deposit.

The distribution of cash will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. The depositary will hold any cash amounts it is unable to distribute in a non-interest bearing account for the benefit of the applicable holders and beneficial owners of ADSs until the distribution can be effected or the funds that the depositary holds must be escheated as unclaimed property in accordance with the laws of the relevant states of the United States.

Distributions of Shares

Whenever we make a free distribution of ordinary shares for the securities on deposit with the custodian, we will deposit the applicable number of ordinary shares with the custodian. Upon receipt of confirmation of such deposit,

 

174


Table of Contents

the depositary will either distribute to holders new ADSs representing the ordinary shares deposited or modify the ADS-to-ordinary shares ratio, in which case each ADS you hold will represent rights and interests in the additional ordinary shares so deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed as in the case of a cash distribution.

The distribution of new ADSs or the modification of the ADS-to-ordinary shares ratio upon a distribution of ordinary shares will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or governmental charges, the depositary may sell all or a portion of the new ordinary shares so distributed.

No such distribution of new ADSs will be made if it would violate a law (e.g., the U.S. securities laws) or if it is not operationally practicable. If the depositary does not distribute new ADSs as described above, it may sell the ordinary shares received upon the terms described in the deposit agreement and will distribute the proceeds of the sale as in the case of a distribution of cash.

Distributions of Rights

Whenever we intend to distribute rights to purchase additional ordinary shares, we will give prior notice to the depositary and we will assist the depositary in determining whether it is lawful and reasonably practicable to distribute rights to purchase additional ADSs to holders.

The depositary will establish procedures to distribute rights to purchase additional ADSs to holders and to enable such holders to exercise such rights if it is lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the deposit agreement (such as opinions to address the lawfulness of the transaction). You may have to pay fees, expenses, taxes and other governmental charges to subscribe for the new ADSs upon the exercise of your rights. The depositary is not obligated to establish procedures to facilitate the distribution and exercise by holders of rights to purchase new ordinary shares other than in the form of ADSs.

The depositary will not distribute the rights to you if:

 

   

we do not timely request that the rights be distributed to you or we request that the rights not be distributed to you; or

 

   

we fail to deliver satisfactory documents to the depositary; or

 

   

it is not reasonably practicable to distribute the rights.

The depositary will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale will be distributed to holders as in the case of a cash distribution. If the depositary is unable to sell the rights, it will allow the rights to lapse.

Elective Distributions

Whenever we intend to distribute a dividend payable at the election of shareholders either in cash or in additional shares, we will give prior notice thereof to the depositary and will indicate whether we wish the elective distribution to be made available to you. In such case, we will assist the depositary in determining whether such distribution is lawful and reasonably practicable.

The depositary will make the election available to you only if it is reasonably practicable and if we have provided all of the documentation contemplated in the deposit agreement. In such case, the depositary will establish procedures to enable you to elect to receive either cash or additional ADSs, in each case as described in the deposit agreement.

If the election is not made available to you, you will receive either cash or additional ADSs, depending on what a shareholder in the Cayman Islands would receive upon failing to make an election, as more fully described in the deposit agreement.

Other Distributions

Whenever we intend to distribute property other than cash, ordinary shares or rights to purchase additional ordinary shares, we will notify the depositary in advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary in determining whether such distribution to holders is lawful and reasonably practicable.

 

175


Table of Contents

If it is reasonably practicable to distribute such property to you and if we provide to the depositary all of the documentation contemplated in the deposit agreement, the depositary will distribute the property to the holders in a manner it deems practicable.

The distribution will be made net of fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes and governmental charges, the depositary may sell all or a portion of the property received.

The depositary will not distribute the property to you and will sell the property if:

 

   

we do not request that the property be distributed to you or if we ask that the property not be distributed to you; or

 

   

we do not deliver satisfactory documents to the depositary; or

 

   

the depositary determines that all or a portion of the distribution to you is not reasonably practicable.

The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.

Redemption

Whenever we decide to redeem any of the securities on deposit with the custodian, we will notify the depositary in advance. If it is practicable and if we provide all of the documentation contemplated in the deposit agreement, the depositary will provide notice of the redemption to the holders.

The custodian will be instructed to surrender the shares being redeemed against payment of the applicable redemption price. The depositary will convert the redemption funds received into U.S. dollars upon the terms of the deposit agreement and will establish procedures to enable holders to receive the net proceeds from the redemption upon surrender of their ADSs to the depositary. You may have to pay fees, expenses, taxes and other governmental charges upon the redemption of your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as the depositary may determine.

Changes Affecting Ordinary Shares

The ordinary shares held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, split-up, cancellation, consolidation or any other reclassification of such ordinary shares or a recapitalization, reorganization, merger, consolidation or sale of assets of the Company.

If any such change were to occur, your ADSs would, to the extent permitted by law, represent the right to receive the property received or exchanged in respect of the ordinary shares held on deposit. The depositary may in such circumstances deliver new ADSs to you, amend the deposit agreement, the ADRs and the applicable Registration Statement(s) on Form F-6, call for the exchange of your existing ADSs for new ADSs and take any other actions that are appropriate to reflect as to the ADSs the change affecting the ordinary shares. If the depositary may not lawfully distribute such property to you, the depositary may sell such property and distribute the net proceeds to you as in the case of a cash distribution.

Issuance of ADSs upon Deposit of Ordinary Shares

Upon completion of this offering, the ordinary shares being offered pursuant to this prospectus will be deposited by us with the custodian. Upon receipt of confirmation of such deposit, the depositary will issue ADSs to the underwriters named in this prospectus.

After the closing of this offering, the depositary may create ADSs on your behalf if you or your broker deposit ordinary shares with the custodian. The depositary will deliver these ADSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the ordinary shares to the custodian. Your ability to deposit ordinary shares and receive ADSs may be limited by the legal considerations in the United States and Cayman Islands applicable at the time of deposit.

The issuance of ADSs may be delayed until the depositary or the custodian receives confirmation that all required approvals have been given and that the ordinary shares have been duly transferred to the custodian. The depositary will only issue ADSs in whole numbers.

 

176


Table of Contents

When you make a deposit of ordinary shares, you will be responsible for transferring good and valid title to the depositary. As such, you will be deemed to represent and warrant that:

 

   

the ordinary shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained;

 

   

all preemptive (and similar) rights, if any, with respect to such ordinary shares have been validly waived or exercised;

 

   

you are duly authorized to deposit the ordinary shares;

 

   

the ordinary shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the ADSs issuable upon such deposit will not be, “restricted securities” (as defined in the deposit agreement); and

 

   

the ordinary shares presented for deposit have not been stripped of any rights or entitlements.

If any of the representations or warranties are incorrect in any way, we and the depositary may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentations.

Transfer, Combination and Split Up of ADRs

As an ADR holder, you will be entitled to transfer, combine or split up your ADRs and the ADSs evidenced thereby. For transfers of ADRs, you will have to surrender the ADRs to be transferred to the depositary and also must:

 

   

ensure that the surrendered ADR is properly endorsed or otherwise in proper form for transfer;

 

   

provide such proof of identity and genuineness of signatures as the depositary deems appropriate;

 

   

provide any transfer stamps required by the State of New York or the United States; and

 

   

pay all applicable fees, charges, expenses, taxes and other government charges payable by ADR holders pursuant to the terms of the deposit agreement, upon the transfer of ADRs.

To have your ADRs either combined or split up, you must surrender the ADRs in question to the depositary with your request to have them combined or split up, and you must pay all applicable fees, charges and expenses payable by ADR holders, pursuant to the terms of the deposit agreement, upon a combination or split up of ADRs.

Withdrawal of Ordinary Shares Upon Cancellation of ADSs

As a holder, you will be entitled to present your ADSs to the depositary for cancellation and then receive the corresponding number of underlying ordinary shares at the custodian’s offices. Your ability to withdraw the ordinary shares held in respect of the ADSs may be limited by the legal considerations in the United States and Cayman Islands applicable at the time of withdrawal. In order to withdraw the ordinary shares represented by your ADSs, you will be required to pay to the depositary the fees for cancellation of ADSs and any charges and taxes payable upon the transfer of the ordinary shares. You assume the risk for delivery of all funds and securities upon withdrawal. Once canceled, the ADSs will not have any rights under the deposit agreement.

If you hold ADSs registered in your name, the depositary may ask you to provide proof of identity and genuineness of any signature and such other documents as the depositary may deem appropriate before it will cancel your ADSs. The withdrawal of the ordinary shares represented by your ADSs may be delayed until the depositary receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the depositary will only accept ADSs for cancellation that represent a whole number of securities on deposit.

You will have the right to withdraw the securities represented by your ADSs at any time except for:

 

   

temporary delays that may arise because (i) the transfer books for the ordinary shares or ADSs are closed, or (ii) ordinary shares are immobilized on account of a shareholders’ meeting or a payment of dividends;

 

   

obligations to pay fees, taxes and similar charges;

 

   

restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit; and/or

 

   

other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time).

 

177


Table of Contents

The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with mandatory provisions of law.

Voting Rights

As a holder, you generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the ordinary shares represented by your ADSs. The voting rights of holders of ordinary shares are described in “Description of Share Capital and Articles of Association—Articles of Association” in this prospectus.

At our request, the depositary will distribute to you any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary to exercise the voting rights of the securities represented by ADSs. In lieu of distributing such materials, the depositary may distribute to holders of ADSs instructions on how to receive such materials upon request.

If the depositary timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities (in person or by proxy) represented by the holder’s ADSs as follows:

 

   

The depositary will vote (or cause the custodian to vote) the ordinary shares held on deposit in accordance with the voting instructions received from the holders of ADSs.

 

   

Holders of ADSs in respect of which no timely voting instructions have been received shall be deemed to have instructed the depositary to give a discretionary proxy to a person designated by us to vote the ordinary shares represented by such holders’ ADSs; provided, however, that no such discretionary proxy shall be given with respect to any matter to be voted upon as to which we inform the depositary that (a) we do not wish such proxy to be given, (b) substantial opposition exists, or (c) the rights of holders of ordinary shares may be adversely affected.

Securities for which no voting instructions have been received will not be voted (except as otherwise contemplated in the deposit agreement). Please note that the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a timely manner.

Fees and Charges

As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement:

 

SERVICE

  

FEE

Issuance of ADSs (e.g., an issuance of ADS upon a deposit of ordinary shares or upon a change in the ADS(s)-to-ordinary shares ratio), excluding ADS issuances as a result of distributions of ordinary shares    Up to $0.05 per ADS issued
Cancellation of ADSs (e.g., a cancellation of ADSs for delivery of deposited property or upon a change in the ADS(s)-to-ordinary shares ratio)    Up to $0.05 per ADS cancelled
Distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements)    Up to $0.05 per ADS held
Distribution of ADSs pursuant to (i) share dividends or other free share distributions, or (ii) exercise of rights to purchase additional ADSs    Up to $0.05 per ADS held
Distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., upon a spin-off)    Up to $0.05 per ADS held
ADS Services    Up to $0.05 per ADS held on the applicable record date(s) established by the depositary

 

178


Table of Contents

As an ADS holder you will also be responsible to pay certain charges such as:

 

   

taxes (including applicable interest and penalties) and other governmental charges;

 

   

the registration fees as may from time to time be in effect for the registration of ordinary shares on the share register and applicable to transfers of ordinary shares to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;

 

   

certain cable, telex and facsimile transmission and delivery expenses;

 

   

the expenses and charges incurred by the depositary in the conversion of foreign currency;

 

   

the fees and expenses incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to ordinary shares, ADSs and ADRs; and

 

   

the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of deposited property.

ADS fees and charges for (i) the issuance of ADSs, and (ii) the cancellation of ADSs are charged to the person to whom the ADSs are issued (in the case of ADS issuances) and to the person whose ADSs are cancelled (in the case of ADS cancellations). In the case of ADSs issued by the depositary into DTC, the ADS issuance and cancellation fees and charges may be deducted from distributions made through DTC, and may be charged to the DTC participant(s) receiving the ADSs being issued or the DTC participant(s) holding the ADSs being cancelled, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are charged to the holders as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and charges is deducted from the funds being distributed. In the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS record date will be invoiced for the amount of the ADS fees and charges and such ADS fees and charges may be deducted from distributions made to holders of ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash and the ADS service fee may be deducted from distributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices prescribed by DTC and the DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder. Certain depositary fees and charges (such as the ADS services fee) may become payable shortly after the closing of the ADS offering. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes. The depositary may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary agree from time to time.

Amendments and Termination

We may agree with the depositary to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days’ prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially prejudicial to your substantial rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act or to be eligible for book-entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be able to provide you with prior notice of any modifications or supplements that are required to accommodate compliance with applicable provisions of law.

You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become effective. The deposit agreement cannot be amended to prevent you from withdrawing the ordinary shares represented by your ADSs (except as permitted by law).

We have the right to direct the depositary to terminate the deposit agreement. Similarly, the depositary may in certain circumstances on its own initiative terminate the deposit agreement. In either case, the depositary must give

 

179


Table of Contents

notice to the holders at least 30 days before termination. Until termination, your rights under the deposit agreement will be unaffected.

After termination, the depositary will continue to collect distributions received (but will not distribute any such property until you request the cancellation of your ADSs) and may sell the securities held on deposit. After the sale, the depositary will hold the proceeds from such sale and any other funds then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary will have no further obligations to holders other than to account for the funds then held for the holders of ADSs still outstanding (after deduction of applicable fees, taxes and expenses).

In connection with any termination of the deposit agreement, the depositary may make available to owners of ADSs a means to withdraw the ordinary shares represented by ADSs and to direct the depositary of such ordinary shares into an unsponsored American depositary share program established by the depositary. The ability to receive unsponsored American depositary shares upon termination of the deposit agreement would be subject to satisfaction of certain U.S. regulatory requirements applicable to the creation of unsponsored American depositary shares and the payment of applicable depositary fees.

Books of Depositary

The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.

The depositary will maintain in New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADSs. These facilities may be closed from time to time, to the extent not prohibited by law.

Limitations on Obligations and Liabilities

The deposit agreement limits our obligations and the depositary’s obligations to you. Please note the following:

 

   

We and the depositary are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith.

 

   

The depositary disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is cast or for the effect of any vote, provided it acts in good faith and without negligence and in accordance with the terms of the deposit agreement.

 

   

The depositary disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document forwarded to you on our behalf or for the accuracy of any translation of such a document, for the investment risks associated with investing in ordinary shares, for the validity or worth of the ordinary shares, for any tax consequences that result from the ownership of ADSs, for the credit-worthiness of any third party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.

 

   

We and the depositary will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.

 

   

We and the depositary disclaim any liability if we or the depositary are prevented or forbidden from or subject to any civil or criminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the deposit agreement, by reason of any provision, present or future of any law or regulation, or by reason of present or future provision of any provision of our Articles of Association, or any provision of or governing the securities on deposit, or by reason of any act of God or war or other circumstances beyond our control.

 

   

We and the depositary disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in our Articles of Association or in any provisions of or governing the securities on deposit.

 

   

We and the depositary further disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel, accountants, any person presenting ordinary shares for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed by either of us in good faith to be competent to give such advice or information.

 

180


Table of Contents
   

We and the depositary also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit that is made available to holders of ordinary shares but is not, under the terms of the deposit agreement, made available to you.

 

   

We and the depositary may rely without any liability upon any written notice, request or other document believed to be genuine and to have been signed or presented by the proper parties.

 

   

We and the depositary also disclaim liability for any consequential or punitive damages for any breach of the terms of the deposit agreement.

 

   

No disclaimer of any Securities Act or Exchange Act liability is intended by any provision of the deposit agreement, in each case to the extent established under applicable U.S. laws.

Nothing in the deposit agreement gives rise to a partnership or joint venture, or establishes a fiduciary relationship, among us, the depositary bank and you as ADS holder.

Nothing in the deposit agreement precludes Citibank (or its affiliates) from engaging in transactions in which parties adverse to us or the ADS owners have interests, and nothing in the deposit agreement obligates Citibank to disclose those transactions, or any information obtained in the course of those transactions, to us or to the ADS owners, or to account for any payment received as part of those transactions.

Taxes

You will be responsible for the taxes and other governmental charges payable on the ADSs and the securities represented by the ADSs. We, the depositary and the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due.

The depositary may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges are paid by the applicable holder. The depositary and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax withholding for any distributions on your behalf. However, you may be required to provide to the depositary and to the custodian proof of taxpayer status and residence and such other information as the depositary and the custodian may require to fulfill legal obligations. You are required to indemnify us, the depositary and the custodian for any claims with respect to taxes based on any tax benefit obtained for you.

Foreign Currency Conversion

The depositary will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute the U.S. dollars in accordance with the terms of the deposit agreement. You may have to pay fees and expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental requirements.

If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable period, the depositary may take the following actions in its discretion:

 

   

Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is lawful and practical.

 

   

Distribute the foreign currency to holders for whom the distribution is lawful and practical.

 

   

Hold the foreign currency (without liability for interest) for the applicable holders.

 

181


Table of Contents

Governing Law/Waiver of Jury Trial

The deposit agreement, the ADRs and the ADSs will be interpreted in accordance with the laws of the State of New York. The rights of holders of ordinary shares (including ordinary shares represented by ADSs) is governed by the laws of the Cayman Islands.

AS A PARTY TO THE DEPOSIT AGREEMENT, YOU IRREVOCABLY WAIVE YOUR RIGHT TO TRIAL BY JURY, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN ANY LEGAL PROCEEDING ARISING OUT OF THE DEPOSIT AGREEMENT OR THE ADRs AGAINST US AND/OR THE DEPOSITARY.

 

182


Table of Contents

SHARES AND ADS ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the ordinary shares or the ADSs, and a liquid trading market for the ADSs may not develop or be sustained after this offering. Future sales of substantial amounts of the ADSs in the public market, including shares issued upon exercise of outstanding options, or the anticipation of these sales, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of equity securities.

Based upon the             ordinary shares that were outstanding on November 30, 2018, upon the closing of this offering, we will have            outstanding ordinary shares, which include              ordinary shares represented by ADSs, after giving effect to this offering and the conversion of all outstanding Series A convertible preferred shares into 91,600,398 ordinary shares upon the closing of this offering, and assuming no exercise by the underwriters of their option to purchase additional ADSs.

Of the ADSs to be outstanding immediately after the closing of this offering, we expect that the ADSs to be sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining ordinary shares outstanding after this offering will be “restricted securities” under Rule 144, and we expect that substantially all of these restricted securities will be subject to the 180-day lock-up period under the lock-up agreements as described below. These restricted securities may be sold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144 or Rule 701 under the Securities Act.

Rule 144

In general, under Rule 144, beginning 90 days after the date of this prospectus, any person who is not our affiliate and has held their securities for at least six months, including the holding period of any prior owner other than one of our affiliates, may sell securities without restriction, subject to the availability of current public information about us. In addition, under Rule 144, any person who is not our affiliate and has not been our affiliate at any time during the preceding three months and has held their securities for at least one year, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available.

Beginning 90 days after the date of this prospectus, a person who is our affiliate or who was our affiliate at any time during the preceding three months may sell any unrestricted securities, as well as restricted securities that the person has beneficially owned for at least six months, including the holding period of any prior owner other than one of our affiliates, under Rule 144. Affiliates selling restricted or unrestricted securities may sell a number of securities within any three-month period that does not exceed the greater of:

 

   

1% of the number of ordinary shares then outstanding, which will equal approximately            shares or            ADSs, immediately after this offering; and

 

   

the average weekly trading volume of the ordinary shares in the form of ADSs on The Nasdaq Global Market during the four calendar weeks preceding the filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144 with respect to the sale.

Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 701

In general, under Rule 701 of the Securities Act, any of our employees, consultants, or advisors, other than our affiliates, who purchased shares from us in connection with a qualified compensatory stock plan or other written agreement is eligible to resell these shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with the holding period requirements of Rule 144 and without regard to the volume of such sales or the availability of public information about us. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Subject to the 180-day lock-up period described below, approximately            ordinary shares will be eligible for sale in accordance with Rule 701.

 

183


Table of Contents

Regulation S

Regulation S under the Securities Act provides that ordinary shares owned by any person may be sold without registration in the United States, provided that the sale is effected in an offshore transaction and no directed selling efforts are made in the United States (as these terms are defined in Regulation S), subject to certain other conditions. In general, this means that our ordinary shares may be sold in some other manner outside the United States without requiring registration in the United States.

Lock-Up Agreements

We and our directors and executive officers, and holders of substantially all of our outstanding equity securities, have agreed with the underwriters, subject to certain exceptions, not to, during the 180-day period following the date of the final prospectus for this offering, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any ordinary shares, ADSs or any options or warrants to purchase any ordinary shares, or any securities convertible into, exchangeable for or that represent the right to receive any ordinary shares, except with the prior written consent of Jefferies LLC and Evercore Group L.L.C. on behalf of the underwriters. Jefferies LLC and Evercore Group L.L.C. may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period.

The lock-up restrictions and specified exceptions are described in more detail under “Underwriting.”

Share Options and Warrant

As of November 30, 2018, we had outstanding options to purchase 15,784,770 ordinary shares, of which options to purchase 11,719,418 shares were vested. Following this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all of the ordinary shares subject to outstanding options and options and other awards issuable pursuant to the 2019 plan, the ESPP and our 2006 plan. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to vesting restrictions, any applicable lock-up agreements described above and Rule 144 limitations applicable to affiliates.

As of November 30, 2018, we had an outstanding warrant to purchase Series A convertible preferred shares or other shares issued by us in a qualified financing. This warrant will become a warrant to purchase                      ordinary shares upon closing of this offering. Any shares acquired through the exercise of this warrant will be eligible for sale subject to the lock-up agreements and securities laws described above.

 

184


Table of Contents

TAXATION

Material U.S. Federal Income Tax Considerations for U.S. Holders

The following discussion describes the material U.S. federal income tax consequences relating to the ownership and disposition of our ordinary shares or ADSs by U.S. Holders (as defined below). This discussion applies to U.S. Holders that purchase our ADSs pursuant to this offering and hold such ADSs as a capital asset (generally, property held for investment). This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions, and final, temporary, and proposed U.S. Treasury Regulations, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to specific U.S. Holders in light of their particular circumstances, including state and local tax consequences, estate tax consequences, alternative minimum tax consequences, and tax consequences applicable to U.S. Holders subject to special rules, such as:

 

   

banks, insurance companies, and certain other financial institutions;

 

   

U.S. expatriates and certain former citizens or long-term residents of the United States;

 

   

dealers or traders in securities who use a mark-to-market method of tax accounting;

 

   

persons holding ordinary shares or ADSs as part of a hedging transaction, “straddle,” wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to ordinary shares or ADSs;

 

   

persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;

 

   

brokers, dealers or traders in securities, commodities or currencies;

 

   

tax-exempt entities or government organizations;

 

   

S corporations, partnerships or other entities or arrangements classified as partnerships for U.S. federal income tax purposes;

 

   

regulated investment companies or real estate investment trusts;

 

   

persons who acquired our ordinary shares or ADSs pursuant to the exercise of any employee share option or otherwise as compensation;

 

   

persons that own or are deemed to own ten percent or more of our shares; and

 

   

persons holding our ordinary shares or ADSs in connection with a trade or business, permanent establishment, or fixed base outside the United States.

If an entity treated as a partnership for U.S. federal income tax purposes holds our ordinary shares or ADSs, the U.S. federal income tax consequences relating to an investment in such ordinary shares or ADSs will depend upon the status of the partner and the activities of the partnership.

A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ordinary shares or ADSs and is:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, 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 (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U. S. persons have authority to control all substantial decisions of the trust or (ii) the trust has made a valid election to be treated as a U.S. person under applicable U.S. Treasury Regulations.

Persons considering an investment in our ADSs should consult their own tax advisors as to the particular tax consequences applicable to them relating to the purchase, ownership and disposition of our ADSs, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their

 

185


Table of Contents

terms. Generally, a holder of an ADS should be treated for U.S. federal income tax purposes as holding the ordinary shares represented by the ADS. Accordingly, no gain or loss will be recognized upon an exchange of ADSs for the underlying ordinary shares represented by such ADSs. The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security. Accordingly, the creditability of foreign taxes, if any, as described below, could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of the underlying ordinary shares.

Passive Foreign Investment Company Rules

We are a foreign corporation, within the meaning of the Code. If we are classified as a passive foreign investment company, or PFIC, in any taxable year, a U.S. Holder will be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.

A non-U.S. corporation will be classified as a PFIC for any taxable year in which, after applying certain look-through rules, either:

 

   

at least 75% of its gross income is “passive income” (the “PFIC income test”); or

 

   

on average at least 50% of its assets, determined on a quarterly basis, are assets that produce passive income or are held for the production of passive income (the “PFIC asset test”).

Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents, and gains from the sale or exchange of property that gives rise to passive income. Assets that produce or are held for the production of passive income generally include cash, even if held as working capital or raised in a public offering, marketable securities, and other assets that may produce passive income. Generally, in determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.

Based on our estimated gross income and the average value of our gross assets, taking into account the initial public offering price of the ADSs in this offering and the expected price of the ADSs following this offering, and the nature of our business, we do not believe that we were a PFIC for our tax year ended December 31, 2017, and do not expect to be a PFIC during our tax year ending December 31, 2018. However, there can be no assurance that we will not be classified as a PFIC for the current taxable year or any prior or future taxable year. The determination of whether we are a PFIC is a fact-intensive determination made on an annual basis and the applicable law is subject to varying interpretation.

A separate determination must be made after the close of each taxable year as to whether we are a PFIC for that year. As a result, our PFIC status may change from year to year. The total value of our assets for purposes of the PFIC asset test generally will be calculated using the market price of our ordinary shares or ADSs, which may fluctuate considerably. Fluctuations in the market price of the ordinary shares or ADSs may result in our being a PFIC for any taxable year.

If we are a PFIC in any taxable year during which a U.S. Holder owns our ordinary shares or ADSs, the U.S. Holder could be liable for additional taxes and interest charges under the “PFIC excess distribution regime” upon (i) a distribution paid during a taxable year that is greater than 125% of the average annual distributions paid in the three preceding taxable years, or, if shorter, the U.S. Holder’s holding period for our ordinary shares or ADSs, and (ii) any gain recognized on a sale, exchange or other disposition, including a pledge, of our ordinary shares or ADSs, whether or not we continue to be a PFIC. Under the PFIC excess distribution regime, the tax on such distribution or gain would be determined by allocating the distribution or gain ratably over the U.S. Holder’s holding period for our ordinary shares or ADSs. The amount allocated to the current taxable year (i.e., the year in which the distribution occurs or the gain is recognized) and any year prior to the first taxable year in which we are a PFIC will be taxed as ordinary income earned in the current taxable year. The amount allocated to other taxable years will be taxed at the highest marginal rates in effect for individuals or corporations, as applicable, to ordinary income for each such taxable year, and an interest charge, generally applicable to underpayments of tax, will be added to the tax.

 

186


Table of Contents

If we are classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares or ADSs, we must generally continue to be treated as a PFIC by that holder for all succeeding years during which the U.S. Holder holds such ordinary shares or ADSs, regardless of whether we continue to meet the tests described above, unless we cease to be a PFIC and the U.S. Holder makes a “deemed sale” election under the PFIC rules with respect to our ordinary shares or ADSs. If the “deemed sale” election is made, the U.S. Holder will be deemed to have sold our ordinary shares or ADSs it holds at their fair market value on the last day of the last taxable year in which we qualified as a PFIC, and any gain recognized from such deemed sale would be taxed under the PFIC excess distribution regime. After the deemed sale election, the U.S. Holder’s ordinary shares or ADSs would not be treated as shares of a PFIC unless we subsequently become a PFIC. If we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares or ADSs, and one of our non-U.S. subsidiaries is also a PFIC (i.e., a lower-tier PFIC), such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be taxed under the PFIC excess distribution regime on distributions by the lower-tier PFIC and on gain from the disposition of shares of the lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions. Any of our non-U.S. subsidiaries that have elected to be disregarded as entities separate from us or as partnerships for U.S. federal income tax purposes would not be corporations under U.S. federal income tax law and accordingly, cannot be classified as lower-tier PFICs. However, non-U.S. subsidiaries that have not made such election may be classified as lower-tier PFICs if we are a PFIC during a U.S. Holder’s holding period and the subsidiary meets the PFIC income test or PFIC asset test.

If we are a PFIC, a U.S. Holder will not be subject to tax under the PFIC excess distribution regime on distributions or gain recognized on our ordinary shares or ADSs if a valid “mark-to-market” election is made by the U.S. Holder for our ordinary shares or ADSs, provided that the ordinary shares or ADSs are “marketable.” Our ordinary shares or ADSs will be considered marketable if they are “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury Regulations. A class of stock is regularly traded during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Our ADSs will be marketable as long as they remain listed on The Nasdaq Global Market and are regularly traded. A mark-to-market election will not apply to our ordinary shares or ADSs for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. Such election will not apply to any of our non-U.S. subsidiaries. Accordingly, a U.S. Holder may continue to be subject to tax under the PFIC excess distribution regime with respect to any lower-tier PFICs notwithstanding the U.S. Holder’s mark-to-market election for our ordinary shares or ADSs.

An electing U.S. Holder generally must take into account as ordinary income each year an amount equal to the excess, if any, of the fair market value of our ordinary shares or ADSs held at the end of such taxable year over the adjusted tax basis of such ordinary shares or ADSs. The U.S. Holder may also claim an ordinary loss deduction for the excess, if any, of the U.S. Holder’s adjusted tax basis of such ordinary shares or ADSs over their fair market value at the end of the taxable year, but only to the extent of any net mark-to-market gains for prior years. The U.S. Holder’s tax basis in our ordinary shares or ADSs would be adjusted to reflect any income or loss recognized as a result of the mark-to-market election. Any gain from a sale, exchange or other disposition of our ordinary shares or ADSs in any taxable year in which we are a PFIC would be treated as ordinary income and any loss from such sale, exchange or other disposition would be treated first as ordinary loss (to the extent of any net mark-to-market gains for prior years) and thereafter as capital loss. If, after having been a PFIC for a taxable year, we cease to be classified as a PFIC because we no longer meet the PFIC income or PFIC asset test, the U.S. Holder would not be required to take into account any latent gain or loss in the manner described above and any gain or loss recognized on the sale or exchange of the ordinary shares or ADSs would be classified as a capital gain or loss. Once made, the election cannot be revoked without the consent of the Internal Revenue Service, or the IRS, unless the ADSs cease to be marketable.

The tax consequences that would apply if we are a PFIC would also be different from those described above if a U.S. Holder were able to make a valid qualified electing fund, or QEF, election. As we do not expect to provide U.S. Holders with the information necessary for a U.S. Holder to make a QEF election, prospective investors should assume that a QEF election will not be available.

Unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. A U.S. Holder’s failure to file the annual report will

 

187


Table of Contents

cause the statute of limitations for such U.S. Holder’s U.S. federal income tax return to remain open with regard to the items required to be included in such report until three years after the U.S. Holder files the annual report, and, unless such failure is due to reasonable cause and not willful neglect, the statute of limitations for the U.S. Holder’s entire U.S. federal income tax return will remain open during such period.

Distributions

While we do not expect to pay any dividends in the near future, in the event any dividends are paid, subject to the discussion above under “Passive Foreign Investment Company Rules,” a U.S. Holder that receives a distribution with respect to our ordinary shares or ADSs generally will be required to include the gross amount of such distribution in gross income as a dividend when actually or constructively received to the extent of the U.S. Holder’s pro rata share of our current and/or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent a distribution received by a U.S. Holder is not a dividend because it exceeds the U.S. Holder’s pro rata share of our current and accumulated earnings and profits, it will be treated first as a tax-free return of capital and reduce (but not below zero) the adjusted tax basis of the U.S. Holder’s ordinary shares or ADSs. To the extent the distribution exceeds the adjusted tax basis of the U.S. Holder’s ordinary shares or ADSs, the remainder will be taxed as capital gain. Because we may not account for our earnings and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect all distributions to be reported to them as dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at preferential rates applicable to “qualified dividend income.” However, the qualified dividend income treatment may not apply if we are treated as a PFIC with respect to the U.S. Holder. Distributions on our ordinary shares or ADSs that are treated as dividends generally will constitute income from sources outside the United States for foreign tax credit purposes and generally will constitute passive category income. Such dividends will not be eligible for the “dividends received’’ deduction generally allowed to corporate shareholders with respect to dividends received from U.S. corporations.

Dividends will be included in a U.S. Holder’s income on the date of the Depositary’s receipt of the dividend. The amount of any dividend income paid in foreign currency will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss with respect to the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Sale, Exchange or Other Disposition of Our Ordinary Shares or ADSs

Subject to the discussion above under “Passive Foreign Investment Company Rules,’’ a U.S. Holder generally will recognize capital gain or loss for U.S. federal income tax purposes upon the sale, exchange or other disposition of our ordinary shares or ADSs in an amount equal to the difference, if any, between the amount realized (i.e., the amount of cash plus the fair market value of any property received) on the sale, exchange or other disposition and such U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs. Such capital gain or loss generally will be long-term capital gain taxable at a reduced rate for non-corporate U.S. Holders or long-term capital loss if, on the date of sale, exchange or other disposition, the ordinary shares or ADSs were held by the U.S. Holder for more than one year. Any capital gain of a non-corporate U.S. Holder that is not long-term capital gain is taxed at ordinary income rates. The deductibility of capital losses is subject to limitations. Any gain or loss recognized from the sale or other disposition of our ordinary shares or ADSs will generally be gain or loss from sources within the United States for U.S. foreign tax credit purposes.

Medicare Tax

Certain U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally are subject to a 3.8% tax on all or a portion of their net investment income, which may include their gross dividend income and net gains from the disposition of our ordinary shares or ADSs.

Information Reporting and Backup Withholding

U.S. Holders may be required to file certain U.S. information reporting returns with the IRS with respect to an investment in our ordinary shares or ADSs, including, among others, IRS Form 8938 (Statement of Specified Foreign Financial Assets). As described above under “Passive Foreign Investment Company Rules,” each U.S. Holder who is a shareholder of a PFIC must file an annual report containing certain information. U.S. Holders paying more than $100,000 for our ordinary shares or ADSs may be required to file IRS Form 926 (Return by a U.S. Transferor of

 

188


Table of Contents

Property to a Foreign Corporation) reporting this payment. Substantial penalties may be imposed upon a U.S. Holder that fails to timely comply with the required information reporting.

Dividends on and proceeds from the sale or other disposition of our ADSs may be reported to the IRS unless the U.S. Holder establishes a basis for exemption. Backup withholding may apply to amounts subject to reporting if the holder (i) fails to provide an accurate U.S. taxpayer identification number or otherwise establish a basis for exemption, or (ii) is described in certain other categories of persons. However, U.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

Cayman Islands Taxation

Prospective investors should consult their professional advisers on the possible tax consequences of buying, holding or selling any ADSs under the laws of their country of citizenship, residence or domicile.

The following is a discussion on certain Cayman Islands income tax consequences of an investment in the ADSs. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.

No stamp duty, capital duty, registration or other issue or documentary taxes are payable in the Cayman Islands on the creation, issuance or delivery of the ADSs. The Cayman Islands currently have no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax. There are currently no Cayman Islands’ taxes or duties of any nature on gains realized on a sale, exchange, conversion, transfer or redemption of the ADSs. Payments of dividends and capital in respect of the ADSs or ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of interest and principal or a dividend or capital to any holder of the ADSs, nor will gains derived from the disposal of the ADSs be subject to Cayman Islands income or corporation tax as the Cayman Islands currently have no form of income or corporation taxes.

Pursuant to section 6 of the Tax Concessions Law (2018 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet:

 

   

that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to us or our operations; and

 

   

that no such tax or any tax in the nature of estate duty or inheritance tax shall be payable on or in respect of the ADSs or ordinary shares, debentures or other obligations of ours.

The undertaking for the Company is for a period of twenty years from April 11, 2006.

 

189


Table of Contents

UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement, dated                ,                  between us and Jefferies LLC, Evercore Group L.L.C. and BMO Capital Markets Corp. as the representatives of the underwriters named below and the joint book-running managers of this offering, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the respective number of ADSs shown opposite its name below:

 

 

 

UNDERWRITER

   NUMBER OF
ADSs
 

Jefferies LLC

  

Evercore Group L.L.C.

  

BMO Capital Markets Corp.

  

Nomura Securities International

  
  

 

 

 

Total

                       
  

 

 

 

 

 

The underwriting agreement provides that the obligations of the several underwriters are subject to certain conditions precedent such as the receipt by the underwriters of officers’ certificates and legal opinions and approval of certain legal matters by their counsel. The underwriting agreement provides that the underwriters will purchase all of the ADSs if any of them 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. We have agreed to indemnify the underwriters and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of those liabilities.

The underwriters have advised us that, following the completion of this offering, they currently intend to make a market in the ADSs as permitted by applicable laws and regulations. However, the underwriters are not obligated to do so, and the underwriters may discontinue any market-making activities at any time without notice in their sole discretion. Accordingly, no assurance can be given as to the liquidity of the trading market for the ADSs, that you will be able to sell any of the ADSs held by you at a particular time or that the prices that you receive when you sell will be favorable.

The underwriters are offering the ADSs subject to their acceptance of the ADSs from us and subject to prior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commission and Expenses

The underwriters have advised us that they propose to offer the ADSs to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers, which may include the underwriters, at that price less a concession not in excess of $                per ADS. After the offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.

 

190


Table of Contents

The following table shows the public offering price, the underwriting discounts and commissions that we are to pay the underwriters and the proceeds, before expenses, to us in connection with this offering. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional ADSs.

 

 

 

     PER ADS      TOTAL  
     WITHOUT
OPTION TO
PURCHASE
ADDITIONAL
ADSs
     WITH
OPTION TO
PURCHASE
ADDITIONAL
ADSs
     WITHOUT
OPTION TO
PURCHASE
ADDITIONAL
ADSs
     WITH
OPTION TO
PURCHASE
ADDITIONAL
ADSs
 

Public offering price

   $                    $                    $                    $                

Underwriting discounts and commissions paid by us

   $        $        $        $    

Proceeds to us, before expenses

   $        $        $        $    

 

 

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $                . We have also agreed to reimburse the underwriters for certain expenses, including an amount not to exceed $                in connection with the clearance of this offering with the Financial Industry Regulatory Authority, Inc. as set forth in the underwriting agreement.

Determination of Offering Price

Prior to this offering, there has not been a public market for our ADSs. Consequently, the initial public offering price for our ADSs will be determined by negotiations between us and the representatives. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

We offer no assurances that the initial public offering price will correspond to the price at which the ADSs will trade in the public market subsequent to the offering or that an active trading market for the ADSs will develop and continue after the offering.

Listing

We intend to apply to have our ADSs listed on the Nasdaq Global Market under the trading symbol “MITO”.

Option to Purchase Additional ADSs

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of                ADSs from us at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. If the underwriters exercise this option, each underwriter will be obligated, subject to specified conditions, to purchase a number of additional ADSs proportionate to that underwriter’s initial purchase commitment as indicated in the table above. This option may be exercised only if the underwriters sell more ADSs than the total number set forth on the cover page of this prospectus.

No Sales of Similar Securities

We, our officers, directors and holders of all or substantially all our equity securities have agreed, subject to specified exceptions, not to directly or indirectly:

 

   

sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-l(h) under the Securities Exchange Act of 1934, as amended, or

 

   

otherwise dispose of any ordinary shares, options or warrants to acquire ordinary shares or ADSs, or securities exchangeable or exercisable for or convertible into ordinary shares or ADSs currently or hereafter owned either of record or beneficially, or

 

191


Table of Contents
   

enter into any swap, hedge or similar arrangement or agreement that transfers, in whole or in part, the economic risk of ownership of our ordinary shares or ADSs, or of options or warrants to ordinary shares or ADSs, or securities or rights exchangeable or exercisable for or convertible into ordinary shares or ADSs,

 

   

make any demand for, or exercise any right with respect to, the registration under the Securities Act of the offer and sale of any ordinary shares or ADSs, or of options or warrants to ordinary shares or ADSs, or securities or rights exchangeable or exercisable for or convertible into ordinary shares or ADSs, or cause to be filed a registration statement, prospectus or prospectus supplement (or an amendment or supplement thereto) with respect to any such registration, or

 

   

publicly announce an intention to do any of the foregoing for a period of 180 days after the date of this prospectus.

This restriction terminates after the close of trading of the ADSs on and including the 180th day after the date of this prospectus.

Jefferies LLC and Evercore Group L.L.C. may, in their sole discretion and at any time or from time to time before the termination of the 180-day period release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our shareholders who will execute a lock-up agreement, providing consent to the sale of ordinary shares or ADSs prior to the expiration of the lock-up period.

Stabilization

The underwriters have advised us that they, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in short sale transactions, stabilizing transactions, syndicate covering transactions or the imposition of penalty bids in connection with this offering. These activities may have the effect of stabilizing or maintaining the market price of our ADSs at a level above that which might otherwise prevail in the open market. Establishing short sales positions may involve either “covered” short sales or “naked” short sales.

“Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs in this offering. The underwriters may close out any covered short position by either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase ADSs through the option to purchase additional ADSs.

“Naked” short sales are sales in excess of the option to purchase additional ADSs. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchase in this offering.

A stabilizing bid is a bid for the purchase of ADSs on behalf of the underwriters for the purpose of fixing or maintaining the price of the ADSs. A syndicate covering transaction is the bid for or the purchase of ADSs on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. Similar to other purchase transactions, the underwriter’s purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our ADSs or preventing or retarding a decline in the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriters to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the ADSs originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member.

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 ADSs. The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.

 

192


Table of Contents

The underwriters may also engage in passive market making transactions in our ADSs on The Nasdaq Global Market in accordance with Rule 103 of Regulation M during a period before the commencement of offers or sales of ADSs in this offering and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid that bid must then be lowered when specified purchase limits are exceeded.

Electronic Distribution

A prospectus in electronic format may be made available by e-mail or on the web sites or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of ADSs for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ web sites and any information contained in any other web site maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by us or the underwriters and should not be relied upon by investors.

Other Activities and Relationships

The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for us and our affiliates, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities or instruments issued by us and our affiliates. If the underwriters or their respective affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The underwriters and their respective affiliates may hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the ADSs offered hereby. Any such short positions could adversely affect future trading prices of the ADSs offered hereby. The underwriters and certain of their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.

Selling Restrictions

Australia

This prospectus is not a disclosure document for the purposes of Australia’s Corporations Act 2001 (Cth) of Australia, or Corporations Act, has not been lodged with the Australian Securities & Investments Commission and is only directed to the categories of exempt persons set out below. Accordingly, if you receive this prospectus in Australia:

You confirm and warrant that you are either:

 

   

a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act;

 

   

a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant’s certificate to the Company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made;

 

   

a person associated with the Company under Section 708(12) of the Corporations Act; or

 

   

a “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act.

 

193


Table of Contents

To the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act, any offer made to you under this prospectus is void and incapable of acceptance.

You warrant and agree that you will not offer any of the ADSs issued to you pursuant to this prospectus for resale in Australia within 12 months of those ADSs being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.

Cayman Islands

No invitation, whether directly or indirectly, may be made to the public in the Cayman Islands to subscribe for securities of the company, and no such invitation is hereby made.

Pursuant to the Companies Law, no invitation may be made to the public in the Cayman Islands to subscribe for the ordinary shares by or on behalf of the company unless at the time of such invitation the company is listed on the Cayman Islands Stock Exchange.

European Economic Area

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 common shares which are the subject of the offering contemplated by this prospectus supplement and the accompanying prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any common shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

 

   

to any legal entity which is a “qualified investor” as defined in the Prospectus Directive;

 

   

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the underwriters or the underwriters nominated by us for any such offer; or

 

   

in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of common shares shall require us or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public of common shares” in relation to the common shares or ADSs 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 common shares or ADSs to be offered so as to enable an investor to decide to purchase or subscribe to the common shares or ADSs, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

Hong Kong

No securities have been offered or sold, and no securities may be offered or sold, in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent; or to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong (“SFO”) and any rules made under that Ordinance; or in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong (“CO”) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO. No document, invitation or advertisement relating to the securities has been issued or may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made under that Ordinance.

 

194


Table of Contents

This prospectus has not been registered with the Registrar of Companies in Hong Kong. Accordingly, this prospectus may not be issued, circulated or distributed in Hong Kong, and the securities may not be offered for subscription to members of the public in Hong Kong. Each person acquiring the securities will be required, and is deemed by the acquisition of the securities, to confirm that he is aware of the restriction on offers of the securities described in this prospectus and the relevant offering documents and that he is not acquiring, and has not been offered any securities in circumstances that contravene any such restrictions.

Japan

The offering has not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948 of Japan, as amended), or FIEL, and the underwriters will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEL and any other applicable laws, regulations and ministerial guidelines of Japan.

Singapore

This prospectus has not been and will not be lodged or registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase of the securities may not be issued, circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

   

a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

   

a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the securities pursuant to an offer made under Section 275 of the SFA except:

 

   

to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

   

where no consideration is or will be given for the transfer;

 

   

where the transfer is by operation of law;

 

   

as specified in Section 276(7) of the SFA; or

 

   

as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

Switzerland

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX), or on any other stock exchange or regulated trading facility in Switzerland. This prospectus has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

 

195


Table of Contents

Neither this prospectus nor any other offering or marketing material relating to the offering, us or the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of securities has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of securities.

United Kingdom

This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order and other persons to whom it may lawfully be communicated (each such person being referred to as a “relevant person”).

This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.

United Arab Emirates

The offering contemplated hereunder has not been approved or licensed by the Central Bank of the United Arab Emirates (UAE), the Securities and Commodities Authority of the UAE and/or any other relevant licensing authority in the UAE including any licensing authority incorporated under the laws and regulations of any of the free zones established and operating in the territory of the UAE, in particular the Dubai Financial Services Authority, or DFSA, a regulatory authority of the Dubai International Financial Centre (DIFC). This offering does not constitute a public offer of shares in the UAE, DIFC and/or any other free zone in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended), or the DFSA Markets Rules, accordingly, or otherwise. The ADSs may not be offered to the public in the UAE and/or any of the free zones.

The ADSs may be offered and issued only to a limited number of investors in the UAE or any of its free zones who qualify as sophisticated investors under the relevant laws and regulations of the UAE or the free zone concerned. We represent and warrant that the ADSs will not be offered, sold, transferred or delivered to the public in the UAE or any of its free zones.

Dubai International Financial Centre

This document relates to an Exempt Offer in accordance with the Markets Rules of the Dubai Financial Services Authority. This document is intended for distribution only to Persons of a type specified in those rules to whom Exempt Offers can be made. It must not be delivered to, or relied on by, any other Person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The ADSs to which this document relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the ADSs offered should conduct their own due diligence on the ADSs. If you do not understand the contents of this document you should consult an authorized financial adviser.

Canada

(A) Resale Restrictions

The distribution of ADSs in Canada is being made only in the provinces of Ontario, Quebec, Alberta and British Columbia on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of these securities are made. Any resale of the ADSs in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the securities.

 

196


Table of Contents

(B) Representations of Canadian Purchasers

By purchasing ADSs in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:

 

   

the purchaser is entitled under applicable provincial securities laws to purchase the ADSs without the benefit of a prospectus qualified under those securities laws as it is an “accredited investor” as defined under National Instrument 45-106— Prospectus Exemptions ,

 

   

the purchaser is a “permitted client” as defined in National Instrument 31-103— Registration Requirements, Exemptions and Ongoing Registrant Obligations ,

 

   

where required by law, the purchaser is purchasing as principal and not as agent, and

 

   

the purchaser has reviewed the text above under Resale Restrictions.

(C) Conflicts of Interest

Canadian purchasers are hereby notified that the underwriters are relying on the exemption set out in section 3A.3 or 3A.4, if applicable, of National Instrument 33-105— Underwriting Conflicts from having to provide certain conflict of interest disclosure in this document.

(D) Statutory Rights of Action

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if the offering memorandum (including any amendment thereto) such as this document contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser of these securities in Canada should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

(E) Enforcement of Legal Rights

All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

(F) Taxation and Eligibility for Investment

Canadian purchasers of ADSs should consult their own legal and tax advisors with respect to the tax consequences of an investment in the ADSs in their particular circumstances and about the eligibility of the ADSs for investment by the purchaser under relevant Canadian legislation.

Israel

This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968, or the Securities Law, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, and any offer of the ADSs is directed only at, (i) a limited number of persons in accordance with the Israeli Securities Law and (ii) investors listed in the first addendum, or the Addendum, to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case, purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors are required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.

 

197


Table of Contents

EXPENSES OF THIS OFFERING

The following table indicates the expenses to be incurred in connection with the 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 SEC registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and The Nasdaq Global Market listing fee.

 

 

 

     AMOUNT  

Securities and Exchange Commission registration fee

   $ 10,454  

FINRA filing fee

     13,438  

Nasdaq Global Stock Market listing fee

                 *  

Accountants’ fees and expenses

                 *  

Legal fees and expenses

                 *  

Transfer agent’s fees and expenses

                 *  

Printing and engraving expenses

                 *  

Miscellaneous

                 *  
  

 

 

 

Total expenses

   $             *  
  

 

 

 

 

 

*   To be filed by amendment.

 

198


Table of Contents

LEGAL MATTERS

Legal matters with respect to U.S. federal and New York state law in connection with this offering will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, New York, New York. Certain legal matters with respect to Cayman Islands law in connection with the validity of the ADSs being offered by this prospectus and other legal matters will be passed upon for us by Walkers, George Town, Cayman Islands. Cooley LLP, New York, New York is serving as counsel for the underwriters in connection with this offering.

EXPERTS

The consolidated financial statements of Stealth BioTherapeutics Corp and subsidiaries as of December 31, 2016 and 2017 and for the years then ended, included in this prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein (which report expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph referring to our ability to continue as a going concern). Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The registered business address of Deloitte & Touche LLP is 200 Berkeley Street, Boston, Massachusetts 02116.

ENFORCEMENT OF CIVIL LIABILITIES

Our agent for service of process in the United States is Stealth Delaware, and the executive offices of Stealth Delaware are located at 275 Grove Street, Suite 3-107, Newton, MA 02466, and the telephone number there is (617) 600-6888.

We are incorporated under the laws of the Cayman Islands. We have been advised that there is some doubt as to the enforceability in the Cayman Islands, in original actions or in actions for enforcement of judgments of the U.S. courts, of civil liabilities based solely on the federal securities laws of the United States. In addition, awards for punitive damages in actions brought in the United States, or elsewhere may be unenforceable in the Cayman Islands. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in the Cayman Islands will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and the Cayman Islands do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.

We have been advised by our Cayman Islands legal counsel that the Cayman Islands Court is unlikely (i) to recognize or enforce against us judgments of the courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed by those provisions are penal in nature. In certain circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the Cayman Islands Court will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits and based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty , inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). The Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

 

199


Table of Contents

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form F-1, including relevant exhibits and schedules under the Securities Act with respect to underlying ordinary shares represented by the ADSs, to be sold in this offering. A related registration statement on F-6 has been filed with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement and its exhibits and schedules for further information with respect to us and our ADSs.

Immediately upon the completion of this offering, we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish the depositary with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meeting and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

 

200


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Index to Consolidated Financial Statements as of December 31, 2016 and 2017 and for the Years Ended December 31, 2016 and 2017

 

     PAGE  

Independent Registered Public Accounting Firm Report

     F-2  

Consolidated Balance Sheets

     F-3  

Consolidated Statements of Operations

     F-4  

Consolidated Statements of Convertible Preferred Shares and Shareholders’ Deficit

     F-5  

Consolidated Statements of Cash Flows

     F-6  

Notes to Consolidated Financial Statements

     F-7  

Index to Unaudited Interim Condensed Consolidated Financial Statements as of December 31, 2017 and September 30, 2018 and for the Nine Month Periods Ended September 30, 2017 and 2018

  

Condensed Consolidated Balance Sheets

     F-23  

Condensed Consolidated Statements of Operations

     F-24  

Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders’ Deficit

     F-25  

Condensed Consolidated Statements of Cash Flows

     F-26  

Notes to Unaudited Consolidated Financial Statements

     F-27  

 

 

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Stealth BioTherapeutics Corp

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Stealth BioTherapeutics Corp and its subsidiaries (the “Company”) as of December 31, 2016 and 2017, the related consolidated statements of operations, convertible preferred shares and shareholders’ deficit, and cash flows, for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations, cash used in operations, and accumulated shareholders’ deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

October 25, 2018 (December 28, 2018 as to the effects of the reverse share split described in Note 18)

We have served as the Company’s auditor since 2014.

 

F-2


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONSOLIDATED BALANCE SHEETS

 

 

 

     DECEMBER 31,  
     2016     2017  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 9,709,732     $ 4,118,804  

Prepaid expenses and other current assets

     1,728,393       1,801,203  
  

 

 

   

 

 

 

Total current assets

     11,438,125       5,920,007  

Property and equipment, net

     999,530       795,940  

Other non-current assets

     884,598       438,982  
  

 

 

   

 

 

 

Total assets

   $ 13,322,253     $ 7,154,929  
  

 

 

   

 

 

 

Liabilities, convertible preferred shares and shareholders’ deficit

    

Current liabilities:

    

Accounts payable

   $ 2,909,247     $ 7,454,569  

Accrued expenses and other current liabilities

     8,866,732       12,520,020  

Accrued interest payable

           2,525,685  

Current portion of long-term debt

           2,094,295  
  

 

 

   

 

 

 

Total current liabilities

     11,775,979       24,594,569  
  

 

 

   

 

 

 

Convertible notes payable to shareholder

           50,000,000  

Long-term debt, less current portion

           11,956,867  

Warrant liability

           512,618  
  

 

 

   

 

 

 

Total liabilities

     11,775,979       87,064,054  
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

    

Series A convertible preferred shares, $0.0003 par value; 106,666,667 shares authorized; 91,600,398 issued and outstanding at December 31, 2016 and 2017; aggregate liquidation preference of $211,376,929 at December 31, 2016 and 2017

     211,376,929       211,376,929  

Shareholders’ deficit:

    

Ordinary shares, $0.0003 par value; 203,333,333 shares authorized at December 31, 2016 and 2017; 68,458,475 and 68,474,614 shares issued and outstanding at December 31, 2016 and 2017, respectively

     20,538       20,542  

Additional paid-in capital

     36,795,750       38,250,174  

Accumulated deficit

     (246,646,943     (329,556,770
  

 

 

   

 

 

 

Total shareholders’ deficit

     (209,830,655     (291,286,054
  

 

 

   

 

 

 

Total liabilities, convertible preferred shares and shareholders’ deficit

   $ 13,322,253     $ 7,154,929  
  

 

 

   

 

 

 

 

 

See the accompanying notes to these consolidated financial statements.

 

F-3


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016     2017  

Operating expenses:

    

Research and development

   $ 48,445,173     $ 63,219,537  

General and administrative

     13,403,332       16,500,875  
  

 

 

   

 

 

 

Total operating expenses

     61,848,505       79,720,412  
  

 

 

   

 

 

 

Loss from operations

     (61,848,505     (79,720,412
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     799,023       56,843  

Interest expense

           (3,281,715

Change in valuation of warrant liability

           35,457  
  

 

 

   

 

 

 

Total other income (expense), net

     799,023       (3,189,415
  

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

   $ (61,049,482   $ (82,909,827
  

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted

   $ (0.90   $ (1.21
  

 

 

   

 

 

 

Weighted average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted

     68,165,325       68,472,262  
  

 

 

   

 

 

 

 

 

See the accompanying notes to these consolidated financial statements

 

F-4


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ DEFICIT

 

 

 

    SERIES A
CONVERTIBLE
PREFERRED SHARES
    SHAREHOLDER
DEMAND NOTE
RECEIVABLE
                ORDINARY SHARES     ADDITIONAL
PAID-IN
CAPITAL
    ACCUMULATED
DEFICIT
    TOTAL
SHAREHOLDERS’
DEFICIT
 
    SHARES     AMOUNT                 SHARES     AMOUNT  

Balance at January 1, 2016

    91,600,398     $ 211,376,929     $ (50,739,404           68,125,142     $ 20,438     $ 34,952,859     $ (185,597,461   $ (150,624,164

Proceeds from shareholder demand note receivable

                50,739,404                                      

Exercise of warrant

                            333,333       100       9,900             10,000  

Share-based compensation expense

                                        1,832,991             1,832,991  

Net loss

                                              (61,049,482     (61,049,482
 

 

 

   

 

 

   

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    91,600,398       211,376,929                   68,458,475       20,538       36,795,750       (246,646,943     (209,830,655

Exercise of share options

                            16,139       4       10,471             10,475  

Share-based compensation expense

                                        1,286,970             1,286,970  

Issuance of warrant for ordinary shares

                                        156,983             156,983  

Net loss

                                              (82,909,827     (82,909,827
 

 

 

   

 

 

   

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    91,600,398     $ 211,376,929     $             68,474,614     $ 20,542     $ 38,250,174     $ (329,556,770   $ (291,286,054
 

 

 

   

 

 

   

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See the accompanying notes to these consolidated financial statements

 

F-5


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

     YEAR ENDED
DECEMBER 31,
 
     2016     2017  

Cash flows from operating activities:

    

Net loss

   $ (61,049,482   $ (82,909,827

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     312,537       346,872  

Change in fair value of warrant liability

           (35,457

Issuance of warrant for ordinary shares

           156,983  

Amortization of debt discount

           192,020  

Write-off of deferred financing costs

       457,652  

Non-cash interest expense

           2,525,685  

Share-based compensation

     1,832,991       1,286,970  

Loss on disposal of asset

           17,670  

Changes in operating assets and liabilities:

    

Prepaid expenses and other current assets

     1,563,817       (72,810

Accounts payable

     767,838       4,545,322  

Accrued expenses and other current liabilities

     2,552,366       3,653,288  
  

 

 

   

 

 

 

Net cash used in operating activities

     (54,019,933     (69,835,632
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (287,883     (160,952

Changes in other assets

     105,362       (12,036
  

 

 

   

 

 

 

Net cash used in investing activities

     (182,521     (172,988
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of convertible notes payable to shareholder

           50,000,000  

Proceeds from venture debt issuance

           14,633,000  

Payment of venture issuance costs

           (225,783

Proceeds from repayment of shareholder demand note receivable

     50,739,404        

Payment of deferred financing costs

     (457,652      

Proceeds from exercise of share options and warrant

     10,000       10,475  
  

 

 

   

 

 

 

Net cash provided by financing activities

     50,291,752       64,417,692  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,910,702     (5,590,928

Cash and cash equivalents, beginning of period

     13,620,434       9,709,732  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 9,709,732     $ 4,118,804  
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing and financing activity:

    

Noncash items:

    

Fair value of warrants issued in connection with term loan

   $     $ 548,075  
  

 

 

   

 

 

 

Supplemental cash flow information-cash paid for interest

   $     $ 564,010  
  

 

 

   

 

 

 

 

 

See the accompanying notes to these consolidated financial statements.

 

F-6


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations

The Company

Stealth BioTherapeutics Corp was incorporated in Grand Cayman, Cayman Islands as Stealth Peptides International, Inc. in April 2006. Its wholly owned subsidiary, Stealth BioTherapeutics Inc., was incorporated in Delaware as Stealth Peptides Inc. in October 2007. In addition, a wholly owned subsidiary, Stealth BioTherapeutics (HK) Limited, was incorporated in Hong Kong in September 2017. In May 2018, Stealth BioTherapeutics (Shanghai) Limited was formed as a wholly foreign owned enterprise in China. Hereinafter, Stealth BioTherapeutics Corp, Stealth BioTherapeutics Inc., Stealth BioTherapeutics (HK) Limited, and Stealth BioTherapeutics (Shanghai) Limited are referred to as the “Company.” The Company is a clinical stage biotechnology company focused on the discovery and development of novel pharmaceutical agents to treat patients suffering from diseases involving mitochondrial dysfunction through its mitochondrial medicine platform. The consolidated financial statements include the assets and liabilities and operating results of the Company and its wholly owned subsidiaries. Since inception, the Company has devoted substantially all of its efforts to research and development, business planning, acquiring operating assets, seeking intellectual property protection for its technology and product candidates, and raising capital.

Since inception, the Company has entered into numerous debt and equity issuances with Morningside Venture (I) Investments Limited (the “Shareholder”). As of December 31, 2017, the Shareholder held approximately 98% of the Company’s outstanding shares. See Notes 7 and 8. Since inception, the Company has incurred net losses and negative cash flows from operations and had an accumulated deficit of $246.6 million and $329.6 million as of December 31, 2016 and 2017, respectively. The Company has financed its operations to date from the issuance of preferred shares, ordinary shares and convertible debt substantially to the Shareholder, as well as term debt.

Liquidity and Going Concern

These consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Since its inception, the Company has incurred recurring losses, including a net loss of $82.9 million for the year ended December 31, 2017. The Company expects to continue to incur operating losses in the foreseeable future.

Management believes that cash and cash equivalents of $4.1 million at December 31, 2017, together with proceeds of $5.0 million received in 2018 under our term loan facility (Note 6), proceeds of $50.0 million received under the January 2018 note purchase agreement (Note 7) and proceeds of $15.0 million received in October 2018 under the October note purchase agreement (Note 7), along with an additional borrowing capacity of $15 million (Note 7), will be sufficient to fund operating expenses into the first quarter of 2019. The Company may seek to obtain financing through equity and debt issuances, collaborative agreements, and grants from government and private sponsors. Because the ability to obtain additional financing is outside of the Company’s control, the foregoing conditions raise substantial doubt in regard to the Company’s ability to continue as a going concern. If the Company is unable to obtain additional funding when needed, or to the extent needed, it may be necessary to scale back operations or halt certain research and development activities, which could prevent the Company from successfully executing on its operating plan. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue its operations.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to authoritative GAAP, as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the

 

F-7


Table of Contents

amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates related to, but not limited to, estimates related to fair value of ordinary share, share-based compensation expense, recoverability of the Company’s net deferred tax asset-related valuation allowances, and certain prepaid expenses and accrued expenses. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.

The Company utilizes significant estimates and assumptions in determining the fair value of its ordinary shares. The Company utilized various valuation methodologies in accordance with the framework of the 2004 and 2014 American Institute of Certified Public Accountants Technical Practice Aids, Valuation of Privately-held Company Equity Securities Issued as Compensation, to estimate the fair value of its ordinary shares. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector, the prices at which the Company sold preferred shares, the superior rights and preferences of securities senior to the Company’s ordinary shares at the time and the likelihood of achieving a liquidity event, such as an initial public offering (“IPO”) or sale of the Company. Significant changes to the key assumptions used in the valuations could result in different fair values of ordinary shares at each valuation date and materially affect the consolidated financial statements.

Principles of Consolidation

All intercompany balances and transactions have been eliminated in consolidation.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. Management views the Company’s operations and manages its business as a single operating segment.

Cash Equivalents

Cash equivalents include highly liquid investments maturing within 90 days from the date of purchase. Cash equivalents consist primarily of U.S. government treasury funds at December 31, 2016 and 2017 and are valued at cost, which approximates fair value.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of money market funds and U.S. treasury funds. The Company places these investments in highly rated financial institutions and limits the amount of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds.

Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level  1 —Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or 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 for which all significant inputs 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.

 

F-8


Table of Contents

The Company’s financial instruments consist of cash equivalents, principally U.S. government securities, accounts payable, accrued expenses, term debt and a warrant liability.

Management believes that the carrying amounts of the Company’s cash equivalents, accounts payable and accrued expenses approximate the fair value due to the short term nature of those instruments. The Company has classified these financial instruments as Level I. Cash equivalents as of December 31, 2016 and 2017 were $5.2 million and $4.0 million, respectively.

The Company believes that its debt obligations bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value. The debt fair value measurements are considered Level 2 in the fair value hierarchy.

The Company’s warrant liability is carried at fair value determined according to the fair value hierarchy described above and classified as a Level 3 measurement (see Note 6).

As of December 31, 2017, the Company has a term loan outstanding, the fair value of which is measured using Level 2 inputs and warrant liability, which is measured using Level 3 inputs (see Note 6). The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the years ended December 31, 2016 and 2017. The change in fair value of the warrant is included in other income (expense).

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major improvements are capitalized as additions to property and equipment, whereas expenditures for maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operating expenses as incurred.

Depreciation and amortization is recorded using the straight line method over the estimated useful lives of the respective assets, which are as follows:

 

 

 

ASSET

  

ESTIMATED

USEFUL LIFE

Computer equipment and software

   3 years

Furniture, fixtures, and other

   5 years

Laboratory equipment

   5 years

Leasehold improvements

  

Shorter of useful life

or term of lease

 

 

Impairment of Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to the undiscounted expected future cash flows the assets are expected to generate and recognizes an impairment loss equal to the excess of the carrying value over the fair value of the related asset. For the years ended December 31, 2016 and 2017, no impairments have been recorded.

Operating Leases

The Company leases facilities under a non-cancelable operating lease agreement. The lease agreement contains free or escalating rent payment provisions. The Company recognizes rent expense under such leases on a straight-line basis over the term of the lease with the difference between the expense and the payments recorded as deferred rent on the consolidated balance sheets. Any reimbursements by the landlord for tenant improvements are considered lease incentives, the balance of which is recorded as a lease incentive obligation within deferred rent on the consolidated balance sheets and amortized over the life of the lease. Lease renewal periods are considered in determining the lease term.

 

F-9


Table of Contents

Convertible Preferred Shares

The Company classifies convertible preferred shares as temporary equity in the consolidated balance sheets due to certain change in control clauses that are outside of the Company’s control, including liquidation, sale, or transfer of control of the Company, as holders of the convertible preferred shares could cause redemption of the shares in these situations.

Research and Development Costs

Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses include (i) employee-related expenses, including salaries, benefits, travel and share-based compensation expense; (ii) external research and development expenses incurred under arrangements with contract research organizations and contract manufacturing organizations, investigational sites and consultants, including share-based compensation expense for consultants; (iii) the cost of acquiring, developing and manufacturing clinical study materials; and (iv) costs associated with preclinical and clinical activities and regulatory operations. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized and recorded in the accompanying consolidated balance sheets as prepaid research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed. If expectations change such that the Company does not expect it will need the goods to be delivered or the services to be rendered, capitalized non-refundable advance payments would be charged to expense.

The Company enters into consulting, research and other agreements with commercial entities, researchers, universities and others for the provision of goods and services. Under such agreements, the Company may pay for services on an hourly, monthly, quarterly, project or other basis. Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided by the Company’s clinical sites and vendors. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.

Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

Share-based Compensation

The Company accounts for share-based compensation awards as compensation expense based on their grant date fair values. For share-based awards granted to employees, the Company allocates share-based compensation expense on a straight-line basis over the associated service or vesting period. For non-employees the compensation expense is generally recognized during the period in which services are rendered. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then current fair value of the Company’s ordinary shares and updated assumption inputs in the Black-Scholes option-pricing model (“Black-Scholes”). The Company recognizes compensation expense for the portion of awards that have vested each period. Share-based compensation is classified in the accompanying consolidated statements of operations within research and development or general and administrative operating expenses depending on where the related services are provided.

The Company estimates the fair value of its share options using Black-Scholes, which requires the input of subjective assumptions, including (a) expected share price volatility, (b) expected term of the award, (c) risk-free interest rate, (d) expected dividends and (e) estimated fair value of its ordinary shares on the measurement date. Due to the lack of a public market for the trading of its ordinary shares and a lack of Company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies, but which are publicly traded. When selecting these public companies on which it has based its expected share price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry and with historical share price information sufficient to meet the expected term of the share-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based awards. The Company will continue to apply this process until a sufficient amount of historical

 

F-10


Table of Contents

information regarding the volatility of its own share price becomes available. The expected term of options granted represents the weighted average of previously transacted awards plus the minimum and maximum expected life of the outstanding awards based on vesting and expiry. The expected term for nonemployee awards is the remaining contractual term of the option. The risk-free interest rates are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future.

The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from its estimates. The Company uses historical plan data to estimate forfeitures and records share-based compensation expense only for those awards that are expected to vest. Share-based compensation expense recognized in the consolidated financial statements is based on awards that are ultimately expected to vest.

Income Taxes

Deferred income taxes are recorded using an asset and liability approach. The Company records deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized, which is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2016 and 2017, the Company does not have any material uncertain tax positions.

Guarantees and Indemnification

The Company indemnifies its officers and directors for certain events or occurrences that happen by reason of the relationship with, or position held at, the Company. The Company has not experienced any losses related to these indemnification obligations, and no claims were outstanding.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to net loss for all periods presented.

Net Loss Per Share Attributable to Ordinary Shareholders

Basic net loss per share attributable to ordinary shareholders is calculated by dividing net loss attributable to ordinary shareholders by the weighted average shares outstanding during the period, without consideration for ordinary shares equivalents. During periods of income, the Company allocates participating securities a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted average ordinary shares and participating securities (the “two-class method”). The Company’s convertible preferred shares participate in any dividends declared by the Company and are, therefore, considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. Diluted net loss per share attributable to ordinary shareholders is calculated by adjusting weighted average shares outstanding for the dilutive effect of ordinary share equivalents outstanding for the period, determined using the treasury-share and if-converted methods. For purposes of the diluted net loss per share attributable to ordinary shareholders’ calculation, convertible preferred shares, share options, warrants and convertible notes are considered to be ordinary share equivalents, but have been excluded from the calculation of diluted net loss per share attributable to ordinary shareholders, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share are the same for all periods presented.

 

F-11


Table of Contents

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09 Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies share-based payment accounting through a variety of amendments. The standard was effective for annual periods beginning after December 15, 2016 and for interim periods within those fiscal years. The changes resulting from the adoption of this standard impact the accounting for income taxes, accounting for forfeitures, statutory tax withholding and the presentation of statutory tax withholding on the statement of cash flows. The Company adopted this standard on January 1, 2017. Under guidance within ASU 2016-09, excess tax benefits and deficiencies are to be recognized as income tax expense or benefit in the statement of operations in the period in which they occur rather than as an increase or decrease in stockholders’ equity (deficit). Since the Company maintains a full valuation allowance on its net deferred tax asset, there is no net impact to its accumulated deficit or its net loss resulting from the adoption of this standard. Also under the guidance in ASU 2016-09, an entity may elect to account for forfeitures as they occur or continue to estimate the total number of awards that are vested or expected to vest. The Company has elected to continue to estimate its forfeitures. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or statement of cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new guidance most significantly impacts lessee accounting and disclosures but also requires enhanced disclosures for lessors. The guidance requires lessees to identify arrangements that should be accounted for as leases. For lease arrangements exceeding a 12-month term, a right-of-use asset and lease obligation is recorded by the lessee for all leases, whether operating or financing, while the statement of operations reflects lease expense for operating leases and amortization and interest expense for financing leases. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. In addition, the new lease guidance requires the use of the modified retrospective method. The guidance is effective for private companies for fiscal years beginning after December 15, 2019. The Company is evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”): Classification of Certain Cash Receipts and Cash Payments . This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for private companies for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company does not believe that the adoption of ASU No. 2016-15 will have a material impact on its consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU No. 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”). These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This standard is effective for private companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as long as ASU No. 2014-09 has been adopted by the Company. The Company is evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

 

F-12


Table of Contents

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

 

 

     AS OF DECEMBER 31,  
     2016      2017  

Research and development

   $ 1,541,341      $ 1,527,711  

Other

     187,052        273,492  
  

 

 

    

 

 

 

Total

   $ 1,728,393      $ 1,801,203  
  

 

 

    

 

 

 

 

 

4. Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

     AS OF DECEMBER 31,  
     2016     2017  

Computer equipment and software

   $ 330,070     $ 354,903  

Furniture, fixtures and other

     644,756       718,955  

Laboratory equipment

     409,336       376,806  

Leasehold improvements

     336,178       374,097  
  

 

 

   

 

 

 
     1,720,340       1,824,761  

Accumulated depreciation

     (720,810     (1,028,821
  

 

 

   

 

 

 

Property and equipment, net

   $ 999,530     $ 795,940  
  

 

 

   

 

 

 

 

 

Depreciation expense for the years ended December 31, 2016 and 2017 was $312,537 and $346,872, respectively.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

     AS OF DECEMBER 31,  
     2016      2017  

Research and development

   $ 5,798,917      $ 9,272,095  

Employee compensation costs

     1,555,968        2,060,991  

Consulting and professional services

     489,258        542,436  

Legal expenses

     660,474        407,923  

Deferred rent

     196,537        165,373  

Other

     165,578        71,202  
  

 

 

    

 

 

 

Total

   $ 8,866,732      $ 12,520,020  
  

 

 

    

 

 

 

 

 

 

 

F-13


Table of Contents

6. Debt

Term Loan

In June 2017, the Company entered into a Loan and Security Agreement, (“LSA”), with a lender which permits the Company to borrow up to an aggregate principal amount of $40.0 million through a multiple tranche term loan (“Loan”). The tranche advances are based on the Company achieving certain performance milestones as defined in the LSA. Upon closing of the Loan, the Company drew the first tranche less expenses, which resulted in net proceeds of $12.1 million. In September 2017, the Company drew the second tranche advance of $2.5 million upon achieving the first milestone, bringing the total gross amount borrowed to $15.0 million as of December 31, 2017.

The Loan included a $200,000 facility charge, which was paid to the lender on the closing date. The Company paid a $30,000 due diligence fee prior to the Loan closing, and the Company incurred additional cash expenses of $362,783 related to the Loan. These three amounts were all recorded as a debt discount and are being amortized as interest expense using the effective interest method over the life of the Loan. The Loan also includes an end of term charge equal to the greater of $750,000 or 5% of the aggregate principal amount of all advances. The end of term charge is being accrued and recorded to interest expense over the life of the Loan using the effective interest method.

The Loan bears interest at the greater of (i) the prime rate plus 5.5% or (ii) 9.5%. As of December 31, 2017, the interest rate was 10.0%. Interest accrues from the closing date and interest payments are due monthly in arrears on the first of the month. Payments under the Loan are interest only for the first twelve months after closing followed by a 30-month amortization period of principal and interest through the scheduled maturity date of January 1, 2021. Principal and interest payments will commence on August 1, 2018. However, if certain milestones are met, the date may be extended to February 1, 2019 or August 1, 2019, depending on the milestone achievement. During 2018, the Loan was amended to, among other things, delay the principal payments to December 1, 2018 and possibly further to April 30, 2019 depending upon the achievement of certain milestones.

The Company’s obligations to the lender are secured by a first priority security interest in substantially all of its assets, excluding intellectual property (“IP”). The lender maintains a negative pledge on IP with a security interest in the proceeds of the sale of the IP. The Loan contains certain covenants related to restrictions on payments for certain investments, additional debt, distributions and transfers.

As consideration for the Loan, the Company and the lender entered into a Warrant Agreement (“Warrant”), pursuant to which the lender, as Warrant holder, has the right to purchase a quantity of shares equal to the quotient derived by dividing (a) the Warrant coverage by (b) the exercise price. Warrant coverage means the greater of (a) $312,500 plus 2.5% of future tranche advances in the event all or part of the tranches are funded or (b) $375,000. The exercise price is (a) the purchase price of Series A preferred shares, $2.30769 per share, or (b) the price per share paid in the next equity round of financing of ordinary shares or preferred shares, which results in aggregate gross proceeds of at least $30 million. As of December 31, 2017, the exercise price, share type and amount of shares had not been fully defined. The Warrant is exercisable beginning in June 2017, in whole or in part, and expires in ten years.

The estimated Warrant shares were initially valued on June 30, 2017, using the Black-Scholes model with the following assumptions: volatility of 64.5%, expected term of ten years, risk-free interest rate of 2.3%, fair value of Series A preferred shares of $2.43 and a zero dividend yield. The resulting estimated Warrant fair value of $548,075 has been recorded as a debt discount and is being amortized through interest expense using the effective interest method through the scheduled maturity date of January 1, 2021. At December 31, 2017, the following assumptions were used: volatility of 67.3%, expected term of 9.5 years, risk-free interest rate of 2.4%, fair value of Series A preferred shares of $2.28 and a zero dividend yield.

 

F-14


Table of Contents

Certain estimates and judgments were used by management to estimate future funding from the Loan and the associated probabilities of occurrence, and volatility, amongst others. The warrant is recorded at fair value on our consolidated balance sheet as a liability and subject to revaluation at each balance sheet date, and any changes in value are recorded as a component of gain or loss from valuation of warrant liability, until the earlier of their exercise or expiration or upon the completion of a liquidation event. Activity related to the Warrant liability for the year ended December 31, 2017 is as follows:

 

 

 

Fair value at January 1, 2017

   $  
  

 

 

 

Issuance of warrant

     548,075  

Change in fair value of warrant liability

     (35,457
  

 

 

 

Fair value at December 31, 2017

   $ 512,618  
  

 

 

 

 

 

In addition, the lender can declare a material adverse effect while monitoring our business, operations, properties, assets or financial condition. A material adverse effect is considered an event of default under the LSA. In the event of default, repayment of amounts due under the Loan may be accelerated by the lender.

Future principal payments under the Loan as of December 31, 2017 are as follows:

 

 

 

2018

   $ 2,242,136  

2019

     5,781,667  

2020

     6,378,089  

2021

     598,108  
  

 

 

 

Total future principal payments

     15,000,000  
  

 

 

 

Less unamortized debt discount

     948,838  
  

 

 

 

Total balance as depicted on the balance sheet

   $ 14,051,162  
  

 

 

 

Term loan—current portion

     2,094,295  

Term loan—non-current portion

     11,956,867  
  

 

 

 

Total balance as depicted on the balance sheet

   $ 14,051,162  
  

 

 

 

 

 

Interest expense related to the Loan for the year ended December 31, 2017 was $1,035,493. Accrued interest as of December 31, 2017 was $279,463.

In March 2018, the Company drew the third tranche advance of $5.0 million upon achieving the third milestone, bringing the total gross amount borrowed to $20.0 million. During 2018, the Loan was amended to, among other things, delay the principal payments to December 1, 2018 and possibly further to April 30, 2019 depending upon the achievement of certain milestones. For consideration of the amendments, the Company agreed to pay an additional end of term charge of $250,000 at maturity which is being accrued and recorded to interest expense over the life of the loan using the effective interest method.

7. Convertible Notes Payable and Shareholder Demand Note Receivable

For the year ended December 31, 2016, the Company recorded $763,995 of interest income from a Shareholder Demand Note Receivable that was paid in full during 2016.

In connection with the issuance of a note in December 2009, the Company issued a warrant to the Shareholder to purchase 333,333 ordinary shares at $0.03 per share. The warrant was fully exercised in November 2016 for $10,000.

 

F-15


Table of Contents

During the year ended December 31, 2017, the Company issued six convertible promissory notes payable to the Shareholder, resulting in proceeds of $50.0 million (the “2017 Shareholder Notes”). The notes accrue interest at 8% per annum. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. The Shareholder also has the right to convert some or all of the outstanding amount into shares of Series A preferred shares at a conversion price of $2.30769 after December 31, 2018.

Interest expense related to the convertible notes for the year ended December 31, 2017 was $2,246,222, which was recorded as accrued interest payable on the accompanying consolidated balance sheet.

In January 2018, the Company entered into a note exchange agreement with the Shareholder in the amount of $52.4 million, which represents the total principal and accrued interest of the 2017 Shareholder Notes at the time of the execution of the note exchange agreement. The exchange terminated the 2017 Shareholder Notes and created a new convertible note under substantially the same terms as the notes described in the following paragraph.

In January 2018, the Company entered into a note purchase agreement with new investors (as amended, the “2018 Agreement”), whereby the Company may borrow an aggregate principal amount of $30.0 million in exchange for notes convertible into ordinary shares of the Company. In April 2018, the note purchase agreement was amended to allow the Company to borrow up to $65.0 million in the aggregate. Under the 2018 Agreement, between January and May 2018, the Company issued notes in an aggregate principal amount of $50.0 million (the “2018 New Investor Notes”). The 2018 New Investor Notes accrue interest at 7% per annum. Accrued interest on the 2018 New Investor Notes compounds annually, and upon such compounding, shall be added to the outstanding principal amount. The 2018 New Investor Notes, as amended, are convertible upon (i) the closing of an initial public offering or (ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. Unless the outstanding amount of the 2018 New Investor Notes are earlier repaid, retired, discharged, or automatically converted into shares of the Company upon the occurrence of events discussed below, all amounts outstanding become due and payable on the later of (i) January 10, 2020 and (ii) five business days after the date on which the term loan is repaid, terminated and discharged in full.

In October 2018, the Company entered into an additional note purchase agreement with the Shareholder (the “2018 Shareholder Note”), whereby the Company may borrow an aggregate principal amount of up to $30.0 million, of which it has borrowed $15.0 million. The notes contain similar terms as the notes described in the preceding paragraph. The 2018 Shareholder Note is convertible upon a qualified initial public offering of our ordinary shares in the United States at the initial public offering price per share. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium of such principal and interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. The 2018 Shareholder Note accrues interest at 7% per annum and accrued interest compounds annually, and upon such compounding, is added to the outstanding principal amount. Unless earlier converted into shares, the 2018 Shareholder Note becomes due and payable on the later of (i) October 3, 2020 and (ii) five business days after the date on which the Loan is repaid, terminated and discharged in full.

8. Convertible Preferred Shares

At December 31, 2016 and 2017, the Company had authorized 106,666,667 shares of Series A preferred, $0.0003 par value, and there were 91,600,398 shares issued and outstanding.

The rights and preferences of the Series A preferred shares are as follows:

Conversion —At any time at the holder’s request and automatically upon the closing of a qualified IPO or sale of the Company, Series A preferred shares is convertible into ordinary shares at a ratio which is computed by dividing the original issue price by the applicable conversion price. A qualified IPO is defined under our articles of association as a fully underwritten public offering of ordinary shares in which aggregate gross proceeds equal or exceed $35 million pursuant to an effective registration statement under the Securities Act or in a jurisdiction

 

F-16


Table of Contents

outside of the United States. The initial conversion price of $2.30769 may be adjusted if and whenever the Company subsequently issues or sells ordinary shares or Series A preferred shares at a per share price that is less than the conversion price in effect at that time. At December 31, 2017, the applicable conversion ratio was 1:1.

Dividends —Series A preferred shareholders are entitled to receive, when and as declared by the board of directors, preferential cash dividends at a rate at least equal to 8% of the original issue price. Such dividends are not cumulative. No dividends have been declared.

Redemption Rights —Series A preferred shareholders do not have any stated redemption rights.

Liquidation Rights —In the event of a liquidation, dissolution, or winding-up of the Company, Series A preferred shareholders shall be paid an amount first out of legally available funds available for distribution to holders of the Company’s capital share an amount equal to $2.30769 per share, plus all declared but unpaid dividends with respect to each such shares, as adjusted for any share dividend, share split, recapitalization, or other similar event. After payment of all preferential amounts, any assets and funds of the Company that remain available shall be distributed on a pro rata basis among the holders of ordinary shares.

Voting Rights —Series A preferred shareholders are entitled to the number of votes equal to the number of ordinary shares into which the Series A preferred shares are convertible. Preferred and ordinary shareholders vote together as a single class except for the election of the Company’s board of directors. For such election, holders of Series A preferred shares have the right to elect two directors and the holders of ordinary shares have a right to appoint one director.

9. Shareholders’ Equity

Ordinary Shares

At December 31, 2016 and 2017, the Company had 203,333,333 ordinary shares, $0.0003 par value, authorized for issuance, and there were 68,458,475 and 68,474,614 ordinary shares issued and outstanding, respectively.

In January 2017, the Company issued a warrant to purchase 231,989 ordinary shares to an affiliate of its interim Chief Financial Officer of Stealth BioTherapeutics Inc. at an exercise price of $1.38 per share. The warrant was fully vested as of December 31, 2017 and expires in January 2022. The Company recorded an expense of $156,983 within general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2017. In June 2018, the warrant was amended and restated to be treated as an option agreement under the 2006 plan.

The voting, dividend and liquidation rights of holders of ordinary shares are subject to and qualified by the rights, powers and preferences of holders of Series A preferred shares. The rights and preferences of ordinary shares are as follows:

Voting —Holders are entitled to one vote for each ordinary share held at all meetings of shareholders and written action in lieu of meetings; there is no cumulative voting.

Dividends —Holders are entitled to receive dividends, if and when declared by the board of directors. Cash dividends may not be declared or paid to holders until paid on Series A preferred shares in accordance with its terms. No dividends have been declared.

Liquidation —After payment to the holders of Series A preferred shares of its liquidation preference, the holders of ordinary shares are entitled to share in the Company’s assets available for distribution on a pro rata basis, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event.

 

F-17


Table of Contents

The Company has reserved for future issuances the following number of ordinary shares as of December 31, 2017:

 

 

 

2006 Share Incentive Plan

     25,516,081  

Conversion of Series A preferred shares

     91,600,398  

Exercise of ordinary share warrant

     231,989  

Conversion of preferred share warrant

     162,500  
  

 

 

 

Total

     117,510,968  
  

 

 

 

 

 

10. Share Option Plan

The Company’s 2006 Share Incentive Plan, as amended, (the “2006 Plan”), provides for the grant of share options or other awards to employees, directors, advisers, and consultants for the purchase of up to 25,544,054 ordinary shares. Share options vest over varying schedules as determined by the Company’s board of directors and typically expire 10 years from the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the 2006 Plan. At December 31, 2017, there were 10,727,050 shares available for future grant.

In determining the exercise prices for options granted, the Company’s board of directors has considered the fair value of ordinary shares as of the grant date, based upon a variety of factors, including the results obtained from a third-party valuation, its financial position and financial performance, the status of technological developments of its proposed products, the composition and ability of the current scientific and management team, an evaluation or benchmark of its competition, the illiquid nature of the ordinary shares, sales of capital share including convertible preferred shares, the effect of the rights and preferences of Series A preferred shares, and the prospects of a liquidity event.

Total share-based compensation expense is as follows:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016      2017  

Research and development

   $ 378,045      $ 722,277  

General and administrative

     1,454,946        564,693  
  

 

 

    

 

 

 

Total

   $ 1,832,991      $ 1,286,970  
  

 

 

    

 

 

 

 

 

As of December 31, 2017, total unrecognized compensation expense related to non-vested share options, net of related forfeiture estimates, was $1,827,032. The Company expects to recognize its remaining unrecognized share-based compensation expense over a weighted-average period of approximately 2.6 years.

The fair value of each share option granted to employees and directors was estimated on the date of grant using the following assumptions:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016     2017  

Risk free interest rate

     1.23% - 2.42     1.89% - 2.83

Expected dividend yield

            

Expected term (in years)

     6.4       6.0  

Expected volatility

     50%       57%  

Underlying fair value of ordinary shares

     $1.14       $1.38  

 

 

 

F-18


Table of Contents

The following table summarizes share option plan activity for the year ended December 31, 2017:

 

 

 

     NUMBER OF
SHARES
    WEIGHTED-
AVERAGE
EXERCISE PRICE
     AVERAGE
REMAINING
CONTRACTUAL
LIFE (IN YEARS)
     AGGREGATE
INTRINSIC VALUE
 

Outstanding at January 1, 2017

     10,953,667     $ 0.87        7.9      $ 5,599,435  

Granted

     4,301,900     $ 1.38        

Exercised

     (16,139   $ 0.66        

Cancelled or forfeited

     (450,396   $ 1.17        
  

 

 

         

Outstanding at December 31, 2017

     14,789,032     $ 1.02        7.5      $ 3,580,527  
  

 

 

         

Exercisable at December 31, 2017

     10,265,876     $ 0.87        6.9      $ 3,442,241  
  

 

 

         

Vested and expected to vest at December 31, 2017

     13,161,820     $ 0.96        7.3      $ 3,557,007  
  

 

 

         

 

 

The weighted average grant date fair value per share for awards granted during the years ended December 31, 2016 and December 31, 2017 was $0.58 and $0.74, respectively.

11. 401(k) Savings Plan

In 2014, the Company adopted a tax-qualified employee savings and retirement 401(k) Plan, covering all qualified employees. Eligible employees may make pretax contributions to the 401(k) Plan up to statutory limits. The Company contributes up to 3% of an employee’s annual salary, within statutory limits. During the years ended December 31, 2016 and 2017, the Company contributed $228,422 and $267,989, respectively.

12. License Agreements

In 2006, the Company entered into a license agreement, as amended, with Cornell University and a research institute (collectively “licensor”) for certain intellectual property rights, and subsequently entered into four additional license agreements with Cornell. Under the terms of the original license agreement, the Company issued an aggregate of 666,667 ordinary shares to Cornell between 2006 and 2009. The Company has also paid $60,000 in license fees. The Company is also required to pay royalties on the commercial sale of products that result from the licensed intellectual property, as well as a percentage of any sublicensing revenue. Subject to specified reductions and royalty offset, such royalties are calculated as a tiered, low-to-mid single digit percentage of net sales of licensed products under each of the license agreements, except that for licensed products under the original agreement, such royalties are calculated as a tiered, low single-digit to sub-teen percentage of net sales, depending on patent coverage, amount of net sales and type of licensed product. Under this license agreement, if the Company fails to commercialize a product by December 31, 2020, the licensor may terminate the license, subject to specified exceptions for causes due to scientific, regulatory and other events over which we cannot exert direct control.

13. Commitments and Contingencies

Lease commitments

The Company’s U.S. subsidiary currently leases office space in Newton, Massachusetts under a lease that expires in November 2020 and the Company’s U.S. subsidiary has made a security deposit of $325,000, which is classified in other assets on the accompanying consolidated balance sheets.

The Company has accounted for the lease as an operating lease. Rent expense was $564,895 for each of the years ended December 31, 2016 and 2017. The expense is being recorded on a straight-line basis over the term of the lease. Incentives received from the landlord related to the operating lease are recorded as deferred rent. As of December 31, 2016 and 2017, the Company recorded deferred rent of $196,537 and $165,373, respectively, which is included in accrued expenses and other current liabilities on the accompanying consolidated balance sheet.

 

F-19


Table of Contents

Future minimum payments payable under all operating leases as of December 31, 2017 are as follows:

 

 

 

YEAR ENDING DECEMBER 31,

      

2018

   $ 607,939  

2019

     622,385  

2020

     582,659  
  

 

 

 

Total minimum lease payments

   $ 1,812,983  
  

 

 

 

 

 

14. Income Taxes

As a Cayman Islands entity, Stealth BioTherapeutics Corp is not currently subject to taxation. Stealth BioTherapeutics Inc. is subject to U.S. income tax and certain state income taxes.

The following table presents domestic and foreign components of loss before income tax benefit for the periods presented:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016      2017  

Domestic

   $ 480,149      $ 1,598,933  

Foreign

     60,569,333        81,310,894  
  

 

 

    

 

 

 

Loss before income tax benefit

   $ 61,049,482      $ 82,909,828  
  

 

 

    

 

 

 

 

 

A reconciliation setting forth the differences between the Company’s effective tax rate and the U.S. statutory tax rate is as follows:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016     2017  

Income tax benefit at federal statutory rate

   $ 162,567     $ 557,206  

State and local income taxes net of federal tax benefit

     334,773       254,703  

Federal credits

     881,381       1,298,890  

Federal rate change

           (280,090

Nondeductible/nontaxable permanent items

     (15,353     (11,849

Other

     21,169       1,406  

Change in valuation allowance

     (1,384,537     (1,820,266
  

 

 

   

 

 

 

Income tax benefit

   $     $  
  

 

 

   

 

 

 

Effective tax rate

     0.0     0.0
  

 

 

   

 

 

 

 

 

 

F-20


Table of Contents

The significant components of the Company’s deferred tax assets are as follows:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016      2017  

Deferred tax assets:

     

Federal and state net operating loss carryforwards

   $ 606,265      $ 620,007  

Credits

     1,227,570        2,871,521  

Deferred rent

     71,941        39,817  

Other accrued liabilities

            55,961  

Depreciation

            2,245  
  

 

 

    

 

 

 

Total deferred tax assets

     1,905,776        3,589,551  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Other accrued liabilities

     94,493         

Depreciation

     41,998         
  

 

 

    

 

 

 

Total deferred tax liabilities

     136,491         
  

 

 

    

 

 

 

Valuation allowance

     1,769,285        3,589,551  
  

 

 

    

 

 

 

Net deferred tax liability

   $      $  
  

 

 

    

 

 

 

 

 

As of December 31, 2017, Stealth BioTherapeutics Inc. had federal and state net operating loss carryforwards of $2,623,358 and $788,499, respectively. The net operating loss carryforwards expire at various dates beginning in 2034 through 2036 for U.S. and state tax purposes.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. As of December 31, 2017, the Company maintains a full valuation allowance for its deferred tax assets due to uncertainty regarding their realization. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more or less than the net amount the Company has recorded. The valuation allowance increased $1,820,266 during the year ended December 31, 2017 due primarily to the generation of net operating losses during the period and the recognition of potential research and development tax credits.

The Company is not currently under any income tax examinations. Due to the Company’s net operating losses, all tax years generally remain open in each jurisdiction. No interest or penalties have been recorded on any unrecognized tax benefits since its inception. The Company does not believe material uncertain tax positions have arisen to date.

Under the provisions of Section 382 of the Internal Revenue Code of 1986, certain substantial changes in the Company’s ownership, including a sale of the Company, or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards and tax credits, which could be used annually to offset future taxable income.

On December 22, 2017, The Tax Cuts and Jobs Act (the “Act)” was enacted. The Act significantly revised the U.S. corporate income tax law by lowering the corporate Federal income tax rate from 35% to 21%. As of December 31, 2017, the Company has assessed the effects of the corporate rate reduction on its existing deferred tax balances which resulted in a $280,090 reduction in the deferred tax assets. Since the Company maintains a full valuation allowance on its deferred tax assets, a corresponding reduction in the valuation allowance equal to the effect of the rate reduction on the ending deferred tax asset was also reflected. In addition to the rate reduction, the Act also requires companies with foreign subsidiaries to pay a one-time transition tax on earnings that were previously tax deferred. As of December 31, 2017, the Company does not have previously deferred foreign earnings subject to the transition tax.

 

F-21


Table of Contents

15. Net Loss Per Share Attributable to Ordinary Shareholders

Basic and diluted net loss per ordinary share are calculated as follows:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016     2017  

Numerator:

    

Net loss attributable to ordinary shareholders—basic and diluted

   $ (61,049,482   $ (82,909,827
  

 

 

   

 

 

 

Denominator:

    

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted

     68,165,325       68,472,262  
  

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted

   $ (0.90   $ (1.21
  

 

 

   

 

 

 

 

 

The following ordinary share equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, as their effect is anti-dilutive:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2016      2017  

Convertible preferred shares

     91,600,398        91,600,398  

Preferred share warrants

            162,500  

Ordinary share warrants

            231,989  

Convertible notes payable to shareholder and accrued interest

            22,640,052  

Outstanding share options

     10,953,667        14,789,032  
  

 

 

    

 

 

 

Total

     102,554,065        129,423,971  
  

 

 

    

 

 

 

 

 

16. Related Party

For the year ended December 31, 2016, the Company paid $107,500 for services provided by an entity affiliated with its Chief Executive Officer for services provided as its Chief Executive Officer. For the year ended December 31, 2016 and 2017, the Company paid $2,868 and $193,523, respectively, for services provided by an entity affiliated with its interim Chief Financial Officer for services provided as its Chief Financial Officer.

Except as disclosed elsewhere in the notes to the accompanying consolidated financial statements, there were no other material transactions with related parties.

17. Subsequent Events

The Company has completed an evaluation of all subsequent events through October 25, 2018 (December 28, 2018 for Note 18), the date these financial statements were available to be issued. Except as disclosed in Notes 1, 6, 7, 9 and 18, the Company has concluded that no subsequent events have occurred that require disclosure.

18. Reverse Share Split

The Company’s board of directors and shareholders approved a three for one reverse share split of its issued and outstanding ordinary shares and share options and a proportional adjustment to the existing conversion ratios for the Company’s preferred shares through a consolidation of its share capitalization effective as of December 28, 2018. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse share split.

 

F-22


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

    DECEMBER 31,     SEPTEMBER 30,     PRO FORMA
SEPTEMBER 30,
 
    2017     2018     2018  

Assets

     

Current assets:

     

Cash and cash equivalents

  $ 4,118,804     $ 4,078,286     $ 4,078,286  

Prepaid expenses and other current assets

    1,801,203       951,775       951,775  
 

 

 

   

 

 

   

 

 

 

Total current assets

    5,920,007       5,030,061       5,030,061  

Property and equipment, net

    795,940       572,472       572,472  

Deferred offering costs

          5,621,698       5,621,698  

Other non-current assets

    438,982       405,494       405,494  
 

 

 

   

 

 

   

 

 

 

Total assets

  $ 7,154,929     $ 11,629,725     $ 11,629,725  
 

 

 

   

 

 

   

 

 

 

Liabilities, convertible preferred shares and shareholders’ deficit

     

Current liabilities:

     

Accounts payable

  $ 7,454,569     $ 8,826,256     $ 8,826,256  

Accrued expenses and other current liabilities

    12,520,020       15,313,272       15,313,272  

Accrued interest payable

    2,525,685       5,024,558       5,024,558  

Current portion of long-term debt

    2,094,295       6,893,160       6,893,160  
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    24,594,569       36,057,246       36,057,246  
 

 

 

   

 

 

   

 

 

 

Convertible notes payable

    50,000,000       78,142,465       78,142,465  

Long-term debt, less current portion

    11,956,867       12,467,422       12,467,422  

Derivative liability

          33,652,582       33,652,582  

Warrant liability

    512,618       386,349       386,349  
 

 

 

   

 

 

   

 

 

 

Total liabilities

    87,064,054       160,706,064       160,706,064  
 

 

 

   

 

 

   

 

 

 

Commitments and contingencies

     

            Series A convertible preferred shares, $.0003 par value; 106,666,667 shares authorized; 91,600,398 issued and outstanding at December 31, 2017 and September 30, 2018; aggregate liquidation preference of $211,376,929 at December 31, 2017 and September 30, 2018; no shares issued and outstanding as of September 30, 2018 (pro forma)

    211,376,929       211,376,929        

Shareholders’ deficit:

     

Ordinary shares, $.0003 par value; 203,333,333 shares authorized and 68,474,614 shares issued and outstanding at December 31, 2017 and September 30, 2018;              shares authorized and              shares issued and outstanding at September 30, 2018 (pro forma)

    20,542       20,542       48,022  

Additional paid-in capital

    38,250,174       39,205,914       250,555,363  

Accumulated deficit

    (329,556,770     (399,679,724     (399,679,724
 

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit

    (291,286,054     (360,453,268     (149,076,339
 

 

 

   

 

 

   

 

 

 

Total liabilities, convertible preferred shares and shareholders’ deficit

  $ 7,154,929     $ 11,629,725     $ 11,629,725  
 

 

 

   

 

 

   

 

 

 

 

 

See the accompanying notes to these condensed consolidated financial statements.

 

F-23


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2017     2018  

Operating expenses:

    

Research and development

   $ 46,212,164     $ 41,757,884  

General and administrative

     12,937,339       12,541,068  
  

 

 

   

 

 

 

Total operating expenses

     59,149,503       54,298,952  
  

 

 

   

 

 

 

Loss from operations

     (59,149,503     (54,298,952
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     26,394       140,783  

Interest expense

     (1,710,941     (14,422,008

Change in valuation of warrant liability

     (5,964     126,269  

Change in valuation of derivative liability

           (1,669,046
  

 

 

   

 

 

 

Total other income (expense), net

     (1,690,511     (15,824,002
  

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

   $ (60,840,014   $ (70,122,954
  

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders — basic and diluted

   $ (0.89   $ (1.02
  

 

 

   

 

 

 

Weighted average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted

     68,471,469       68,474,614  
  

 

 

   

 

 

 

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

F-24


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ DEFICIT

(unaudited)

 

 

 

     SERIES A
CONVERTIBLE
PREFERRED SHARES
           ORDINARY SHARES      ADDITIONAL
PAID-IN
CAPITAL
     ACCUMULATED
DEFICIT
    TOTAL
SHAREHOLDERS’
DEFICIT
 
     SHARES      AMOUNT            SHARES      AMOUNT  

Balance at January 1, 2017

     91,600,398        211,376,929            68,458,475        20,538        36,795,750        (246,646,943     (209,830,655

Exercise of share options

                       16,139        4        10,471              10,475  

Share-based compensation expense

                                     977,643              977,643  

Issuance of warrant for ordinary shares

                                     156,983              156,983  

Net loss

                                            (60,840,014     (60,840,014
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2017

     91,600,398      $ 211,376,929            68,474,614      $ 20,542      $ 37,940,847      $ (307,486,956   $ (269,525,567
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at December 31, 2017

     91,600,398      $ 211,376,929            68,474,614      $ 20,542      $ 38,250,174      $ (329,556,770   $ (291,286,054
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Share-based compensation expense

                     955,740          955,740  

Net loss

                                        (70,122,954     (70,122,954
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2018

     91,600,398      $ 211,376,929            68,474,614      $ 20,542      $ 39,205,914      $ (399,679,724   $ (360,453,268
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements

 

F-25


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2017     2018  

Cash flows from operating activities:

    

Net loss

   $ (60,840,014   $ (70,122,954

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     262,061       235,120  

Change in fair value of warrant liability

     5,964       (126,269

Change in fair value of derivative liability

           1,669,046  

Issuance of warrant for ordinary shares

     156,983        

Amortization of debt discount

     94,825       8,155,768  

Write-off of deferred financing costs

     457,652        

Non-cash interest expense

     1,288,807       4,808,463  

Share-based compensation

     977,643       955,740  

Changes in operating assets and liabilities:

    

Prepaid expenses and other current assets

     (905,977     861,063  

Accounts payable

     1,680,818       1,371,686  

Accrued expenses, accrued interest payable and other current liabilities

     5,455,173       1,277,811  
  

 

 

   

 

 

 

Net cash used in operating activities

     (51,366,065     (50,914,526
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (160,952     (11,652

Changes in other assets

     21,451        
  

 

 

   

 

 

 

Net cash used in investing activities

     (139,501     (11,652
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of convertible notes payable from shareholder

     50,000,000        

Proceeds from issuance of convertible notes payable

           50,000,000  

Proceeds from long term debt issuance

     14,633,000       5,000,000  

Payment of long term debt issuance costs

     (225,783      

Payment of convertible debt issuance costs

           (55,826

Proceeds from repayment of shareholder demand note receivable

            

Payment of deferred financing costs

           (4,058,514

Proceeds from exercise of share options and warrant

     10,475        
  

 

 

   

 

 

 

Net cash provided by financing activities

     64,417,692       50,885,660  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     12,912,126       (40,518

Cash and cash equivalents, beginning of period

     9,709,732       4,118,804  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 22,621,858     $ 4,078,286  
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing and financing activity:

    

Noncash items:

    

Fair value of warrants issued in connection with term loan

   $ 548,075     $  
  

 

 

   

 

 

 

Fair value of derivatives recorded in connection with the 2018 Shareholder Note and 2018 New Investor Notes

   $     $ 31,983,535  
  

 

 

   

 

 

 

Noncash conversion of accrued interest due to Shareholder into new convertible notes payable to Shareholder

   $     $ 2,357,333  
  

 

 

   

 

 

 

Deferred financing costs included in accrued expenses

   $     $ 1,563,184  
  

 

 

   

 

 

 

Supplemental cash flow information-Cash paid for interest

   $ 213,281     $ 1,410,035  
  

 

 

   

 

 

 

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

 

F-26


Table of Contents

STEALTH BIOTHERAPEUTICS CORP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine months ended September 30, 2017 and 2018

1. Organization and Operations

The Company

Stealth BioTherapeutics Corp was incorporated in Grand Cayman, Cayman Islands as Stealth Peptides International, Inc. in April 2006. Its wholly owned subsidiary, Stealth BioTherapeutics Inc., was incorporated in Delaware as Stealth Peptides Inc. in October 2007. In addition, a wholly owned subsidiary, Stealth BioTherapeutics (HK) Limited, was incorporated in Hong Kong in September 2017. In May 2018, Stealth BioTherapeutics (Shanghai) Limited was formed as a wholly foreign owned enterprise in China. Hereinafter, Stealth BioTherapeutics Corp, Stealth BioTherapeutics Inc., Stealth BioTherapeutics (HK) Limited, and Stealth BioTherapeutics (Shanghai) Limited are referred to as the “Company.” The Company is a clinical stage biotechnology company focused on the discovery and development of novel pharmaceutical agents to treat patients suffering from diseases involving mitochondrial dysfunction through its mitochondrial medicine platform. The condensed consolidated financial statements include the assets and liabilities and operating results of the Company and its wholly owned subsidiaries. Since inception, the Company has devoted substantially all of its efforts to research and development, business planning, acquiring operating assets, seeking intellectual property protection for its technology and product candidates, and raising capital.

The Company has entered into numerous debt and equity issuances with Morningside Venture (I) Investments Limited (the “Shareholder”). As of September 30, 2018, the Shareholder held approximately 98% of the Company’s outstanding shares. See Notes 8 and 9. The Company has incurred net losses and negative cash flows from operations and had an accumulated deficit of $399.7 million as of September 30, 2018. The Company has financed its operations to date from the issuance of preferred shares, ordinary shares, convertible debt, as well as long term debt.

Liquidity and Going Concern

These condensed consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Since its inception, the Company has incurred recurring losses, including net losses of $70.1 million for the nine months ended September 30, 2018. The Company expects to continue to incur operating losses in the foreseeable future.

Management believes that cash and cash equivalents of $4.1 million at September 30, 2018, together with the proceeds of $25.0 million received in October and December 2018 under the 2018 Shareholder Note (Note 8), along with an additional borrowing availability of $5.0 million (Note 8), will be sufficient to fund operating expenses into the first quarter of 2019. The Company may seek to obtain financing through equity and debt issuances, collaborative agreements, and grants from government and private sponsors. Because the ability to obtain additional financing is outside of the Company’s control, the foregoing conditions raise substantial doubt in regard to the Company’s ability to continue as a going concern. If the Company is unable to obtain additional funding when needed, or to the extent needed, it may be necessary to scale back operations or halt certain research and development activities, which could prevent the Company from successfully executing on its operating plan. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue its operations.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2017, included elsewhere in this prospectus. Since the date of those financial statements, there have been no changes to its significant accounting policies.

 

F-27


Table of Contents

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial reporting and as required by Regulation S-X, Rule 10-01. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s financial position as of September 30, 2018 and the results of its operations and its cash flows for the nine months ended September 30, 2017 and 2018. The financial data and other information disclosed in these notes related to the nine months ended September 30, 2017 and 2018 are unaudited. The results for the nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period.

Unaudited Pro Forma Information

Upon the completion of the Company’s initial public offering (“IPO”), all outstanding Series A convertible preferred shares and the outstanding aggregate principal amount of, and all accrued and unpaid interest on, the Company’s outstanding convertible notes will each automatically convert into the Company’s ordinary shares. The unaudited pro forma balance sheet information has been prepared assuming the automatic conversion of the Series A convertible preferred shares outstanding into 91,600,398 ordinary shares of the Company upon the completion of the IPO. The unaudited pro forma net income (loss) per share for the year ended December 31, 2017 and the nine months ended September 30, 2018 assumes the automatic conversion of all outstanding shares of Series A convertible preferred shares into an aggregate of 91,600,398 ordinary shares upon the completion of the IPO. The unaudited pro forma Consolidated Balance Sheet data as of September 30, 2018 and the unaudited pro forma net income (loss) per share for the year ended December 31, 2017 and the nine months ended September 30, 2018 does not give effect to the automatic conversion of an aggregate principal amount of $102.4 million and all accrued and unpaid interest on the Company’s outstanding convertible promissory notes into ordinary shares upon the closing of this offering.

The Company believes that the unaudited pro forma net income (loss) loss per share disclosure provides material information to investors because the conversion of the convertible preferred shares into ordinary shares is expected to occur upon the closing of the IPO and, therefore, that the disclosure of pro forma net income (loss) per share provides a measure of net income (loss) per share that is comparable to what will be reported as a public company.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in shareholders’ (deficit) equity as a reduction of proceeds generated as a result of the offering.

Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the consolidated statement of operations. The Company recorded deferred offering costs of $5.6 million as of September 30, 2018 and are included in other non-current assets.

 

F-28


Table of Contents

3. Fair Value of Financial Assets and Liabilities

Fair Value Hierarchy

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 —Quoted prices in active markets that are accessible at the market date for identical unrestricted assets or liabilities.

Level 2—lnputs 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 for which all significant inputs 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.

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values as of December 31, 2017 and September 30, 2018:

 

 

 

     FAIR VALUE MEASUREMENTS AS OF
DECEMBER 31, 2017 USING
 
     LEVEL 1      LEVEL 2      LEVEL 3      TOTAL  

Assets:

                                

Short-term U.S. Treasury securities

   $ 4,118,804                    $   4,118,804  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 4,118,804                    $ 4,118,804  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Warrant liability

   $      $      $      512,618      $ 512,618  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $      $      $ 512,618      $ 512,618  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

     FAIR VALUE MEASUREMENTS AS OF
SEPTEMBER 30, 2018 USING
 
     LEVEL 1      LEVEL 2      LEVEL 3      TOTAL  

Assets:

                                

Short-term U.S. Treasury securities

   $ 4,078,286                    $ 4,078,286  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 4,078,286      $      $      $ 4,078,286  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative liability

   $      $      $ 33,652,582      $ 33,652,582  

Warrant liability

                 $ 386,349      $ 386,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $      $      $ 34,038,931      $ 34,038,931  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

As of December 31, 2017 and September 30, 2018, the carrying amounts of cash, accounts payable, and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments. The Company’s cash equivalents, which are in money market funds and U.S. treasury securities, are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices as of December 31, 2017 and September 30, 2018.

 

F-29


Table of Contents

As of December 31, 2017 and September 30, 2018, the outstanding debt from Loan (Note 7) and convertible debt obligations (Note 8) bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value.

Warrant Liability

As consideration for the Company’s Term Loan (see Note 7), the Company and the lender entered into a Warrant Agreement. The warrant was recorded as a liability at fair value upon issuance. The warrant is recorded at fair value on our condensed consolidated balance sheet as a liability and discount to the Loan. It is subject to revaluation at each balance sheet date, and any changes in value are recorded as a component of gain or loss from valuation of warrant liability, until the earlier of their exercise or expiration or upon the completion of a liquidation event.

The estimated fair value of the Warrant was remeasured as of September 30, 2017, using a Black-Scholes model with the following assumptions: volatility of 66.7%, expected term of 9.75 years, risk-free interest rate of 2.3%, fair value of Series A preferred of $2.43 and a zero dividend yield. The resulting estimated fair value of the warrant liability was $554,039.

In 2018, the Company revised its valuation model for the Warrant to consider various liquidity scenarios. The scenarios were based on the probability and estimated timing of a liquidity event including short term IPO, long term IPO, equity financing or a sale of the Company. The Company then used a Black-Scholes model which incorporates assumptions and estimates, to value the warrant under the various liquidity scenarios. The estimated fair value of the Warrant as of September 30, 2018, used the following assumptions: volatility of 74%, expected term of 8.25 years, risk-free interest rate of 2.9%, fair value of Series A preferred of $2.97 and a zero dividend yield. The resulting estimated fair value of the warrant liability was $386,349.

The following table presents our warrant liability measured at fair value using unobservable inputs (Level 3) as of the nine months ended September 30, 2017 and 2018:

 

 

 

Fair value at January 1, 2017

   $  

Initial fair value of warrant liability

     548,075  

Change in fair value of warrant liability

     5,964  
  

 

 

 

Fair value at September 30, 2017

   $ 554,039  
  

 

 

 

Fair value at December 31, 2017

   $ 512,618  

Change in fair value of warrant liability

     (126,269
  

 

 

 

Fair value at September 30, 2018

   $ 386,349  
  

 

 

 

 

 

Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these scenarios could result in a significantly higher or lower fair value of the liability.

Derivative Liability

The Company evaluated the 2018 New Investor Notes Note (see Note 8 for description of convertible notes issued) and concluded that certain of the redemption and conversion features met the bifurcation criteria under ASC 815 , Derivatives and Hedging , that should be accounted for separately from the debt (“Derivative Liability”). The Derivative Liability is recorded at fair value on our consolidated balance sheet as a liability and subject to revaluation at each balance sheet date, and any changes in value are recorded as a component of gain or loss in the change in valuation of derivative liability on the statements of operations.

In January 2018, upon the issuance of the first note in the amount of $15.0 million as well as the exchange note of $52.4 million, the identified embedded derivatives were initially valued using a Monte Carlo simulation. The simulation took into consideration the probability of four scenarios: subsequent financing at 10% probability, short term IPO at 20% probability, long term IPO at 50% probability, and change of control at a 20% probability. Other assumptions included a forecast horizon of 2.0 years, the present value of the Company’s equity, and expected volatility of 82%. The resulting fair value of the derivatives was $19.3 million.

 

F-30


Table of Contents

In April 2018, upon the issuance of the second note in the amount of $5.0 million, the embedded derivative was initially valued using a Monte Carlo simulation. The simulation took into consideration the probability of four scenarios: subsequent financing at 10% probability, short term IPO at 30% probability, long term IPO at 40% probability, and change of control at a 20% probability. Other assumptions included a forecast horizon of 1.8 years, the present value of the Company’s equity, and expected volatility of future equity of 83%. The resulting derivative fair value is $1.4 million.

In May 2018, upon the issuance of additional notes in the amount of $30.0 million, the embedded derivatives were initially valued using a Monte Carlo simulation. The simulation took into consideration the probability of four scenarios: subsequent financing at 10% probability, short term IPO at 40% probability, long term IPO at 30% probability, and change of control at a 20% probability. Other assumptions included a forecast horizon of 1.6 years, the present value of the Company’s equity, and expected volatility of future equity of 79%. The resulting derivative fair value is $11.2 million.

As of September 30, 2018, the fair value of the Derivative Liability was re-measured using the Monte Carlo simulation. The simulation took into consideration the probability of four scenarios: subsequent financing at 10% probability, short term IPO at 20% probability, long term IPO at 50% probability, and change of control at a 20% probability. Other assumptions included a forecast horizon of 2.0 years, the present value of the Company’s equity, and expected volatility of future equity of 63%. The resulting fair value of the derivative was $33.7 million.

The following table presents our Derivative Liability measured at fair value using unobservable inputs (Level 3) as of the nine months ended September 30, 2018:

 

 

 

Fair value at January 1, 2018

   $  

Initial fair value of Derivative Liability

     31,983,535  

Change in fair value of Derivative Liability

     1,669,047  
  

 

 

 

Fair value at September 30, 2018

   $ 33,652,582  
  

 

 

 

 

 

Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these scenarios could result in a significantly higher or lower fair value of the liability.

There have been no transfers between fair value measure levels during the year ended December 31, 2017 and for the nine months ended September 30, 2018.

4. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

 

 

     AS OF DECEMBER 31,      AS OF SEPTEMBER 30,  
     2017      2018  

Research and development

   $ 1,527,711      $ 592,242  

Prepaid insurance

     49,013        117,639  

Other

     224,479        241,894  
  

 

 

    

 

 

 

Total

   $ 1,801,203      $ 951,775  
  

 

 

    

 

 

 

 

 

 

F-31


Table of Contents

5. Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

     AS OF DECEMBER 31,     AS OF SEPTEMBER 30,  
     2017     2018  

Computer equipment and software

   $ 354,903     $ 366,555  

Furniture, fixtures and other

     718,955       718,955  

Laboratory equipment

     376,806       376,806  

Leasehold improvements

     374,097       374,097  
  

 

 

   

 

 

 
     1,824,761       1,836,413  

Accumulated depreciation

     (1,028,821     (1,263,941
  

 

 

   

 

 

 

Property and equipment, net

   $ 795,940     $ 572,472  
  

 

 

   

 

 

 

 

 

Depreciation expense for the nine months ended September 30, 2017 and 2018 was $262,061 and $235,120, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

     AS OF DECEMBER 31,      AS OF SEPTEMBER 30,  
     2017      2018  

Research and development

   $ 9,272,095      $ 9,672,416  

Employee compensation costs

     2,060,991        2,037,398  

Consulting and professional services

     542,436        2,729,687  

Legal expenses

     407,923        513,221  

Deferred rent

     165,373        133,993  

Other

     71,202        226,557  
  

 

 

    

 

 

 

Total

   $ 12,520,020      $ 15,313,272  
  

 

 

    

 

 

 

 

 

7. Debt

Term Loan

In June 2017, the Company entered into a Loan and Security Agreement (the “LSA”) with a lender which permits the Company to borrow up to an aggregate principal amount of $40.0 million through a multiple tranche term loan (the “Loan”). The tranche advances are based on the Company achieving certain performance milestones as defined in the LSA. Upon closing of the Loan, the Company drew the first tranche less expenses, which resulted in net proceeds of $12.1 million. In September 2017, the Company drew the second tranche advance of $2.5 million upon achieving the first milestone. In March 2018, the Company drew the third tranche advance of $5.0 million upon achieving a second milestone, bringing the total gross amount borrowed to $20.0 million as of September 30, 2018.

The Loan included a $200,000 facility charge, which was paid to the lender on the closing date. The Company paid a $30,000 due diligence fee prior to the Loan closing, and the Company incurred additional cash expenses of $362,783 related to the Loan. These three amounts were all recorded as a debt discount and are being amortized as interest expense using the effective interest method over the life of the Loan. The Loan also includes an end of term charge equal to the greater of $750,000 or 5% of the aggregate principal amount of all advances. The end of term charge is being accrued and recorded to interest expense over the life of the Loan using the effective interest method.

 

F-32


Table of Contents

The Loan bears interest at the greater of (i) the prime rate plus 5.5% or (ii) 9.5%. As of September 30, 2018, the interest rate was 10.75%. Interest accrues from the closing date and interest payments are due monthly in arrears on the first of the month. Payments under the Loan are interest only for the first twelve months after closing followed by a 30-month amortization period of principal and interest that were scheduled to begin on August 1, 2018 and continue through the scheduled maturity date of January 1, 2021.    During 2018, the Loan was amended to, among other things, postpone the principal payments to December 1, 2018 and possibly further to April 30, 2019 depending upon the achievement of certain milestones. These amendments to the Loan were accounted for as a debt modification. For consideration of the amendments, the Company agreed to pay an additional end of term charge of $250,000 at maturity which is being accrued and recorded to interest expense over the life of the loan using the effective interest method.

The Company’s obligations to the lender are secured by a first priority security interest in substantially all of its assets, excluding intellectual property (“IP”). The lender maintains a negative pledge on IP with a security interest in the proceeds of the sale of the IP. The Loan contains certain covenants related to restrictions on payments for certain investments, additional debt, distributions and transfers.

As consideration for the Loan, the Company and the lender entered into a Warrant Agreement (“Warrant”), pursuant to which the lender, as Warrant holder, has the right to purchase a quantity of shares equal to the quotient derived by dividing (a) the Warrant coverage by (b) the exercise price. Warrant coverage means the greater of (a) $312,500 plus 2.5% of future tranche advances in the event all or part of the tranches are funded or (b) $375,000. The exercise price is (a) the purchase price of Series A preferred shares (“Series A preferred”), $2.30769 per share, or (b) the price per share paid in the next equity round of financing of ordinary shares or preferred shares, which results in aggregate gross proceeds of at least $30 million. As of September 30, 2018, the exercise price, share type and amount of shares had not been fully defined. The Warrant was exercisable beginning in June 2017, in whole or in part, and expires in ten years. The Warrant was recorded as a liability and a discount to the debt. The discount on the debt is being amortized through interest expense using the effective interest rate method over the remaining term of the Loan. See Note 3 for fair value considerations and disclosures.

In addition, the lender can declare a material adverse effect while monitoring our business, operations, properties, assets or financial condition. A material adverse effect is considered an event of default under the LSA. In the event of default, repayment of amounts due under the Loan may be accelerated by the lender.

Future principal payments under the Loan as of September 30, 2018 are as follows:

 

 

 

2018

   $ 686,547  

2019

     8,710,804  

2020

     9,706,175  

2021

     896,474  
  

 

 

 

Total future principal payments

     20,000,000  
  

 

 

 

Less unamortized debt discount

     639,418  
  

 

 

 

Total balance as depicted on the balance sheet

   $ 19,360,582  
  

 

 

 

Term loan—current portion

     6,893,160  

Term loan—non-current portion

     12,467,422  
  

 

 

 

Total balance as depicted on the balance sheet

   $ 19,360,582  
  

 

 

 

 

 

Interest expense related to the Loan for the nine months ended September 30, 2017 and 2018 was $486,941 and $2,074,466, respectively. Accrued interest as of September 30, 2018 was $634,473.

 

F-33


Table of Contents

8. Convertible Notes Payable and Shareholder Demand Note Receivable

During the year ended December 31, 2017, the Company issued six convertible promissory notes payable to the Shareholder, resulting in proceeds of $50.0 million (the “2017 Shareholder Notes”).The notes accrue interest at 8% per annum. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. The Shareholder also has the right to convert some or all of the outstanding amount into shares of Series A preferred shares at a conversion price of $2.30769 after December 31, 2018. In January 2018, the Company entered into a note exchange agreement with the Shareholder in the amount of $52.4 million, which represents the total principal and accrued interest of the 2017 Shareholder Notes at the time of the execution of the note exchange agreement. The exchange terminated the 2017 Shareholder Notes and created a new convertible note under substantially the same terms as the notes described in the following paragraph. The note exchange agreement was accounted for as a debt extinguishment and resulted in no gain or loss upon recognition of the new debt.

In January 2018, the Company entered into a note purchase agreement with new investors (as amended, the “2018 Agreement”), whereby the Company may borrow an aggregate principal amount of $30.0 million in exchange for notes convertible into ordinary shares of the Company. In April 2018, the note purchase agreement was amended to allow the Company to borrow up to $65.0 million in the aggregate. Under the 2018 Agreement, between January and May 2018, the Company issued notes in an aggregate principal amount of $50.0 million (the “2018 New Investor Notes”). The 2018 New Investor Notes accrue interest at 7% per annum. Accrued interest on the 2018 New Investor Notes compounds annually. The 2018 New Investor Notes, as amended, are convertible upon (i) the closing of an initial public offering or (ii) a subsequent financing occurring after January 10, 2019. Effective upon the closing of a qualified financing, as defined, the outstanding principal and accrued interest plus a 25% premium, defined as the sum of principal plus interest multiplied by 25%, will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. Unless the outstanding amount of the 2018 New Investor Notes are earlier repaid, retired, discharged, or automatically converted into shares of the Company upon the occurrence of events discussed below, all amounts outstanding become due and payable on the later of (i) January 10, 2020 and (ii) five business days after the date on which the term loan is repaid, terminated and discharged in full.

The Company evaluated the 2018 New Investor Notes as well as the exchange agreement and concluded that certain of the redemption and conversion features met the bifurcation criteria under ASC 815, Derivatives and Hedging , that should be accounted for separately from the debt.

The Derivative Liability is recorded at fair value on our consolidated balance sheet as a liability and subject to revaluation at each balance sheet date, and any changes in value are recorded as a component of gain or loss in the change in valuation of derivative liability on the statements of operations. The initial values of the derivative, along with legal fees, were recorded as a debt discount and are being amortized as interest expense using the effective interest method over the life of the note. See Note 3 for fair value considerations and disclosures.

In October 2018, the Company entered into an additional note purchase agreement with the Shareholder (the “2018 Shareholder Note”), whereby the Company may borrow an aggregate principal amount of up to $30.0 million, of which it has borrowed $25.0 million. The notes contain similar terms as the notes described in the paragraph above describing the 2018 New Investor Notes. The 2018 Shareholder Note is convertible upon a qualified initial public offering of our ordinary shares in the United States at the initial public offering price per share. Effective upon the closing of a qualified financing, the outstanding principal and accrued interest plus a 25% premium of such principal and interest will automatically convert into shares of the same class and series of our shares issued to other investors in the qualified financing. The 2018 Shareholder Note accrues interest at 7% per annum and accrued interest compounds annually, and upon such compounding, is added to the outstanding principal amount. Unless earlier converted into shares, the 2018 Shareholder Note becomes due and payable on the later of (i) October 3, 2020 and (ii) five business days after the date on which the Loan is repaid, terminated and discharged in full.

Interest expense for the nine months ended September 30, 2017 and 2018 was $1,224,000 and $12,347,543, respectively.

 

F-34


Table of Contents

9. Convertible Preferred Shares

At December 31, 2017 and September 30, 2018, the Company had authorized 106,666,667 shares of Series A preferred, $0.0003 par value, and there were 91,600,398 shares issued and outstanding.

The rights and preferences of the Series A preferred are as follows:

Conversion —At any time at the holder’s request and automatically upon the closing of a qualified IPO or sale of the Company, Series A preferred is convertible into ordinary shares at a ratio which is computed by dividing the original issue price by the applicable conversion price. A qualified IPO is defined under our articles of association as a fully underwritten public offering of ordinary shares in which aggregate gross proceeds equal or exceed $35 million pursuant to an effective registration statement under the Securities Act or in a jurisdiction outside of the United States. The initial conversion price of $2.30769 may be adjusted if and whenever the Company subsequently issues or sells ordinary shares or Series A preferred at a per share price that is less than the conversion price in effect at that time. At September 30, 2018, the applicable conversion ratio was 1:1.

Dividends —Series A preferred is entitled to receive, when and as declared by the board of directors, preferential cash dividends at a rate at least equal to 8% of the original issue price. Such dividends are not cumulative. No dividends have been declared.

Redemption Rights —Series A preferred does not have any stated redemption rights.

Liquidation Rights —In the event of a liquidation, dissolution, or winding-up of the Company, Series A preferred shall be paid an amount first out of legally available funds available for distribution to holders of the Company’s capital share an amount equal to $2.30769 per share, plus all declared but unpaid dividends with respect to each such shares, as adjusted for any share dividend, share split, recapitalization, or other similar event. After payment of all preferential amounts, any assets and funds of the Company that remain available shall be distributed on a pro rata basis among the holders of ordinary shares.

Voting Rights —Series A preferred is entitled to the number of votes equal to the number of ordinary shares into which the Series A preferred is convertible. Preferred and ordinary shareholders vote together as a single class except for the election of the Company’s board of directors. For such election, holders of Series A preferred have the right to elect two directors and the holders of ordinary shares have a right to appoint one director.

10. Shareholders’ Equity

Ordinary Shares

At December 31, 2017 and September 30, 2018, 203,333,333 ordinary shares, $0.0003 par value, were authorized for issuance, and 68,474,614 ordinary shares were issued and outstanding.

In January 2017, the Company issued a warrant to purchase 231,989 ordinary shares to an affiliate of the interim Chief Financial Officer of Stealth BioTherapeutics Inc. at an exercise price of $1.38 per share. The warrant was fully vested as of December 31, 2017 and expires in January 2022. The Company recorded an expense of $156,983 and $0 within general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2017 and 2018, respectively. In June 2018, the warrant was amended and restated to be treated as an option agreement under the Company’s 2006 Share Incentive Plan.

 

F-35


Table of Contents

The voting, dividend and liquidation rights of holders of ordinary shares are subject to and qualified by the rights, powers and preferences of holders of Series A preferred. The rights and preferences of ordinary shares are as follows:

Voting —Holders are entitled to one vote for each ordinary share held at all meetings of shareholders and written action in lieu of meetings; there is no cumulative voting.

Dividends —Holders are entitled to receive dividends, if and when declared by the board of directors. Cash dividends may not be declared or paid to holders until paid on Series A preferred in accordance with its terms. No dividends have been declared.

Liquidation —After payment to the holders of Series A preferred of its liquidation preference, the holders of ordinary shares are entitled to share in the Company’s assets available for distribution on a pro rata basis, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event.

The Company has reserved for future issuances the following number of ordinary shares as of September 30, 2018:

 

 

 

2006 Share Incentive Plan

     25,516,081  

Conversion of Series A preferred

     91,600,398  

Conversion of Series A preferred warrant

     216,667  
  

 

 

 

Total

     117,333,146  
  

 

 

 

 

 

11. Share Option Plan

The Company’s 2006 Share Incentive Plan, as amended, (the “2006 Plan”), provides for the grant of share options or other awards to employees, directors, advisers, and consultants for the purchase of up to 25,544,054 ordinary shares. Share options vest over varying schedules as determined by the Company’s board of directors and typically expire 10 years from the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the 2006 Plan. At September 30, 2018, there were 9,965,096 shares available for future grant.

In determining the exercise prices for options granted, the Company’s board of directors has considered the fair value of ordinary shares as of the grant date, based upon a variety of factors, including the results obtained from a third-party valuation, its financial position and financial performance, the status of technological developments of its proposed products, the composition and ability of the current scientific and management team, an evaluation or benchmark of its competition, the illiquid nature of the ordinary shares, sales of capital share including convertible preferred shares, the effect of the rights and preferences of Series A preferred shares, and the prospects of a liquidity event.

Total share-based compensation expense is as follows:

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2017      2018  

Research and development

   $ 558,787      $ 438,352  

General and administrative

     418,856        517,388  
  

 

 

    

 

 

 

Total

   $ 977,643      $ 955,740  
  

 

 

    

 

 

 

 

 

As of September 30, 2018, total unrecognized compensation expense related to non-vested share options, net of related forfeiture estimates, was $1,980,935. The Company expects to recognize its remaining unrecognized share-based compensation expense over a weighted-average period of approximately 2.5 years.

 

F-36


Table of Contents

The fair value of each share option granted to employees and directors was estimated on the date of grant using the following assumptions:

 

 

 

     NINE MONTHS ENDED
SEPTEMBER 30,
     2018

Risk free interest rate

   2.65% - 3.02%

Expected dividend yield

  

Expected term (in years)

   6.1

Expected volatility

   59%

 

 

The following table summarizes share option plan activity for the nine months ended September 30, 2018:

 

 

 

     NUMBER OF
SHARES
    WEIGHTED-
AVERAGE
EXERCISE PRICE
     AVERAGE
REMAINING
CONTRACTUAL
LIFE (IN YEARS)
     AGGREGATE
INTRINSIC VALUE
 

Outstanding at December 31, 2017

     14,789,032     $ 1.02        7.5      $ 3,580,527  

Granted

     1,756,572     $ 1.20        

Cancelled or forfeited

     (994,618   $ 1.29        
  

 

 

         

Outstanding at September 30, 2018

     15,550,986     $ 1.05        6.9      $ 7,781,308  
  

 

 

         

Exercisable at September 30, 2018

     11,427,608     $ 0.81        6.3      $ 6,884,182  
  

 

 

         

Vested and expected to vest at September 30, 2018

     14,297,882     $ 1.02        6.7      $ 7,529,751  
  

 

 

         

 

 

The weighted average grant date fair value per share for awards granted during the nine months ended September 30, 2018 was $0.82.

12. Income Taxes

During the year ended December 31, 2017 and nine months ended September 30, 2018, the Company recorded a full valuation allowance on federal and state deferred tax assets since management does not forecast the Company to be in a profitable position in the near future.

13. Net Loss Per Share Attributable to Ordinary Shareholders

Basic and diluted net loss per ordinary share are calculated as follows:

 

 

 

     NINE MONTHS ENDED SEPTEMBER 30,  
                 2017                             2018              

Numerator:

    

Net loss attributable to ordinary shareholders—basic and diluted

   $ (60,840,014   $ (70,122,954
  

 

 

   

 

 

 

Denominator:

    

Weighted-average ordinary shares used in net loss per share attributable to ordinary shareholders—basic and diluted

     68,471,469       68,474,614  
  

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders—basic and diluted

   $ (0.89   $ (1.02
  

 

 

   

 

 

 

 

 

 

F-37


Table of Contents

The following ordinary share equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, as their effect is anti-dilutive:

 

 

 

     NINE MONTHS ENDED SEPTEMBER 30,  
                 2017                              2018              

Convertible preferred Series A

     91,600,398        91,600,398  

Preferred Series A share warrants

     162,500        216,667  

Outstanding share options

     14,945,849        15,550,986  
  

 

 

    

 

 

 

Total

     106,708,747        107,368,051  
  

 

 

    

 

 

 

 

 

14. Related Party

For the nine months ended September 30, 2017 and 2018, the Company paid $186,858 and $203,828, respectively, for consulting services provided by an entity affiliated with its interim Chief Financial Officer.

Except as disclosed elsewhere in the notes to the accompanying condensed consolidated financial statements, there were no other material transactions with related parties.

15. Subsequent Events

The Company has completed an evaluation of all subsequent events through December 28, 2018, the date these financial statements were available to be issued. Except as disclosed in Notes 1, 8 and 16, the Company has concluded that no subsequent events have occurred that require disclosure.

16. Reverse Share Split

The Company’s board of directors and shareholders approved a three for one reverse share split of its issued and outstanding ordinary shares and share options and a proportional adjustment to the existing conversion ratios for the Company’s preferred shares through a consolidation of its share capitalization effective as of December 28, 2018. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse share split.

 

F-38


Table of Contents

 

 

                 American Depositary Shares

 

 

LOGO

Representing                 Ordinary Shares

 

Joint Book-Running Managers

Jefferies

Evercore ISI

BMO Capital Markets

Lead Manager

Nomura Securities International

 

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 6. Indemnification of Directors and Officers.

Every director and officer is indemnified and secured harmless out of the assets and funds of the Company against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such director or officer in or about the conduct of the Company’s affairs or in the execution of such director or officer’s duties, powers, authorities or discretions, including any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning the Company or its affairs in any court whether Cayman Islands or elsewhere.

Item 7. Recent Sales of Unregistered Securities.

Set forth below is information regarding ordinary shares, preferred shares, share options, and warrants to purchase shares issued by us within the past three years that were not registered under the Securities Act. Also included is the consideration received by us for such securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed. All of the securities described below are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of share capital described in this Item 7 included appropriate legends setting forth that the securities have not been registered and the applicable restrictions on transfer.

Except as otherwise indicated herein or as the context otherwise requires, references below to “Stealth,” “the Company,” “we,” “us” and “our” refer to Stealth BioTherapeutics Corp and its consolidated subsidiaries, or any one or more of them as the context may require.

Since January 1, 2016, we have issued the following unregistered securities:

(a) Share option grants and option exercises

We granted options to purchase an aggregate of 8,764,139 ordinary shares, with exercise prices ranging from $1.14 to $2.22 per share, pursuant to our 2006 share incentive plan, as amended. We issued an aggregate of 16,139 ordinary shares upon the exercise of options for aggregate consideration of $10,476.

In October 2018, we reduced the exercise price per share of an aggregate of 385,833 options granted in June 2018 from $2.22 per share to $1.53 per share.

No underwriters were involved in the foregoing issuances of securities. The issuances of share options and the ordinary shares issued upon the exercise of the options described in this paragraph (a) of Item 7 were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act, or pursuant to Section 4(a)(2) under the Securities Act, relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

(b) Convertible Promissory Note Issuances

Between February 2017 and December 2018, we issued convertible notes in an aggregate principal amount of $127.4 million. The notes are convertible into shares of our preferred shares or ordinary shares upon the occurrence of certain qualified financings.

No underwriters were involved in the issuance of these securities. The convertible securities described in this paragraph (b) of Item 7 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act provided under Regulation D promulgated under the Securities Act, or pursuant to Section 4(a)(2) under the Securities Act, relating to transactions by an issuer not involving any public offering. Each recipient of the security in the transaction described above represented that it was an accredited investor and was acquiring the security for its own account for investment purposes only and not with a view to the public resale or distribution thereof and that it could bear the risks of the investment and could hold the security for an indefinite period of time, and appropriate legends were affixed to the instrument representing the security issued in such transaction.

 

II-1


Table of Contents

(c) Warrant Issuances

In January 2017, we issued a warrant to purchase up to 231,989 ordinary shares to a consultant at an exercise price of $1.38 per share.

In June 2017, in connection with our entry into a loan agreement, we issued to a lender a warrant, which was amended and restated in June 2018. The warrant is exercisable for that number of our shares equal to the quotient determined by dividing (a) $500,000 plus an amount equal to 2.5% of any amount drawn under specified tranches of the loan agreement by (b) an exercise price equal to (i) $2.30769 in the event the shares issuable are Series A preferred shares or (ii) if the shares issuable are next round securities, the price per share of such next round securities. The warrant holder may elect whether to exercise the warrant for shares of Series A convertible preferred shares or next round securities.

No underwriters were involved in the issuance of these warrants. The issuance of the warrants described in this paragraph (c) of Item 7 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act provided under Regulation D promulgated under the Securities Act, or pursuant to Section 4(a)(2) under the Securities Act, relating to transactions by an issuer not involving any public offering. Each recipient of the security in the transaction described above represented that it was an accredited investor and was acquiring the security for its own account for investment purposes only and not with a view to the public resale or distribution thereof and that it could bear the risks of the investment and could hold the security for an indefinite period of time, and appropriate legends were affixed to the instrument representing the security issued in such transaction.

(d) Warrant Exercise

In December 2009, in connection with our preferred share financing, we issued a warrant to purchase an aggregate of 333,333 ordinary shares. In November 2016, the holder exercised this warrant, pursuant to which 333,333 ordinary shares were issued for an aggregate exercise price of $10,000.

No underwriters were involved in the foregoing issuance of securities. The issuance of the warrant described in this paragraph (d) of Item 7 was issued to an investor in reliance upon the exemption from the registration requirements of the Securities Act provided under Regulation D promulgated under the Securities Act, or pursuant to Section 4(a)(2) under the Securities Act, relating to transactions by an issuer not involving any public offering. The recipient of securities in the transaction described above represented that it was an accredited investor and was acquiring the securities for its own account for investment purposes only and not with a view to the public resale or distribution thereof and that it could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the instrument representing such securities issued in such transaction.

Item 8. Exhibits and Financial Statement Schedules.

(a) Exhibits.

The exhibits to the registration statement are listed in the Exhibit Index attached hereto and incorporated by reference herein.

(b) Financial Statement Schedules.

No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or notes.

Item 9. Undertakings.

(a) The undersigned registrant hereby undertakes to provide to the underwriter, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in

 

II-2


Table of Contents

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 Securities Act and will be governed by the final adjudication of such issue.

(c) The undersigned hereby undertakes that:

(1) 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.

(2) 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.

 

II-3


Table of Contents

EXHIBIT INDEX

 

EXHIBIT

NUMBER

  

DESCRIPTION OF EXHIBIT

1.1*    Form of Underwriting Agreement
3.1    Memorandum and Articles of Association of the Registrant, as amended
3.2*    Form of Articles of Association of the Registrant (to be effective prior to the closing of this offering)
4.1*    Form of Deposit Agreement among Registrant, Citibank, N.A., as depositary, and all Owners and Holders of ADSs issued thereunder
4.2*    Form of American Depositary Receipt (included in Exhibit 4.2)
4.3    Warrant Agreement, dated June 30, 2017, by and between the Company and Hercules Capital Inc., as amended and restated on June 7, 2018
5.1*    Opinion of Walkers
8.1*    Tax Opinion of Wilmer Cutler Pickering Hale and Dorr LLP
10.1    2006 Share Incentive Plan, as amended
10.2    Form of Incentive Option Agreement under 2006 Share Incentive Plan, as amended
10.3    Form of Nonstatutory Option Agreement under 2006 Share Incentive Plan, as amended
10.4*    2019 Share Incentive Plan
10.5*    Form of Incentive Share Option Agreement under 2019 Share Incentive Plan
10.6*    Form of Nonstatutory Share Option Agreement under 2019 Share Incentive Plan
10.7    Form of Director and Officer Indemnification Agreement by and between the Registrant and each of its officers and directors
10.8†    Exclusive License Agreement, dated April  20, 2006, among the Company, Cornell Research Foundation, Inc. and Institut de recherches cliniques de Montréal, as amended by First Amendment to Exclusive License Agreement dated October 7, 2010
10.9†    Exclusive License Agreement, dated November 22, 2010, between the Company and Cornell University
10.10†    Exclusive License Agreement, dated November 3, 2011, by and between the Company and Cornell University
10.11†    Exclusive License Agreement, dated December 27, 2012, by and between the Company and Cornell University
10.12†    Exclusive License Agreement, dated August 12, 2013, by and between the Company and Cornell University
10.13    Office Lease Agreement, dated October 31, 2014, by and between the Company and Hines Global REIT Riverside Center, LLC
10.14    Amendment Agreement by and between the Company and Danforth Advisors, LLC, dated as of June 13, 2018
10.15    Loan and Security Agreement, dated June 30, 2017, by and between the Company and Hercules Capital Inc., as amended on March 12, 2018, July 26, 2018 and October 10, 2018
21.1    Subsidiaries of the Registrant
23.1    Consent of Deloitte & Touche, LLP, independent registered public accounting firm
23.2*    Consent of Walkers (included in Exhibit 5.1)
24.1*    Power of Attorney (included on signature page)

 

II-4


Table of Contents
*   To be filed by amendment.
  Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.

 

II-5


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newton, Massachusetts on this 28th day of December, 2018.

 

STEALTH BIOTHERAPEUTICS CORP
By:    

/s/ Irene P. McCarthy

    Irene P. McCarthy
    Chief Executive Officer

 

II-6


Table of Contents

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned officers and directors of Stealth BioTherapeutics Corp, hereby severally constitute and appoint Irene P. McCarthy and Henry Hess, and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him or her and in his or her name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

SIGNATURE

  

TITLE

 

DATE

/s/ Irene P. McCarthy

Irene P. McCarthy

   Chief Executive Officer and Director (principal executive officer, principal financial officer and principal accounting officer)   December 28, 2018

/s/ Francis W. Chen

Francis W. Chen, Ph.D.

   Director   December 28, 2018

/s/ Gerald L. Chan

Gerald L. Chan, Sc.D.

   Director  

December 28, 2018

/s/ Kevin F. McLaughlin

Kevin F. McLaughlin

   Director  

December 28, 2018

/s/ Vincent Sai Sing Cheung

Vincent Sai Sing Cheung

   Director  

December 28, 2018

/s/ Lu Huang

Lu Huang

   Director  

December 28, 2018

/s/ Cheuk Kin Stephen Law

Cheuk Kin Stephen Law

   Director  

December 28, 2018

/s/ Edward P. Owens

Edward P. Owens

   Director  

December 28, 2018

 

Stealth BioTherapeutics, Inc.

Authorized Representative in the United States

By:   /s/ Irene P. McCarthy
Name:   Irene P. McCarthy
Title:   Chief Executive Officer

 

II-7

Exhibit 3.1

THE COMPANIES LAW (AS AMENDED)

COMPANY LIMITED BY SHARES

THIRD AMENDED & RESTATED

MEMORANDUM & ARTICLES OF ASSOCIATION

OF

STEALTH BIOTHERAPEUTICS CORP

ADOPTED BY SPECIAL RESOLUTION DATED 7 SEPTEMBER 2018

 

     

Acknowledgement

Companies Registry

H.K.

     

14/09/2018 16:07:49

Submission No/Seq No:

   223473143/2
      CR No:    F0024414
      Sh. Form.    AN5

 

LOGO

190 Elgin Avenue, George Town

Grand Cayman KY1-9001, Cayman Islands

T  +1 345 949 0100  F  +1 345 949 7886  www.walkersglobal.com

REF: HA/RJ/S7050-151539

 

      LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


TABLE OF CONTENTS

MEMORANDUM OF ASSOCIATION

 

The Name of the Company

     1  

The Registered Office of the Company

     1  

The Objects for which the Company is established

     1  

The Liability of the Members

     1  

The Capital of the Company

     1  

ARTICLES OF ASSOCIATION

 

TABLE A

     1  

Interpretation

     1  

Preliminary

     5  

Share Capital

     6  

Rights and Restrictions of Series A Preferred Shares and Ordinary Shares

     7  

Variation Of Rights Attaching To Shares

     18  

Certificates

     18  

Fractional Shares

     18  

Lien

     18  

Calls On Shares

     19  

Forfeiture Of Shares

     20  

Transfer Of Shares

     20  

Transmission Of Shares

     21  

Alteration Of Capital

     21  

Redemption And Purchase Of Own Shares

     22  

Closing Register Of Members Or Fixing Record Date

     22  

General Meetings

     23  

Notice Of General Meetings

     23  

Proceedings At General Meetings

     23  

Votes Of Members

     25  

Corporations Acting By Representatives At Meetings

     25  

Directors

     25  

Alternate Director

     26  

Powers And Duties Of Directors

     26  

Borrowing Powers Of Directors

     28  

The Seal

     28  

Disqualification Of Directors

     28  

Proceedings Of Directors

     28  

Dividends

     30  

Accounts And Audit

     31  

Capitalisation Of Profits

     31  

Share Premium Account

     32  

Notices

     32  

Indemnity

     33  

 

   i    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Non-Recognition Of Trusts

     33  

Winding Up

     34  

Amendment Of Articles Of Association

     34  

Registration By Way Of Continuation

     34  

 

 

   ii    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


THE COMPANIES LAW (AS AMENDED)

COMPANY LIMITED BY SHARES

THIRD AMENDED AND RESTATED

MEMORANDUM OF ASSOCIATION

OF

STEALTH BIOTHERAPEUTICS CORP

(Adopted by Special Resolution dated 7 September 2018)

 

1.

The name of the Company is Stealth BioTherapeutics Corp .

 

2.

The Registered Office of the Company will be situated at the offices of Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman, Cayman Islands, or at such other location as the Directors may from time to time determine.

 

3.

The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by any law as provided by Section 7(4) of the Companies Law (as amended).

 

4.

The Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit as provided by Section 27(2) of the Companies Law (as amended).

 

5.

Nothing in the preceding sections shall be deemed to permit the Company to carry on the business of a Bank or Trust Company without being licensed in that behalf under the provisions of the Banks & Trust Companies Law (as amended), or to carry on Insurance Business from within the Cayman Islands or the business of an Insurance Manager, Agent, Sub-agent or Broker without being licensed in that behalf under the provisions of the Insurance Law (as amended), or to carry on the business of Company Management without being licensed in that behalf under the provisions of the Companies Management Law (as amended).

 

6.

The Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands; provided that nothing in this section shall be construed as to prevent the Company effecting and concluding contracts in the Cayman Islands, and exercising in the Cayman Islands all of its powers necessary for the carrying on of its business outside the Cayman Islands.

 

7.

The liability of the members is limited to the amount, if any, unpaid on the shares respectively held by them.

 

8.

The capital of the Company is US$93,000 divided into 320,000,000 Series A Preferred Shares, of a nominal or par value of US$0.0001 each, and 610,000,000 Ordinary Shares, of a nominal or par value of US$0.0001 , each provided always that subject to the provisions of the Companies Law (as amended) and the Articles of Association the Company shall have power to redeem or purchase any of its shares and to sub-divide or consolidate the said shares or any of them and to issue all or any part of its capital whether original, redeemed, increased or reduced with or without any preference priority or special privilege or subject to any postponement of rights or to any conditions or restrictions

 

   1    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  whatsoever and so that unless the conditions of issue shall otherwise expressly provide every issue of shares whether stated to be ordinary, preference or otherwise shall be subject to the powers on the part of the Company hereinbefore provided.

 

9.

The Company may exercise the power contained in Section 226 of the Companies Law (as amended) to deregister in the Cayman Islands and be registered by way of continuation in some other jurisdiction.

 

   2    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


THE COMPANIES LAW (AS AMENDED)

COMPANY LIMITED BY SHARES

THIRD AMENDED AND RESTATED

ARTICLES OF ASSOCIATION

OF

STEALTH BIOTHERAPEUTICS CORP

(Adopted by Special Resolution dated 7 September 2018)

TABLE A

The Regulations contained or incorporated in Table ‘A’ in the First Schedule of the Companies Law (as amended) shall not apply to this Company and the following Articles shall comprise the Articles of Association of the Company:

INTERPRETATION

 

1.

In these Articles:

Affiliate ” or “ Affiliates ” mean, as applied to the Company or any other specified Person, any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company (or other specified Person) and shall also include (a) any Person who is a director or officer of the Company (or such other specified Person) or beneficial owner of at least 5% of any class of the then issued equity securities of the Company (or such other specified Person) and Family Members of any such Person, (b) any Person of which the Company (or such other specified Person) or an Affiliate (as defined in clause (a) above) of the Company (or such other specified Person) shall, directly or indirectly, either beneficially own at least 10% of any class of such Person’s then issued equity securities, and (c) in the case of a specified Person who is an individual, any Family Member of such Person;

Agreed Terms ” shall have the meaning set forth in Article 12(d)(i) hereof;

Companies Law ” means the Companies Law (as amended) of the Cayman Islands;

Company Purchaser ” shall have the meaning set forth in Article 12(d)(i) hereof;

Completion Date ” shall have the meaning set forth in Article 12(d)(ii)(A) hereof;

Compulsory Purchase Notice ” shall have the meaning set forth in Article 12(d)(i) hereof;

Conversion Date ” shall have the meaning set forth in Article 12(g)(i)(B) hereof;

Conversion Price ” shall have the meaning set forth in Article 12(g)(ii) hereof;

Convertible Securities ” shall mean securities or obligations that are exercisable for, convertible into or exchangeable for Ordinary Shares. The term includes options, warrants or other rights to subscribe for or purchase Ordinary Shares or to subscribe for or purchase other securities that are convertible into or exchangeable for Ordinary Shares; for the avoidance of doubt, the term includes Series A Preferred Shares;

 

   1    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Cornell ” shall have the meaning set forth in Article 12(m) hereof;

Declared Dividends ” shall have the meaning set forth in Article 12(f) hereof;

Directors ” and “ Board of Directors ” means the Directors of the Company for the time being, or as the case may be, the Directors assembled as a Board or as a committee thereof;

Equity Incentive Plan ” means the 2006 Equity Incentive Plan of the Company, as adopted by the Board of Directors, pursuant to which Ordinary Shares (subject to adjustment in the event of any share dividend, share split, recapitalisation or other similar event) may be issued to senior officers, employees, directors, consultants and advisors of the Company or a Subsidiary of the Company;

Excluded Securities ” shall mean (i) Ordinary Shares offered to the public pursuant to a Qualified IPO; (ii) Ordinary Shares issuable under the Equity Incentive Plan; (iii) Ordinary Shares issued upon conversion of Convertible Securities; (iv) Ordinary Shares issued in a transaction contemplated by Article 12(g)(iv) hereof; (v) Ordinary Shares issued in connection with a bona fide business acquisition of another entity by the Company (which acquisition is approved by the Board of Directors), (v) Ordinary Shares issued or issuable in connection with or pursuant to equipment leases, bank credit arrangements or strategic partnership agreements entered into for primarily non-equity financing purposes which are approved by the Board of Directors, and (vi) any Shares issued with approval of the Board and the written consent of the holder(s) of the majority of the Series A Preferred Shares;

Family Member ” shall mean, as applied to any individual, such individual’s spouse, child (including a stepchild or an adopted child) grandchild, parent, brother or sister thereof or any spouse of any of the foregoing, and each trust created for the exclusive benefit of one or more of them;

Financial Year End ” shall mean 31 st  December of each year;

Independent Third Party ” shall mean any Person which immediately prior to the contemplated transaction neither owns, nor is an Affiliate of a Person which owns, in excess of 5% of the Ordinary Shares (calculated on an as converted basis) outstanding at such time;

Member ” means a person whose name is entered in the Register of Members and includes each subscriber to the Memorandum of Association pending the issue to him of the subscriber share or shares;

Memorandum of Association ” means the Memorandum of Association of the Company, as amended and re-stated from time to time;

Minority Member ” shall have the meaning set forth in Article 12(d)(i) hereof;

Offer Date ” shall mean the date on which the Directors dispatch written notice to the Original Members in accordance with Article 12(h)(i) for the purposes of complying with the pre-emption rights on new issuances of shares;

 

   2    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Ordinary Resolution ” means a resolution:

 

  (a)

passed by a simple majority of such Members as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting of the Company and where a poll is taken regard shall be had in computing a majority to the number of votes to which each Member is entitled; or

 

  (b)

approved in writing by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments if more than one, is executed;

Ordinary Shares ” shall mean the Company’s Ordinary Shares, of a nominal or par value of US$.0001 each;

Ordinary Shares Deemed Outstanding ” shall mean, at any specified time, the number of Ordinary Shares actually then in issue at such time, plus the number of Ordinary Shares issuable upon the conversion of all Convertible Securities whether or not the Convertible Securities are convertible into Ordinary Shares at such time;

Original Members ” shall mean all holders of Series A Preferred Shares, Hazel H. Szeto and Cornell Research Foundation;

paid up ” means paid up as to the par value and any premium payable in respect of the issue of any shares and includes credited as paid up;

Person ” shall mean an individual, partnership, company, corporation, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof;

Pro Rata Proportion ” shall mean a number expressed as a percentage calculated in accordance with the following formula:

% = A/B x 100

where:

 

  A        =

the number of Ordinary Shares held by an Original Member plus the number of Ordinary Shares into which Convertible Securities held by him are convertible as at the Offer Date

 

  B        =

the Ordinary Shares Deemed Outstanding as at the Offer Date;

Purchase Price ” with respect to the Series A Preferred Shares shall mean US$0.76923 per share;

Qualified IPO ” shall mean either:

 

  (i)

a fully underwritten public offering pursuant to an effective registration statement under the United States Securities Act covering the offer and sale by the Company of Ordinary Shares; or

 

  (ii)

a fully underwritten public offering in a jurisdiction outside of the United States of America covering the offer and sale by the Company of Ordinary Shares,

in which the aggregate gross proceeds to the Company equals or exceeds US$35,000,000;

 

   3    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Register of Members ” means the register to be kept by the Company in accordance with Section 40 of the Companies Law;

Registration Rights Agreement ” shall mean the Registration Rights Agreement entered into between the Company, Morningside Venture (I) Investments Limited, S4 Investments, LLC, Cornell Research Foundation and Hazel H. Szeto dated April 20, 2006;

Remaining Shares ” shall have the meaning set forth in Article 8(b) hereof;

Requisite Percentage ” shall mean 62% (sixty two percent);

Restricted Action ” shall have the meaning set forth in Article 12(c)(iv) hereof;

Sale of the Company ” shall mean a single transaction or a series of transactions pursuant to which one or more Independent Third Parties acquire (i) share capital of the Company possessing the voting power to elect a majority of the Company’s board of directors (whether by merger, consolidation or safe or transfer of the Company’s share capital, provided, however, that a Qualified IPO that results in an acquisition of voting power shall not be a Sale of the Company); or (ii) all or substantially all of the Company’s assets determined on a consolidated basis;

Seal ” means the Common Seal of the Company (if adopted) including any facsimile thereof;

Series A Preferred Shares ” shall mean the Company’s Series A Preferred Shares, of a nominal or par value of US$.0001 each;

Series A Preference Amount ” of any Series A Preferred Share shall be US$0.76923 (which amount shall be subject to equitable adjustment whenever there shall occur a stock dividend, stock split, combination of shares, reclassification or similar event with respect to such Series A Preferred Shares);

Series A Requisite Percentage ” shall mean 50% plus one vote;

Series A Restricted Action ” shall have the meaning set forth in Article 12(c)(iii) hereof;

shares ” shall mean any shares in the capital of the Company, including a fraction of any share;

signed ” includes a signature or representation of a signature affixed by mechanical means;

Special Resolution ” means a resolution passed in accordance with Section 60 of the Companies Law, being a resolution:

 

  (a)

passed by a majority of not less than two-thirds of such Members as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting of the Company of which notice specifying the intention to propose the resolution as a Special Resolution has been duly given and where a poll is taken regard shall be had in computing a majority to the number of votes to which each Member is entitled; or

 

  (b)

approved in writing by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the Special Resolution so adopted shall be the date on which the instrument or the last of such instruments if more than one, is executed;

 

   4    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Stock Restriction Agreement ” shall mean any relevant Stock Restriction Agreement between the Company and each of the holders of Ordinary Shares entered into from time to time; and

Subscription Agreement ” shall mean the Subscription and Shareholders Agreement entered into between the Company, Morningside Venture (I) Investments Limited, S4 Investments, LLC, Cornell Research Foundation and Hazel H. Szeto dated April 20, 2006, as such agreement may be amended from time to time;

Subsidiary ” shall mean, with respect to any Person, any company, corporation, partnership, association or other business entity of which (i) if a company or corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons shall be allocated a majority of partnership, association or other business entity gains or losses or shall be or control the managing general partner of such partnership, association or other business entity.

 

2.

In these Articles, save where the context requires otherwise:

 

  (a)

words importing the singular number shall include the plural number and vice versa;

 

  (b)

words importing the masculine gender only shall include the feminine gender;

 

  (c)

words importing persons only shall include companies or associations or bodies of persons, whether corporate or not;

 

  (d)

may ” shall be construed as permissive and “ shall ” shall be construed as imperative;

 

  (e)

references to a “ dollar ” or “ dollars ” or $ is a reference to dollars of the United States; and

 

  (f)

references to a statutory enactment shall include reference to any amendment or reenactment thereof for the time being in force.

 

3.

Subject to the last two preceding Articles, any words defined in the Companies Law shall, if not inconsistent with the subject or context, bear the same meaning in these Articles.

PRELIMINARY

 

4.

The business of the Company may be commenced as soon after incorporation as the Directors see fit.

 

5.

The registered office of the Company shall be at such address in the Cayman Islands as the Directors shall from time to time determine. The Company may in addition establish and maintain such other offices and places of business and agencies in such places as the Directors may from time to time determine.

 

   5    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


SHARE CAPITAL

 

6.

The authorised share capital of the Company as at the date of adoption of these Articles is US$93,000 divided into:

 

  (a)

320,000,000 Series A Preferred Shares with a par value of US$0.0001 each; and

 

  (b)

610,000,000 Ordinary Shares with a par value of US$0.0001 each.

 

7.

Subject as otherwise provided in these Articles, all shares in the capital of the Company for the time being and from time to time unissued shall be under the control of the Directors and may be re-designated, issued, allotted, have options granted over them or be disposed of in such manner, to such persons on such terms and in such manner as the Directors in their absolute discretion may think fit, save that no share may be issued at a discount except in accordance with the Companies Law.

 

8.

Pre-emptive issuances of shares:

 

  (a)

The Directors shall not exercise any power of the Company to allot or issue shares of any class on any terms unless a written offer (capable of acceptance for a period of not less than 30 days) has been made to each Original Member to allot to him on the same terms such number of shares which is nearly as practicable equal to such Original Member’s Pro Rata Proportion of the shares being offered.

 

  (b)

If after the expiration of the 30 day period referred to above, an Original Member elects not to purchase his proportion of the shares offered, elects to purchase only some of the shares offered or has failed to respond, the remaining Original Members may for a further period of 10 days offer to purchase such shares not taken up by the relevant Original Members (the “ Remaining Shares ”). If the Company receives offers for more shares than the number of Remaining Shares, each Original Member who offered to buy Remaining Shares shall be entitled to a number of Remaining Shares reflecting, as nearly as possible, the number of Remaining Shares he offered to buy as a proportion of the total number of Remaining Shares for which offers were received.

 

  (c)

After the expiration of the time specified in clause (b) above, the Directors may for a period of 90 days thereafter, allot to any person or persons the shares which shall not have been accepted.

 

  (d)

The foregoing shall not apply to issuances of any Excluded Securities or to issuances pursuant to the Subscription Agreement. The pre-emption rights referred to above shall terminate upon the consummation of a Qualified IPO.

 

9.

The Company shall not issue any Ordinary Shares that result in, or grant to any person securities or options to purchase Ordinary Shares that, or would if exercised, result in, such person owning more than 1 % of the Company’s outstanding Ordinary Shares (giving effect to the conversion into Ordinary Shares of all outstanding Convertible Securities) unless such person, as a condition to the receipt of such shares or option, becomes a party to the Subscription Agreement as provided in Article 11.3 thereof.

 

10.

The Company may insofar as may be permitted by law, pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any shares. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid-up shares or partly in one way and partly in the other. The Company may also on any issue of shares pay such brokerage as may be lawful.

 

   6    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


11.

The Directors shall keep or cause to be kept a register of members as required by Section 40 of the Companies Law at such place or places as the Directors may from time to time determine, and in the absence of any such determination, the Register of Members shall be kept at the registered office of the Company. The Company shall not be bound to register more than four persons as the joint holders of any share or shares.

RIGHTS AND RESTRICTIONS OF SERIES A PREFERRED SHARES AND ORDINARY SHARES

 

12.

The rights and restrictions attaching to Series A Preferred Shares and Ordinary Shares are as follows:

 

  (a)

Issue Price

Series A Preferred Shares shall be issued at a purchase price of US$0.76923 each or at such other price as the Directors may in their absolute discretion determine.

Ordinary Shares shall be issued at such price as the Directors may in their absolute discretion determine.

 

  (b)

Voting

At a general meeting of the Company every holder of an Ordinary Share present in person and every person representing any such holder by proxy shall have the right to have one vote for each such share of which he or the person represented by proxy is the holder.

At a general meeting of the Company and at any separate meeting of the holders of the Series A Preferred Shares, every holder of Series A Preferred Shares shall be entitled to such number of votes for the Series A Preferred Shares held by such holder on the record date fixed for such meeting, (or on the effective date of any written resolution), as shall be equal to the whole number of Ordinary Shares into which such holder’s Series A Preferred Shares are convertible (in accordance with the terms of Article 12(g) hereof), immediately after the close of business on the record date fixed for such meeting (or the effective date of such written resolution).

Subject to the following provisions of these Articles, holders of Ordinary Shares and holders of Series A Preferred Shares shall vote as one class.

 

  (c)

Special Approval Rights

 

  (i)

The affirmative vote, or written consent, of the holders of the Series A Requisite Percentage of all Series A Preferred Shares in issue voting separately on an as converted basis as a single class, shall be necessary to authorize the Company to take any of the following actions:

 

  (A)

changing, varying or abrogating the rights, preferences, privileges, powers of or the restrictions attaching to the Series A Preferred Shares;

 

  (B)

authorizing, creating or issuing any class or series of shares having any right, preference or priority superior to or ranking pari passu with the Series A Preferred Shares;

 

  (C)

issuing any debt or equity security of the Company or any option to acquire any debt or equity security other than Excluded Securities and issuances of shares of authorized classes or series of shares in compliance with the Subscription Agreement;

 

   7    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  (D)

amending any provision of the Memorandum and the Articles of Association of the Company or any of its Subsidiaries;

 

  (E)

authorizing the Sale of the Company;

 

  (F)

authorizing or effecting, or permitting any Subsidiary to authorize or effect, the liquidation (whether complete or partial), dissolution or winding up of the Company or any Subsidiary;

 

  (G)

authorizing or effecting, or permitting any Subsidiary to authorize or effect, the acquisition in any manner, directly or indirectly, of the shares or all or a substantial portion of the assets of any Person by the Company or any Subsidiary

 

  (H)

save as authorized by the terms of these Articles, authorizing or effecting the declaration or payment of dividends or other distributions upon, or the redemption or repurchase of, any shares in the capital of the Company other than the repurchase of Ordinary Shares from departing employees pursuant to the terms of the Equity Incentive Plan or the Stock Restriction Agreement pursuant to which such employee has been issued Ordinary Shares;

 

  (I)

the adoption or amendment of any stock option plan of the Company (including, without limitation, any amendment increasing the number of Ordinary Shares reserved under the Equity Incentive Plan to a number greater than 76,632,161 shares) and the grant of any stock options other than pursuant to the Equity Incentive Plan; and

 

  (J)

changing the size of the Board of Directors, which shall be set at three (3) members.

 

  (ii)

The affirmative vote, or written consent, of the holders of the Requisite Percentage of all Series A Preferred Shares and Ordinary Shares then in issue, voting together on an as converted basis as a single class, shall be necessary to authorize the Company to take any of the following actions:

 

  (A)

changing, varying or abrogating the rights, preferences, privileges, powers of or the restrictions attaching to the Series A Preferred Shares;

 

  (B)

issuing any debt or equity security of the Company or any option to acquire any debt or equity security other than Excluded Securities and issuances of shares of authorized classes or series of shares to existing Members in compliance with the Subscription Agreement;

 

  (C)

the redemption or repurchase of, any shares in the capital of the Company other than the repurchase of Ordinary Shares from departing employees pursuant to the terms of the Equity Incentive Plan or the Stock Restriction Agreement pursuant to which such employee has been issued Ordinary Shares;

 

  (D)

amending any provision of the Memorandum and Articles of Association of the Company or any of its Subsidiaries;

 

  (E)

authorizing the Sale of the Company;

 

   8    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  (F)

the adoption or amendment of any stock option plan of the Company (including, without limitation, any amendment increasing the number of Ordinary Shares reserved under the Equity Incentive Plan to a number greater than 76,632,161 shares) and the grant of any stock options other than pursuant to the Equity Incentive Plan; and

 

  (G)

authorizing or effecting, or permitting any Subsidiary to authorize or effect, the liquidation (whether complete or partial), dissolution or winding up of the Company or any Subsidiary.

 

  (iii)

The approval rights to authorize the Company to take any of the actions referred to in Article 12(c)(i) above (“ Series A Restricted Actions ”) may be exercised at any general meeting of the Company, at a special meeting of the holders of Series A Preferred Shares convened for such purpose or by written consent. At each meeting of Members at which holders of Series A Preferred Shares shall have the right, voting separately as a single class, to authorize the Company to take any Series A Restricted Action, the presence in person or by proxy of the holders of the Series A Requisite Percentage of all Series A Preferred Shares entitled to vote on the matter shall be necessary and sufficient to constitute a quorum. At any such meeting or at any adjournment thereof, in the absence of a quorum of the holders of the Series A Preferred Shares, a majority of the holders of such shares present in person or by proxy shall have the power to adjourn the meeting as to the actions to be taken by the holders of the Series A Preferred Shares from time to time and place to place without notice other than announcement at the meeting until a quorum shall be present.

 

  (iv)

The approval rights to authorize the Company to take any of the actions referred to in Article 12(c) (ii) above (“ Restricted Actions ”) may be exercised at any general meeting of the Company or by written consent. At each meeting of Members at which holders of Series A Preferred Shares and holders of Ordinary Shares shall have the right, voting together as a single class, to authorize the Company to take any Restricted Action, the presence in person or by proxy of the holders of the Requisite Percentage of all Series A Preferred Shares and Ordinary Shares then in issue and entitled to vote on the matter shall be necessary and sufficient to constitute a quorum. At any such meeting or at any adjournment thereof, in the absence of a quorum of the holders of the Series A Preferred Shares and the holders of Ordinary Shares, a majority of the holders of such shares present in person or by proxy shall have the power to adjourn the meeting as to the actions to be taken by the holders of the Series A Preferred Shares and the holders of Ordinary Shares from time to time and place to place without notice other than announcement at the meeting until a quorum shall be present.

 

  (d)

Compulsory Transfer

 

  (i)

If, prior to a Qualified IPO, an offer on the terms agreed, including an agreed upon consideration that is at least equal to 5 times the per share purchase price of the Series A Preferred Stock (as adjusted for all share splits, share dividends, recapitalizations, or other similar events) times the number of outstanding Ordinary Shares, calculated on a fully diluted, as-if-converted basis, (the “ Agreed Terms ”) by a person (the “ Company Purchaser ”) is approved in accordance with Articles 12(c)(i)(E) and 12(c)(ii)(E) above to acquire all the Company’s shares then in issue and the offer is approved by the Directors, the Directors or any other Member may, by serving a notice (the “ Compulsory Purchase Notice ”) on each Member who has not agreed to sell its shares to the Company

 

   9    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  Purchaser on the Agreed Terms (a “ Minority Member ”), require all the Minority Members to sell all their shares to one or more persons identified by the Company Purchaser on the Agreed Terms.

 

  (ii)

The shares subject to the Compulsory Purchase Notices shall be sold and purchased in accordance with the following provisions:

 

  (A)

by the date set out in the Agreed Terms as the completion date, or if no such date then one month from the date of the Compulsory Purchase Notice (the “ Completion Date ”), the Minority Members shall deliver stock transfer forms for their shares, with the relevant share certificates, to the Company;

 

  (B)

on the Completion Date the Company shall pay the Minority Members, on behalf of the Company Purchaser, the price for their shares as set out in the Agreed Terms to the extent the Company Purchaser has provided the Company with the requisite funds. The Company’s receipt for the price shall be a good discharge to the Company Purchaser. The Company shall hold the price in trust for the relevant Minority Members without any obligation to pay interest;

 

  (C)

to the extent that the Company Purchaser has not, by the Completion Date, provided the Company with funds to pay the price for the Minority Members’ shares, a Minority Member who has not been paid shall be entitled to the return of the stock transfer forms and share certificates for the relevant shares and the Minority Member shall have no further rights or obligations under this Article in respect of those shares; and

 

  (D)

if a Minority Member fails to deliver stock transfer forms for his shares to the Company by the Completion Date, the Directors may (and shall, if requested by the Company Purchaser) authorize any Director to transfer such shares on the Minority Member’s behalf to the Company Purchaser to the extent the Company Purchaser has, by the Completion date, provided the Company with funds to pay the agreed price for the shares to be acquired by the Company Purchaser. The Directors shall then authorize registration of the transfer. The defaulting Minority Member shall surrender his share certificate for his shares to the Company. On surrender, he shall be entitled to the price for his shares.

 

  (e)

Dividends

The Company shall not declare, pay or set aside any dividends on Ordinary Shares (other than dividends on Ordinary Shares payable in Ordinary Shares) in any year unless the holders of the Series A Preferred Shares then outstanding shall first receive, or simultaneously receive, for each year such Series A Shares have been issued and outstanding, a dividend on each outstanding Series A Preferred Share in an amount at least equal to 8% per year of original purchase price per Series A Preferred Share, $0.76923, (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares). The foregoing dividend shall not be cumulative. The Company shall not declare, pay or set aside any dividends on shares of any class or series of capital stock of the Company (other than dividends on Ordinary Shares payable in Ordinary Shares and other than dividends specified in the preceding sentence) unless the holders of the Series A Preferred Shares then outstanding shall first receive, or simultaneously receive, in addition to any dividend payable pursuant to the foregoing provisions of this subsection, a dividend on each

 

   10    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


outstanding Series A Preferred Share in an amount at least equal to (i) in the case of a dividend on Ordinary Shares or any class or series that is convertible into Ordinary Shares, that dividend per Series A Preferred Share as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all such shares of such class or series had been converted into Ordinary Shares and (B) the number of Ordinary Shares issuable upon conversion of a Series A Preferred Share, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Ordinary Shares, at a rate per Series A Preferred Share determined by dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock and multiplying such fraction by an amount equal to US$0.76923 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares).

 

  (f)

Winding Up

On a return of capital on liquidation, dissolution or otherwise (other than a redemption of shares) the assets of the Company available for distribution among the Members shall be applied in paying to each holder of Series A Preferred Shares in priority to any payment to the holders of any other class of shares, an amount per Series A Preferred Share equal to the Purchase Price, save that if at that time the value of the net assets of the Company is less than the sum of the product of the Purchase Price multiplied by the Series A Preferred Shares then in issue, the amount to be distributed shall be reduced to an aggregate amount equal to such holder’s ratable proportion (based on the number of Ordinary Shares into which the Series A Preferred Shares are then convertible) of the value of the Company’s net assets.

After the holders of Series A Preferred Shares shall have been paid in full an amount per Series A Preferred Share equal to the Purchase Price, the remaining assets of the Company available for distribution among the Members shall be applied in paying to the holders of Series A Preferred Shares, in priority to any other payment to the holders of any other class of shares, an amount equal to any declared but unpaid dividends on such shares held by such holders (the “ Declared Dividends ”) save that if the value of such assets is less than the Declared Dividends, the amount to be distributed to each holder shall be reduced to the holder’s ratable proportion (based on the number of Ordinary Shares into which the Series A Preferred Shares are then convertible) of the value of the Company’s net assets.

After the holders of Series A Preferred Shares have been paid in full the Purchase Price and any Declared Dividends, the remaining assets of the Company available for distribution among the Members shall be distributed ratably among the holders of Ordinary Shares.

A Sale of the Company shall be deemed to be a liquidation and any amounts payable in accordance with this Article shall become payable upon the happening of such event.

 

  (g)

Conversion Rights

 

  (i)

Conversion Procedure

 

  (A)

At any time and from time to time, any holder of Series A Preferred Shares shall have the right, at its option, to convert all or any portion of each Series A Preferred Share (including any fraction of a share) held by such holder into a number of fully paid Ordinary Shares computed by dividing the Purchase Price by the applicable Conversion Price in effect on the Conversion Date.

 

   11    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


Notwithstanding any other provision hereof, if a conversion of Series A Preferred Shares is to be made in connection with a Qualified IPO or a Sale of the Company, such conversion may, at the election of any holder tendering Series A Preferred Shares for conversion, be conditioned upon the consummation of the Qualified IPO or Sale of the Company, in which case such conversion shall not be deemed to be effective until the consummation of such Qualified IPO or Sale of the Company.

 

  (B)

Subject to the provisions of Article 12(g)(i)(A), each conversion of Series A Preferred Shares shall be deemed to have been effected as of the close of business on the effective date of such conversion specified in a written notice (the “ Conversion Date ”); provided , however, that the Conversion Date shall not be a date earlier than the date such notice is so given, and if such notice does not specify a conversion date, the Conversion Date shall be deemed to be the date such notice is given to the Company. On the Conversion Date, the rights of the holder of such Series A Preferred Shares as such holder (including the right to receive distributions and dividends other than distributions and dividends payable to holders of Ordinary Shares) shall cease and the Person or Persons in whose name or names any certificate or certificates for Ordinary Shares are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the Ordinary Shares represented thereby.

 

  (C)

As soon as practicable after the Conversion Date, but in any event within ten (10) business days after the holder has delivered the certificates (or affidavits of lost certificate) evidencing the Series A Preferred Shares converted into Ordinary Shares in accordance herewith, the Company shall deliver to the converting holder:

 

  (1)

a certificate or certificates representing, in the aggregate, the number of Ordinary Shares issued upon such conversion, in the same name or names as the certificates representing the converted Series A Preferred Shares and in such denomination or denominations as the converting holder shall specify and a check for cash with respect to any fractional interest in an Ordinary Share as provided in Article 12(g)(i)(G); and

 

  (2)

a certificate representing any Series A Preferred Shares that were represented by the certificate or certificates delivered to the Company in connection with such conversion but that were not converted.

 

  (D)

The issuance of certificates for Ordinary Shares upon conversion of Series A Preferred Shares shall be made without charge to the holders of such Series A Preferred Shares for any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of Ordinary Shares. Upon conversion of Series A Preferred Shares, the Company shall take all such actions as are necessary in order to ensure that the Ordinary Shares so issued upon such conversion shall be validly issued and fully paid.

 

   12    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  (E)

The Company shall not close its books against the transfer of Series A Preferred Shares or of Ordinary Shares issued or issuable upon conversion of Series A Preferred Shares in any manner that interferes with the timely conversion of Series A Preferred Shares. The Company shall assist and cooperate with any holder of Series A Preferred Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Series A Preferred Shares hereunder (including, without limitation, making any filings required to be made by the Company).

 

  (F)

The Company shall at all times reserve and keep available out of its authorised but unissued Ordinary Shares, solely for the purpose of issuance upon the conversion of the Series A Preferred Shares, such number of Ordinary Shares as are issuable upon the conversion of all Series A Preferred Shares then in issue. All Ordinary Shares that are so issuable shall, when issued in accordance with the terms hereof, be duly and validly issued and fully paid and free from all taxes, liens and charges (other than those taxes, liens and charges caused by such holder of Series A Preferred Shares). The Company shall take all such actions as may be necessary to assure that all such Ordinary Shares may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which Ordinary Shares may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance).

 

  (G)

No fractional interests in Ordinary Shares or script shall be issued upon conversion of the Series A Preferred Shares. If more than one Series A Preferred Share shall be surrendered for conversion at any one time by the same holder, the number of full Ordinary Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series Preferred Shares so surrendered. Instead of any fractional interests in Ordinary Shares which would otherwise be issuable upon conversion of any Series A Preferred Shares, the Company shall pay a cash adjustment in respect of such fractional interest equal to the fair market value of such fractional interest as determined by the Board of Directors.

 

  (ii)

Conversion Price.

The initial conversion price for each Series A Preferred Share shall be US$0.76923, which price may be adjusted from time to time hereafter (as so adjusted, each, a “ Conversion Price ”). If and whenever on or after the original date of issuance of the Series A Preferred Shares the Company issues or sells, or in accordance with Article 12(g)(iii) is deemed to have issued or sold, any of its Ordinary Shares or Convertible Securities for a consideration per share less than the applicable Conversion Price in effect immediately prior to the time of such issue or sale, then upon such issue or sale, the applicable Conversion Price shall be adjusted in accordance with the following formula:

CP 2 = CP 1 * (A+B) / (A+C)

where

 

  CP 2     =

New Conversion Price

 

  CP 1     =

Conversion Price in effect immediately prior to new issue

 

   13    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  A    =

Number of shares deemed to be outstanding immediately prior to the issue (including all Ordinary Shares, all Series A Preferred Shares on an as-converted basis and all outstanding options on an as-exercised basis; and does not include any securities converting in the current round)

 

  B    =

Aggregate consideration received by the Company with respect to the new issue divided by CP 1

 

  C    =

Number of shares of stock issued in the subject transaction.

Notwithstanding the foregoing, no adjustments shall be made under this Article 12(g)(ii) with respect to the issuance of any Excluded Securities.

 

  (iii)

Effect on Conversion Price of Certain Events.

For purposes of determining the adjusted Conversion Price under Article 12(g)(ii), the following shall be applicable:

 

  (A)

Issuance of Convertible Securities . If the Company in any manner issues or sells any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Ordinary Shares are issuable upon such conversion or exchange is less than the applicable Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of Ordinary Shares issuable upon conversion or exchange of such Convertible Securities shall be deemed to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the “price per share for which Ordinary Shares are issuable” shall be determined by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the cumulative minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise, conversion or exchange thereof and, if applicable, the exercise, conversion and exchange of any other Convertible Securities that such Convertible Securities may be converted into or exchanged for, by (b) the total maximum number of Ordinary Shares issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the applicable Conversion Price shall be made when Ordinary Shares and, if applicable, any other Convertible Securities, are actually issued upon the exercise, conversion or exchange of such Convertible Securities.

 

  (B)

Change in Exercise Price or Conversion Rate . If the additional consideration payable to the Company upon the exercise, conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or exchangeable for Ordinary Shares change at any time, each Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price that would have been in effect at such time had such Convertible Securities that are still in issue provided for such changed additional consideration or changed conversion rate, as the case may be, at the time such Convertible Securities were initially granted, issued or sold; but only if as a result of

 

   14    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  such adjustment such Conversion Price then in effect hereunder is thereby reduced; and on the termination date of any right to exercise, convert or exchange such Convertible Securities, such Conversion Price then in effect hereunder shall be increased to the Conversion Price that would have been in effect at the time of such termination had such Convertible Securities, to the extent issued immediately prior to such termination, never been issued.

 

  (iv)

Subdivision or Combination of Ordinary Shares

If the Company at any time subdivides (by any share split, share dividend, recapitalization, or other distribution of Ordinary Shares) its Ordinary Shares then in issue into a greater number of shares, each Conversion Price in effect immediately prior to such combination shall be proportionately reduced, and conversely, in the event the Ordinary Shares then in issue shall be combined (by reverse share split or otherwise) into a smaller number of shares, each Conversion Price in effect immediately prior to such combination shall be proportionately increased.

 

  (v)

Certain Events.

If an event not specified in Article 12(g)(iii) and Article 12(g)(iv) occurs that has substantially the same economic effect on any Series A Preferred Shares as those specifically enumerated, then Article 12(g)(iii) and Article 12(g)(iv) shall be construed liberally, mutatis mutandis, in order to give such Series A Preferred Shares the intended benefit of the protections provided thereunder. In such event, the Board of Directors shall make an appropriate adjustment in each Conversion Price so as to protect the rights of the holders of Series A Preferred Shares; provided that no such adjustment shall increase any Conversion Price as otherwise determined pursuant to Article 12(g)(iii) or (iv) or decrease the number of Ordinary Shares issuable upon conversion of any Series A Preferred Shares.

 

  (vi)

Notices

 

  (A)

Promptly after any adjustment of any Conversion Price, the Company shall give written notice thereof to all holders of Series A Preferred Shares to which such Conversion Price is applicable, setting forth in reasonable detail and certifying the calculation of such adjustment.

 

  (B)

The Company shall give written notice to all holders of Series A Preferred Shares at least twenty (20) days prior to the date on which the Company closes its books or takes a record (a) with respect to any dividend or distribution upon Ordinary Shares, (b) with respect to any pro rata subscription offer to holders of Ordinary Shares or (c) for determining rights to vote with respect to any dissolution or liquidation.

 

  (vii)

Mandatory Conversion.

Each Series A Preferred Share shall automatically be converted into fully paid Ordinary Shares of the Company on the basis set forth in Article 12(g)(i) immediately upon the consummation of a Qualified IPO. Each Series A Preferred Share shall automatically be converted into fully paid Ordinary Shares of the Company on the basis set forth in Article 12(g)(i) upon the written election of holders Series A Preferred Shares representing at least a majority of the outstanding and issued Series A Preferred Shares.

 

   15    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  Holders of Series A Preferred Shares so converted may deliver to the Company at its principal office (or such other office or agency of the Company as the Company may designate by notice in writing to such holders) during its usual business hours, the certificate or certificates for the shares so converted. As promptly as practicable thereafter, the Company shall issue and deliver to such holder a certificate or certificates for the number of whole Ordinary Shares to which such holder is entitled, together with any cash dividends and payment in lieu of fractional interests to which such holder may be entitled. Until such time as a holder of Series A Preferred Shares shall surrender its certificate or certificates therefor as provided above, such certificates shall be deemed to represent the Ordinary Shares to which such holder shall be entitled upon the surrender thereof.

 

  (viii)

Automatic Conversion for Failure to Participate in Second or Third Tranche Financing.

 

  (A)

Trigger Event . In the event that any holder of Series A Perferred Shares (a “Series A Member”) does not participate in either the Second Tranche Financing or the Third Tranche Financing, as applicable, (as such terms are defined in the Subscription Agreement) by purchasing the shares of Series A Preferred Shares in such Financing as obligated pursuant to the terms of the Subscription Agreement, ( provided that the Series A Member has received a Second or Third Tranche Completion Certificate, as applicable), then each share of Series A Preferred Shares then held by such Series A Member shall automatically, and without any further action on the part of such Series A Member, be converted into Ordinary Shares at the Conversion Price in effect immediately prior to the date specified in the Second or Third Tranche Completion Certificate, as applicable (as such terms are defined in the Subscription Agreement). For purposes of determining the number of shares of Series A Preferred Shares owned by a Series A Member, all shares of Series A Preferred Shares held by Affiliates of such Series A Member shall be aggregated with such Series A Member’s shares ( provided that no shares or securities shall be attributed to more than one entity or person within any such group of affiliated entities or persons). Such conversion, pursuant to this Article 12(g)(viii)(A) is referred to as a “Special Mandatory Conversion”.

 

  (B)

Procedural Requirements. Upon a Special Mandatory Conversion, each holder of shares of Series A Preferred Shares converted pursuant to Article 12(g)(viii)(A) above shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Company to indemnify the Company against any claim that may be made against the Company on account of the alleged loss, theft or destruction of such certificate) to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of Ordinary Shares to which such holder is entitled pursuant to this subsection. All rights with respect to the Series A Preferred Shares converted pursuant to Article 12(g)(viii)(A) above, including the rights, if any, to receive notices and vote (other than as a holder of Ordinary Shares), will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefore (or lost certificate affidavit and agreement), to receive the items provided for in the last sentence of Article 12(g)(viii)(B). If so required by the Company, certificates surrendered for conversion shall be endorsed or accompanied

 

   16    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  by written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. As soon as practicable after the Special Mandatory Conversion and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Series A Preferred Shares so converted, the Company shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Ordinary Shares issuable on such conversion in accordance with the provisions hereof, together with cash in lieu of any fraction of a share of Ordinary Shares otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Series A Preferred Shares converted.

 

  (C)

Effect of Special Mandatory Conversion . All certificates evidencing shares of Series A Preferred Shares which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the time of the Special Mandatory Conversion, be deemed to have been retired and cancelled, and the shares of Series A Preferred Shares converted pursuant to Article 12(g)(viii)(A) represented thereby shall, from and after the time of the Special Mandatory Conversion, be deemed to have been converted into Ordinary Shares for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. Such converted Series A Preferred Shares may not be reissued as shares of such series, and the Company may, in accordance with the provisions of these articles, thereafter take such appropriate action (without the need for Shareholder action) as may be necessary to reduce the authorized number of shares of Series A Preferred Shares accordingly.

 

  (h)

[Reserved]

 

  (i)

Transfers of Shares

 

  (i)

All transfers of Company shares by a Member shall be subject to, and shall only be made in accordance with, the Subscription Agreement. As provided in the Subscription Agreement, a legend shall be imprinted on all certificates representing shares of the Company providing notice of the restrictions on transfer contained in the Subscription Agreement. The directors shall not register any purported transfer of shares may without compliance with such restrictions.

 

  (ii)

This Article 12(i) shall terminate upon the consummation of a Qualified IPO.

 

  (j)

[Reserved]

 

  (k)

[Reserved]

 

  (l)

Registration Rights

Members shall have registration rights with respect to potential public offerings of shares of the Company in accordance with the Registration Rights Agreement.

 

  (m)

Certain Ownership Rights

Until an aggregate of $10 Million of equity capital has been invested in the Company, the Company will issue to Cornell Research Foundation (“ Cornell ”) for no additional consideration, from time to time, such number of Ordinary Shares as will cause Cornell to

 

   17    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


own at least 10 percent (10%) of all the issued and outstanding shares of capital stock of the Company on a fully diluted basis, assuming the exercise, conversion, and exchange of all outstanding securities of the Company for or into Ordinary Shares of the Company.

VARIATION OF RIGHTS ATTACHING TO SHARES

 

13.

If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied or abrogated with the consent in writing of the holders of two-thirds of the issued shares of that class, or with the sanction of a resolution passed by at least a two-thirds majority of the holders of shares of the class present in person or by proxy at a separate general meeting of the holders of the shares of the class. To every such separate general meeting the provisions of these Articles relating to general meetings of the Company shall mutatis mutandis apply, but so that the necessary quorum shall be at least one person holding or representing by proxy at least one-third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a poll.

 

14.

The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied or abrogated by the creation or issue of further shares ranking pari passu therewith or the redemption or purchase of shares of any class by the Company.

CERTIFICATES

 

15.

Every person whose name is entered as a member in the Register of Members shall, without payment, be entitled to a certificate in the form determined by the Directors. Such certificate may be under the Seal. All certificates shall specify the share or shares held by that person and the amount paid up thereon, provided that in respect of a share or shares held jointly by several persons the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all.

 

16.

If a share certificate is defaced, lost or destroyed it may be renewed on such terms, if any, as to evidence and indemnity as the Directors think fit.

FRACTIONAL SHARES

 

17.

Subject to the provisions of Article 12(g)(i)(G), the Directors may issue fractions of a share of any class of shares, and, if so issued, a fraction of a share (calculated to three decimal points) shall be subject to and carry the corresponding fraction of liabilities (whether with respect to any unpaid amount thereon, contribution, calls or otherwise), limitations, preferences, privileges, qualifications, restrictions, rights (including, without limitation, voting and participation rights) and other attributes of a whole share of the same class of shares.

LIEN

 

18.

The Company shall have a first priority lien and charge on every partly paid share for all moneys (whether presently payable or not) called or payable at a fixed time in respect of that share, and the Company shall also have a first priority lien and charge on all partly paid shares standing registered in the name of a Member (whether held solely or jointly with another person) for all moneys presently payable by him or his estate to the Company, but the Directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The Company’s lien, if any, on a share shall extend to all distributions payable thereon.

 

   18    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


19.

The Company may sell, in such manner as the Directors in their absolute discretion think fit, any shares on which the Company has a lien, but no sale shall be made unless an amount in respect of which the lien exists is presently payable nor until the expiration of 14 days after a notice in writing, stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the share, or the persons entitled thereto by reason of his death or bankruptcy.

 

20.

For giving effect to any such sale the Directors may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares comprised in any such transfer and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.

 

21.

The proceeds of the sale after deduction of expenses, fees and commission incurred by the Company shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable, and the residue shall (subject to a like lien for sums not presently payable as existed upon the shares prior to the sale) be paid to the person entitled to the shares at the date of the sale.

CALLS ON SHARES

 

22.

The Directors may from time to time make calls upon the Members in respect of any moneys unpaid on their partly paid shares, and each Member shall (subject to receiving at least 14 days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on such shares.

 

23.

The joint holders of a share shall be jointly and severally liable to pay calls in respect thereof.

 

24.

If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest upon the sum at the rate of eight per centum per annum from the day appointed for the payment thereof to the time of the actual payment, but the Directors shall be at liberty to waive payment of that interest wholly or in part.

 

25.

The provisions of these Articles as to the liability of joint holders and as to payment of interest shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the amount of the share, or by way of premium, as if the same had become payable by virtue of a call duly made and notified.

 

26.

The Directors may make arrangements on the issue of partly paid shares for a difference between the Members, or the particular shares, in the amount of calls to be paid and in the times of payment.

 

27.

The Directors may, if they think fit, receive from any Member willing to advance the same all or any part of the moneys uncalled and unpaid upon any partly paid shares held by him, and upon all or any of the moneys so advanced may (until the same would, but for such advance, become presently payable) pay interest at such rate (not exceeding without the sanction of an Ordinary Resolution, eight per cent, per annum) as may be agreed upon between the Member paying the sum in advance and the Directors.

 

   19    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


FORFEITURE OF SHARES

 

28.

If a Member fails to pay any call or instalment of a call in respect of partly paid shares on the day appointed for payment, the Directors may, at any time thereafter during such time as any part of such call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued.

 

29.

The notice shall name a further day (not earlier than the expiration of 14 days from the date of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed the shares in respect of which the call was made will be liable to be forfeited.

 

30.

If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by notice has been made, be forfeited by a resolution of the Directors to that effect.

 

31.

A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit, and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit.

 

32.

A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all moneys which at the date of forfeiture were payable by him to the Company in respect of the shares forfeited, but his liability shall cease if and when the Company receives payment in full of the amount unpaid on the shares forfeited.

 

33.

A statutory declaration in writing that the declarant is a Director, and that a share has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts in the declaration as against all persons claiming to be entitled to the share.

 

34.

The Company may receive the consideration, if any, given for a share on any sale or disposition thereof pursuant to the provisions of these Articles as to forfeiture and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of and that person shall be registered as the holder of the share, and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the disposition or sale.

 

35.

The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which by the terms of issue of a share becomes due and payable, whether on account of the amount of the share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified.

TRANSFER OF SHARES

 

36.

Shares may be transferred by an instrument of transfer subject to the restrictions and procedures referred to in Article 12(i).

 

37.

The instrument of transfer of any share shall be in any usual or common form or such other form as the Directors may, in their absolute discretion, approve and be executed by or on behalf of the transferor and if in respect of a nil or partly paid up share, or if so required by the Directors, shall also be executed on behalf of the transferee, shall be accompanied by the certificate (if any) of the shares to which it relates and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer. The transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the Register of Members in respect thereof.

 

   20    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


38.

The Directors may in their absolute discretion decline to register any transfer of shares without assigning any reason therefor. If the Directors refuse to register a transfer of any shares, they shall within two months after the date on which the transfer was lodged with the Company send to the transferee notice of the refusal.

 

39.

The registration of transfers may be suspended at such times and for such periods as the Directors may, in their absolute discretion, from time to time determine, provided always that such registration shall not be suspended for more than 45 days in any year.

 

40.

All instruments of transfer which are registered shall be retained by the Company, but any instrument of transfer which the Directors decline to register shall (except in any case of fraud) be returned to the person depositing the same.

TRANSMISSION OF SHARES

 

41.

The legal personal representative of a deceased sole holder of a share shall be the only person recognised by the Company as having any title to the share. In the case of a share registered in the name of two or more holders, the survivors or survivor, or the legal personal representatives of the deceased survivor, shall be the only person recognised by the Company as having any title to the share.

 

42.

Any person becoming entitled to a share in consequence of the death or bankruptcy of a Member shall upon such evidence being produced as may from time to time be required by the Directors, have the right either to be registered as a Member in respect of the share or, instead of being registered himself, to make such transfer of the share as the deceased or bankrupt person could have made; but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by the deceased or bankrupt person before the death or bankruptcy.

 

43.

A person becoming entitled to a share by reason of the death or bankruptcy of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company.

ALTERATION OF CAPITAL

 

44.

Subject to the rights attaching to the various classes of shares set forth in Article 12(c), the Company may from time to time by Ordinary Resolution increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe.

 

45.

Subject to the rights attaching to the various classes of shares set forth in Article 12(c), the Company may by Ordinary Resolution:

 

  (a)

consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;

 

  (b)

convert all or any of its paid up shares into stock and reconvert that stock into paid up shares of any denomination;

 

  (c)

subdivide its existing shares, or any of them into shares of a smaller amount provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived;

 

   21    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  (d)

cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled.

 

46.

Subject to the rights attaching to the various classes of shares set forth in Article 12(c), the Company may by Special Resolution reduce its share capital and any capital redemption reserve in any manner authorised by law.

REDEMPTION AND PURCHASE OF OWN SHARES

 

47.

Subject to the provisions of the Companies Law and the provisions of these Articles, the Company may:

 

  (a)

issue shares on terms that they are to be redeemed or are liable to be redeemed at the option of the Company or the Member on such terms and in such manner as the Directors may, before the issue of such shares, determine;

 

  (b)

purchase its own shares (including any redeemable shares) on such terms and in such manner as the Directors may determine and agree with the Member; and

 

  (c)

make a payment in respect of the redemption or purchase of its own shares otherwise than out of profits or the proceeds of a fresh issue of shares.

 

48.

Any share in respect of which notice of redemption has been given shall not be entitled to participate in the profits of the Company in respect of the period after the date specified as the date of redemption in the notice of redemption.

 

49.

The redemption or purchase of any share shall not be deemed to give rise to the redemption or purchase of any other share.

 

50.

The Directors may when making payments in respect of redemption or purchase of shares, if authorised by the terms of issue of the shares being redeemed or purchased or with the agreement of the holder of such shares, make such payment either in cash or in specie.

CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE

 

51.

For the purpose of determining those Members that are entitled to receive notice of, attend or vote at any meeting of Members or any adjournment thereof, or those Members that are entitled to receive payment of any dividend, or in order to make a determination as to who is a Member for any other purpose, the Directors may provide that the Register of Members shall be closed for transfers for a stated period which shall not exceed in any case 40 days. If the Register of Members shall be so closed for the purpose of determining those Members that are entitled to receive notice of, attend or vote at a meeting of Members the register shall be so closed for at least 10 days immediately preceding such meeting and the record date for such determination shall be the date of the closure of the Register of Members.

 

52.

In lieu of or apart from closing the Register of Members, the Directors may fix in advance a date as the record date for any such determination of those Members that are entitled to receive notice of, attend or vote at a meeting of the Members and for the purpose of determining those Members that are entitled to receive payment of any dividend the Directors may, at or within 90 days prior to the date of declaration of such dividend fix a subsequent date as the record date for such determination.

 

53.

If the Register of Members is not so closed and no record date is fixed for the determination of those Members entitled to receive notice of, attend or vote at a meeting of Members or those

 

   22    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  Members that are entitled to receive payment of a dividend, the date on which notice of the meeting is posted or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members, When a determination of those Members that are entitled to receive notice of, attend or vote at a meeting of Members has been made as provided in this Article, such determination shall apply to any adjournment thereof.

GENERAL MEETINGS

 

54.

The Directors may, whenever they think fit, convene a general meeting of the Company.

 

55.

General meetings shall also be convened on the written requisition of any Member or Members entitled to attend and vote at general meetings of the Company who hold not less than 10 per cent (on an as converted basis) of the paid up voting share capital of the Company deposited at the registered office of the Company specifying the objects of the meeting for a date no later than 21 days from the date of deposit of the requisition signed by the requisitionists, and if the Directors do not convene such meeting for a date not later than 45 days after the date of such deposit, the requisitionists themselves may convene the general meeting in the same manner, as nearly as possible, as that in which general meetings may be convened by the Directors, and all reasonable expenses incurred by the requisitionists as a result of the failure of the Directors to convene the general meeting shall be reimbursed to them by the Company.

 

56.

If at any time there are no Directors, any two Members (or if there is only one Member then that Member) entitled to vote at general meetings of the Company may convene a general meeting in the same manner as nearly as possible as that in which meetings may be convened by the Directors.

NOTICE OF GENERAL MEETINGS

 

57.

At least seven days notice counting from the date service is deemed to take place as provided in these Articles specifying the place, the day and the hour of the meeting and, in case of special business, the general nature of that business, shall be given in the manner hereinafter provided or in such other manner (if any) as may be prescribed by the Company by Ordinary Resolution to such persons as are, under these Articles, entitled to receive such notices from the Company, but with the consent of all the Members entitled to receive notice of some particular meeting and attend and vote thereat, that meeting may be convened by such shorter notice or without notice and in such manner as those Members may think fit.

 

58.

The accidental omission to give notice of a meeting to or the non-receipt of a notice of a meeting by any Member shall not invalidate the proceedings at any meeting.

PROCEEDINGS AT GENERAL MEETINGS

 

59.

All business carried out at a general meeting shall be deemed special with the exception of sanctioning a dividend, the consideration of the accounts, balance sheets, and any report of the Directors or of the Company’s auditors, the appointment and removal of Directors and the fixing of the remuneration of the Company’s auditors. No special business shall be transacted at any general meeting without the consent of all Members entitled to receive notice of that meeting unless notice of such special business has been given in the notice convening that meeting.

 

60.

No business shall be transacted at any general meeting unless a quorum of Members is present at the time when the meeting proceeds to business. Save as otherwise provided by these Articles, one or more Members holding at least a majority of the paid up voting share capital of the Company present in person or by proxy shall be a quorum.

 

   23    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


61.

If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Member or Members present and entitled to vote shall be a quorum.

 

62.

If the Directors wish to make this facility available to Members for a specific or all general meetings of the Company, a Member may participate in any general meeting of the Company, by means of a telephone or similar communication equipment by way of which all persons participating in such meeting can hear each other and such participation shall be deemed to constitute presence in person at the meeting.

 

63.

The chairman, if any, of the Board of Directors shall preside as chairman at every general meeting of the Company.

 

64.

If there is no such chairman, or if at any general meeting he is not present within fifteen minutes after the time appointed for holding the meeting or is unwilling to act as chairman, the Members present shall choose one of their number to be chairman of that meeting.

 

65.

The chairman may with the consent of any general meeting at which a quorum is present (and shall if so directed by the meeting) adjourn a meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a meeting is adjourned for 14 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.

 

66.

At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded by one or more Members present in person or by proxy entitled to vote, and unless a poll is so demanded, a declaration by the chairman that a resolution has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the book of the proceedings of the Company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of, or against, that resolution.

 

67.

If a poll is duly demanded it shall be taken in such manner as the chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded.

 

68.

In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall be entitled to a second or casting vote.

 

69.

A poll demanded on the election of a chairman of the meeting or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs.

 

   24    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


VOTES OF MEMBERS

 

70.

Subject to any rights and restrictions for the time being attached to any class or classes of shares and in particular Article 12(b), on a show of hands every Member present in person and every person representing a Member by proxy shall at a general meeting of the Company have one vote and on a poll every Member and every person representing a Member by proxy shall have one vote for each share of which he or the person represented by proxy is the holder.

 

71.

In the case of joint holders the vote of the senior who tenders a vote whether in person or by proxy shall be accepted to the exclusion of the votes of the joint holders and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members.

 

72.

A Member of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, or other person in the nature of a committee appointed by that court, and any such committee or other person may vote by proxy.

 

73.

No Member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares carrying the right to vote held by him have been paid.

 

74.

On a poll votes may be given either personally or by proxy.

 

75.

The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under seal or under the hand of an officer or attorney duly authorised. A proxy need not be a Member.

 

76.

An instrument appointing a proxy may be in any usual or common form or such other form as the Directors may approve.

 

77.

The instrument appointing a proxy shall be deemed to confer authority to demand or join in demanding a poll.

 

78.

A resolution in writing signed by all the Members for the time being entitled to receive notice of and to attend and vote at general meetings (or being corporations by their duly authorised representatives) shall be as valid and effective as if the same had been passed at a general meeting of the Company duly convened and held.

CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS

 

79.

Any corporation which is a Member or a Director may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members or of the Board of Directors or of a committee of Directors, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual Member or Director.

DIRECTORS

 

80.

The name of the first Director(s) shall either be determined in writing by a majority (or in the case of a sole subscriber that subscriber) of, or elected at a meeting of, the subscribers of the Memorandum of Association.

 

81.

The Company may by Ordinary Resolution appoint any Person to be a Director.

 

   25    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


82.

Subject to the provisions of these Articles, a Director shall hold office until such time as he is removed from office by those Members making the relevant appointment.

 

83.

The minimum number of directors shall be two and the maximum shall be ten.

 

84.

The remuneration of the Directors may be determined by the Board of Directors or by the Company by Ordinary Resolution.

 

85.

There shall be no shareholding qualification for Directors unless determined otherwise by the Company by Ordinary Resolution.

 

86.

The Directors shall have power at any time and from time to time to appoint a person as Director, either as a result of a casual vacancy or as an additional Director, subject to the maximum number (if any) imposed by these Articles.

ALTERNATE DIRECTOR

 

87.

Any Director may in writing appoint another person to be his alternate (i) to act in his place at any meeting of the Directors at which he is unable to be present or (ii) act in his place by signing any resolution effected in accordance with Article 111. Every such alternate shall be entitled to notice of meetings of the Directors and to attend and vote thereat as a Director when the person appointing him is not personally present and where he is a Director to have a separate vote on behalf of the Director he is representing in addition to his own vote. A Director may at any time in writing revoke the appointment of an alternate appointed by him. Such alternate shall not be an officer of the Company and shall be deemed to be the agent of the Director appointing him. The remuneration of such alternate shall be payable out of the remuneration of the Director appointing him and the proportion thereof shall be agreed between them.

 

88.

Any Director may appoint any person, whether or not a Director, to be the proxy of that Director to attend and vote on his behalf, in accordance with instructions given by that Director, or in the absence of such instructions at the discretion of the proxy, at a meeting or meetings of the Directors which that Director is unable to attend personally. The instrument appointing the proxy shall be in writing under the hand of the appointing Director and shall be in any usual or common form or such other form as the Directors may approve, and must be lodged with the chairman of the meeting of the Directors at which such proxy is to be used, or first used, prior to the commencement of the meeting.

POWERS AND DUTIES OF DIRECTORS

 

89.

Subject to the provisions of the Companies Law, these Articles and to any resolutions made in a general meeting, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in setting up and registering the Company and may exercise all powers of the Company. No resolution made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that resolution had not been made.

 

90.

The Directors may from time to time appoint any person, whether or not a Director to hold such office in the Company as the Directors may think necessary for the administration of the Company, including but not limited to, the office of president, one or more vice-presidents, treasurer, assistant treasurer, manager or controller, and for such term and at such remuneration (whether by way of salary or commission or participation in profits or partly in one way and partly in another), and with such powers and duties as the Directors may think fit. Any person so appointed by the Directors may be removed by the Directors. The Directors may also appoint one or more of their number to the office of managing director upon like terms, but any such appointment shall ipso facto determine if any managing director ceases from any cause to be a Director, or if the Company by Ordinary Resolution resolves that his tenure of office be terminated.

 

   26    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


91.

The Directors may appoint a Secretary (and if need be an Assistant Secretary or Assistant Secretaries) who shall hold office for such term, at such remuneration and upon such conditions and with such powers as they think fit. Any Secretary or Assistant Secretary so appointed by the Directors may be removed by the Directors.

 

92.

The Directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors.

 

93.

The Directors may from time to time and at any time by power of attorney appoint any company, firm or person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretion (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Directors may think fit, and may also authorise any such attorney to delegate all or any of the powers, authorities and discretion vested in him.

 

94.

The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the three next following Articles shall not limit the general powers conferred by this Article.

 

95.

The Directors from time to time and at any time may establish any committees, local boards or agencies for managing any of the affairs of the Company and may appoint any persons to be members of such committees or local boards and may appoint any managers or agents of the Company and may fix the remuneration of any such persons.

 

96.

The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any person so appointed and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.

 

97.

Any such delegates as aforesaid may be authorised by the Directors to subdelegate all or any of the powers, authorities, and discretion for the time being vested in them.

 

   27    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


BORROWING POWERS OF DIRECTORS

 

98.

The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party.

THE SEAL

 

99.

The Seal shall not be affixed to any instrument except by the authority of a resolution of the Board of Directors provided always that such authority may be given prior to or after the affixing of the Seal and if given after may be in general form confirming a number of affixings of the Seal. The Seal shall be affixed in the presence of a Director or a Secretary (or an Assistant Secretary) or in the presence of any one or more persons as the Directors may appoint for the purpose and every person as aforesaid shall sign every instrument to which the Seal is so affixed in their presence.

 

100.

The Company may maintain a facsimile of the Seal in such countries or places as the Directors may appoint and such facsimile Seal shall not be affixed to any instrument except by the authority of a resolution of the Board of Directors provided always that such authority may be given prior to or after the affixing of such facsimile Seal and if given after may be in general form confirming a number of affixings of such facsimile Seal. The facsimile Seal shall be affixed in the presence of such person or persons as the Directors shall for this purpose appoint and such person or persons as aforesaid shall sign every instrument to which the facsimile Seal is so affixed in their presence and such affixing of the facsimile Seal and signing as aforesaid shall have the same meaning and effect as if the Seal had been affixed in the presence of and the instrument signed by a Director or a Secretary (or an Assistant Secretary) or in the presence of any one or more persons as the Directors may appoint for the purpose.

 

101.

Notwithstanding the foregoing, a Secretary or any Assistant Secretary shall have the authority to affix the Seal, or the facsimile Seal, to any instrument for the purposes of attesting authenticity of the matter contained therein but which does not create any obligation binding on the Company.

DISQUALIFICATION OF DIRECTORS

 

102.

The office of Director shall be vacated, if the Director:

 

  (a)

becomes bankrupt or makes any arrangement or composition with his creditors;

 

  (b)

is found to be or becomes of unsound mind;

 

  (c)

resigns his office by notice in writing to the Company; or

 

  (d)

is removed from office by Ordinary Resolution.

PROCEEDINGS OF DIRECTORS

 

103.

The Directors may meet together (either within or without the Cayman Islands) for the despatch of business, adjourn, and otherwise regulate their meetings and proceedings as they think fit. Two clear days notice of a meeting shall be given to each Director. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the chairman shall have a second or casting vote. A Director may, and a Secretary or Assistant Secretary on the requisition of a Director shall, at any time summon a meeting of the Directors.

 

104.

A Director or Directors may participate in any meeting of the Board of Directors, or of any, committee appointed by the Board of Directors of which such Director or Directors are members

 

   28    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  by means of telephone or similar communication equipment by way of which all persons participating in such meeting can hear each other and such participation shall be deemed to constitute presence in person at the meeting.

 

105.

The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors, and unless so fixed, if there be two or more Directors shall be two, and if there be one Director the quorum shall be one. A Director represented by proxy or by an Alternate Director at any meeting shall be deemed to be present for the purposes of determining whether or not a quorum is present.

 

106.

A Director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company shall declare the nature of his interest at a meeting of the Directors. A general notice given to the Board of Directors by any Director to the effect that he is a member of any specified company or firm and is to be regarded as interested in any contract which may thereafter be made with that company or firm shall be deemed a sufficient declaration of interest in regard to any contract so made. A Director may vote in respect of any contract or proposed contract or arrangement notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of the Directors at which any such contract or proposed contract or arrangement shall come before the meeting for consideration.

 

107.

A Director may hold any other office or place of profit under the Company (other than the office of auditor) in conjunction with his office of Director for such period and on such terms (as to remuneration and otherwise) as the Directors may determine and no Director or intending Director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any Director is in any way interested, be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement by reason of such Director holding that office or of the fiduciary relation thereby established. A Director, notwithstanding his interest, may be counted in the quorum present at any meeting of the Directors whereat he or any other Director is appointed to hold any such office or place of profit under the Company or whereat the terms of any such appointment are arranged and he may vote on any such appointment or arrangement.

 

108.

Any Director may act by himself or his firm in a professional capacity for the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; provided that nothing herein contained shall authorise a Director or his firm to act as auditor to the Company.

 

109.

The Directors shall cause minutes to be made in books or loose-leaf folders provided for the purpose of recording:

 

  (a)

all appointments of officers made by the Directors;

 

  (b)

the names of the Directors present at each meeting of the Directors and of any committee of the Directors;

 

  (c)

all resolutions and proceedings at all meetings of the Company, and of the Directors and of committees of Directors.

 

110.

When the chairman of a meeting of the Directors signs the minutes of such meeting those minutes shall be deemed to have been duly held notwithstanding that all the Directors have not actually come together or that there may have been a technical defect in the proceedings.

 

   29    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


111.

A resolution signed by all the Directors shall be as valid and effectual as if it had been passed at a meeting of the Directors duly called and constituted. When signed a resolution may consist of several documents each signed by one or more of the Directors.

 

112.

The continuing Directors may act notwithstanding any vacancy in their body but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number, or of summoning a general meeting of the Company, but for no other purpose.

 

113.

The Directors may elect a chairman of their meetings and determine the period for which he is to hold office but if no such chairman is elected, or if at any meeting the chairman is not present within fifteen minutes after the time appointed for holding the meeting, the Directors present may choose one of their number to be chairman of the meeting.

 

114.

A committee appointed by the Directors may elect a chairman of its meetings. If no such chairman is elected, or if at any meeting the chairman is not present within five minutes after the time appointed for holding the meeting, the members present may choose one of their number to be chairman of the meeting.

 

115.

A committee appointed by the Directors may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the committee members present and in case of an equality of votes the chairman shall have a second or casting vote.

 

116.

All acts done by any meeting of the Directors or of a committee of Directors, or by any person acting as a Director, shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director.

DIVIDENDS

 

117.

Subject to any rights and restrictions for the time being attached to any class or classes of shares, the Directors may from time to time declare dividends (including interim dividends) and other distributions on shares in issue and authorise payment of the same out of the funds of the Company lawfully available therefor.

 

118.

Subject to any rights and restrictions for the time being attached to any class or classes of shares, the Company by Ordinary Resolution may declare dividends, but no dividend shall exceed the amount recommended by the Directors.

 

119.

The Directors may, before recommending or declaring any dividend, set aside out of the funds legally available for distribution such sums as they think proper as a reserve or reserves which shall, in the absolute discretion of the Directors be applicable for meeting contingencies, or for equalising dividends or for any other purpose to which those funds may be properly applied and pending such application may in the absolute discretion of the Directors, either be employed in the business of the Company or be invested in such investments (other than shares) as the Directors may from time to time think fit.

 

120.

Any dividend may be paid by cheque sent through the post to the registered address of the Member or person entitled thereto, or in the case of joint holders, to any one of such joint holders at his registered address or to such person and such address as the Member or person entitled, or such joint holders as the case may be, may direct. Every such cheque shall be made payable to the order of the person to whom it is sent or to the order of such other person as the Member or person entitled, or such joint holders as the case may be, may direct.

 

   30    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


121.

The Directors when paying dividends to the Members in accordance with the provisions of these Articles may make such payment either in cash or in specie.

 

122.

Subject to any rights and restrictions for the time being attached to any class or classes of shares, all dividends shall be declared and paid according to the amounts paid on the shares, but if and so long as nothing is paid up on any of the shares dividends may be declared and paid according to the par value of the shares. No amount paid on a share in advance of calls shall, while carrying interest, be treated for the purposes of this Article as paid on the share.

 

123.

If several persons are registered as joint holders of any share, any of them may give effectual receipts for any dividend or other moneys payable on or in respect of the share.

 

124.

Subject to the rights and restrictions for the time being attached to any class or classes of shares, no dividend shall bear interest against the Company.

ACCOUNTS AND AUDIT

 

125.

The books of account relating to the Company’s affairs shall be kept in such manner as may be determined from time to time by the Directors.

 

126.

The books of account shall be kept at the registered office of the Company, or at such other place or places as the Directors think fit, and shall always be open to the inspection of the Directors.

 

127.

The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Members not being Directors, and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by law or authorised by the Directors or by the Company by Ordinary Resolution.

 

128.

The accounts relating to the Company’s affairs shall be audited by an auditor nominated by the Directors from time to time.

CAPITALISATION OF PROFITS

 

129.

Subject to the Companies Law, the Directors may, with the authority of an Ordinary Resolution:

 

  (a)

resolve to capitalise an amount standing to the credit of reserves (including a share premium account, capital redemption reserve and profit and loss account), whether or not available for distribution;

 

  (b)

appropriate the sum resolved to be capitalised to the Members in proportion to the nominal amount of shares (whether or not fully paid) held by them respectively and apply that sum on their behalf in or towards:

 

  (i)

paying up the amounts (if any) for the time being unpaid on shares held by them respectively, or

 

  (ii)

paying up in full unissued shares or debentures of a nominal amount equal to that sum,

and allot the shares or debentures, credited as fully paid, to the Members (or as they may direct) in those proportions, or partly in one way and partly in the other, but the share premium account, the capital redemption reserve and profits which are not available for distribution may, for the purposes of this Article, only be applied in paying up unissued shares to be allotted to Members credited as fully paid;

 

   31    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


  (c)

make any arrangements they think fit to resolve a difficulty arising in the distribution of a capitalised reserve and in particular, without limitation, where shares or debentures become distributable in fractions the Directors may deal with the fractions as they think fit;

 

  (d)

authorise a person to enter (on behalf of all the Members concerned) into an agreement with the Company providing for either:

 

  (i)

the allotment to the Members respectively, credited as fully paid, of shares or debentures to which they may be entitled on the capitalisation, or

 

  (ii)

the payment by the Company on behalf of the Members (by the application of their respective proportions of the reserves resolved to be capitalised) of the amounts or part of the amounts remaining unpaid on their existing shares,

and any such agreement made under this authority being effective and binding on all those Members; and

 

  (e)

generally do all acts and things required to give effect to the resolution.

SHARE PREMIUM ACCOUNT

 

130.

The Directors shall in accordance with Section 34 of the Companies Law establish a share premium account and shall carry to the credit of such account from time to time a sum equal to the amount or value of the premium paid on the issue of any share.

 

131.

There shall be debited to any share premium account on the redemption or purchase of a share the difference between the nominal value of such share and the redemption or purchase price provided always that at the discretion of the Directors such sum may be paid out of the profits of the Company or, if permitted by Section 37 of the Companies Law, out of capital.

NOTICES

 

132.

Any notice or document may be served by the Company or by the person entitled to give notice to any Member either personally, by facsimile or by sending it via a recognised courier service, fees prepaid, addressed to the Member at his address as appearing in the Register of Members. In the case of joint holders of a share, all notices shall be given to that one of the joint holders whose name stands first in the Register of Members in respect of the joint holding, and notice so given shall be sufficient notice to all the joint holders.

 

133.

Any Member present, either personally or by proxy, at any meeting of the Company shall for all purposes be deemed to have received due notice of such meeting and, where requisite, of the purposes for which such meeting was convened.

 

134.

Any notice or other document, if served by (a) facsimile, shall be deemed to have been served upon production by the transmitting facsimile machine of a report confirming transmission of the facsimile in full to the facsimile number of the recipient or (b) recognised courier service, shall be deemed to have been served 72 hours after the time when the letter containing the same is delivered to the courier service. In proving service by post or courier service it shall be sufficient to prove that the letter containing the notice or documents was properly addressed and duly posted or delivered to the courier service.

 

   32    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


135.

Any notice or document delivered or sent by courier to or left at the registered address of any Member in accordance with the terms of these Articles shall notwithstanding that such Member be then dead or bankrupt, and whether or not the Company has notice of his death or bankruptcy, be deemed to have been duly served in respect of any share registered in the name of such Member as sole or joint holder, unless his name shall at the time of the service of the notice or document, have been removed from the Register of Members as the holder of the share, and such service shall for all purposes be deemed a sufficient service of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share.

 

136.

Notice of every general meeting of the Company shall be given to:

 

  (a)

all Members holding shares with the right to receive notice and who have supplied to the Company an address for the giving of notices to them; and

 

  (b)

every person entitled to a share in consequence of the death or bankruptcy of a Member, who but for his death or bankruptcy would be entitled to receive notice of the meeting.

No other person shall be entitled to receive notices of general meetings.

INDEMNITY

 

137.

Every Director (including for the purposes of this Article any alternate Director appointed pursuant to the provisions of these Articles), Secretary, Assistant Secretary, or other officer for the time being and from time to time of the Company (but not including the Company’s auditors) and the personal representatives of the same shall be indemnified and secured harmless out of the assets and funds of the Company against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him in or about the conduct of the Company’s business or affairs or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning the Company or its affairs in any court whether in the Cayman Islands or elsewhere.

 

138.

No such Director, alternate Director, Secretary, Assistant Secretary or other officer of the Company (but not including the Company’s auditors) shall be liable (a) for the acts, receipts, neglects, defaults or omissions of any other such Director or officer or agent of the Company or (b) for any loss on account of defect of title to any property of the Company or (c) on account of the insufficiency of any security in or upon which any money of the Company shall be invested or (d) for any loss incurred through any bank, broker or other similar person or (e) for any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgement or oversight on his part or (f) for any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers authorities, or discretions of his office or in relation thereto, unless the same shall happen through his own dishonesty.

NON-RECOGNITION OF TRUSTS

 

139.

No person shall be recognised by the Company as holding any share upon any trust and the Company shall not, unless required by law, be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent or future interest in any of its shares or any other rights in respect thereof except an absolute right to the entirety thereof in each Member registered in the Register of Members.

 

   33    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496


WINDING UP

 

140.

Subject to the rights and restrictions for the time being attached to any class or classes of shares, if the Company shall be wound up the liquidator may, with the sanction of an Ordinary Resolution of the Company divide amongst the Members in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Members or different classes of shares. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction shall think fit, but so that no Member shall be compelled to accept any shares or other securities whereon there is any liability.

AMENDMENT OF ARTICLES OF ASSOCIATION

 

141.

Subject to the Companies Law and the rights attaching to the various classes of shares, the Company may at any time and from time to time by Special Resolution alter or amend these Articles in whole or in part.

REGISTRATION BY WAY OF CONTINUATION

 

142.

The Company may by Special Resolution resolve to be registered by way of continuation in a jurisdiction outside the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing. In furtherance of a resolution adopted pursuant to this Article, the Directors may cause an application to be made to the Registrar of Companies to deregister the Company in the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing and may cause all such further steps as they consider appropriate to be taken to effect the transfer by way of continuation of the Company

 

   34    LOGO
19804498.1 S7050.151539       Filed: 12-Sep-2018 14:15 EST
   www.verify.gov.ky File#: 165223    Auth Code: H21041619496

Exhibit 4.3

THIS WARRANT, AND THE SECURITIES ISSUABLE UPON THE EXERCISE OF THIS WARRANT, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS.

AMENDED AND RESTATED WARRANT AGREEMENT

To Purchase Shares of

Stealth BioTherapeutics Corp

Originally Dated as of June 30, 2017 (the “ Effective Date ”)

Amended and Restated as of June 7, 2018

WHEREAS, Stealth BioTherapeutics Corp, a company incorporated under the laws of the Cayman Islands, entered into a Loan and Security Agreement, dated June 30, 2017 (the “ Loan Agreement ”) with Hercules Capital, Inc., a Maryland corporation, in its capacity as administrative agent, Hercules Capital, Inc. (the “ Warrantholder ”), and the other lender parties thereto; and

WHEREAS, the Company (as defined below) originally granted to the Warrantholder, in consideration for, among other things, the financial accommodations provided for in the Loan Agreement, the right to purchase Warrant Shares (as defined below) pursuant to the original Warrant Agreement dated June 30, 2017 (the “ Original Agreement ”).

WHEREAS, the Company has requested, and the Warrantholder has agreed, to, amend and restate the Original Agreement effective as of June 7, 2018 (such amended and restated agreement, the “ Agreement ”).

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Company and the Warrantholder agree as follows:

SECTION 1.     GRANT OF THE RIGHT TO PURCHASE SHARES.

For value received, the Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe for and purchase, from the Company, an aggregate number of fully paid and non-assessable Warrant Shares equal to the quotient derived by dividing (a) the Warrant Coverage (as defined below) by (b) the Exercise Price (as defined below). The Exercise Price of such shares is subject to adjustment as provided in Section 8. As used herein, the following terms shall have the following meanings:

Act ” means the Securities Act of 1933, as amended;

Cash Fee ” means a lump-sum cash amount in US dollars (US$) payable by the Company to Warrantholder equal to:

 

  i.

If the Pre-Money Valuation is below US$750.0 million: $350,000;

 

  ii.

If the Pre-Money Valuation is equal to or greater than US$750.0 million but less than US$1.0 billion: US$300,000; or

 

  iii.

If the Pre-Money Valuation is equal to or greater than US$1.0 billion: zero US dollars;

Charter ” means the Company’s Amended and Restated Memorandum and Articles of Association, as may be amended from time to time;


Company ” means Stealth BioTherapeutics Corp, an exempted company incorporated under the laws of the Cayman Islands, and any successor or surviving entity that assumes the obligations of the Company under this Agreement pursuant to Section 8(a);

Equity Round ” means any offering of equity securities by the Company, after the Effective Date, in a transaction or series of related transactions principally for equity financing purposes in which cash is received by the Company and/or debt of the Company is cancelled or converted in exchange for equity securities of the Company, including, at the Warrant Holder’s election, any Initial Public Offering of the Company or of any direct or indirect parent entity of the Company; provided that an Equity Round shall not include additional closings of the Company’s Series A Preferred (as defined below) round of financing (including the issuance of shares of Series A Preferred upon the conversion of convertible promissory notes made by the Company in favor of existing shareholders of the Company).

Exercise Price ” means (a) in the case of Warrant Shares that are Series A Preferred, the price per share of Series A Preferred Shares, $0.76923 per share, or (b) in the case of Warrant Shares that are Next Round Shares (as defined below), the price per share of Next Round Shares paid by investors (before deduction of any underwriters’ discounts and commissions) in the Next Round, in either case subject to adjustment pursuant to Section 8;

Initial Public Offering ” means (i) the initial underwritten public offering of the Company’s Ordinary Shares (or the ordinary shares or other securities of any direct or indirect parent entity of the Company) pursuant to a registration statement under the Act, which public offering has been declared effective by the Securities and Exchange Commission (“ SEC ”) (the “ US IPO ”); or (ii) the initial public offering and listing of the Company’s Ordinary Shares (or the ordinary shares or other securities of any direct or indirect parent entity of the Company) on The Stock Exchange of Hong Kong Limited (“ HKSE ”) (the “ Hong Kong IPO ”);

Merger Event ” means any sale, lease, license or other transfer of all or substantially all assets of the Company or any merger or consolidation involving the Company in which the Company is not the surviving entity, or in which the outstanding shares of the Company are otherwise converted into or exchanged for shares of preferred stock, other securities or property of another entity, including, without limitation, the currently contemplated reorganization pursuant to which the Company will become a wholly owned subsidiary of a newly formed Delaware corporation to be called Stealth BioTherapeutics Inc. (the “ Reorganization ”);

Next Round ” means the next Equity Round in which the Company issues and sells Ordinary Shares or Preferred Shares and any options, warrants, rights or other securities that are exercisable, convertible or exchangeable into, or otherwise provide the right to purchase or acquire, such Ordinary Shares or Preferred Shares for aggregate gross proceeds of at least $30,000,000 but excluding the issuance of convertible promissory notes which are convertible into shares of Series A Preferred to existing shareholders of the Company;

Ordinary Shares ” means the Company’s ordinary shares, $0.0001 nominal or par value per share;

Preferred Shares ” means the Company’s preferred shares, $0.0001 nominal or par value per share;

Pre-Money Valuation ” means (i) the public offering price in the Hong Kong IPO multiplied by (ii) the aggregate number of Ordinary Shares outstanding determined on a fully diluted, as converted basis, as of immediately prior to the issuance of Ordinary Shares in the Hong Kong IPO;

Purchase Price ” means, with respect to any exercise of this Agreement, an amount equal to the Exercise Price as of the relevant time multiplied by the number of Warrant Shares requested to be exercised under this Agreement pursuant to such exercise;“ Warrant Coverage ” means $500,000 plus, in the event all or part of the Tranche 4 Advance is funded pursuant to the Loan Agreement, 2.50% of such amount funded; and

 

- 2 -


Warrant Shares ” means, at the election of the Warrantholder, (a) the Series A Preferred Shares, $0.0001 nominal or par value per share, of the Company (the “ Series A Preferred ”) or (b) in connection with the consummation of the Next Round, the Ordinary Shares, or class and series of any Preferred Shares of the Company, and any options, warrants, rights or other securities that are exercisable, convertible or exchangeable into, or otherwise provide the right to purchase or acquire, such Ordinary Shares or Preferred Shares issued in the Next Round (including, at the Warrantholder’s election, in the case of an Initial Public Offering of any direct or indirect parent entity of the Company, the ordinary shares or other securities of such direct or indirect parent entity of the Company) (such equity securities, the “ Next Round Shares ”), and, to the extent provided in Sections 8(a) and (b), any other shares into or for which such Warrant Shares may be converted or exchanged.

SECTION 2.     TERM OF THE AGREEMENT.

Except as otherwise provided for herein, the term of this Agreement and the right to purchase Warrant Shares as granted herein (the “ Warrant ”) shall commence on the Effective Date and shall be exercisable for a period ending upon the date that is ten (10) years from the Effective Date; provided , however , that this Warrant shall automatically terminate, without any action on the part of the Warrantholder, as of immediately following (and contingent upon) the consummation of a Hong Kong IPO. Immediately prior to (and contingent upon) any such termination of this Warrant in connection with a Hong Kong IPO, (i) this Warrant shall be deemed to be exercised in full pursuant to the Net Issuance method set forth in Section 3 as of immediately prior to the closing of such Hong Kong IPO (provided, that, for the avoidance of doubt, if the Net Issuance method would result in the issuance of zero Warrant Shares, then such Warrant shall be terminated without the issuance of any Warrant Shares) and (ii) within five (5) business days of the consummation of a Hong Kong IPO, the Company shall pay Warrantholder the Cash Fee.

SECTION 3.     EXERCISE OF THE PURCHASE RIGHTS.

(a)     Exercise . The purchase rights set forth in this Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2, by tendering to the Company at its principal office a notice of exercise in substantially the form attached hereto as Exhibit I (the “ Notice of Exercise ”), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the Purchase Price in accordance with the terms set forth below, and in no event later than ten (10) days thereafter (provided, that, in the event the Warrant Shares are traded on a U.S. securities exchange , no later than two (2) trading days thereafter), the Company shall issue or cause to be issued to the Warrantholder a certificate for the number of Warrant Shares purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the “ Acknowledgment of Exercise ”) indicating the number of shares which remain subject to future purchases, if any. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the Notice of Exercise and payment of the Purchase Price shall have been delivered to the Company as provided in this Section 3.

The Purchase Price may be paid at the Warrantholder’s election either (i) by cash or check or (ii) by surrender of all or a portion of the Warrant for Warrant Shares to be exercised under this Agreement and, if applicable, an amended Agreement representing the remaining number of shares purchasable hereunder, as determined below (“ Net Issuance ”); provided , however , that Warrantholder shall not exercise by cash, and may only exercise by Net Issuance, during the period beginning 28 days prior to the submission of a listing application to HKSE relating to a Hong Kong IPO through the earlier of the consummation or abandonment of such Hong Kong IPO. If the Warrantholder elects the Net Issuance method, the Company will issue Warrant Shares in accordance with the following formula:

X = Y(A-B)

A

Where:                 X =     the number of Warrant Shares to be issued to the Warrantholder.

                              Y =     the number of Warrant Shares requested to be exercised under this Agreement.

 

- 3 -


                              A =     the fair market value of one (1) Warrant Share at the time of issuance of such Warrant Shares.

                              B =     the Exercise Price.

For purposes of the above calculation, fair market value of Warrant Shares shall mean with respect to each Warrant Share:

(i)    if the exercise is in connection with an Initial Public Offering, and if the registration statement relating to such Initial Public Offering has been declared effective by the SEC (for US IPO) or if the prospectus relating to such Initial Public Offering has been registered with the Hong Kong Companies Registry (for Hong Kong IPO), then the fair market value per share shall be (1) in the event the Warrant Shares are Preferred Shares, the product of (A) the initial “Price to Public” of the Ordinary Shares specified in the final prospectus with respect to the offering and (B) the number of Ordinary Shares into which each Preferred Share is convertible at the time of such exercise, and (2) in the event the Warrant Shares are Ordinary Shares, the initial price to public of the Ordinary Shares specified in the final prospectus in the case of a US IPO or in the results announcement in the case of a Hong Kong IPO with respect to the offering;

(ii)    if the exercise is after, and not in connection with an Initial Public Offering, and:

(A)    if the Ordinary Shares are traded on a securities exchange, the fair market value shall be deemed to be the prior day closing price before the day the current fair market value of the securities is being determined; or

(B)    if the Ordinary Shares are traded over-the-counter, the fair market value shall be deemed to be the prior day closing bid and asked price quoted in the over-the-counter market before the day the current fair market value of the securities is being determined; and

(iii)    if at any time the Warrant Shares are not listed on any securities exchange or traded over-the-counter, the fair market value of Warrant Shares shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for Warrant Shares sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors, unless the Company shall become subject to a Merger Event, in which case the fair market value of Warrant Shares shall be deemed to be the per share value received by the holders of Warrant Shares pursuant to such Merger Event.

In the event the exercise is in connection with Initial Public Offering of ordinary shares or other securities of any direct or indirect parent entity of the Company, appropriate adjustment shall be made in the application of the foregoing provisions of this Section 3(a) to ensure that such provisions shall be applicable to the purchase rights under this Agreement in relation to the securities offered in such Initial Public Offering. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof.

(b)     Exercise Prior to Expiration . To the extent this Agreement is not previously exercised as to all Warrant Shares subject hereto, and if the fair market value of one Warrant Share is greater than the Exercise Price then in effect, this Agreement shall be deemed automatically exercised pursuant to Section 3(a) (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one Warrant Share upon such expiration shall be determined pursuant to Section 3(a). To the extent this Agreement or any portion thereof is deemed automatically exercised pursuant to this Section 3(b), the Company agrees to promptly notify the Warrantholder of the number of Warrant Shares, if any, the Warrantholder is to receive by reason of such automatic exercise.

 

- 4 -


SECTION 4.     RESERVATION OF SHARES.

During the term of this Agreement, the Company will at all times have authorized and reserved a sufficient number of Warrant Shares to provide for the exercise of the rights to purchase Warrant Shares as provided for herein, and shall have authorized and reserved a sufficient number of Ordinary Shares to provide for the conversion of any Preferred Shares issuable hereunder.

SECTION 5.     NO FRACTIONAL SHARES OR SCRIP.

No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the then fair market value of one Warrant Share.

SECTION 6.     NO RIGHTS AS SHAREHOLDER.

This Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of this Warrant.

SECTION 7.     WARRANTHOLDER REGISTRY.

The Company shall maintain a registry showing the name and address of the registered holder of this Agreement. The Warrantholder’s initial address, for purposes of such registry, is set forth below the Warrantholder’s signature on this Agreement. The Warrantholder may change such address by giving written notice of such changed address to the Company.

SECTION 8.     ADJUSTMENT RIGHTS.

The Exercise Price and the number of Warrant Shares purchasable hereunder are subject to adjustment, as follows:

(a)     Merger Event . If at any time there shall be a Merger Event, then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of this Agreement, the number of shares of common stock, preferred stock or other securities or property (collectively, “ Reference Property ”) that the Warrantholder would have received in connection with such Merger Event if the Warrantholder had exercised this Agreement immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company’s Board of Directors and reasonably acceptable to the Warrantholder) shall be made in the application of the provisions of this Agreement with respect to the rights and interests of the Warrantholder after the Merger Event to the end that the provisions of this Agreement (including adjustments of the Exercise Price, the ability of the Warrantholder to elect the class and series of Warrant Shares as set forth in the definition thereof and adjustments to ensure that the provisions of this Section 8 shall thereafter be applicable, as nearly as possible, to the purchase rights under this Agreement in relation to any Reference Property thereafter acquirable upon exercise of such purchase rights) shall continue to be applicable in their entirety, and to the greatest extent possible. Without limiting the foregoing, in connection with any Merger Event, upon the closing thereof, the successor or surviving entity shall assume the obligations of this Agreement; provided that the foregoing assumption requirement shall not apply with respect to a Merger Event (other than the Reorganization or similar internal reorganization) if (i) the consideration to be paid for or in respect of the outstanding Warrant Shares in such Merger Event consists solely of cash and/or readily marketable securities, and (ii) the value of such consideration (as determined at closing in accordance with the definitive executed transaction documents) to be paid for or in respect of each outstanding Warrant Share is at least three (3) times the Exercise Price in effect as of immediately prior to the closing of such Merger Event. In connection with a Merger Event and upon the Warrantholder’s written election to the Company, the Company shall cause this Agreement to be exchanged for the consideration that the Warrantholder would have received if the Warrantholder had chosen to exercise its right to have shares issued pursuant to the Net Issuance provisions of this Agreement without actually exercising such right, acquiring such shares and exchanging such shares for such consideration. The provisions of this Section 8(a) shall similarly apply to successive Merger Events.

 

- 5 -


(b)     Reclassification of Shares . Except for Merger Events subject to Section 8(a), and subject to Section 8(f), if the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Agreement exist into the same or a different number of securities of any other class or classes, this Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change; provided to the extent the Warrantholder has the right to elect to receive upon exercise either Series A Preferred Shares or Next Round Shares, the adjustment under this clause (b) shall apply solely to the class and series of securities that has been so combined, reclassified, exchanged or subdivided and shall not impair the Warrantholder’s right to elect to exercise the purchase rights for any other class or series of Warrant Shares. The provisions of this
Section 8(b) shall similarly apply to successive combination, reclassification, exchange, subdivision or other change.

(c)     Subdivision or Combination of Shares . If the Company at any time shall combine or subdivide its Warrant Shares, (i) in the case of a subdivision, the Exercise Price shall be proportionately decreased and the number of Warrant Shares issuable hereunder shall be proportionately increased, or (ii) in the case of a combination, the Exercise Price shall be proportionately increased and the number of Warrant Shares issuable hereunder shall be proportionately decreased.

(d)     Dividends . If the Company at any time while this Agreement is outstanding and unexpired shall:

(i)    pay a dividend with respect to the Warrant Shares payable in Warrant Shares, then the Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of Warrant Shares outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of Warrant Shares outstanding immediately after such dividend or distribution; or

(ii)    make any other distribution with respect to Warrant Shares (or shares into which the Warrant Shares are convertible), except any distribution specifically provided for in any other clause of this Section 8, then, in each such case, provision shall be made by the Company such that the Warrantholder shall receive upon exercise or conversion of this Warrant a proportionate share of any such distribution as though it were the holder of the Warrant Shares (or other shares for which the Warrant Shares are convertible) as of the record date fixed for the determination of the shareholders of the Company entitled to receive such distribution.

(e)     Antidilution Rights . Additional antidilution rights applicable to the Warrant Shares purchasable hereunder are as set forth in the Charter and shall be applicable with respect to the Warrant Shares issuable hereunder. The Company shall promptly provide the Warrantholder with any restatement, amendment, modification or waiver of the Charter; provided , that no such amendment, modification or waiver shall impair or reduce the antidilution rights applicable to the Warrant Shares as of the Effective Date unless such amendment, modification or waiver affects the rights of the Warrantholder with respect to the Warrant Shares in the same manner as it affects all other holders of Warrant Shares. The Company shall provide the Warrantholder with prior written notice of any issuance of its share capital or other equity security to occur after the Effective Date of this Agreement (but excluding any issuances that are “Excluded Securities” as defined in the Charter), which notice shall include (i) the price at which such share capital or security are to be sold, (ii) the number of shares to be issued and (iii) such other information as necessary for the Warrantholder to determine if a dilutive event has occurred. For the avoidance of doubt, there shall be no duplicate anti-dilution adjustment pursuant to this subsection (e), the forgoing subsection (d) and the Charter.

 

- 6 -


(f)     Notice of Adjustments . If: (i) the Company shall declare any dividend or distribution upon its share capital, whether in shares, cash, property or other securities; (ii) there shall be any Merger Event; (iii) there shall be an Initial Public Offering; or (iv) there shall be any voluntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days’ prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Warrant Shares shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Warrant Shares shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of an Initial Public Offering, the Company shall give the Warrantholder at least ten (10) days’ written notice prior to the effective date thereof.

Each such written notice shall set forth, in reasonable detail, (x) the event requiring the notice, and (y) if any adjustment is required to be made, (A) the amount of such adjustment, (B) the method by which such adjustment was calculated, (C) the adjusted Exercise Price (if the Exercise Price has been adjusted) and (D) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given in accordance with Section 12(g) below.

(g)     Timely Notice . Failure to timely provide such notice required by subsection (f) above shall entitle the Warrantholder to retain the benefit of the applicable notice period notwithstanding anything to the contrary contained in any insufficient notice received by the Warrantholder. For purposes of this subsection (g), the notice period shall begin on the date the Warrantholder receives a written notice in accordance with Section 12(g) containing all the information required to be provided in such subsection (f).

SECTION 9.     REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.

(a)     Reservation of Warrant Shares . The Warrant Shares issuable upon exercise of the Warrantholder’s rights have been or, in the case of Warrant Shares issuable in the Next Round, will be duly and validly reserved and, when issued in accordance with the provisions of this Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided , that the Warrant Shares issuable pursuant to this Agreement may be subject to restrictions on transfer under applicable securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and current bylaws or similar organizational documents. The issuance of certificates for Warrant Shares upon exercise of this Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of Warrant Shares; provided , that the Company shall not be required to pay any tax which may be payable in respect of any transfer and the issuance and delivery of any certificate in a name other than that of the Warrantholder.

(b)     Due Authority . The execution and delivery by the Company of this Agreement and the performance of all obligations of the Company hereunder, including the issuance to the Warrantholder of the right to acquire the Warrant Shares and, if applicable, the Ordinary Shares into which they may be converted, have been duly authorized by all necessary corporate action on the part of the Company. This Agreement: (i) does not violate the Company’s Charter or current bylaws or similar organizational documents; (ii) does not contravene any law or governmental rule, regulation or order applicable to it; and (iii) does not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. This Agreement constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms.

 

- 7 -


(c)     Consents and Approvals . No consent or approval of, giving of notice to, registration with or taking of any other action in respect of any state, federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Agreement, except for any filing required by applicable securities laws, which filings will be effective by the time required thereby.

(d)     Issued Securities . All issued and outstanding Ordinary Shares, Preferred Shares or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding Ordinary Shares, Preferred Shares and any other securities were issued in full compliance with all applicable securities laws. In addition, as of the date immediately preceding the date of the Original Agreement:

(i)    The authorized capital of the Company consisted of (A) 610,000,000 Ordinary Shares, of which 205,410,426 shares were issued and outstanding, and (B) 320,000,000 Series A Preferred, of which 274,801,194 shares were issued and outstanding and convertible into 274,801,194 Ordinary Shares.

(ii)    The Company had reserved 76,632,161 Ordinary Shares for issuance under its equity incentive plan(s), under which 44,454,544 options were outstanding and 695,967 Ordinary Shares for issuance upon exercise of a warrant issued January 19, 2017. Except for the foregoing, and convertible promissory notes in the aggregate principal amount of $30,000,000, there were no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company’s capital shares or other securities of the Company. The Company has no outstanding loans to any employee, officer or director of the Company, and the Company agrees not to enter into any such loan or otherwise guarantee the payment of any loan made to an employee, officer or director by a third party.

(iii)    In accordance with the Company’s Charter, no shareholder of the Company has preemptive rights to purchase new issuances of the Company’s capital shares, which right has not been waived.

(e)     Registration Rights . The Company agrees that the Ordinary Shares issued and, if applicable, issuable upon conversion of the Warrant Shares issued and issuable upon exercise of this Warrant, and, at all times (if any) when the Warrant Shares shall be Ordinary Shares, the Warrant Shares issued and issuable upon exercise of this Warrant, shall have the “Piggyback” and S-3 registration rights pursuant to and as set forth in the Company’s registration rights agreement or similar agreement (the “ Registration Rights Agreement ”) on a pari passu basis with the holders of outstanding Preferred Shares who are parties thereto. The provisions set forth in the Company’s Registration Rights Agreement or similar agreement relating to such registration rights in effect as of the Effective Date may not be amended, modified or waived without the prior written consent of the Warrantholder unless such amendment, modification or waiver affects the rights associated with the Warrant Shares issued and issuable upon exercise hereof in the same manner as such amendment, modification or waiver affects the rights associated with all outstanding Preferred Shares whose holders are parties thereto.

(f)     Other Commitments to Register Securities . Except as set forth in this Agreement, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the Act any of its presently outstanding securities or any of its securities which may hereafter be issued.

(g)     Exempt Transaction . Subject to the accuracy of the Warrantholder’s representations in Section 10, the issuance of the Warrant Shares upon exercise of this Agreement, and, if applicable, the issuance of the Ordinary Shares upon conversion of the Warrant Shares, will each constitute a transaction exempt from (i) the registration requirements of Section 5 of the Act, in reliance upon Section 4(a)(2) thereof, (ii) the qualification requirements of the applicable state securities laws, and (iii) applicable securities laws of the Cayman Islands.

 

- 8 -


(h)     Compliance with Rule 144 . If the Warrantholder proposes to sell Warrant Shares issuable upon the exercise of this Agreement, or the Ordinary Shares into which such shares are convertible, in compliance with Rule 144 promulgated by the SEC, then, upon the Warrantholder’s written request to the Company, the Company shall furnish to the Warrantholder, within ten (10) days after receipt of such request, a written statement confirming the Company’s compliance with the filing requirements of the SEC as set forth in such Rule, as such Rule may be amended from time to time.

(i)     Information Rights . During the term of this Agreement, the Warrantholder shall be entitled to the information rights contained in Section 7.1 of the Loan Agreement, and Section 7.1 of the Loan Agreement is hereby incorporated into this Agreement by this reference as though fully set forth herein, provided , however, that the Company shall not be required to deliver a Compliance Certificate once all Indebtedness (as defined in the Loan Agreement) owed by the Company to the Warrantholder has been repaid; and provided , further , that the right set forth in this Section 9(i) shall terminate upon an Initial Public Offering.

SECTION 10.     REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.

This Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder:

(a)     Investment Purpose . The right to acquire Warrant Shares is being acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of such rights or the Warrant Shares except pursuant to an effective registration statement or an exemption from the registration requirements of the Act.

(b)     Private Issue . The Warrantholder understands (i) that the Warrant Shares issuable upon exercise of this Agreement are not registered under the Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company’s reliance on such exemption is predicated on the representations set forth in this Section 10.

(c)     Financial Risk . The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment.

(d)     Risk of No Registration . The Warrantholder understands that if the Company does not register with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934 (the “ 1934 Act ”), or file reports pursuant to Section 15(d) of the 1934 Act, or if a registration statement covering the securities under the Act is not in effect when it desires to sell (i) the rights to purchase Warrant Shares pursuant to this Agreement or (ii) the Warrant Shares issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of (A) its rights hereunder to purchase Warrant Shares or (B) Warrant Shares issued or issuable hereunder which might be made by it in reliance upon Rule 144 under the Act may be made only in accordance with the terms and conditions of that Rule.

(e)     Accredited Investor . The Warrantholder is an “accredited investor” within the meaning of Rule 501 of Regulation D of the Act, as presently in effect.

SECTION 11.     TRANSFERS.

Subject to compliance with applicable federal and state securities laws, this Agreement and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof (except for transfer

 

- 9 -


taxes) upon surrender of this Agreement properly endorsed. Each taker and holder of this Agreement, by taking or holding the same, consents and agrees that this Agreement, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Agreement shall have been so endorsed and its transfer recorded on the Company’s books, shall be treated by the Company and all other persons dealing with this Agreement as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Agreement. The transfer of this Agreement shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the “ Transfer Notice ”), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. Until the Company receives such Transfer Notice, the Company may treat the registered owner hereof as the owner for all purposes. The Company shall promptly, and in no event later than ten (10) days after being provided with an executed instrument of transfer, register any transfer of the Warrant Shares made in accordance with the Charter.

SECTION 12.     MISCELLANEOUS.

(a)     Effective Date . The provisions of this Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company as of the Effective Date. This Agreement shall be binding upon any successors or assigns of the Company.

(b)     Remedies . In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where the Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. The Company expressly agrees that it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement.

(c)     No Impairment of Rights . The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment.

(d)     Additional Documents . Upon the request of Holder, the Company shall supply documentation reasonably necessary to evaluate whether to exercise (either in cash or on a net issuance basis) this Warrant, including without limitation, (i) any merger, purchase or asset sale agreement and related documents and estimated payout allocations to each of the respective shareholder, warrant and option holders in connection with a Merger Event, (ii) the most recent capitalization tables, valuation reports (if any) pursuant to the safe-harbor provisions of Section 409A of the Internal Revenue Code of 1986, as amended, and board determination of share value (including any waterfall or per share allocations provided to the shareholders) and (iii) the most recent Charter.

(e)     Attorneys’ Fees . In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys’ fees and expenses and all costs of proceedings incurred in enforcing this Agreement. For the purposes of this Section 12(e), attorneys’ fees shall include without limitation fees incurred in connection with the following: (i) contempt proceedings; (ii) discovery; (iii) any motion, proceeding or other activity of any kind in connection with an insolvency proceeding; (iv) garnishment, levy and debtor and third-party examinations; and (v) post-judgment motions and proceedings of any kind, including without limitation any activity taken to collect or enforce any judgment.

(f)     Severability . In the event any one or more of the provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision.

 

- 10 -


(g)     Notices . Except as otherwise provided herein, any notice, demand, request, consent, approval, declaration, service of process or other communication that is required, contemplated or permitted under this Agreement or with respect to the subject matter hereof shall be in writing, and shall be deemed to have been validly served, given, delivered and received upon the earlier of: (i) the day of transmission by facsimile or hand delivery if transmission or delivery occurs on a business day at or before 5:00 pm in the time zone of the recipient, or, if transmission or delivery occurs on a non-business day or after such time, the first business day thereafter, or the first business day after deposit with an overnight express service or overnight mail delivery service; or (ii) the third calendar day after deposit in the United States mail, with proper first class postage prepaid, and shall be addressed to the party to be notified as follows:

If to the Warrantholder:

HERCULES CAPITAL, INC.

Legal Department

Attention: Chief Legal Officer and Roy Liu

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Facsimile: 650-473-9194

Telephone: 650-289-3060

With a copy to:

LATHAM & WATKINS LLP

140 Scott Drive

Menlo Park, CA 94025

Attn: Haim Zaltzman

Facsimile: 650-463-2600

Telephone: 650-328-4600

If to the Company:

STEALTH BIOTHERAPEUTICS CORP

2 nd Floor, Le Prince de Galles

3-5 Avenue des Citronniers

MC 98000, Monaco

Telephone: 377 97-97-47-37

Facsimile: 377 97-97-47-30

With a copy to:

STEALTH BIOTHERAPEUTICS INC.

Attention: President

275 Grove Street, Ste. 3-107

Newton, MA 02466

Telephone: (617) 600-6888

Facsimile: (617) 600-6884

or to such other address as each party may designate for itself by like notice.

(h)     Entire Agreement; Amendments . This Agreement constitutes the entire agreement and understanding of the parties hereto in respect of the subject matter hereof, and supersedes and replaces in their entirety any prior proposals, term sheets, letters, negotiations or other documents or agreements, whether written or oral, with respect to the subject matter hereof (including the Warrantholder’s proposal letter dated June 1, 2017). None of the terms of this Agreement may be amended except by an instrument executed by each of the parties hereto.

 

- 11 -


(i)     Headings . The various headings in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provisions hereof.

(j)     No Strict Construction . The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

(k)     No Waiver . No omission or delay by the Warrantholder at any time to enforce any right or remedy reserved to it, or to require performance of any of the terms, covenants or provisions hereof by the Company at any time designated, shall be a waiver of any such right or remedy to which the Warrantholder is entitled, nor shall it in any way affect the right of the Warrantholder to enforce such provisions thereafter.

(l)     Survival . All agreements, representations and warranties contained in this Agreement or in any document delivered pursuant hereto shall be for the benefit of the Warrantholder and shall survive the execution and delivery of this Agreement and the expiration or other termination of this Agreement.

(m)     Governing Law . This Agreement has been negotiated and delivered to the Warrantholder in the State of California, and shall have been accepted by the Warrantholder in the State of California. Delivery of Warrant Shares to the Warrantholder by the Company under this Agreement is due in the State of California. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction.

(n)     Consent to Jurisdiction and Venue . All judicial proceedings arising in or under or related to this Agreement may be brought in any state or federal court of competent jurisdiction located in the State of California. By execution and delivery of this Agreement, each party hereto generally and unconditionally: (i) consents to personal jurisdiction in Santa Clara County, State of California; (ii) waives any objection as to jurisdiction or venue in Santa Clara County, State of California; (iii) agrees not to assert any defense based on lack of jurisdiction or venue in the aforesaid courts; and (iv) irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Service of process on any party hereto in any action arising out of or relating to this Agreement shall be effective if given in accordance with the requirements for notice set forth in Section 12(g), and shall be deemed effective and received as set forth in Section 12(g). Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of either party to bring proceedings in the courts of any other jurisdiction.

(o)     Mutual Waiver of Jury Trial . Because disputes arising in connection with complex financial transactions are most quickly and economically resolved by an experienced and expert person and the parties wish applicable state and federal laws to apply (rather than arbitration rules), the parties desire that their disputes be resolved by a judge applying such applicable laws. EACH OF THE COMPANY AND THE WARRANTHOLDER SPECIFICALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM (COLLECTIVELY, “ CLAIMS ”) ASSERTED BY THE COMPANY AGAINST THE WARRANTHOLDER OR ITS ASSIGNEE OR BY THE WARRANTHOLDER OR ITS ASSIGNEE AGAINST THE COMPANY. This waiver extends to all such Claims, including Claims that involve persons other than the Company and the Warrantholder; Claims that arise out of or are in any way connected to the relationship between the Company and the Warrantholder; and any Claims for damages, breach of contract, specific performance or any equitable or legal relief of any kind arising out of this Agreement.

(p)     Judicial Reference . If the waiver of jury trial set forth above is ineffective or unenforceable, the parties agree that all Claims shall be resolved by reference to a private judge sitting

 

- 12 -


without a jury, pursuant to Code of Civil Procedure Section 638, before a mutually acceptable referee or, if the parties cannot agree, a referee selected by the Presiding Judge of Santa Clara County, California. Such proceeding shall be conducted in Santa Clara County, California, with California rules of evidence and discovery applicable to such proceeding.

(q)     Prejudgment Relief . In the event Claims are to be resolved by arbitration, either party may seek from a court of competent jurisdiction identified in Section 12(n), any prejudgment order, writ or other relief and have such prejudgment order, writ or other relief enforced to the fullest extent permitted by law notwithstanding that all Claims are otherwise subject to resolution by judicial reference.

(r)     Counterparts . This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so delivered shall be deemed an original, but all of which counterparts shall constitute but one and the same instrument.

[Remainder of Page Intentionally Left Blank]

 

- 13 -


IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed by its officers thereunto duly authorized as of the Amended and Restated date set forth above.

 

  COMPANY:     STEALTH BIOTHERAPEUTICS CORP
      By:  

/s/ Louise Garbarino

 
      Name:  

Louise Garbarino

 
      Title:  

Director

 
  WARRANTHOLDER:     HERCULES CAPITAL, INC.
      By:  

/s/ Zhuo Huang

 
      Name:  

Zhuo Huang

 
      Title:  

Associate General Counsel

 


EXHIBIT I

NOTICE OF EXERCISE

 

To:

Stealth BioTherapeutics Corp

 

(1)

The undersigned Warrantholder hereby elects to purchase [              ] [Series [      ] Preferred Shares] [Ordinary Shares] of Stealth BioTherapeutics Corp, pursuant to the terms of the Agreement originally dated June 30, 2017 (as amended from time to time, the “ Agreement ”) between Stealth BioTherapeutics Corp and the Warrantholder, and [CASH PAYMENT: tenders herewith payment of the Purchase Price in full, together with all applicable transfer taxes, if any.] [NET ISSUANCE: elects pursuant to Section 3(a) of the Agreement to effect a Net Issuance.]

 

(2)

Please issue a certificate or certificates representing said [Series [      ] Preferred Shares] [Ordinary Shares] in the name of the undersigned or in such other name as is specified below.

   

 

    (Name)
   

 

    (Address)
WARRANTHOLDER:     HERCULES CAPITAL, INC.
    By:  

 

    Name:  

 

    Title:  

 

    Date:  

 


EXHIBIT II

ACKNOWLEDGMENT OF EXERCISE

The undersigned Stealth BioTherapeutics Corp hereby acknowledges receipt of the “Notice of Exercise” from Hercules Capital, Inc. to purchase [              ] [Series [      ] Preferred Shares] [Ordinary Shares] of Stealth BioTherapeutics Corp, pursuant to the terms of the Agreement, and further acknowledges that [              ] shares remain subject to purchase under the terms of the Agreement.

 

COMPANY:           Stealth BioTherapeutics Corp
    By:  

 

    Title:  

 

    Date:  

 


EXHIBIT III

TRANSFER NOTICE

(To transfer or assign the foregoing Agreement execute this form and supply required information. Do not use this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Agreement and all rights evidenced thereby are hereby transferred and assigned to

 

 

(Please Print)

 
whose address is  

 

 

 

Dated:  

 

 

Holder’s Signature:  

 

 

Holder’s Address:  

 

 

 

 

Signature Guaranteed:  

 

  

NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Agreement.

Exhibit 10.1

STEALTH PEPTIDES INTERNATIONAL INC.

2006 SHARE INCENTIVE PLAN

 

1.

Purpose

The purpose of this 2006 Share Incentive Plan (the “Plan”) of Stealth Peptides International Inc., an exempted company incorporated under the laws of the Cayman Islands (the “Company”), is to advance the interests of the Company’s shareholders by enhancing the Company’s ability to attract, retain and motivate persons who are expected to make important contributions to the Company and by providing such persons with equity ownership opportunities and performance-based incentives that are intended to align their interests with those of the Company’s shareholders. Except where the context otherwise requires, the term “Company” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a controlling interest, as determined by its Board of Directors (the “Board”).

 

2.

Eligibility

All of the Company’s employees, officers, directors, consultants and advisors are eligible to receive options, restricted shares and other share-based awards (each, an “Award”) under the Plan. Each person who receives an Award under the Plan is deemed a “Participant.”

 

3.

Administration and Delegation

(a)     Administration by the Board . The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may construe and interpret the terms of the Plan and any Award agreements entered into under the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith.

(b)     Appointment of Committees . To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a “Committee”). All references in the Plan to the “Board” shall mean the Board or a Committee of the Board to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee.


4.

Shares Available for Awards .

(a)     Number of Shares . Subject to adjustment under Section 8, Awards may be made under the Plan for up to 76,632,161 Ordinary Shares, of a nominal par value of $0.0001 per share, of the Company (the “Ordinary Shares”). If any Award expires or is terminated, surrendered or canceled without having been fully exercised is forfeited in whole or in part (including as the result of the Ordinary Shares subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Ordinary Shares not being issued, the unused Ordinary Shares covered by such Award shall again be available for the grant of Awards under the Plan. Further, Ordinary Shares tendered to the Company by a Participant to exercise an Award shall be added to the number of Ordinary Shares available for the grant of Awards under the Plan. However, in the case of Incentive Options (as hereinafter defined), the foregoing provisions shall be subject to any limitations under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

(b)     Substitute Awards . In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Awards in substitution for any options or other stock or stock based awards granted by such entity or an affiliate thereof. Substitute Awards may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Awards contained in the Plan. Substitute Awards shall not count against the overall share limit set forth in Section 4(a) except as may be required by reason of Section 422 and related provisions of the Code.

 

5.

Share Options

(a)     General . The Board may grant options to purchase Ordinary Shares (each, an “Option”) and determine the number of Ordinary Shares to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Option (as hereinafter defined) shall be designated a “Nonstatutory Option.”

(b)     Incentive Options . An Option that the Board intends to be an “incentive stock option” as defined in Section 422 of the Code (an “Incentive Option”) shall only be granted to employees of the Company, any of the present or future parent or subsidiary corporations of the Company as defined in Sections 424(e) or (f) of the Code, and any other entities the employees of which are eligible to receive Incentive Options under the Code, and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) that is intended to be an Incentive Option is not an Incentive Option or for any action taken by the Board, including without limitation the conversion of an Incentive Option to a Nonstatutory Option.

(c)     Exercise Price . The Board shall establish the exercise price of each Option and specify such exercise price in the applicable option agreement. The exercise price shall be not less than 100% of the Fair Market Value (as defined below) on the date the Option is granted.

 

- 2 -


(d)     Duration of Options . Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement.

(e)     Exercise of Option . Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. Ordinary Shares subject to the Option will be delivered by the Company following exercise either as soon as practicable or, subject to such conditions as the Board shall specify, on a deferred basis (with the Company’s obligation to be evidenced by an instrument providing for future delivery of the deferred shares at the time or times specified by the Board).

(f)     Payment Upon Exercise . Ordinary Shares purchased upon the exercise of an Option granted under the Plan shall be paid for as follows:

(1)    in cash or by check, payable to the order of the Company;

(2)    except as the Board may otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

(3)    when the Ordinary Shares are registered under the United States Securities Exchange Act of 1934 (or comparable securities laws of any jurisdiction outside of the United States), by delivery of Ordinary Shares owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board (“Fair Market Value”), provided (i) such method of payment is then permitted under applicable law, (ii) such Ordinary Shares, if acquired directly from the Company, was owned by the Participant for such minimum period of time, if any, as may be established by the Board in its discretion and (iii) such Ordinary Shares are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements;

(4)    to the extent permitted by applicable law and by the Board, by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or

(5)    by any combination of the above permitted forms of payment.

(g)     Repricing of Options . The Board may, without shareholder approval, amend any outstanding Option granted under the Plan to provide an exercise price per share that is lower than the then-current exercise price per share of such outstanding Option. The Board may also, without shareholder approval, cancel any outstanding Option and grant in substitution therefor new Awards covering the same or a different number of Ordinary Shares and having an exercise price per share lower than the then-current exercise price per share of the cancelled Option.

 

- 3 -


6.

Restricted Shares

(a)     General . The Board may grant Awards entitling recipients to acquire Ordinary Shares, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a “Restricted Share Award”).

(b)     Terms and Conditions . The Board shall determine the terms and conditions of a Restricted Share Award, including the conditions for repurchase (or forfeiture) and the issue price, if any.

(c)     Share Certificates . Any share certificates issued in respect of a Restricted Share Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a share power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death (the “Designated Beneficiary”). In the absence of an effective designation by a Participant, “Designated Beneficiary” shall mean the Participant’s estate.

(d)     Dividends . Participants holding Restricted Shares will be entitled to all ordinary cash dividends paid with respect to such Shares. If any such dividends or distributions are paid in shares, or consist of a dividend or distribution to holders of Ordinary Shares other than an ordinary cash dividend, the shares, cash or other property will be subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. Each dividend payment will be made no later than the end of the calendar year in which the dividends are paid to shareholders of that class of Ordinary Shares or, if later, the 15th day of the third month following the date the dividends are paid to shareholders of that class of Ordinary Shares.

 

7.

Other Share-Based Awards

Other Awards of Ordinary Shares, and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Ordinary Shares or other property, may be granted hereunder to Participants (“Other Share Awards”), including without limitation appreciation rights and Awards entitling recipients to receive Ordinary Shares to be delivered in the future. Such Other Share Awards shall also be available as a form of payment in the settlement of other Award granted under the Plan or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Share Awards may be paid in Ordinary Shares or cash, as the Board shall determine. Subject to the provisions of the Plan, the Board shall determine the conditions of each Other Share Awards, including any purchase price applicable thereto.    

 

- 4 -


8.

Adjustments for Changes in Ordinary Shares and Certain Other Events

(a)     Changes in Capitalization . In the event of any share split, reverse share split, share dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Ordinary Shares other than an ordinary cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of securities and exercise price per share of each outstanding Option, (iii) the repurchase price per share subject to each outstanding Restricted Share Award, and (iv) the terms of each other outstanding Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent determined by the Board.

(b)     Reorganization Events

(1)     Definition . A “Reorganization Event” shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which all of the Ordinary Shares of the Company are converted into or exchanged for the right to receive cash, securities or other property or are cancelled by or (b) any exchange of all of the Ordinary Shares of the Company for cash, securities or other property pursuant to a share exchange transaction or (c) any liquidation or dissolution of the Company.

(2)     Consequences of a Reorganization Event on Awards Other than Restricted Share Awards . In connection with a Reorganization Event, the Board shall take any one or more of the following actions as to all or any outstanding Awards on such terms as the Board determines: (i) provide that Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof); (ii) upon written notice to a Participant, provide that the Participant’s unexercised Options or other unexercised Awards shall become exercisable in full and will terminate immediately prior to the consummation of such Reorganization Event unless exercised by the Participant within a specified period following the date of such notice; (iii) provide that outstanding Awards shall become realizable or deliverable, or restrictions applicable to an Award shall lapse, in whole or in part prior to or upon such Reorganization Event; (iv) in the event of a Reorganization Event under the terms of which holders of Ordinary Shares will receive upon consummation thereof a cash payment for each share surrendered in the Reorganization Event (the “Acquisition Price”), make or provide for a cash payment to a Participant equal to (A) the Acquisition Price times the number of Ordinary Shares subject to the Participant’s Options or other Awards (to the extent the exercise price does not exceed the Acquisition Price) minus (B) the aggregate exercise price of all such outstanding Options or other Awards, in exchange for the termination of such Options or other Awards; (v) provide that, in connection with a liquidation or dissolution of the Company, Awards shall convert into the right to receive liquidation proceeds (if applicable, net of the exercise price thereof); and (vi) any combination of the foregoing.

For purposes of clause (i) above, an Option shall be considered assumed if, following consummation of the Reorganization Event, the Option confers the right to purchase, for each Ordinary Share subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Ordinary Shares for each Ordinary Share held

 

- 5 -


immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Ordinary Shares); provided, however, that if the consideration received as a result of the Reorganization Event is not solely Ordinary Shares (or their equivalent) of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of Ordinary Shares (or their equivalent) of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding Ordinary Shares as a result of the Reorganization Event.

(3)     Consequences of a Reorganization Event on Restricted Share Awards . Upon the occurrence of a Reorganization Event other than a liquidation or dissolution of the Company, the repurchase and other rights of the Company under each outstanding Restricted Share Award shall inure to the benefit of the Company’s successor and shall apply to the cash, securities or other property which the Ordinary Shares were converted into or exchanged for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to the Ordinary Shares subject to such Restricted Share Award. Upon the occurrence of a Reorganization Event involving the liquidation or dissolution of the Company, except to the extent specifically provided to the contrary in the instrument evidencing any Restricted Share Award or any other agreement between a Participant and the Company, all restrictions and conditions on all Restricted Share Awards then outstanding shall automatically be deemed terminated or satisfied.

 

9.

General Provisions Applicable to Awards

(a)     Transferability of Awards . Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or, other than in the case of an Incentive Option, pursuant to a qualified domestic relations order, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.

(b)     Documentation . Each Award shall be evidenced in such form (written, electronic or otherwise) as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c)     Board Discretion . Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly.

(d)     Termination of Status . The Board shall determine the effect on an Award of the disability, death, termination or other cessation of employment, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participant’s legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award.

 

- 6 -


(e)     Withholding . Each Participant shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld in connection with an Award to such Participant. Except as the Board may otherwise provide in an Award, for so long as the Ordinary Shares are registered under the Exchange Act, Participants may satisfy such tax obligations in whole or in part by delivery of Ordinary Shares, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, except as otherwise provided by the Board, that the total tax withholding where shares are being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). Shares surrendered to satisfy tax withholding requirements cannot be subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.

(f)     Amendment of Award . The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Option to a Nonstatutory Option, provided that the Participant’s consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant.

(g)     Conditions on Delivery of Shares . The Company will not be obligated to deliver any Ordinary Shares pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable share exchange or share market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

(h)     Acceleration . The Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

 

10.

Miscellaneous

(a)     No Right To Employment or Other Status . No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.

(b)     No Rights As Shareholders . Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a shareholder with respect to any

 

- 7 -


Ordinary Shares to be distributed with respect to an Award until becoming the record holder of such shares on the Register of Members of the Company. Notwithstanding the foregoing, in the event the Company effects a split of the Ordinary Shares by means of a share dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such share dividend shall be entitled to receive, on the distribution date, the share dividend with respect to the Ordinary Shares acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such share dividend.

(c)     Effective Date and Term of Plan . The Plan shall become effective on the date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of 10 years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company’s shareholders, but Awards previously granted may extend beyond that date.

(d)     Amendment of Plan . The Board may amend, suspend or terminate the Plan or any portion thereof at any time.

(e)     Authorization of Sub-Plans . The Board may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions. The Board shall establish such sub-plans by adopting supplements to this Plan containing (i) such limitations on the Board’s discretion under the Plan as the Board deems necessary or desirable or (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable. All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.

(f)     Compliance with Code Section 409A . No Award shall provide for a deferral of compensation that does not comply with Section 409A of the Code, unless the Board, at the time of grant, specifically provides that the Award is not intended to comply with Section 409A of the Code. The Company shall have no liability to a Participant, or any other party, if an Award that is intended to be exempt from, or compliant with, Section 409A, is not so exempt or compliant or for any other action taken by the Board.

(g)     Governing Law . The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law.

 

- 8 -

Exhibit 10.2

STEALTH BIOTHERAPEUTICS CORP

Incentive Option Agreement

 

1.

Grant of Option .

This agreement evidences the grant by Stealth BioTherapeutics Corp, a corporation incorporated under the laws of the Cayman Islands (the “Company”), on [insert date of Board approval] (the “Grant Date”) to [insert name of Participant], an employee of the Company or a subsidiary thereof (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2006 Share Incentive Plan (the “Plan”), a total of [insert number of Option Shares] Ordinary Shares (the “Shares”), of a nominal par value of $0.0001 per share, of the Company (the “Ordinary Shares”) at $[insert exercise price] per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on [insert date that is ten years after Board approval] (the “Final Exercise Date”).

It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

 

2.

Vesting Schedule .

This option shall become exercisable (“vested”) as to [25]% 1 of the Shares on the [one-year] anniversary of the Commencement Date and the remaining [75]% shall vest in equal monthly installments (each installment being 2.083% of the Shares) over a period of [three] years, such that the option is fully vested on the [fourth] anniversary of the Commencement Date. “Commencement Date” shall mean [insert date that vesting commences].

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

 

3.

Exercise and Termination of Option; Repurchase Right .

(a)     Form of Exercise . Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b)     Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee or officer or consultant of the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an “Eligible Participant”).

 

 

1  

Vesting schedule subject to Board approval.


(c)     Termination of Relationship with the Company . If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation.

(d)     Exercise Period Upon Death or Disability . If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for Cause (as defined in paragraph (e) below), this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

(e)     Termination for Cause; Breach of Certain Obligations . If, prior to the Final Exercise Date, the Participant is discharged by the Company for Cause (as defined below) or the Participant violates the non-competition or confidentiality provisions of any agreement between the Participant and the Company, then immediately upon notice from the Company to the Participant (i) the right to exercise this option, to the extent not previously exercised, shall terminate, and (ii) the Company shall have the right to repurchase all shares previously issued upon exercise of this option at a repurchase price equal to the exercise price therefor. If the Company exercises the foregoing repurchase right, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the shares to be repurchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer to the Company, and the Company shall promptly thereafter deliver or mail to the Participant a check in payment of the repurchase price for such shares. The foregoing repurchase right shall terminate upon the earlier of the events specified in Section 4(g) below. “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for Cause if the Company determines, within 60 days after the Participant’s resignation, that discharge for Cause was warranted.

 

4.

Company Right of First Refusal .

(a)     Notice of Proposed Transfer . If the Participant proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively, “transfer”) any Shares acquired upon exercise of this option, then the Participant shall first give written notice of the proposed transfer (the “Transfer Notice”) to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares the Participant proposes to transfer (the “Offered Shares”), the price per share and all other material terms and conditions of the transfer.

 

2


(b)     Company Right to Purchase . For 60 days following its receipt of such Transfer Notice, the Company shall have the option to repurchase (subject to applicable law) all or part of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all or part of the Offered Shares, it shall give written notice of such election to the Participant within such 60-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares to be purchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for such Offered Shares; provided that if the terms of payment set forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice; and provided further that any delay in making such payment shall not invalidate the Company’s exercise of its option to purchase the Offered Shares.

(c)     Shares Not Purchased By Company . If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 60-day period following the expiration of the option granted to the Company under Section 4(b) above, transfer the Offered Shares which the Company has not elected to acquire to the proposed transferee, provided that such transfer shall not be on terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 4 shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(d)     Consequences of Non-Delivery . After the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to Section 4(b) above, the Company shall not pay any dividend to the Participant on account of such Offered Shares or permit the Participant to exercise any of the privileges or rights of a shareholder with respect to such Offered Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares.

(e)     Exempt Transactions . The following transactions shall be exempt from the provisions of this Section 4:

(1)    any transfer of Shares to or for the benefit of any spouse, children, parents, uncles, aunts, siblings, nieces, nephews, grandchildren and any other relatives approved by the Board of Directors (collectively, “Approved Relatives”) or to a trust, corporation, limited liability company, partnership or other entity established solely for the benefit of the Participant and/or Approved Relatives;

 

3


(2)    any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the “Securities Act”); and

(3)    the sale of all or substantially all of the shares of the Company (including pursuant to a merger or consolidation);

provided , however , that in the case of a transfer pursuant to clause (1) above, such Shares shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(f)     Assignment of Company Right . The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 4 to one or more persons or entities.

(g)     Termination . The provisions of this Section 4 shall terminate upon the earlier of the following events:

(1)    the closing of the sale of Ordinary Shares in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act; or

(2)    the sale of all or substantially all of the share capital, assets or business of the Company, by merger, consolidation, sale of assets or otherwise (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Ordinary Shares immediately prior to such transaction beneficially own, directly or indirectly, more than 75% of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction).

(h)     No Obligation to Recognize Invalid Transfer . The Company shall not be required (1) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Section 4, or (2) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred.

(i)     Legends . The certificate representing Shares shall bear a legend substantially in the following form (in addition to, or in combination with, any legend required by applicable federal and state securities laws and agreements relating to the transfer of the Company securities):

“The shares represented by this certificate are subject to a right of first refusal in favor of the Company, as provided in a certain option agreement with the Company.”

 

4


5.

Agreement in Connection with Public Offering .

The Participant agrees, in connection with the initial underwritten public offering of the Company’s securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any Ordinary Shares held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company’s securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering.

 

6.

Tax Matters .

(a)     Withholding . No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

(b)     Disqualifying Disposition . If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition.

 

7.

Nontransferability of Option .

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

 

8.

Provisions of the Plan .

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

[ Remainder of page intentionally left blank. ]

 

 

5


IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

 

    STEALTH BIOTHERAPEUTICS CORP
Dated:     By:    
    Name:    
    Title:   Authorized Signatory

 


PARTICIPANT’S ACCEPTANCE

The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2006 Share Incentive Plan.

 

PARTICIPANT:
 

 

[Name]
Address:

 

 

7

Exhibit 10.3

STEALTH BIOTHERAPEUTICS CORP

Nonstatutory Option Agreement

 

1.

Grant of Option .

This agreement evidences the grant by Stealth BioTherapeutics Corp, a corporation incorporated under the laws of the Cayman Islands (the “Company”), on [insert date of Board approval] (the “Grant Date”) to [insert name of Participant], a [insert Participant’s position] of the Company or a subsidiary thereof (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2006 Share Incentive Plan (the “Plan”), a total of [insert number of Option Shares] Ordinary Shares (the “Shares”), of a nominal par value of $0.0001 per share, of the Company (the “Ordinary Shares”) at $[insert exercise price] per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on [insert date that is ten years after Board approval] (the “Final Exercise Date”).

It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

 

2.

Vesting Schedule .

This option shall become exercisable (“vested”) as to [2.083]% 1 Shares at the end of each successive [one-month] period following the Commencement Date, such that the option is fully vested on the [fourth] anniversary of the Commencement Date. “Commencement Date” shall mean [insert date vesting commences].

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

 

3.

Exercise and Termination of Option; Repurchase Right .

(a)     Form of Exercise . Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b)     Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee, officer, director, or consultant of the Company or other entity the employees, officers, directors, consultants or advisors of which are eligible to receive option grants under the Plan (an “Eligible Participant”).

 

 

1  

Vesting schedule subject to Board approval.


(c)     Termination of Relationship with the Company . If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation.

(d)     Exercise Period Upon Death or Disability . If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for Cause (as defined in paragraph (e) below), this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

(e)     Termination for Cause; Breach of Certain Obligations . If, prior to the Final Exercise Date, the Participant is discharged by the Company for Cause (as defined below) or the Participant violates the non-competition or confidentiality provisions of any agreement between the Participant and the Company, then immediately upon notice from the Company to the Participant (i) the right to exercise this option, to the extent not previously exercised, shall terminate, and (ii) the Company shall have the right to repurchase all shares previously issued upon exercise of this option at a repurchase price equal to the exercise price therefor. If the Company exercises the foregoing repurchase right, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the shares to be repurchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer to the Company, and the Company shall promptly thereafter deliver or mail to the Participant a check in payment of the repurchase price for such shares. The foregoing repurchase right shall terminate upon the earlier of the events specified in Section 4(g) below. “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for Cause if the Company determines, within 60 days after the Participant’s resignation, that discharge for Cause was warranted.

 

4.

Company Right of First Refusal .

(a)     Notice of Proposed Transfer . If the Participant proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively, “transfer”) any Shares acquired upon exercise of this option, then the Participant shall first give written notice of the proposed transfer (the “Transfer Notice”) to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares the Participant proposes to transfer (the “Offered Shares”), the price per share and all other material terms and conditions of the transfer.

 

2


(b)     Company Right to Purchase . For 60 days following its receipt of such Transfer Notice, the Company shall have the option to repurchase (subject to applicable law) all or part of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all or part of the Offered Shares, it shall give written notice of such election to the Participant within such 60-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares to be purchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for such Offered Shares; provided that if the terms of payment set forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice; and provided further that any delay in making such payment shall not invalidate the Company’s exercise of its option to purchase the Offered Shares.

(c)     Shares Not Purchased By Company . If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 60-day period following the expiration of the option granted to the Company under Section 4(b) above, transfer the Offered Shares which the Company has not elected to acquire to the proposed transferee, provided that such transfer shall not be on terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 4 shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(d)     Consequences of Non-Delivery . After the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to Section 4(b) above, the Company shall not pay any dividend to the Participant on account of such Offered Shares or permit the Participant to exercise any of the privileges or rights of a shareholder with respect to such Offered Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares.

(e)     Exempt Transactions . The following transactions shall be exempt from the provisions of this Section 4:

(1)    any transfer of Shares to or for the benefit of any spouse, children, parents, uncles, aunts, siblings, nieces, nephews, grandchildren and any other relatives approved by the Board of Directors (collectively, “Approved Relatives”) or to a trust, corporation, limited liability company, partnership or other entity established solely for the benefit of the Participant and/or Approved Relatives;

 

3


(2)    any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the “Securities Act”); and

(3)    the sale of all or substantially all of the shares of the Company (including pursuant to a merger or consolidation);

provided , however , that in the case of a transfer pursuant to clause (1) above, such Shares shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(f)     Assignment of Company Right . The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 4 to one or more persons or entities.

(g)     Termination . The provisions of this Section 4 shall terminate upon the earlier of the following events:

(1)    the closing of the sale of Ordinary Shares in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act; or

(2)    the sale of all or substantially all of the share capital, assets or business of the Company, by merger, consolidation, sale of assets or otherwise (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Ordinary Shares immediately prior to such transaction beneficially own, directly or indirectly, more than 75% of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction).

(h)     No Obligation to Recognize Invalid Transfer . The Company shall not be required (1) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Section 4, or (2) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred.

(i)     Legends . The certificate representing Shares shall bear a legend substantially in the following form (in addition to, or in combination with, any legend required by applicable federal and state securities laws and agreements relating to the transfer of the Company securities):

“The shares represented by this certificate are subject to a right of first refusal in favor of the Company, as provided in a certain option agreement with the Company.”

 

4


5.

Agreement in Connection with Public Offering .

The Participant agrees, in connection with the initial underwritten public offering of the Company’s securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any Ordinary Shares held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company’s securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering.

 

6.

Tax Matters .

(a)     Withholding . No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

(b)     Disqualifying Disposition . If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition.

 

7.

Nontransferability of Option .

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

 

8.

Provisions of the Plan .

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

[ Remainder of page intentionally left blank. ]

 

 

5


IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

 

    STEALTH BIOTHERAPEUTICS CORP
Dated:     By:    
    Name:    
    Title:   Authorized Signatory

 


PARTICIPANT’S ACCEPTANCE

The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2006 Share Incentive Plan.

 

PARTICIPANT:
 

 

[Name]
Address:

 

 

7

Exhibit 10.7

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “ Agreement ”) is made and entered into as of                    , 201     between Stealth BioTherapeutics Corp, an exempted company incorporated under the laws of the Cayman Islands with registered number 165223 (the “ Company ”), and                     (“ Indemnitee ”).

WITNESSETH THAT:

WHEREAS , highly competent persons have become more reluctant to serve companies as directors and officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the company;

WHEREAS , the Board of Directors of the Company (the “ Board ”) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to companies or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The Memorandum and Articles of Association of the Company (as amended) (the “ Articles ”) permit indemnification of the officers and directors of the Company;

WHEREAS , the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;

WHEREAS , the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company and its shareholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS , it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

WHEREAS , this Agreement is a supplement to and in furtherance of the Articles and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder; and

WHEREAS , Indemnitee does not regard the protection available under the Company’s Articles and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that Indemnitee be so indemnified;


NOW, THEREFORE , in consideration of Indemnitee’s agreement to serve as [a director][an officer] from and after the date hereof, the parties hereto agree as follows:

1.     Indemnity of Indemnitee . The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by law (including pursuant to the Company’s Articles), as such may be amended from time to time. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

(a)     Proceedings Other Than Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of Indemnitee’s Corporate Status (as hereinafter defined), the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section  1(a) , Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee, or on Indemnitee’s behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee: (i) acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and (ii) did not act dishonestly, in willful default, or fraud as determined by a court of competent jurisdiction.

(b)     Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section  1(b) if, by reason of Indemnitee’s Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section  1(b) , Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee acted: (i) in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company (ii) did not act dishonestly, with willful default, or fraud as determined by a court of competent jurisdiction; provided , however , if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that a court of competent jurisdiction shall determine that such indemnification may be made.

(c)     Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, Indemnitee shall be indemnified to the maximum extent permitted by law, as such may be amended from time to time, against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

2


2.     Additional Indemnity . In addition to, and without regard to any limitations on, the indemnification provided for in Section  1 of this Agreement, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf if, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee in or about the conduct of the Company’s business or affairs. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be by reason of the Indemnitee’s own dishonesty, willful default or fraud.

3.     Contribution .

(a)    Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

(b)    Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction or events from which such action, suit or proceeding arose; provided , however , that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the transaction or events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which applicable law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or

 

3


proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c)    The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors, or employees of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.

(d)    To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

4.     Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a witness, or is made (or asked) to respond to discovery requests, in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

5.     Advancement of Expenses . Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee’s Corporate Status within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section  5 shall be unsecured and interest free.

6.     Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under applicable law. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

(a)    To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. A Director or the Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the

 

4


Board in writing that Indemnitee has requested indemnification. Notwithstanding the foregoing, any failure of Indemnitee to provide such a request to the Company, or to provide such a request in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee unless, and to the extent that, such failure actually and materially prejudices the interests of the Company.

(b)    Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section  6(a) hereof, a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board (1) by a majority vote of the Disinterested Directors (as defined below), even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel (as defined below) in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the shareholders of the Company.

(c)    If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section  6(b) hereof, the Independent Counsel shall be selected as provided in this Section  6(c) . The Independent Counsel shall be selected by the Board. Indemnitee may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “ Independent Counsel ” as defined in Section  13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section  6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section  6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section  6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section  6(c) , regardless of the manner in which such Independent Counsel was selected or appointed.

(d)    In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement (other than, for the avoidance of doubt, circumstances where a court of competent jurisdiction has determined that the Indemnitee has acted dishonestly, with willful default or fraud). Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement

 

5


that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(e)    Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise (as hereinafter defined), including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(f)    If the person, persons or entity empowered or selected under Section  6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact (other than by reason of dishonesty or fraud), or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading (other than by reason of dishonesty or fraud), in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such sixty (60) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto; and provided further , that the foregoing provisions of this Section  6(f) shall not apply if the determination of entitlement to indemnification is to be made by the shareholders pursuant to Section  6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the shareholders for their consideration at an annual general meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a written notice of extraordinary general meeting of shareholders is delivered to the shareholders in accordance with the Articles , such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

(g)    Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, director on the Board or shareholder of the Company shall act reasonably and in good faith in making a

 

6


determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(h)    The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(i)    The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

7.     Remedies of Indemnitee .

(a)    In the event that (i) a determination is made pursuant to Section  6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section  5 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section  6(b) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section  6 of this Agreement, Indemnitee shall be entitled to an adjudication in a court of competent jurisdiction, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section  7(a) . The Company shall not oppose Indemnitee’s right to seek any such adjudication.

(b)    In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section  7 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section  6(b) .

 

7


(c)    If a determination shall have been made pursuant to Section  6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section  7 , absent (i) a misstatement by Indemnitee of a material fact (other than by reason of dishonesty or fraud), or an omission of a material fact necessary to make Indemnitee’s misstatement not materially misleading in connection with the application for indemnification (other than by reason of dishonesty or fraud), or (ii) a prohibition of such indemnification under applicable law.

(d)    In the event that Indemnitee, pursuant to this Section  7 , seeks a judicial adjudication of Indemnitee’s rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on Indemnitee’s behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section  13 of this Agreement) actually and reasonably incurred by Indemnitee in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.

(e)    The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section  7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance, to the extent not prohibited by law, such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

(f)    Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.

8.     Non-Exclusivity; Survival of Rights; Insurance; Primacy of Indemnification; Subrogation .

(a)    The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles, any agreement, a vote of shareholders, a resolution of directors of the Company, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in applicable law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Articles and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

8


(b)    To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other company, corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c)    In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d)    The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise and has no obligation to return or repay such funds.

(e)    The Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other company, corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other company, corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise.

9.     Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

(a)    for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or

(b)    for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section  16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or

 

9


(c)    in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation, or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

10.     Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise) and shall continue thereafter for so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section  7 hereof) by reason of Indemnitee’s Corporate Status, whether or not Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

11.     Security . To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

12.     Enforcement .

(a)    The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b)    This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

(c)    The Company shall not seek from a court, or agree to, a “bar order” which would have the effect of prohibiting or limiting the Indemnitee’s rights to receive advancement of expenses under this Agreement.

13.     Definitions . For purposes of this Agreement:

(a)    “ Corporate Status ” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other company, corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving or employed by at the express written request of the Company.

 

10


(b)    “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(c)    “ Enterprise ” shall mean the Company and any other company, corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving or employed by at the express written request of the Company as a director, officer, employee, agent or fiduciary.

(d)    “ Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding, or responding to, or objecting to, a request to provide discovery in any Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, including without limitation the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(e)    “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(f)    “ Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal (other than by reason of the Indemnitee’s own dishonesty, willful default or fraud), administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of Indemnitee’s Corporate Status, by reason of any action taken by Indemnitee or of any inaction on Indemnitee’s part while acting in Indemnitee’s Corporate Status; in each case whether or not Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section  7 of this Agreement to enforce Indemnitee’s rights under this Agreement.

 

11


14.     Severability . The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Further, the invalidity or unenforceability of any provision hereof as to Indemnitee shall in no way affect the validity or enforceability of any provision hereof as to the other. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

15.     Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

16.     Notice by Indemnitee . Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

17.     Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:

(a)    To Indemnitee at the address set forth below Indemnitee signature hereto.

(b)    To the Company at:

Stealth BioTherapeutics Corp

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue, George Town

Grand Cayman

KY1-9005 Cayman Islands

with a copy to:

c/o Stealth Biotherapeutics Inc.

275 Grove Street, Suite 3-107

Newton, MA 02466

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

 

12


18.     Counterparts . This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g. , www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

19.     Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

20.     Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules that would require the application of laws of any other jurisdiction. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the “ Delaware Court ”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

SIGNATURE PAGE TO FOLLOW

 

13


IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement on and as of the day and year first above written.

 

STEALTH BIOTHERAPEUTICS CORP
By:    
Name:  
Title:  
INDEMNITEE
 

 

Name:

Address:  

 

 

 

 

 

 

 

[ Signature Page to Indemnification Agreement ]

Exhibit 10.8

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

EXCLUSIVE LICENSE AGREEMENT

THIS AGREEMENT is effective as of April 20, 2006 (“Effective Date”) amongst Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business at 2 nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, Cornell Research Foundation, Inc. (“FOUNDATION”), a non-profit corporation of the State of New York, having an office at 20 Thornwood Drive, Suite 105, Ithaca, NY 14850 and Institut de Recherches Cliniques de Montreal (“IRCM”), having principal offices at 110 ave des Pins Ouest, Montreal, Quebec, Canada H2W 1R7. LICENSEE, FOUNDATION and IRCM are each referred to individually as “Party” and collectively as “Parties.” The Parties hereby agree as follows:

ARTICLE 1: INTRODUCTION

 

1.1

FOUNDATION is a wholly owned subsidiary of Cornell University (“Cornell”) and holds the ownership interests of patents, trademarks, copyrights, and proprietary materials made by Cornell’s employees and administers licenses in a manner consistent with the policies of Cornell.

 

1.2

FOUNDATION and, in some cases, IRCM, (collectively referred to as “INSTITUTIONS”) have filed the various patent applications listed in Appendix A relating to FOUNDATION Dockets [**] invented by [**] (“Inventor”). These applications and any patents derived directly therefrom comprise the inventions.

 

1.3

FOUNDATION and IRCM have entered into joint ownership agreements (“JOAs”) dated April 15, 2003 and July 20, 2005 relating to their jointly owned inventions, comprising FOUNDATION Dockets [**], respectively. These agreements provide FOUNDATION the right to manage the jointly owned patents and to negotiate and administer licenses for these jointly owned inventions.

 

1.4

LICENSEE desires to obtain the right to develop and to commercialize the inventions.

 

1.5

The work leading to the inventions was supported in part by an agency of the United States Government, and INSTITUTIONS are obligated to comply with United States OMB Circular A-124 and 37 CFR Part 401. This license is subject to the applicable terms of United States Government regulations concerning Government funded inventions.

 

1.6

The Parties agree to the terms and conditions herein below in order to develop the inventions for commercial purposes, and utilize them in the public interest.

ARTICLE 2: DEFINITIONS

 

2.1

“Affiliate” shall mean (1) any corporation or other noncorporate entity owning directly, or indirectly controlling, at least fifty percent (50%) of the stock normally entitled to vote for election of directors of LICENSEE; (2) any corporation owned or controlled by LICENSEE through ownership of at least fifty percent (50%) of the stock entitled to elect directors or any other entity actually controlled by LICENSEE, (3) any corporate or noncorporate entity under common control with LICENSEE.


2.2

“All Other Therapeutic Products” shall mean Products marketed as therapeutics which are not Antiviral Products or Parenteral Analgesic Products.

 

2.3

“Animal Health Products” shall mean Products which are marketed for veterinary or companion animal use.

 

2.4

“Antiviral Products” shall mean Products subject to the [**] Application(s).

 

2.5

“Applications” shall mean United States patent applications and foreign patent applications listed in Appendix A and any other United States patent applications that may be directly derived therefrom, and any continuations, divisions of these applications, and any foreign patent applications that correspond to United States patent applications.

 

2.6

“Dollars” or “$” shall mean United States Dollars.

 

2.7

“Drug Delivery Products” shall mean Products marketed for use in aiding the delivery of other therapeutic products.

 

2.8

“Exclusive” shall mean that during the term of this Agreement INSTITUTIONS will not grant commercial rights to Patents and/or Applications to any other party in the Field-of-Use.

 

2.9

“Field-of-Use” shall mean all fields with the exclusion of animal health for the [**] Applications and Patents. This includes human therapeutics, medical device reagents, drug delivery agents and research reagents, provided LICENSEE honors requests from research reagent vendors.

 

2.10

“Licensed Territory” shall mean the world.

 

2.11

“License Year” shall mean each twelve-month period beginning on January 1 and ending on December 31. However, the first License Year (alternatively, License Year 1) shall commence on the Effective Date and end on December 31 of the same calendar year.

 

2.12

“Medical Device Reagent Products” shall mean Products sold for use in reagents or solutions requiring marketing clearance by FDA’s Center for Device and Radiologic Health.

 

2.13

“Net Sales” shall mean the gross amount invoiced for sales, leases and other dispositions of Products by LICENSEE, and Sublicensees, to an independent third party on sale or use of Products where Products are either made, used, sold, imported, exported, or otherwise commercialized less (i) all trade, quantity, and cash discounts actually allowed on Products, all credits and allowances actually granted on Products on account of rejection, returns, billing errors, and retroactive price reductions, (iii) duties actually paid on Products, and (iv) excise, sale and use taxes, and equivalent taxes actually paid on Products.

 

2.14

“Parenteral Analgesic Products” shall mean Products which are marketed to alleviate pain and are not delivered via the alimentary canal, but rather by injection through some other route as intrathecal, subcutaneous, intramuscular, intraorbital, intracapsular, intraspinal, intravenous, intrasternal, etc.

 

- 2 -


2.15

“Patents” shall mean any patent listed in Appendix A and any patent that issues on Applications, including any reissues and reexaminations.

 

2.16

“Products” shall mean any product or service which incorporates, utilizes or is otherwise described and claimed by one or more Valid Claims in Applications or Patents or which are made by a process which utilizes, incorporates or is otherwise described and claimed by one or more Valid Claims in Applications or Patents and any services which incorporate or utilize or are otherwise described and claimed in Applications or Patents.

 

2.17

“Research Reagent Products” shall mean Products marketed for use by consumers in laboratories of academic, government, industrial, clinical, or other institutions who determine for themselves that they are entitled to purchase and/or use Products labeled “For Research Use Only - Not for any clinical or therapeutic use in Humans or Animals” or a reasonable equivalent thereto. Research Reagent Products are expressly excluded everywhere in the world, from use for the diagnosis of, or predisposition to, or therapy of a disease state in humans or animals.

 

2.18

“Sponsored Research Agreement” shall mean the agreement, executed concomittantly with this Agreement, under which LICENSEE agrees to fund research in the Inventor’s laboratory for three (3) years at the Weill Medical College of Cornell University.

 

2.19

“Sublicense” shall mean a rights - granting contract with an independent third party or with a subsidiary or an Affiliate in which LICENSEE conveys rights granted to LICENSEE in Sections 4.1 and 4.2 of this Agreement.

 

2.20

“Sublicensee” shall mean any entity granted a Sublicense by LICENSEE, and acceptable to FOUNDATION, under this Agreement.

 

2.21

“Valid Claim” shall mean a claim of (i) an issued Patent which has not been declared invalid in a court of appropriate jurisdiction, or (ii) a pending patent Application which is being diligently prosecuted by or on behalf of FOUNDATION.

ARTICLE 3: APPLICATIONS AND PATENTS

 

3.1

FOUNDATION shall hold title to all Applications and Patents and IRCM shall hold title to some Applications and Patents.

 

3.2

FOUNDATION agrees to use reasonable efforts to file and prosecute Applications and maintain Patents. At any time during the term of this Agreement, LICENSEE may elect in writing to be released from its license in any of the Patents or Applications, in which event LICENSEE shall thereafter have no obligation to reimburse FOUNDATION for any future expenses relating to such Patents or Applications, and FOUNDATION shall have the option at its sole discretion and expense to file, prosecute, maintain and license to a third party such Patents or Applications.

 

- 3 -


3.3

LICENSEE shall reimburse FOUNDATION for all out-of-pocket expenses for preparation, filing, prosecution and maintenance of Applications and Patents except for those Applications and Patents for which it has waived its rights, in writing, as described in Section 3.2. Such reimbursable expenses shall include those incurred prior to Effective Date. Such expenses shall be paid to FOUNDATION by LICENSEE within [**] days of receipt of an invoice therefore unless FOUNDATION has otherwise agreed, in writing. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge, or the highest rate allowed by New York State Law.

 

3.4

FOUNDATION shall have final authority over selection of patent attorneys and all decisions concerning filing and prosecution of Applications and maintenance of Patents. However, FOUNDATION shall keep LICENSEE reasonably informed of its filing, prosecution and maintenance activities and shall give LICENSEE the opportunity to comment on major decisions concerning such activities.

 

3.5

LICENSEE shall not at any time, directly or indirectly, oppose the grant of, nor dispute the validity or enforceability of, nor cooperate in any suit, claim, counterclaim or defense against any patent or claim included in the Patents.

ARTICLE 4: LICENSE GRANT AND COMMERCIAL EFFORTS

 

4.1

Subject to the terms and conditions of this Agreement and to the rights of and obligations to the United States Government as set forth in United States Office of Management & Budget Circular A-124 or 37 CFR Part 401 et seq., INSTITUTIONS hereby grant and LICENSEE hereby accepts an exclusive right to make, use, sell, lease, import, export or otherwise dispose of Products under Applications and Patents in the Field-of-Use in the Licensed Territory for the term of this Agreement as specified in Section 7.1.

 

  (i)

The right of LICENSEE to make Products includes the right to have Products made by contract with third parties within the Licensed Territory. Such contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of INSTITUTIONS and to supply all production of Products exclusively to LICENSEE.

 

4.2

LICENSEE shall also have the right to grant Sublicenses under this Agreement provided LICENSEE: (1) consults with FOUNDATION regarding the potential sublicensee, (2) provides FOUNDATION with a draft sublicense at least [**] days prior to its execution and (3) provides FOUNDATION with a copy of the fully executed sublicense within [**] days of execution. Any such Sublicense shall contain all the provisions of this Agreement which are protective of and beneficial to INSTITUTIONS and LICENSEE shall be responsible to FOUNDATION for the payment of royalties on sales made by a Sublicensee as though they were sales by LICENSEE. Any such Sublicenses shall be subject to an

 

- 4 -


  obligation for LICENSEE to pay to FOUNDATION [**] percent ([**]%) of any consideration received by LICENSEE under a Sublicense, other than (1) consideration consisting of royalties on sales or net sales made by the Sublicensee (which shall be handled in accordance with Section 5.5 hereunder) under such a Sublicense, (2) payments made to LICENSEE for equity securities at or near fair market value and (3) payments made to LICENSEE to fund research and development of Products.

 

4.3

LICENSEE shall be responsible to FOUNDATION for the payment of royalties on sales made by a Sublicensee in accordance with Section 5.5 hereof as though such sales were made by LICENSEE. LICENSEE and FOUNDATION agree to negotiate in good faith an appropriate value for all non-cash consideration or non-cash cross-licenses. LICENSEE’s obligation to pay FOUNDATION’s share of Sublicense consideration shall be considered incurred as of the date on which such Sublicense consideration is received by LICENSEE.

 

4.4

INSTITUTIONS and Cornell retain an irrevocable and nonexclusive right to practice for their own educational and research purposes, the inventions claimed in Applications and Patents and such purposes shall include limited, non-commercial collaboration with other non-profit research institutes.

 

4.5

Nothing in this Agreement shall be construed to give LICENSEE rights in any technologies currently owned or developed in the future by FOUNDATION or Cornell other than those explicitly specified in this Agreement. Nothing in this Agreement shall be construed to give FOUNDATION rights in technologies currently owned or developed in the future by LICENSEE other than those explicitly specified in this Agreement.

 

4.6

The rights granted by this Agreement are to LICENSEE alone and not to any third parties or to any subsidiary or Affiliate of LICENSEE. However, with prior written approval of FOUNDATION (such approval not to be unreasonably withheld), LICENSEE may transfer this Agreement by way of sale of LICENSEE, through sale of assets and/or sale of stock, provided that such sale is not primarily for the benefit of creditors. If LICENSEE fails to obtain the prior written approval from FOUNDATION for such transfer, FOUNDATION shall have the right to terminate this Agreement and the right to require that the transfer of this Agreement be voided.

 

4.7

Notwithstanding the foregoing, LICENSEE shall have the following rights in inventions made by or under the direct supervision of the Inventor during the course of and in performance of the research conducted under the Sponsored Research Agreement (“Sponsored Inventions”):

 

  (i)

The Sponsored Research Agreement shall include provision for prompt disclosure of Sponsored Inventions to LICENSEE.

 

  (ii)

LICENSEE will have [**] days from receipt of a disclosure of a Sponsored Invention to notify FOUNDATION in writing that it elects to license a Sponsored Invention (“Elected Sponsored Invention”).

 

  (iii)

LICENSEE will pay FOUNDATION a license fee of [**] Dollars ($[**]) for each Elected Sponsored Invention totally owned by FOUNDATION and [**] Dollars ($[**]) for each Elected Sponsored Invention partially owned by FOUNDATION.

 

- 5 -


  The license for such a partially owned Elected Sponsored Invention will be non-exclusive. If FOUNDATION negotiates a joint ownership agreement(s) with joint owner(s) of an Elected Sponsored Invention so that the license for the partially owned Invention is exclusive, LICENSEE will pay FOUNDATION a license fee of [**] Dollars ($[**]).

 

  (iv)

Each Elected Sponsored Invention shall be included in this Agreement by means of a agreement between LICENSEE and FOUNDATION that amends the listing of Applications and Patents in Appendix A hereto.

 

  (v)

If LICENSEE does not elect to license a Sponsored Invention, FOUNDATION shall be free to license such Sponsored Invention to any third party or parties of its choosing under terms of its choice without any further obligation to the LICENSEE.

 

4.8

LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to meet the diligence milestones of this Section 4.8 shall be a material breach of this Agreement.

“Best Efforts” under this clause shall also mean achieving the following goals in the times indicated:

 

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

 

4.9

Unless LICENSEE has a Therapeutic Product available for commercial sale prior to [**], LICENSEE agrees that FOUNDATION may terminate this Agreement.

 

- 6 -


4.10

Beginning with the second License Year, within [**] days after the start of each License Year and until LICENSEE markets Products, LICENSEE shall make a written annual report to FOUNDATION covering the preceding License Year, regarding the progress of LICENSEE toward commercial development of Products. Such report shall include, at a minimum, information sufficient to enable FOUNDATION to satisfy reporting requirements of the United States Government and for FOUNDATION to ascertain progress by LICENSEE toward meeting the Best Efforts of this Article 4. LICENSEE shall provide these reports with the royalty report specified in Article 5.

 

4.11

If FOUNDATION should identify Products that (i) LICENSEE is not actively developing or commercializing, as evidenced by the reports provided to FOUNDATION under Section 4.10; and (ii) are in a Field (which shall include for the purpose of this section: human therapeutics, animal health, drug delivery, research reagents and medical device reagents) and/or territorial market that FOUNDATION indicates is significant, (“Undeveloped Product”), FOUNDATION shall provide written notice to LICENSEE of said Undeveloped Product. Within [**] days of receipt of such notice from FOUNDATION, LICENSEE shall provide written notice to FOUNDATION that it elects to: a) affect development and commercialization of said Undeveloped Product itself; or b) affect development and commercialization of said Undeveloped Product through an appropriate sublicensee; or c) terminate LICENSEE’S rights under this Agreement only for said Undeveloped Product. Should LICENSEE elect to affect development and commercialization of said Undeveloped Product itself, FOUNDATION and LICENSEE will negotiate reasonable diligence goals, which shall be added to Section 4.8 by means of an amendment. Should such an amendment not be executed within [**] days of LICENSEE’S election, FOUNDATION may immediately terminate LICENSEE’S rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE. Should LICENSEE elect to sublicense its rights, said sublicense shall be executed within [**] months of LICENSEE’S election. Should said sublicense not be so executed, FOUNDATION may immediately terminate LICENSEE’S rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE.

 

4.12

Prior to execution of this Agreement, LICENSEE shall have provided to FOUNDATION certified copies of its articles of incorporation, bylaws, and current capitalization table, which shall be attached as Appendix D, E and F, respectively, to this Agreement.

 

4.13

LICENSEE shall not use, nor shall LICENSEE permit Sublicensee to use, the names, trademarks and indicia of INSTITUTIONS or of Cornell, nor the names of any employee, student or faculty member of INSTITUTIONS nor of Cornell without prior written approval from the named Party.

 

4.14

LICENSEE shall alone have the obligation to ensure that Products it makes, uses, sells, leases, imports, exports or otherwise disposes of are not defective, that Products satisfy all applicable government regulations and that export of Products satisfies government export requirements.

 

- 7 -


ARTICLE 5: PAYMENTS, ROYALTIES, REPORTS AND RECORDS

 

5.1

As consideration for entering into this Agreement, in lieu of the payment of a cash license fee, LICENSEE shall issue to FOUNDATION in the name of “Cornell Research Foundation, Inc.” shares of the common stock of LICENSEE, such that upon such issuance FOUNDATION shall hold shares of LICENSEE equal to ten percent (10%) of the issued common stock of LICENSEE and remaining at ten percent (10%) until the total cash equity investment made solely by Morningside Venture (I) Investments Limited in LICENSEE shall reach ten million United States dollars ($10,000,000). Licensee shall affect the transfer of said equity to FOUNDATION by means of a Stock Purchase Agreement and a Stockholders’ Agreement acceptable to FOUNDATION, each of which will be executed concomitantly with this Agreement.

 

5.2

FOUNDATION’S equity shall be divided per Cornell University policy. FOUNDATION will distribute to IRCM IRCM’s share of the proceeds obtained upon sale of the equity.

 

5.3

FOUNDATION will provide a right of first refusal to the LICENSEE if FOUNDATION seeks to sell any of this equity position at any time prior to the LICENSEE’S initial public offering.

 

5.4

Commencing upon the [**] of the Effective Date following termination of Sponsored Research Agreement and continuing until the first commercial sale of the first Therapeutic Product, LICENSEE will pay FOUNDATION an annual license maintenance fee of $[**] on each anniversary of the Effective Date.

 

5.5

For the rights granted hereunder, LICENSEE shall pay or cause to be paid to FOUNDATION a royalty on Net Sales of Products manufactured, assembled or sold, leased or otherwise disposed of in countries where there are pending Applications or unexpired Patents that have not been declared invalid in an unappealed decision by a court having jurisdiction as per the following table:

 

Product

   Royalty   If Annual Sales:

Parenteral Analgesic Products

   [**]   [**]
   [**]   [**]
   [**]   [**]

All Other Therapeutic Products

   [**]   [**]
   [**]   [**]
   [**]   [**]
   [**]   [**]

Antiviral Products

   [**]   [**]

Animal Health Products

   [**]   [**]

Drug Delivery Products

   [**]   [**]

Medical Device Reagent Products

   [**]   [**]

Research Reagent Products

   [**]   [**]

Health Food Supplement or Nutraceutical Products

   [**]   [**]

 

- 8 -


Said royalty shall be [**] percent ([**]%) of Net Sales of Products both made or assembled and sold, leased, imported, exported or otherwise disposed of in any country where there are no pending Applications or valid Patents. LICENSEE shall pay royalties on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to Effective Date or sold after the termination of this Agreement.

 

5.6

Royalties shall be payable only once with respect to the same unit of Products.

 

5.7

If a Product contains technology subject to royalties payable to a third party, the royalty due hereunder shall be reduced by [**] percent ([**]%) for every [**] percent ([**]%) of royalty due to such third party, but in no event shall royalties due be reduced by more than [**] percent ([**]%) of the applicable royalty rate payable for such Products.

 

5.8

LICENSEE shall provide FOUNDATION with quarterly written reports of all sales, leases or other dispositions of Products by LICENSEE during the quarter ending March 31, June 30, September 30 and December 31, due within [**] days of the end of each quarter. LICENSEE shall require that Sublicensees provide LICENSEE with quarterly written reports of all sales, leases or other dispositions of Products by Sublicensees, during the quarter ending March 31, June 30, September 30 and December 31, and copies of Sublicensee’s reports shall accompany LICENSEE’S reports to FOUNDATION. In order to minimize LICENSEE time spent on royalty reports, a brief one-page Royalty Report Form is provided in Appendix C that will satisfy FOUNDATION’S reporting requirements. FOUNDATION agrees to keep the information in these reports confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. Royalty payments for sales, leases, and other dispositions of the Products invoiced during a calendar quarter shall accompany the Royalty Report Form for that particular quarter. The Royalty Report Form shall be submitted regardless of whether or not royalties are owed. All amounts reported and all payments made shall be in United States dollars. Conversion from foreign currencies, if any, shall be based upon the conversion rate published in The Wall Street Journal on the last day of the particular quarterly accounting period (or on the last business day on which The Wall Street Journal is published during said quarterly period) for which royalties are due. Royalty checks shall be made payable to Cornell Research Foundation and mailed to the address specified in Section 13.4.

 

5.9

LICENSEE shall keep and maintain, and LICENSEE shall require that Sublicensees keep and maintain, any and all records necessary to certify compliance of LICENSEE with the terms of this agreement, including but not limited to accounting general ledgers, Sublicense and distributor agreements, price lists, catalogs, and marketing materials, audited financial statements, income tax returns, sales tax returns, inventory records, and shipping documents of Products. Such records shall be open to inspection at reasonable times by a certified public accountant chosen by FOUNDATION and acceptable to LICENSEE, which shall not unreasonably withhold such acceptance. Such inspection shall be made at FOUNDATION’S expense. However, if the results of any audit reveal additional royalties owed to FOUNDATION that differ by more the [**]% ([**] percent) from those royalties already paid, LICENSEE shall also reimburse FOUNDATION for the

 

- 9 -


  costs of the audit. FOUNDATION agrees to hold such records confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. The records required by this paragraph shall be maintained and available for inspection for a period of [**] years following the calendar quarter to which they pertain. This paragraph shall survive termination of this Agreement.

 

5.10

LICENSEE shall reimburse FOUNDATION for the expenses specified in Section 3.3 within [**] days of written invoice from FOUNDATION. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates.

 

5.11

Payments due under Sections 5.1 and 5.4 shall be considered late if not received by the dates specified in Sections 5.1 and 5.4 respectively, whether invoiced or not. Payments due under Section 5.10, and any other payments due under this Agreement, other than the payments due under Sections 5.1, and 5.4, shall be considered late if not received within [**] days of the date of invoice. Royalty payments due under Sections 5.8 of this Agreement and payment of FOUNDATION’S share of Sublicense consideration shall become late if not paid within [**] days after the end of the quarter in which the payment obligation was incurred. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge.

 

5.12

LICENSEE agrees to make a written report to FOUNDATION within [**] days after the expiration of this Agreement pursuant to Section 7.1. LICENSEE shall continue to make reports pursuant to the provisions of this Section 5.12 concerning royalties payable in accordance with Section 5.5 in connection with the sale of Products after expiration of the license, until such time as all such Products produced under the license have been sold or destroyed. Concurrent with the submittal of each post-termination report, LICENSEE shall pay FOUNDATION all applicable royalties.

ARTICLE 6: INFRINGEMENT

 

6.1

In the event that any Party determines that a third party is making, using or selling a product that may infringe Patents, it will promptly notify the other Parties in writing. LICENSEE may elect, with the prior written consent of FOUNDATION (and IRCM if applicable) to bring suit against such alleged infringer. Such election must be made within [**] days of receipt of said written consent from FOUNDATION (and IRCM if applicable). All recoveries in such suit shall belong to LICENSEE except that FOUNDATION (and IRCM if applicable) shall have the right to elect to pay up to [**] percent ([**]%) of the litigation costs and receive a percentage of any recovery equal to the percentage of litigation costs paid. FOUNDATION (and IRCM if applicable) must make such election within [**] days of its receipt of notice that LICENSEE has elected to bring suit. FOUNDATION (and IRCM if applicable) shall also have the right to choose to be represented by separate counsel in any such suit at its own expense. Such expense for separate counsel shall not be considered as part of “litigation costs” for purposes of determining FOUNDATION’s share of any recovery in accordance with the sentence above. If LICENSEE elects not to bring a suit against the alleged infringer, it shall

 

- 10 -


  promptly notify FOUNDATION of that fact and FOUNDATION (and IRCM if applicable) shall have the right to commence such actions at its own cost and expense, in which case any recoveries shall belong to FOUNDATION (and IRCM if applicable). In such suits by FOUNDATION (and IRCM if applicable), LICENSEE shall have rights of participation and recovery that are the same as FOUNDATION rights as provided above when LICENSEE elects to sue.

 

6.2

Regardless of which Party controls a suit brought against an infringer, all Parties shall participate in any settlement discussions and each will be a signatory to any settlement agreement.

ARTICLE 7: TERM AND TERMINATION

 

7.1

This Agreement shall commence on Effective Date, and shall continue as an Exclusive license until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction so long as LICENSEE’S covenants under the Agreement are being performed and the LICENSEE is in good standing, and provided this Agreement is not earlier terminated as provided for herein.

 

7.2

INSTITUTIONS may terminate this Agreement if LICENSEE:

 

  (i)

Is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

 

  (ii)

Is in material breach of any provision of this Agreement;

 

  (iii)

Provides any false report;

and LICENSEE fails to remedy any such default, breach, or false report within [**] days after written notice thereof by FOUNDATION.

 

7.3

INSTITUTIONS may terminate this Agreement upon thirty (30) days written notice by FOUNDATION if LICENSEE:

 

  (i)

fails to achieve Best Efforts diligence milestones in Section 4.8;

 

  (ii)

has not sold Products for any period of one (1) year after the end of the fifth License Year;

 

  (iii)

if LICENSEE fails to obtain prior written FOUNDATION approval for the transfer of this Agreement upon the sale of LICENSEE in accordance to Section 4.6.

 

7.4

LICENSEE may terminate the license granted hereunder at any time upon sixty (60) days notice to FOUNDATION. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments due under this Agreement.

 

- 11 -


7.5

Upon termination of this Agreement for any reason, including the end of term as specified above, all rights and obligations under this Agreement shall terminate, except those that have accrued prior to termination and except as specified in this Agreement.

ARTICLE 8: PUBLICATION AND CONFIDENTIALITY

 

8.1

It is the policy of INSTITUTIONS and Cornell to promote and safeguard free and open inquiry by faculty, students and others. To further this policy, INSTITUTIONS and Cornell shall retain the right to publish information described in Applications and Patents.

 

8.2

All Parties agree to keep any information identified as confidential by the disclosing party confidential using methods at least as stringent as each Party uses to protect its own confidential information, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement or to audit LICENSEE as specified under Section 5.9. “Confidential Information” shall include the progress report required under Section 4.10 and any other information marked confidential or accompanied by correspondence indicating such information is confidential exchanged between the parties hereto. The confidentiality and use obligations set forth above apply to all or any part of the Confidential Information disclosed hereunder except to the extent that:

 

  (a)

LICENSEE or INSTITUTIONS can show by written record that it possessed the information prior to its receipt from the other party;

 

  (b)

The information was already available to the public or became so through no fault of the LICENSEE or INSTITUTIONS;

 

  (c)

The information is subsequently disclosed to LICENSEE or INSTITUTIONS by a third party that has the right to disclose it free of any obligations of confidentiality; or

 

  (d)

[**] years have elapsed from the expiration of this Agreement.

ARTICLE 9: ARBITRATION AND JUDICIAL REMEDIES

 

9.1

If a controversy arises under or related to this Agreement, and any disputed claim by any party against any other party under this Agreement excluding any dispute relating to patent validity or infringement arising under this Agreement, the parties shall endeavor to resolve such controversy or dispute by mutual, good faith conciliation and, failing that, may mutually agree to settle the controversy or dispute by mediation in accordance with the WIPO Mediation Rule. The place of mediation shall be New York, New York. The language to be used in the mediation shall be English.

INSTITUTIONS reserve the right and power to proceed with direct judicial remedies without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of [**] days in which to cure such breach. In collecting overdue royalty payments and securing compliance with reporting obligations, INSTITUTIONS may use all judicial remedies available

 

- 12 -


ARTICLE 10: INDEMNIFICATION

 

10.1

LICENSEE agrees to indemnify and hold harmless INSTITUTIONS and Cornell and their respective trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Products purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, (iii) a third party’s manufacture or provision of a Products at the request of LICENSEE or Sublicensee.

 

10.2

INSTITUTIONS shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. INSTITUTIONS shall not have any responsibilities or liabilities whatsoever with respect to Products.

 

10.3

LICENSEE and Sublicensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement.

 

10.4

In addition to the foregoing, LICENSEE shall maintain, during the term of this Agreement, Comprehensive General Liability Insurance, including Products Liability Insurance, to cover the activities of LICENSEE. Such insurance shall provide minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate and shall include INSTITUTIONS and Cornell, their trustees, directors, officers, employees, students, and agents as additional insured parties. Such insurance shall be written to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with ratings of at least A- as rated by A.M. Best. Within [**] days of Effective Date of this Agreement, LICENSEE shall furnish a Certificate of Insurance evidencing primary coverage and additional insured requirements and requiring [**] days prior written notice of cancellation or material change to FOUNDATION. LICENSEE shall advise FOUNDATION, in writing, that it maintains excess liability coverage over primary insurance for at least the minimum limits set forth above. All such insurance of LICENSEE shall be primary coverage; insurance of INSTITUTIONS and Cornell shall be excess and noncontributory. LICENSEE agrees that the insurance requirements of sublicenses shall be at least as protective of Cornell and INSTITUTIONS as LICENSEE insurance requirements.

 

10.5

The provisions of this Article 10 shall survive termination of this Agreement.

ARTICLE 11: WARRANTIES AND LIMITATIONS

 

11.1

Each of INSTITUTIONS and LICENSEE represent and warrant that they have the right to enter into this Agreement. INSTITUTIONS warrant that they have the right to convey to LICENSEE the rights granted under this Agreement.

 

11.2

INSTITUTIONS each warrant that they are the owners of the Applications and Patents as outlined in Appendix A.

 

- 13 -


11.3

INSTITUTIONS make no representation or warranty that Applications will result in issued Patents.

 

11.4

INSTITUTIONS make no representations or warranties concerning the validity or scope of Patents.

 

11.5

INSTITUTIONS do not warrant that Products made, used, sold, leased, imported, exported or otherwise disposed of under the license of this Agreement is or will be free from infringement of patents of third parties.

 

11.6

Nothing herein shall be construed as granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of INSTITUTIONS or Cornell or other persons other than Patents, regardless of whether such patents or other rights are dominant or subordinate to any Patents.

 

11.7

INSTITUTIONS are under no obligation to furnish any technology or information other than that described and claimed in Applications and Patents.

 

11.8

Nothing herein shall be construed to grant LICENSEE rights under any applications or patents other than Applications and Patents.

 

11.9

INSTITUTIONS do not make any representations, extend any warranties of any kind, express or implied, or assume any responsibility whatever concerning the manufacture, use, or sale, lease or other disposition by LICENSEE or its vendees or transferees of Products.

 

11.10

Except as expressly set forth in this Agreement, INSTITUTIONS MAKE NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.

ARTICLE 12: MARKING

 

12.1

Prior to the issuance of patents on the Applications, LICENSEE shall mark, and agrees to require that Sublicensees shall mark, Products (or their containers or labels) made, sold, leased, imported, exported or otherwise disposed of by it under the license granted in this Agreement with the words “Patent Pending,” and following the issuance of one or more Patents, with each Patent’s Number.

ARTICLE 13: MISCELLANEOUS PROVISIONS

 

13.1

Terms in this Agreement which appear capitalized, other than the names of the parties and article headings, have the meanings given in Article 2 and retain those meanings whether used in the singular or plural.

 

- 14 -


13.2

This Agreement shall be binding upon and be to the benefit of the Parties hereto and their heirs, successors and assignees. However, no Party shall assign this Agreement, in whole or in part, without the written consent of the others.

 

13.3

All issues and questions concerning the construction, validity and interpretation of this Agreement and the Schedules and Exhibits hereto shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement (and all Schedules and Exhibits hereto), even though under that jurisdiction’s choice of law or conflict of law analysis, the substantive law of such other jurisdiction would ordinarily apply. The parties hereto hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any State court sitting in Tompkins County, State of New York or Federal court sitting in Syracuse, New York over any suit, action or proceeding arising out of or relating to this Agreement and agree that no such suit, action or proceeding shall be brought in any other court, forum or jurisdiction. The parties hereto hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

 

13.4

All notices required or permitted hereunder shall be in writing and be served on the parties at the addresses set forth below. Any such notices shall be either (a) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered when delivery is made according to the records of such courier, (b) sent by facsimile, in which case notice shall be deemed delivered upon receipt of confirmation of transmission of such facsimile notice, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt. Any notice by facsimile or personal delivery and delivered after 5:00 p.m., Eastern Daylight Time, shall be deemed received on the next Business Day. A party’s address may be changed by written notice to the other parties; provided, however, that no notice of a change of address shall be affected until actual receipt of such notice.

In the case of FOUNDATION:

President

Cornell Research Foundation, Inc.

20 Thornwood Drive, Suite 105

Ithaca, NY 14850

With a copy to:

Brian J. Kelly, Vice President

Cornell Research Foundation, Inc.

418 East 71 st Street

New York, NY 10021

Phone: (212)746-6186

Fax: (212) 746-6662

 

- 15 -


In the case of LICENSEE:

Stealth Peptides International Inc.

c/o McCarthy Legal Services, LLC

Attn: Stephanie O’Brien

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807

All payments shall be made to FOUNDATION:

Cornell Research Foundation, Inc.

P.O. Box 6899

Ithaca, NY 14850-6899

Attention: Accounting Department

 

13.5

No term or provision of this Agreement shall be waived and no breach excused unless such waiver or consent shall be in writing and signed by the party claimed to have waived or consented. No waiver of a breach shall be deemed to be a waiver of a different or subsequent breach.

 

13.6

This Agreement may not be modified, changed or terminated orally. No change, modification, addition or amendment shall be valid unless in writing and signed by the parties hereto.

 

13.7

In the event any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.

 

13.8

This Agreement constitutes and contains the entire agreement of the parties respecting its subject matter and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether written or oral, between the parties respecting its subject matter.

 

13.9

This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document by all parties as listed below. Any photocopy or facsimile copy of this fully-executed Agreement shall have the same legal force and effect as any copy bearing original signatures. Signatures transmitted by facsimile shall be deemed valid as original signatures.

[Signature Page follows]

 

- 16 -


IN WITNESS of this Agreement, INSTITUTIONS and LICENSEE have caused this Agreement to be executed by their duly authorized officers on the dates indicated.

 

CORNELL RESEARCH

FOUNDATION, INC.

   

STEALTH PEPTIDES

INTERNATIONAL INC.

By:  

/s/ Richard S. Cahoon

    By:  

/s/ George Ka Ki Chang

  Richard S. Cahoon     Name:   George Ka Ki Chang
  Senior Vice President     Title:   Authorized Signatory
Date:   April  20, 2006     Date:  

 

INSTITUT DE RECHERCHES

CLINIQUES DE MONTREAL

     
By:  

/s/ Dr. Louis-Gilles Durand

     
Name:   Dr. Louis-Gilles Durand      
Title:   Executive Director, Research Administration and Services      
Date:   April 13, 2006      


Appendix A

Applications and Patents

 

Docket #

  

Pat App

Number

  

Application

Type

  

Filing

Date

  

Title

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

     

[**]

     

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

     

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]

  

[**]

  

[**]

  

[**]

  

[**]

[**]            

 

A-1


Appendix B

Structure of SS-Peptides

[**]

 

B-1


Appendix C

Royalty Report

Report royalty payment information to the Cornell Research Foundation, Inc. (CRF) using the report format or facsimile attached to these instructions. This minimal information must be provided in order to correctly record royalty related events required by your license agreement with CRF.

Use a separate report to record royalty information for each license agreement. For each licensee agreement, report royalty sales by CRF docket number, which identifies the technology. List each contributing technology if more than one technology is used to produce a royalty generating process/product. This level of detail permits evaluation of the use of each technology under license with your company.

Submit this information along with appropriate payment to:

Cornell Research Foundation, Inc.

P.O. Box 6899

Ithaca, NY 14850-6899

[**]

 

C-1


ROYALTY REPORT – [licensee NAME]
LICENSEE NAME:   

 

   CRF LICENSEE NUMBER:                         
REPORTING PERIOD.   

 

  
Individual to contact concerning this information:
Name:   

 

   Phone # or email ID:                         
For each product/item subject to a royalty payment provision, provide the following information as applicable.
PRODUCT/ITEM:   

 

  

 

CRF Docket

Number

 

Country

 

Number of

Units/Products

Sold

 

Gross Sales By

Country

 

Net Sales By

Country

 

Royalty Rate

 

Less Minimum

Royalty Payment

Made

 

Net Royalty

Payment Due

             
             
             
             
             
             
             
             
             
             
             
             
             
             
             

 

            TOTAL PAYMENT  
             

 

 

C-2


FIRST AMENDMENT

TO

EXCLUSIVE LICENSE AGREEMENT

This First Amendment to that certain Exclusive License Agreement, effective as of April 20, 2006 (the “Effective Date”), among Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business and offices at 2 nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, Cornell Research Foundation, Inc. (“CRF”), a nonprofit corporation of the State of New York and wholly owned subsidiary of Cornell University (“Cornell”), having an office at 395 Pine Tree Road, Suite 310, Ithaca, NY 14850, and Institut de Recherches Cliniques de Montreal (“IRCM”), having a principal place of business and offices at 110 ave des Pins Ouest, Montreal, Quebec, Canada H2W 1R7 (the “Exclusive License Agreement”, also known as FOUNDATION Contract No. 2006-11-1691) is effective as of the date last executed below (the “First Amendment Date”). Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Exclusive License Agreement and, unless otherwise indicated, all references herein to Articles, Paragraphs and Appendices shall refer to Articles, Paragraphs and Appendices of the Exclusive License Agreement.

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in consideration of the mutual promises contained in this First Amendment, the Parties agree to amend the Exclusive License Agreement as follows:

 

(1)

Article 1, Paragraph 1.1 is hereby replaced and shall now read in its entirety as follows:

“1.1 Cornell Research Foundation, Inc. (“CRF”) is a wholly owned subsidiary of Cornell University (“Cornell”) and holds the ownership interests in, or has the authority to grant exclusive licenses under all of Cornell’s rights to, certain patents, trademarks, copyrights, and proprietary materials made by Cornell’s employees prior to January 1, 2008, including those patents and patent applications listed in Appendix A-1, and administers licenses in a manner consistent with the policies of Cornell. Cornell holds the ownership interests in, or has the authority to grant exclusive licenses under all of Cornell’s rights to, certain patents, trademarks, copyrights, and proprietary materials made by Cornell’s employees from January 1, 2008 on. Accordingly, “FOUNDATION”, as used herein, refers to CRF and/or Cornell, as applicable, each of which is a Party to this Agreement.”

 

(2)

Article 1, Paragraph 1.2 is hereby replaced and shall now read in its entirety as follows:

“1.2 FOUNDATION, Cornell and, in some cases, IRCM (collectively referred to as “INSTITUTIONS”) have filed the various patent applications listed in Appendix A-1 invented by [**] and/or [**] (each, an “Inventor”).”

 

(3)

Article 2, Paragraph 2.5 is hereby replaced and shall now read in its entirety as follows:

“2.5 “Applications” shall mean (a) the patent applications listed in Appendix A, (b) any foreign patent applications based thereon, (c) all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing applications and are enabled by subject matter that is disclosed in such application, (d) all divisionals and

 

1


continuations of any of the patent applications described in (a)-(c) above, and (e) any patent application sharing a common claim of priority with any of the patent applications described in (a)-(d) above.”

 

(4)

In consideration of payment by LICENSEE to FOUNDATION of [**] Dollars ($[**]), which LICENSEE shall remit to FOUNDATION within [**] days after the First Amendment Date, Article 2, Paragraph 2.9 is hereby replaced and shall now read in its entirety as follows:

“2.9 “Field-of-Use” shall mean all fields, including without limitation human therapeutics, veterinary or companion animal use, medical device reagents, drug delivery agents, and research reagents.”

 

(5)

Article 2, Paragraph 2.15 is hereby replaced and shall now read in its entirety as follows:

“2.15 “Patents” shall mean (a) the patents listed in Appendix A, (b) all patents issuing from any Application, (c) all reissues, reexaminations and extensions of any patent described in (a) or (b) above, and (d) any patent sharing a common claim of priority with any of the patents described in (a)-(c) above.”

 

(6)

Article 2, Definitions, is hereby amended by adding the following new Paragraphs 2.22, 2.23 2.24 and 2.25:

“2.22 “Covered” shall mean, with respect to a Product and a country, that, in the absence of ownership of or a license granted under a Valid Claim in such country, the manufacture, use, offer for sale, sale or importation of such Product would infringe such Valid Claim (or, in the case of a Valid Claim in an Application, would reasonably likely infringe such Valid Claim if it were to issue in a Patent).”

“2.23 “First Amendment Date” shall mean the effective date of the First Amendment to this Agreement.”

“2.24 “Material Transfer Agreement” shall mean any agreement between or among CRF, Cornell, the Medical College of Cornell, and/or IRCM, on the one hand, and any other person, entity or institution (“Recipient”), on the other hand, pursuant to which any tangible embodiment of any SS Peptide is provided or made available to Recipient, whether or not any information or data relating to these materials is also disclosed.”

“2.25 “SS Peptide” shall mean any published or unpublished aromatic, cationic peptide that has at least one net positive charge, a minimum of four amino acids, a maximum of approximately twenty amino acids, a relationship between the minimum number of net positive charges (p m ) and the total number of amino acid residues (r) wherein 3p m is the largest number that is less than or equal to r + 1, a relationship between the minimum number of aromatic groups (a) and the total number of net positive charges (p t ) wherein 2a is the largest number that is less than or equal to p t + 1, except that when a is 1, p t may also be 1, and that has been the subject of any work conducted by either or both Inventors, including without limitation those peptides identified in Appendix B.”

 

2


(7)

Article 3, Paragraph 3.1 is hereby replaced and shall now read in its entirety as follows:

“3.1 CRF and Cornell each represents that CRF holds title to all Applications and Patents filed before January 1, 2008 and Cornell holds title to all Applications filed from January 1, 2008 on. IRCM holds title to some Applications and Patents.”

 

(8)

Article 4, Paragraph 4.7 is hereby replaced and shall now read in its entirety as follows:

“4.7 Notwithstanding the foregoing or anything to the contrary in this Agreement or the Sponsored Research Agreement, LICENSEE shall have the rights set forth in clauses (i)-(v) and (viii) below in INSTITUTION inventions of either Inventor made under or in connection with the Sponsored Research Agreement or in connection with any Material Transfer Agreement that is entered into by one or more of the Parties after the First Amendment Date. Inventions that arise from the Sponsored Research Agreement are “SRA Sponsored Inventions”, inventions that arise from any Material Transfer Agreement to which LICENSEE is a party and with which either Inventor has any conceptual involvement and that is entered into by one or more of the Parties after September 1, 2010 are “MTA Sponsored Inventions”, and further, “SRA Sponsored Inventions” and “MTA Sponsored Inventions” are collectively referred to herein as “Sponsored Inventions”, and all Sponsored Inventions existing as of the date set forth on Appendix A-2 hereunder are listed in Appendix A-2. LICENSEE shall, within [**] days after the First Amendment Date, pay FOUNDATION the applicable license fee listed in clause (iii) or (iv) below for each Sponsored Invention listed in Appendix A-2 that LICENSEE has not earlier paid, provided that FOUNDATION shall have issued to LICENSEE an invoice therefor within [**] days after the First Amendment Date, and, following such payment, such Sponsored Inventions shall be deemed Elected Sponsored Inventions, as defined below, and Appendix A-1 hereto shall be deemed to have been amended to include such Elected Sponsored Inventions in accordance with Paragraph 4.7(v) below, unless any require a separate license as further outlined in Paragraph 4.7(v) below.

 

  (i)

CRF, Cornell and IRCM shall ensure the prompt disclosure of Sponsored Inventions to LICENSEE.

 

  (ii)

LICENSEE will have [**] days after receipt of disclosure of a Sponsored Invention to notify FOUNDATION in writing that it elects, at LICENSEE’s cost, to file a provisional patent application or patent application with respect to such Sponsored Invention.

 

  (iii)

At any time on or before the date that is [**] days (a) before the first business day on or after the [**] of the filing date of a provisional patent application or (b) after the [**] of the filing date of a patent application, in each case ((a) or (b)) filed with respect to any Sponsored Invention, LICENSEE may notify FOUNDATION in writing that it elects to license such Sponsored Invention (an “Elected Sponsored Invention”, which, for clarity, shall include (A) all patent applications sharing a common claim of priority with the initial patent application filed for such Sponsored Invention, (B) any patents issuing on such patent applications, and (C) any foreign counterparts of the foregoing). Within [**] days following such

 

3


  notification, LICENSEE will pay FOUNDATION a license fee of [**] Dollars ($[**]) for (iv) each Elected Sponsored Invention that is an SRA Sponsored Invention exclusively owned by FOUNDATION and [**] Dollars ($[**]) for each Elected Sponsored Invention that is a SRA Sponsored Invention jointly owned by FOUNDATION. The fee payable with respect to any Elected Sponsored Invention that is an MTA Sponsored Invention shall be [**] Dollars ($[**]).

 

  (iv)

In all cases, the license for any Elected Sponsored Invention that is jointly owned by FOUNDATION will be exclusive with respect to FOUNDATION’s interest in such Elected Sponsored Invention. If FOUNDATION enters into a written agreement(s) with the joint owner(s) of such a jointly owned Elected Sponsored Invention that is an SRA Sponsored Invention so that FOUNDATION has the exclusive right to license all rights in such Elected Sponsored Invention (including all rights of the joint owner(s)), LICENSEE will pay FOUNDATION, in lieu of the license fee set forth in paragraph (iii) above, a license fee of [**] Dollars ($[**]) with respect to such Elected Sponsored Invention.

 

  (v)

The license for each Elected Sponsored Invention with INSTITUTION inventorship that includes only either or both Inventors shall be included in this Agreement by means of an agreement between LICENSEE and FOUNDATION that amends the listing of Applications and Patents in Appendix A-1 hereto. Each Elected Sponsored Invention with INSTITUTION inventorship other than as described in the preceding sentence shall be licensed in a separate license agreement in which all material terms and conditions shall be identical to those in this Agreement, provided that, for clarity, LICENSEE shall not be obligated to pay royalties, milestones or any other amounts to FOUNDATION with respect to any given Product under more than one license agreement. For the avoidance of doubt, any license fee for an Elected Sponsored Invention due under paragraphs (iii) or (iv) above shall be made part of any separate license agreement required by this paragraph (v) and not be due under this Exclusive License Agreement.

 

  (vi)

If LICENSEE does not elect to license a Sponsored Invention, FOUNDATION shall be free to license such Sponsored Invention to any third party or parties of its choosing under terms of its choice without any further obligation to the LICENSEE.

 

  (vii)

Effective as of the First Amendment Date, each of CRF, Cornell and IRCM shall comply with the following procedure with respect to negotiating and entering into Material Transfer Agreements. The applicable technology or material transfer office of Cornell or IRCM, as applicable, shall work with the applicable Inventor and Recipient to negotiate each Material Transfer Agreement. If the material to be transferred is a published SS Peptide, the terms of the corresponding Material Transfer Agreement shall include at least the terms set forth on Appendix C attached hereto. If the material to be transferred has been obtained from LICENSEE or is an unpublished SS Peptide, CRF, Cornell or IRCM, as applicable, shall obtain LICENSEE’s written approval to the terms of the corresponding Material Transfer Agreement. For purposes of illustration, an example of a Material Transfer Agreement containing the terms set forth on Appendix C is set forth on Appendix D attached hereto.

 

4


  (viii)

Any royalties payable by LICENSEE to any Recipient in connection with a license to an MTA Sponsored Invention shall be subject to Section 5.7. For clarity, if FOUNDATION or IRCM execute an agreement with Recipient in connection with a jointly (ix) owned Elected Sponsored Invention so that FOUNDATION or IRCM have the exclusive right to license all rights in such Elected Sponsored Invention, and have exclusively licensed all such rights to LICENSEE under this Agreement or a separate license agreement all material terms and conditions of which are identical to those in this Agreement, the royalties paid by LICENSEE to FOUNDATION or IRCM pursuant to such license shall not be subject to Section 5.7.”

 

(10)

Article 4, Paragraphs 4.8 and 4.9 are hereby replaced and shall now read in their entirety as follows:

“4.8 LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to use its Best Efforts to meet the diligence milestones of this Section 4.8 shall be a material breach of this Agreement.

Licensee shall use Best Efforts to achieve the following goals by the date indicated (“Best Efforts” shall mean the efforts that a reasonable person in the position of LICENSEE would make so as to achieve that goal as expeditiously as practicable; notwithstanding the foregoing, LICENSEE shall be deemed to have used Best Efforts with respect to a milestone if it achieves the milestone by the corresponding target achievement date).

 

5


LICENSEE will provide additional milestones on the [**] anniversary of the Effective Date and on the anniversary of the Effective Date every [**] years thereafter until the first commercial sale of a Therapeutic Product.

 

Milestone

      

Target

achievement

date

1    

  [**]      [**]

2.   

  [**]      [**]

3.   

  [**]      [**]

4.   

  [**]      [**]

5.   

  [**]      [**]

6.   

  [**]      [**]

7.   

  [**]      [**]

8.   

  [**]      [**]

9.   

  [**]      [**]

10.   

  [**]      [**]

11.   

  [**]      [**]

12.   

  [**]      [**]

13.   

  [**]      [**]

14.   

  [**]      [**]

15.   

  [**]      [**]

16.   

  [**]      [**]

17.   

  [**]      [**]

18.   

  [**]      [**]

19.   

  [**]      [**]

20.   

  [**]      [**]

21.   

  [**]      [**]

22.   

  [**]      [**]

23.   

  [**]      [**]

24.   

  [**]      [**]

25.   

  [**]      [**]

26.   

  [**]      [**]

27.   

  [**]      [**]

28.   

  [**]      [**]

29.   

  [**]      [**]

 

6


If LICENSEE has not achieved a given milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**] thereafter to achieve such milestone. If LICENSEE has not achieved such milestone by the end of such cure period, the license granted pursuant to Paragraph 4.1 shall thereafter convert to a nonexclusive license solely with respect to the peptide ([**], as applicable) (and, if applicable, indication and/or formulation) that is subject of such unachieved milestone. By way of example, if LICENSEE has not achieved milestone #[**] by [**] but has achieved all other milestones as of such date, LICENSEE’s license hereunder with respect to [**] would become non-exclusive as of [**], and would remain exclusive with respect to all other formulations of [**] and with respect to any formulations of [**].”

“4.9 Unless LICENSEE has a Therapeutic Product available for commercial sale prior to December 31, 2020, LICENSEE agrees that FOUNDATION may terminate this Agreement, except to the extent any failure to meet such date is attributable to factors over which LICENSEE cannot exert direct control, including without limitation IRB delays, clinical trial enrollments, clinical trial results, regulatory delays and events of force majeure.”

 

(11)

Article 4, Paragraph 4.13 is hereby amended by the addition of a second sentence thereto as follows:

“INSTITUTIONS shall not use the names, trademarks and indicia of LICENSEE nor disclose to any third party any non-public information relating to the subject matter of this Agreement without prior written approval from LICENSEE.”

 

(12)

Article 5, Paragraph 5.5 is hereby replaced and shall now read in its entirety as follows:

“5.5 For the rights granted hereunder, LICENSEE shall pay or cause to be paid to FOUNDATION a royalty on Net Sales of Products, on a Product-by-Product and country-by-country basis, where the manufacture, use, sale, offer for sale or importation of such Product by LICENSEE in such country is Covered by a Valid Claim, as per the following table:

 

Product

  

Royalty

  

If Annual Sales:

Parenteral Analgesic Products    [**]    [**]
   [**]    [**]
   [**]    [**]
All Other Therapeutic Products    [**]    [**]
   [**]    [**]
   [**]    [**]
   [**]    [**]
Antiviral Products    [**]    [**]
Animal Health Products    [**]    [**]
Drug Delivery Products    [**]    [**]
Medical Device Reagent Products    [**]    [**]
Research Reagent Products    [**]    [**]

Health Food Supplement or Nutraceutical Products

   [**]    [**]

 

7


In lieu of the royalty in the table above, the royalty shall be [**] percent ([**]%) of Net Sales of Products made, used, sold, offered for sale, or imported in any country where such activities are not Covered by a Valid Claim, except that no royalty shall be due for any sales of any such Product that occur after the fifteenth (15 th ) anniversary of the first commercial sale of such Product. LICENSEE shall pay royalties in accordance with this Section 5.5 on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to the Effective Date or are produced before but sold after the termination of this Agreement.”

 

(13)

Article 7, Paragraph 7.1 is hereby replaced and shall now read in its entirety as follows:

“7.1 This Agreement shall commence on the Effective Date, and shall continue as an Exclusive license, subject to Section 4.8, until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction and no Applications remain pending, and provided this Agreement is not earlier terminated as provided for herein.”

 

(14)

Article 7, Paragraph 7.2 is hereby replaced and shall now read in its entirety as follows:

“7.2    INSTITUTIONS may terminate this Agreement if LICENSEE:

(i)    is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

(ii)    subject to Section 4.8, is in material breach of any provision of this Agreement; or

(iii)    intentionally provides any false report;

and LICENSEE fails to remedy any such default, breach, or false report within [**] days after written notice thereof by FOUNDATION. LICENSEE’s right to terminate this Agreement on a Product-by-Product basis is as set forth in Paragraph 7.4.”

 

(15)

Article 7, Paragraph 7.3 is hereby replaced and shall now read in its entirety as follows:

“INSTITUTIONS may terminate this Agreement upon thirty (30) days written notice by FOUNDATION if LICENSEE fails to obtain prior written FOUNDATION approval for the transfer of this Agreement upon the sale of LICENSEE in accordance to Section 4.6, provided that such notice is given within sixty (60) days after such transfer.”

 

(16)

Article 7, Paragraph 7.4 is hereby replaced and shall now read in its entirety as follows:

“LICENSEE may terminate the license granted hereunder, in its entirety or on a Patent-by-Patent basis, a Product-by-Product, and/or a country-by-country basis if LICENSEE has a reasonable basis for doing so, at any time upon sixty (60) days’ notice to FOUNDATION. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments under this Agreement.”

 

8


(17)

Article 10, Paragraph 10.1 is hereby replaced and shall now read in its entirety as follows:

“10.1 LICENSEE agrees to indemnify, defend and hold harmless INSTITUTIONS and their respective trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Product purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, or (iii) a third party’s manufacture or provision of a Product at the request of LICENSEE or Sublicensee.”

 

(18)

Article 10, Paragraph 10.4 is hereby replaced and shall now read in its entirety as follows:

“10.4 In addition to the foregoing, LICENSEE shall cause Stealth Peptides, Inc., an Affiliate of LICENSEE, to maintain, during the term of this Agreement, Comprehensive General Liability Insurance to cover the activities of LICENSEE. Such insurance shall provide minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate. Such insurance shall be written as primary coverage to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with financial strength ratings of at least A- as rated by A.M. Best. LICENSEE shall obtain appropriate clinical trial coverage before initiating any clinical trials of Products. The coverage and limits referred to above shall not in any way limit the liability of LICENSEE. LICENSEE shall, within [**] days after the Effective Date, furnish Cornell with certificates of insurance showing compliance with all requirements. Such certificates shall provide for [**] day advance written notice to Cornell of any modification. LICENSEE shall use reasonable best efforts to extend the coverage referred to above within [**] months after the First Amendment Date to include INSTITUTIONS as additionally insured parties and shall furnish Cornell with a certificate of insurance evidencing any such extension.”

 

(19)

Article 11, Paragraph 11.2 is hereby replaced and shall now read in its entirety as follows:

“11.2 INSTITUTIONS each warrant that they are the owners of the Applications and Patents as outlined in Appendix A-1 and has the ownership interest in the Applications and Patents listed in Appendix A-2 as indicated thereon.”

 

(20)

Article 13, Paragraph 13.2 is hereby replaced and shall now read in its entirety as follows:

“13.2 This Agreement shall be binding upon and be to the benefit of the Parties and their heirs, successors and permitted assigns. However, no Party shall assign this Agreement, in whole or in part, without the written consent of the other Parties, which consent shall not be unreasonably withheld or delayed.”

 

9


(21)

Article 13, Paragraph 13.4 is hereby revised so that the contact information for notices to LICENSEE shall now read as follows:

“In the case of LICENSEE:

Stealth Peptides International Inc.

c/o Stealth Peptides Inc.

Attn: Travis Wilson

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807”

 

(22)

Article 13, Miscellaneous Provisions, is hereby amended by adding the following new Paragraphs 13.10 and 13.11:

13.10 For clarity, in furtherance of fulfilling its obligations and exercising its rights under this Agreement, LICENSEE may employ third parties, including but not limited to contract manufacturers, contract research organizations and contract sales organizations, to carry out activities on LICENSEE’s behalf, without any obligation to obtain consent from any INSTITUTION therefor.

13.11 This Agreement and its Appendices is written and executed in the English language. Les parties conviennent que cette entente ainsi que tout document accessoire soient rédigés en anglais. Any translation into any other language shall not be an official version of this Agreement and in the event of any conflict in interpretation between the English version and such translation, the English version shall prevail.”

 

(23)

Appendix A is hereby replaced and shall now read in its entirety as attached hereto as Appendix A-1 and Appendix A-2.

 

(24)

Appendix B is hereby replaced and shall now read in its entirety as attached hereto.

 

(25)

Each Party represents and warrants that (a) the representations and warranties made by such Party under Article 11, Paragraphs 11.1 and 11.2 are true as of the First Amendment Date with respect to the Exclusive License Agreement as amended hereby, and (b) the Exclusive License Agreement as amended hereby is in full force and effect in accordance with its terms. Each Party acknowledges and agrees that the Exclusive License Agreement, as amended hereby, remains in full force and effect in accordance with its terms and that, to its knowledge as of the First Amendment Date, each Party is in good standing with respect thereto.

 

(26)

All other terms and conditions of the Exclusive License Agreement shall remain unchanged.

 

(27)

This First Amendment may be executed by original or facsimile signature in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. Such counterparts may be exchanged by facsimile or PDF. Where there is an exchange of executed counterparts by facsimile or PDF, each Party shall be bound by this First Amendment notwithstanding that original copies of this First Amendment may not be exchanged immediately. The Parties shall cooperate after execution of this First Amendment and exchange by facsimile or PDF to ensure that each Party obtains an original executed copy of this First Amendment with reasonable promptness.

 

10


[Signature Page Follows]

 

11


IN WITNESS WHEREOF, the undersigned parties have caused this First Amendment to be executed in counterparts as of the date last written below.

 

CORNELL UNIVERSITY and CORNELL RESEARCH FOUNDATION, INC.     STEALTH PEPTIDES INTERNATIONAL
By:  

/s/ Alan Paau

    By:  

/s/ Louise Garbarino

Print Name:   Alan Paau     Print Name:   Louise Garbarino
Title:  

Vice Provost for Technology Transfer

& Economic Development

    Title:   Alternate Director to Lars Sorensen
Date:   7 October 2010     Date:   24 September 2010

INSTITUT DE RECHERCHES

CLINIQUES DE MONTREAL

     
By:  

/s/ Tarik Mörby, Ph.D.

     
Print Name:   Tarik Mörby, Ph.D      
Title:   President and Scientific Director      
Date:   29 September 2010      

 

12


Appendix A-1

Applications and Patents

 

[**]

[**]

[**]

Docket Number

 

Cornell Docket

Number

 

Country

 

Status

 

App. No.

 

App. Date

 

Pat. No.

 

Grant Date

[**]

  [**]   [**]   [**]   [**]   [**]    

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of five pages were omitted. [**]

 

A-1


Appendix A-2

Patent Applications for Sponsored Inventions as of September 24, 2010

 

[**]

[**]

[**]

Docket Number

 

Cornell Docket

Number

 

Country

 

Status

 

App. No.

 

App. Date

 

Pat. No.

 

Grant Date

[**]

  [**]   [**]   [**]   [**]   [**]    

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of three pages were omitted. [**]

 

A-2


Appendix B

Structure of SS-Peptides

[**]

 

B-1


Appendix C

Minimum Material Transfer Agreement Terms

1.    Recipient shall grant to LICENSEE an exclusive, royalty-bearing, worldwide license, with the right to grant sublicense, to Recipient’s rights to any and all work, discoveries, developments, data, inventions, and know-how related to the peptides and/or evaluation that is subject of the Material Transfer Agreement (“Inventions”).

2.    Recipient shall negotiate in good faith to conclude with LICENSEE a license agreement for the Inventions containing commercially reasonable terms.

3.    If Recipient and LICENSEE fail to reach a mutually acceptable license agreement, LICENSEE shall have a right of first refusal with respect to any terms offered by Recipient to any prospective third-party licensee of the Inventions.

4.    LICENSEE shall be a party to, or named as a third party beneficiary of, the Material Transfer Agreement.

 

C-1


Appendix D

Example of Material Transfer Agreement

MATERIAL TRANSFER AGREEMENT

Joan and Sanford I. Weill Medical College of Cornell University

Office of Research and Sponsored Programs, 1300 York Avenue, New York, NY 10065

Agreement for the Transfer of Biological Materials to Not-for-Profit Institutions

Joan and Sanford I. Weill Medical College of Cornell University (hereinafter, “CU”) is in receipt of a request:

 

by                                                                         of                                                                                           
(Recipient Investigator)   (Recipient Institution)               
For                                                                                   
(Material)     
From                               [**]                  for studies related to   
(CU Investigator)     

 

(Research Project)     

Attach specific protocol for Research Project in Attachment A .

THIS MATERIAL TRANSFER AGREEMENT (this “Agreement”) dated as of [[Month, Day, Year]] (the “Effective Date”), is entered into between [[Recipient Investigator]], (“Recipient Investigator”) and [[Recipient Institution]] (“Recipient Institution”), having a principal place of business at the address of [[Recipient Institution Address]], collectively referred hereinafter as “Recipient”, CU, Stealth Peptides International (Cayman Islands) Inc. (“SPI”), a company with a place of business at 2 nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC 98000, Monaco. The Recipient, CU and SPI are collectively referred to hereinafter as “The Parties”. The Parties agree as follows:

The Material noted above was discovered in the course of research by [**] at CU. CU, and/or its subsidiary Cornell Research Foundation (“CRF”), have sought patent protection for the Material and various uses thereof and have licensed the rights to SPI exclusively for commercial development. The Material currently available to not-for-profit institutions for research is prepared by SPI at SPI’s expense and CU can provide the Material to Recipient if and only if Recipient agrees to the following:

1.    Following the Effective Date, SPI or its affiliate shall provide Recipient with a mutually agreed upon amount ([[QUANTITY]]) of Material (the “Peptide(s)”) by a specific date and such information and data regarding the Peptide(s) as are mutually agreed upon among the Parties as reasonably necessary or useful to enable Recipient to evaluate the Peptide(s) for the purposes of the Research Project as detailed in Attachment A .

 

D-1


2.    Recipient shall have the right to test and use the Peptide(s) for the purposes of the Research Project. Recipient will use the Peptide(s) only for the purposes of [[Describe the evaluation to be conducted in the course of the Research Project]] (the “Evaluation”). Recipient shall protect the Peptide(s) against theft, damage, loss, misuse and/or unauthorized access. Recipient hereby acknowledges that the Peptide(s) delivered pursuant to this Agreement, (a) are experimental in nature and may have unknown hazardous properties; (b) are supplied solely for use in animals and/or in vitro testing; and (c) are not to be used therapeutically for in vivo testing in humans.

3.    The Peptide(s) are provided by CU and SPI to Recipient on a non-exclusive and limited basis for use by Recipient only for the Evaluation under the terms of this Agreement and Recipient hereby acknowledges and agrees that CU and SPI shall be free to use and/or to supply to third parties for any purpose.

4.    This Agreement grants a limited, non-transferable license for Recipient to use the Peptide(s) solely in the Evaluation, subject to all the terms and conditions of this Agreement as expressly provided for herein. Notwithstanding anything contained in this Agreement to the contrary, Recipient agrees that it acquires no rights or interests in the Peptide(s). CU retains rights and titles in and to the Peptide(s) and the related information provided to Recipient by CU, as well as related intellectual property rights, including without limitation, any and all patents, patent applications, trade secrets, copyrights and copyright applications related thereto, subject only to the limited Evaluation use granted to Recipient under the terms of this Agreement. Recipient understands and agrees that no other right or license to the Peptide(s) or to its use is granted or implied as a result of CU, through SPI, providing the Peptide(s) to Recipient under this Agreement. Notwithstanding anything to the contrary in this Agreement, Recipient shall not reverse engineer or otherwise analyze or characterize the Peptide(s) in order to determine the identity or composition thereof.

5.    Recipient acknowledges and agrees that Material may not be used in research sponsored by a commercial entity other than SPI or subject to licensing or consulting obligations to a commercial entity other than SPI without specific permission from CU and SPI. Recipient agrees to promptly and fully disclose in writing and provide to CU and SPI any and all work, discoveries, developments, data, inventions and know-how (whether or not protectable under state, federal, or foreign intellectual property laws) related to the Peptide(s) and/or the Evaluation, including, without limitation, (a) any materials derived from the Peptide(s) and/or the Evaluation (including reagents, bioassay materials, biological or chemical materials, cell lines, plasmids, constructs and vectors); (b) any materials resulting from the physical, chemical, or biological manipulation of Peptide(s); and (c) any materials having DNA or peptide sequences substantially identical to Peptide(s) or any materials described in (a) or (b) above, however obtained (collectively, the “Inventions”). Inventions shall include, but not be limited to, any variants, modifications and/or derivatives of the Peptide(s). All Inventions that derive from Material or that could not have been made but for the incorporation of Material, in whole or in part, shall be jointly owned by CU and the Recipient Institution.

 

D-2


Recipient Institution hereby grants, and SPI hereby accepts, an exclusive, royalty-bearing, worldwide license to Recipient Institution’s rights to any and all Inventions with the right to sublicense. Recipient Institution will negotiate in good faith to conclude a license agreement with a commercially reasonable term(s) within six (6) months from the date in which the first term sheet for the license agreement is presented by the Recipient Institution to SPI (“the Negotiation Period”). Such negotiations shall take into account factors affecting SPI’s ability to commercialize the product profitably, including, but not limited to, e.g. , terms of any third party license which may be necessary for the manufacture, use, and sale of any product relating to the fields of use, size of market(s), development time and cost, product performance relative to competing products, and whether the invention is covered by a sole or joint patent.

In the event Recipient Institution and SPI fail to reach a mutually acceptable license agreement within the Negotiation Period, the Recipient Institution shall be entitled to negotiate in good faith with one or more third parties a license for rights in the Invention, provided, however, Recipient Institution shall not offer to any such third party terms that are more favorable than were offered to SPI. Upon the conclusion of such negotiations and before any license is granted, the Recipient Institution shall offer SPI a license on the same terms as offered to the one or more third parties. If SPI is willing to enter into a license with Recipient Institution on such terms, SPI shall be granted the license instead of such third party so long as SPI accepts such terms within thirty (30) calendar days from receipt of written notice of the offer.

6.    Recipient agrees to provide CU with reports within fifteen (15) calendar days after the end of each calendar half, commencing from the Effective Date and continuing during the term and following the conclusion of the Evaluation, which reports will include all data, results and information generated by or on behalf of Recipient in connection with the Peptide(s) and/or the Evaluation (the “Results”). CU shall have a right to use such Results in any manner it determines, except it will not publish Results in academic journals or present them at public meetings without the consent of the Recipient Investigator.

7.    Recipient agrees to provide both CU Investigator and SPI Official with an advance copy of any proposed manuscript publication that makes reference to the Material, forty five (45) days prior to submission, and twenty one (21) days prior to submission of an abstract. If in the opinion of CU any such publication describes a patentable invention, CU shall have an opportunity to request that Recipient delay publication until after a U.S. patent application has been filed. In no event shall the delay exceed ninety (90) days from the date CU Investigator receives the publication. If a publication does result from work using the Material, Recipient agrees to acknowledge CU and/or give credit to CU scientists, as scientifically appropriate, based on any direct contribution they may have made to the work.

8.    This Agreement shall come into effect on the Effective Date and, unless the Parties otherwise agree in writing, shall continue in effect until the earlier of: (a) completion of the Evaluation and (b) any earlier termination or expiration of this Agreement by either Recipient or CU upon thirty (30) calendar days prior written notice to the other party. Upon the written request of CU, Recipient shall return any unused Peptide(s) and promptly and

 

D-3


fully disclose in writing and provide to CU any and all Inventions. If Recipient Investigator transfers to another institution prior to completion of the studies as specified above, this Agreement shall terminate automatically. Upon any breach of this Agreement by Recipient, CU shall have the right to terminate this Agreement immediately upon written notice to Recipient, as well as seek equitable remedies against Recipient, including but not limited to injunctions and any other restrictions against Recipient violating any obligations contained in this Agreement. Following termination for any reason, Recipient shall return all unused Material to the CU Investigator and no party shall have any further obligations to another party under this Agreement, except that the terms of Sections 4 through 13 will survive any expiration or termination of this Agreement.

9.    Recipient hereby acknowledges that the Peptide(s) are experimental in nature and that they are provided “AS IS.” CU AND SPI MAKE NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PEPTIDE(S) OR THE USE THEREOF. CU AND SPI DISCLAIM ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT.

10.    “Confidential Information” shall mean the confidential and proprietary information of a party which is disclosed by such party (the “Disclosing Party”), to the other party (the “Receiving Party”) in connection with supplying and evaluating the Peptide(s); provided that any CU information or SPI information that relates to the Peptide(s) will be deemed Confidential Information, regardless of the existences of any “Confidential” marking or similar identification or legend. Confidential Information shall include information that is disclosed in writing and marked “Confidential” or with a similar legend, or is disclosed orally and is reduced to writing and marked “Confidential” or with a similar legend within thirty (30) days after such disclosure. Confidential Information shall not include information that, (a) is in possession of the Receiving Party at the time of disclosure thereof as demonstrated by written records; (b) is or later becomes part of the public domain through no fault of the Receiving Party; (c) is received by the Receiving Party from a third party having no obligation of confidentiality to the Disclosing Party; (d) is developed independently by the Receiving Party without use of or reference to any Confidential Information; or (e) is required by law or regulation to be disclosed; provided, however, that, the Receiving Party has provided written notice to the Disclosing Party promptly to enable the Disclosing Party to seek a protective order or otherwise prevent disclosure of such information. From time to time during the term of this Agreement, the Disclosing Party may, in connection with the evaluation of the Peptide(s), disclose Confidential Information to the Receiving Party. The Receiving Party shall use the Confidential Information solely for the purpose of the Evaluation. The Receiving Party agrees to exert reasonable efforts (no less than the protection given its own confidential information) to maintain such Confidential Information in confidence, to make such Confidential Information available only to those persons who require access to it in the performance of this Agreement and the Evaluation, and to inform all such parties of the confidential nature of such Confidential Information. The obligations of the Receiving Party under this Section 10 shall continue for a period of five (5) years after the expiration or termination of this Agreement.

 

D-4


11.    Upon expiration or termination of this Agreement, the Receiving Party, if requested by the Disclosing Party, shall return all copies of Confidential Information disclosed; provided, that, the Receiving Party may retain one copy of such Confidential Information (except the Materials), for archival purposes.

12.    Recipient shall comply in all material respects with all laws and governmental rules, regulations and guidelines, including those of the National Institutes of Health and the Centers for Disease Control, which are provided with and applicable to the use of the Peptide(s), including biosafety procedures. In no event shall CU or SPI be liable for any use by Recipient of the Peptide(s) or for any claim, liability, cost, expense, damage, deficiency, loss or obligation, of any kind or nature (including, without limitation, reasonable attorneys’ fees and other costs and expenses of defense), that may arise from or in connection with this Agreement or the use, handling, storage, or disposition of the Peptide(s) by Recipient. Recipient shall hold harmless and indemnify CU and SPI against any and all losses, liabilities, damages and expenses (including reasonable attorneys’ fees and costs) of every kind arising from the use and Evaluation by Recipient of the Peptide(s) and/or any breach of this Agreement by Recipient.

13.    This Agreement represents the entire agreement among the Parties regarding the transfer and use of the Peptide(s) and shall supersede all previous communications, representations, understandings and agreements, whether oral or written, by or among the Parties with respect to Research Project. Recipient hereby represents that the acceptance of the Peptide(s) in accordance with, and the performance of all the terms of, this Agreement do not and will not breach or conflict with any other agreement or arrangement to which Recipient is a party, including the terms under which any research to be conducted using the Peptide(s) is funded. Recipient represents that it is not subject to any agreement or commitment that conflicts with, or is inconsistent with, this Agreement. Recipient will not hereafter grant to any person or entity any rights inconsistent with the terms of this Agreement.

14.    No change, modification, extension, termination or waiver of this Agreement, or any of the provisions herein contained, shall be valid unless made in writing and signed by duly authorized representatives of Recipient, CU and SPI.

15.    This Agreement shall be governed by the laws of The State of New York.

IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the dates designated. The Effective Date shall be the latest date entered below.

 

Signatures

          

CU Official:

 

 

  Printed Name    Title    Signature    Date

Recipient

          

Institution

          

Official:

 

 

  Printed Name    Title    Signature    Date

 

D-5


Read and

           

Understood

           

Recipient

           

Investigator:

  

 

   Printed Name    Title    Signature    Date

SPI Official:

  

 

   Printed Name    Title    Signature    Date

 

D-6


Attachment A

RESEARCH PROJECT

Principal Investigator :

Project Title :

Project Description :

Research Plan :

 

D-7

Exhibit 10.9

Execution Copy

Confidential

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is made effective as of the date last signed below (“Effective Date”) by and between Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business and offices at 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, and Cornell University (“Cornell”) as represented by its Cornell Center for Technology Enterprise and Commercialization (“CCTEC”) at 395 Pine Tree Road, Ithaca, NY. LICENSEE and Cornell are each referred to individually as “Party” and collectively as “Parties.” The Parties hereby agree as follows :

ARTICLE 1:     INTRODUCTION

 

1.1

Cornell has filed the various patent applications listed in Appendix A.

 

1.2

LICENSEE has exercised its right under Section 4.7 of that certain Exclusive License Agreement, dated April 20, 2006, as amended by the First Amendment dated as of October 7, 2010, to which LICENSEE and Cornell are parties (the “Amended License Agreement”), to obtain the right to develop and to commercialize the inventions disclosed in the Applications.

 

1.3

The work leading to the inventions was supported in part by an agency of the United States Government, and Cornell is obligated to comply with United States OMB Circular A-124 and 37 CFR Part 401. This license is subject to the applicable terms of United States Government regulations concerning Government-funded inventions.

 

1.4

The Parties agree to the terms and conditions hereinbelow in order to develop the inventions for commercial purposes, and utilize them in the public interest.

ARTICLE 2:     DEFINITIONS

 

2.1

“Affiliate” shall mean (1) any corporation or other noncorporate entity owning directly, or indirectly controlling, at least fifty percent (50%) of the stock normally entitled to vote for election of directors of LICENSEE; (2) any corporation owned or controlled by LICENSEE through ownership of at least fifty percent (50%) of the stock entitled to elect directors or any other entity actually controlled by LICENSEE, (3) any corporate or noncorporate entity under common control with LICENSEE.

 

2.2

“Applications” shall mean (a) the patent applications listed in Appendix A, (b) any foreign patent applications based thereon, (c) all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing applications and are enabled by subject matter that is disclosed in such application, (d) all divisionals and continuations of any of the patent applications described in (a)-(c) above, and (e) any patent application sharing a common claim of priority with any of the patent applications described in (a)-(d) above.

 

1


2.3

“Covered” shall mean, with respect to a Product and a country, that, in the absence of ownership of or a license granted under a Valid Claim in such country, the manufacture, use, offer for sale, sale or importation of such Product would infringe such Valid Claim (or, in the case of a Valid Claim in an Application, would reasonably likely infringe such Valid Claim if it were to issue in a Patent).

 

2.4

“Dollars” or “$” shall mean United States Dollars.

 

2.5

“Exclusive” shall mean that during the term of this Agreement Cornell will not grant commercial rights to Patents and/or Applications to any other party in the Field-of-Use.

 

2.6

“Field-of-Use” shall mean any and all fields.

 

2.7

“Human Therapeutic Products” shall mean Products marketed as therapeutics for human use.

 

2.8

“Licensed Territory” shall mean the world.

 

2.9

“License Year” shall mean each twelve-month period beginning on January 1 and ending on December 31. However, the first License Year (alternatively, License Year 1) shall commence on the Effective Date and end on December 31 of the same calendar year.

 

2.10

“Net Sales” shall mean the gross amount invoiced for sales, leases and other dispositions of Products by LICENSEE, and Sublicensees, to an independent third party on sale or use of Products where Products are either made, used, sold, imported, exported, or otherwise commercialized less (i) all trade, quantity, and cash discounts actually allowed on Products, (ii) all credits and allowances actually granted on Products on account of rejection, returns, billing errors, and retroactive price reductions, (iii) duties actually paid on Products, and (iv) excise, sale and use taxes, and equivalent taxes actually paid on Products.

 

2.11

“Patents” shall mean (a) all patents issuing from any Application, (b) all reissues, reexaminations and extensions of any patent described in (a) above, and (c) any patent sharing a common claim of priority with any of the patents described in (a) and (b) above.

 

2.12

“Products” shall mean any product or service that incorporates, utilizes or is otherwise described and claimed by one or more Valid Claims in Applications or Patents or that are made by a process that utilizes, incorporates or is otherwise described and claimed by one or more Valid Claims in Applications or Patents, and any services that incorporate or utilize or are otherwise described and claimed in Applications or Patents.

 

2.13

“Sublicense” shall mean a rights-granting contract with an independent third party or with a subsidiary or an Affiliate in which LICENSEE conveys rights granted to LICENSEE in Sections 4.1 and 4.2 of this Agreement.

 

2


2.14

“Sublicensee” shall mean any entity granted a Sublicense by LICENSEE, and acceptable to Cornell, under this Agreement.

 

2.15

“Valid Claim” shall mean a claim of (i) an issued Patent which has not been declared invalid in a court of appropriate jurisdiction, or (ii) a pending patent Application which is being diligently prosecuted by or on behalf of Cornell.

ARTICLE 3:     APPLICATIONS AND PATENTS

 

3.1

Cornell represents that Cornell holds title to all Applications and Patents.

 

3.2

Cornell agrees to use reasonable efforts to file and prosecute Applications and maintain Patents. At any time during the term of this Agreement, LICENSEE may elect in writing to be released from its license in any of the Patents or Applications, in which event LICENSEE shall thereafter have no obligation to reimburse Cornell for any future expenses relating to such Patents or Applications, and Cornell shall have the option at its sole discretion and expense to file, prosecute, maintain and license to a third party such Patents or Applications.

 

3.3

LICENSEE shall reimburse Cornell for all out-of-pocket expenses for preparation, filing, prosecution and maintenance of Applications and Patents except for those Applications and Patents for which it has waived its rights, in writing, as described in Section 3.2. Such reimbursable expenses shall include those incurred prior to Effective Date. Such expenses shall be paid to Cornell by LICENSEE within [**] days of receipt of an invoice therefore unless Cornell has otherwise agreed, in writing. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge, or the highest rate allowed by New York State Law.

 

3.4

Cornell shall have final authority over selection of patent attorneys and all decisions concerning filing and prosecution of Applications and maintenance of Patents. However, Cornell shall keep LICENSEE reasonably informed of its filing, prosecution and maintenance activities and shall give LICENSEE the opportunity to comment on major decisions concerning such activities.

 

3.5

LICENSEE shall not at any time, directly or indirectly, oppose the grant of, nor dispute the validity or enforceability of, nor cooperate in any suit, claim, counterclaim or defense against any patent or claim included in the Patents.

ARTICLE 4:     LICENSE GRANT AND COMMERCIAL EFFORTS

 

4.1

Subject to the terms and conditions of this Agreement and to the rights of and obligations to the United States Government as set forth in United States Office of Management & Budget

 

3


  Circular A-124 or 37 CFR Part 401 et seq., Cornell hereby grants and LICENSEE hereby accepts an exclusive right to make, use, sell, lease, import, export or otherwise dispose of Products under Applications and Patents in the Field-of-Use in the Licensed Territory for the term of this Agreement as specified in Section 7.1.

 

  (i)

The right of LICENSEE to make Products includes the right to have Products made by contract with third parties within the Licensed Territory. Such contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of Cornell and to supply all production of Products exclusively to LICENSEE.

 

4.2

LICENSEE shall also have the right to grant Sublicenses under this Agreement provided LICENSEE: (1) consults with Cornell regarding the potential sublicensee, (2) provides Cornell with a draft sublicense at least [**] days prior to its execution and (3) provides Cornell with a copy of the fully executed sublicense within [**] days of execution. Any such Sublicense shall contain all the provisions of this Agreement which are protective of and beneficial to Cornell and LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee as though they were sales by LICENSEE. Any such Sublicenses shall be subject to an obligation for LICENSEE to pay to Cornell [**] percent ([**]%) of any consideration received by LICENSEE under a Sublicense, other than (1) consideration consisting of royalties on sales or net sales made by the Sublicensee (which shall be handled in accordance with Section 5.5 hereunder) under such a Sublicense, (2) payments made to LICENSEE for equity securities at or near fair market value and (3) payments made to LICENSEE to fund research and development of Products.

 

4.3

LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee in accordance with Section 5.5 hereof as though such sales were made by LICENSEE. LICENSEE and Cornell agree to negotiate in good faith an appropriate value for all non-cash consideration or non-cash cross-licenses. LICENSEE’s obligation to pay Cornell’s share of Sublicense consideration shall be considered incurred as of the date on which such Sublicense consideration is received by LICENSEE.

 

4.4

Cornell retains an irrevocable and nonexclusive right to practice for its own educational and research purposes, the inventions claimed in Applications and Patents and such purposes shall include limited, non-commercial collaboration with other non-profit research institutes, subject to the requirements of Section 4.7(vii) of the Amended License Agreement relating to Material Transfer Agreements (as defined therein).

 

4.5

Nothing in this Agreement shall be construed to give LICENSEE rights in any technologies currently owned or developed in the future by Cornell other than those explicitly specified in this Agreement. Nothing in this Agreement shall be construed to give Cornell rights in technologies currently owned or developed in the future by LICENSEE other than those explicitly specified in this Agreement.

 

4


4.6

The rights granted by this Agreement are to LICENSEE alone and not to any third parties or to any subsidiary or Affiliate of LICENSEE. However, with prior written approval of Cornell (such approval not to be unreasonably withheld), LICENSEE may transfer this Agreement by way of sale of LICENSEE, through sale of assets and/or sale of stock, provided that such sale is not primarily for the benefit of creditors. If LICENSEE fails to obtain the prior written approval from Cornell for such transfer, Cornell shall have the right to terminate this Agreement and the right to require that the transfer of this Agreement be voided.

 

4.7

LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to use its Best Efforts to meet the diligence milestones of this Section 4.7 shall be a material breach of this Agreement.

Licensee shall use Best Efforts to achieve the following goals by the date indicated (“Best Efforts” shall mean the efforts that a reasonable person in the position of LICENSEE would make so as to achieve that goal as expeditiously as practicable; notwithstanding the foregoing, LICENSEE shall be deemed to have used Best Efforts with respect to a milestone if it achieves the milestone by the corresponding target achievement date). LICENSEE will provide additional milestones on the [**] anniversary of the Effective Date and on the anniversary of the Effective Date every [**] years thereafter until the first commercial sale of a Human Therapeutic Product.

 

Milestone

   Target
achievement date

1.    [**]

   [**]

2.    [**]

   [**]

3.    [**]

   [**]

4.    [**]

   [**]

If LICENSEE has not achieved a given milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**] thereafter to achieve such milestone. If LICENSEE has not achieved such milestone by the end of such cure period, the license granted pursuant to Paragraph 4.1 shall thereafter convert to a non-exclusive license.

 

4.8

Unless LICENSEE has a Human Therapeutic Product available for commercial sale prior to [**], LICENSEE agrees that Cornell may terminate this Agreement, except to the extent any failure to meet such date is attributable to factors over which LICENSEE cannot exert direct control, including without limitation IRB delays, clinical trial enrollments, clinical trial results, regulatory delays and events of force majeure.

 

4.9

Beginning with the second License Year, within [**] days after the start of each License Year and until LICENSEE markets Products, LICENSEE shall make a written annual

 

5


  report to Cornell covering the preceding License Year, regarding the progress of LICENSEE toward commercial development of Products. Such report shall include, at a minimum, information sufficient to enable Cornell to satisfy reporting requirements of the United States Government and for Cornell to ascertain progress by LICENSEE toward meeting the Best Efforts of this Article 4. For clarity, LICENSEE may satisfy its obligations under this Section 4.9 by including the applicable information in each annual report submitted pursuant to Section 4.10 of the Amended License Agreement provided that the applicable information references this Agreement.

 

4.10

If Cornell should identify any Product that (i) LICENSEE is not actively developing or commercializing, as evidenced by the reports provided to Cornell under Section 4.9; and (ii) is in a field (which shall include for the purpose of this section: human therapeutics, animal health, drug delivery, research reagents and medical device reagents) and/or territorial market that Cornell indicates is significant, (such Product, an “Undeveloped Product”), Cornell shall provide written notice to LICENSEE of said Undeveloped Product. Within [**] days after receipt of such notice from Cornell, LICENSEE shall provide written notice to Cornell that it elects to: a) affect development and commercialization of said Undeveloped Product itself; or b) affect development and commercialization of said Undeveloped Product through an appropriate sublicensee; or c) terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product. Should LICENSEE elect to affect development and commercialization of said Undeveloped Product itself, Cornell and LICENSEE will negotiate reasonable diligence goals, which shall be added to Section 4.7 by means of an amendment. Should such an amendment not be executed within [**] days after LICENSEE’s election, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE. Should LICENSEE elect to sublicense its rights, said sublicense shall be executed within [**] months after LICENSEE’s election. Should said sublicense not be so executed, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE.

 

4.11

LICENSEE shall not use , nor shall LICENSEE permit Sublicensee to use, the names, trademarks and indicia of Cornell, nor the names of any employee, student or faculty member of Cornell without prior written approval from Cornell. Cornell shall not use the names, trademarks and indicia of LICENSEE nor disclose to any third party any non-public information relating to the subject matter of this Agreement without prior written approval from LICENSEE.

 

4.12

LICENSEE shall alone have the obligation to ensure that Products it makes, uses, sells, leases, imports, exports or otherwise disposes of are not defective, that Products satisfy all applicable government regulations and that export of Products satisfies government export requirements.

ARTICLE 5:     PAYMENTS, ROYALTIES, REPORTS AND RECORDS

 

5.1

As consideration for entering into this Agreement, LICENSEE shall pay Cornell a license fee of [**] Dollars ($[**]) within [**] days after the Effective Date.

 

6


5.2

Commencing upon the third anniversary of the Effective Date and continuing until the first commercial sale of the first Therapeutic Product, LICENSEE will pay FOUNDATION an annual license maintenance fee of $[**] on each anniversary of the Effective Date.

 

5.3

For the rights granted hereunder, LICENSEE shall pay or cause to be paid to Cornell a royalty on Net Sales of Products, on a Product-by-Product and country-by-country basis, where the manufacture, use, sale, offer for sale or importation of such Product by LICENSEE in such country is Covered by a Valid Claim, as per the following table:

 

Product

   Royalty   If Annual Sales:

All Human Therapeutic Products

   [**]   [**]
   [**]   [**]
   [**]   [**]
   [**]   [**]

In lieu of the royalty in the table above, the royalty shall be [**] percent ([**]%) of Net Sales of Products made, used, sold, offered for sale, or imported in any country where such activities are not Covered by a Valid Claim, except that no royalty shall be due for any sales of any such Product that occur after the fifteenth (15 th ) anniversary of the first commercial sale of such Product. LICENSEE shall pay royalties in accordance with this Section 5.2 on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to the Effective Date or are produced before but sold after the termination of this Agreement.

 

5.4

Royalties shall be payable only once with respect to the same unit of Product, and no royalty shall be payable hereunder with respect to any unit of Product for which royalties are payable under the Amended License Agreement. However, LICENSEE will use reasonable efforts to provide Cornell with information Cornell can use to determine sales of Products relating to the indication Covered by the Applications and Patents of this Agreement.

 

5.5

If a Product contains technology subject to royalties payable to a third party, the royalty due hereunder shall be reduced by [**] percent ([**]%) for every [**] percent ([**]%) of royalty due to such third party, but in no event shall royalties due be reduced by more than [**] percent ([**]%) of the applicable royalty rate payable for such Products.

 

5.6

LICENSEE shall provide Cornell with quarterly written reports of all sales, leases or other dispositions of Products by LICENSEE during the quarter ending March 31, June 30, September 30 and December 31, due within [**] days of the end of each quarter . LICENSEE shall require that Sublicensees provide LICENSEE with quarterly written reports of all sales, leases or other dispositions of Products by Sublicensees, during the quarter ending March 31, June 30, September 30 and December 31, and copies of Sublicensee’s reports shall accompany LICENSEE’s reports to Cornell. In order to minimize LICENSEE time spent on royalty reports, a brief one-page Royalty Report Form is provided in Appendix C to the Amended License Agreement that will satisfy Cornell’s

 

7


  reporting requirements. Cornell agrees to keep the information in these reports confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. Royalty payments for sales, leases, and other dispositions of the Products invoiced during a calendar quarter shall accompany the Royalty Report Form for that particular quarter. The Royalty Report Form shall be submitted regardless of whether or not royalties are owed. All amounts reported and all payments made shall be in United States dollars. Conversion from foreign currencies, if any, shall be based upon the conversion rate published in The Wall Street Journal on the last day of the particular quarterly accounting period (or on the last business day on which The Wall Street Journal is published during said quarterly period) for which royalties are due. Royalty checks shall be made payable to Cornell University and mailed to the address specified in Section 13.4.

 

5.7

LICENSEE shall keep and maintain , and LICENSEE shall require that Sublicensees keep and maintain, any and all records necessary to certify compliance of LICENSEE with the terms of this agreement, including but not limited to accounting general ledgers, Sublicense and distributor agreements, price lists, catalogs, and marketing materials, audited financial statements, income tax returns, sales tax returns, inventory records, and shipping documents of Products. Such records shall be open to inspection at reasonable times by a certified public accountant chosen by Cornell and acceptable to LICENSEE, which shall not unreasonably withhold such acceptance. Such inspection shall be made at Cornell’s expense. However, if the results of any audit reveal additional royalties owed to Cornell that differ by more the [**]% ([**] percent) from those royalties already paid, LICENSEE shall also reimburse Cornell for the costs of the audit. Cornell agrees to hold such records confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. The records required by this paragraph shall be maintained and available for inspection for a period of [**] years following the calendar quarter to which they pertain. This paragraph shall survive termination of this Agreement.

 

5.8

LICENSEE shall reimburse Cornell for the expenses specified in Section 3.3 within [**] days of written invoice from Cornell. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates.

 

5.9

Royalty payments due under Section 5.2 of this Agreement and payment of Cornell’s share of Sublicense consideration shall become late if not paid within [**] days after the end of the quarter in which the payment obligation was incurred. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge.

 

5.10

LICENSEE agrees to make a written report to Cornell within [**] days after the expiration of this Agreement pursuant to Section 7.1. LICENSEE shall continue to make reports pursuant to the provisions of this Section 5.9 concerning royalties payable in accordance with Section 5.2 in connection with the sale of Products after expiration of the license, until such time as all such Products produced under the license have been sold or destroyed. Concurrent with the submittal of each post-termination report, LICENSEE shall pay Cornell all applicable royalties.

 

8


ARTICLE 6:    INFRINGEMENT

 

6.1

In the event that either Party determines that a third party is making, using or selling a product that may infringe Patents, it will promptly notify the other Party in writing. LICENSEE may elect, with the prior written consent of Cornell, to bring suit against such alleged infringer. Such election must be made within [**] days after receipt of said written consent from Cornell. All recoveries in such suit shall belong to LICENSEE except that Cornell shall have the right to elect to pay up to [**] percent ([**]%) of the litigation costs and receive a percentage of any recovery equal to the percentage of litigation costs paid. Cornell must make such election within [**] days after its receipt of notice that LICENSEE has elected to bring suit. Cornell shall also have the right to choose to be represented by separate counsel in any such suit at its own expense. Such expense for separate counsel shall not be considered as part of “litigation costs” for purposes of determining Cornell’s share of any recovery in accordance with the sentence above. If LICENSEE elects not to bring a suit against the alleged infringer, it shall promptly notify Cornell of that fact and Cornell shall have the right to commence such actions at its own cost and expense, in which case any recoveries shall belong to Cornell. In such suits by Cornell, LICENSEE shall have rights of participation and recovery that are the same as Cornell’s rights as provided above when LICENSEE elects to sue.

 

6.2

Regardless of which Party controls a suit brought against an infringer, each Party shall participate in any settlement discussions and each will be a signatory to any settlement agreement.

ARTICLE 7:    TERM AND TERMINATION

 

7.1

This Agreement shall commence on the Effective Date, and shall continue as an Exclusive license, subject to Section 4.8, until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction and no Applications remain pending, and provided this Agreement is not earlier terminated as provided for herein.

 

7.2

Cornell may terminate this Agreement if LICENSEE:

(i)    is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

(ii)    subject to Section 4.8, is in material breach of any provision of this Agreement; or

(iii)    intentionally provides any false report;

 

9


and LICENSEE fails to remedy any such default, breach, or false report within [**] days after written notice thereof by Cornell. LICENSEE’s right to terminate this Agreement on a Product-by-Product basis is as set forth in Paragraph 7.4.

 

7.3

Cornell may terminate this Agreement upon thirty (30) days written notice by Cornell if LICENSEE fails to obtain prior written Cornell approval for the transfer of this Agreement upon the sale of LICENSEE in accordance to Section 4.6, provided that such notice is given within sixty (60) days after such transfer.

 

7.4

LICENSEE may terminate the license granted hereunder, in its entirety or on a Patent-by- Patent basis, a Product-by-Product, and/or a country-by-country basis if LICENSEE has a reasonable basis for doing so, at any time upon sixty (60) days notice to Cornell. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments under this Agreement.

 

7.5

Upon termination of this Agreement for any reason, including the end of term as specified above, all rights and obligations under this Agreement shall terminate, except those that have accrued prior to termination and except as specified in this Agreement.

ARTICLE 8:    PUBLICATION AND CONFIDENTIALITY

 

8.1

It is the policy of Cornell to promote and safeguard free and open inquiry by faculty, students and others. To further this policy, Cornell shall retain the right to publish information described in Applications and Patents.

 

8.2

Each Party agrees to keep any information identified as confidential by the disclosing Party confidential using methods at least as stringent as each Party uses to protect its own confidential information, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement or to audit LICENSEE as specified under Section 5.6. “Confidential Information” shall include the progress report required under Section 4.9 and any other information marked confidential or accompanied by correspondence indicating such information is confidential exchanged between the Parties hereunder. The confidentiality and use obligations set forth above apply to all or any part of the Confidential Information disclosed hereunder except to the extent that:

 

  (a)

LICENSEE or Cornell can show by written record that it possessed the information prior to its receipt from the other Party;

 

  (b)

The information was already available to the public or became so through no fault of the LICENSEE or Cornell;

 

  (c)

The information is subsequently disclosed to LICENSEE or Cornell by a third party that has the right to disclose it free of any obligations of confidentiality; or

 

  (d)

[**] years have elapsed from the expiration of this Agreement.

 

10


ARTICLE 9:    ARBITRATION AND JUDICIAL REMEDIES

 

9.1

If a controversy arises under or related to this Agreement, and any disputed claim by either Party against the other Party under this Agreement, excluding any dispute relating to patent validity or infringement arising under this Agreement, the Parties shall endeavor to resolve such controversy or dispute by mutual, good faith conciliation and, failing that, may mutually agree to settle the controversy or dispute by mediation in accordance with the WIPO Mediation Rule. The place of mediation shall be New York, New York. The language to be used in the mediation shall be English.

Cornell reserves the right and power to proceed with direct judicial remedies without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of [**] days in which to cure such breach. In collecting overdue royalty payments and securing compliance with reporting obligations, Cornell may use all judicial remedies available.

ARTICLE 10:    INDEMNIFICATION

 

10.1

LICENSEE agrees to indemnify, defend and hold harmless Cornell and its trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Product purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, or (iii) a third party’s manufacture or provision of a Product at the request of LICENSEE or Sublicensee.

 

10.2

Cornell shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. Cornell shall not have any responsibilities or liabilities whatsoever with respect to Products.

 

10.3

LICENSEE and Sublicensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement.

 

10.4

In addition to the foregoing, LICENSEE shall cause Stealth Peptides, Inc., an Affiliate of LICENSEE, to maintain, during the term of this Agreement, Comprehensive General Liability Insurance to cover the activities of LICENSEE. Such insurance shall provide minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate. Such insurance shall be written as primary coverage to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with financial strength ratings of at least A- as rated by A.M. Best. LICENSEE shall obtain appropriate clinical trial coverage before initiating any clinical

 

11


  trials of Products. The coverage and limits referred to above shall not in any way limit the liability of LICENSEE. LICENSEE shall, within [**] days after the Effective Date, furnish Cornell with certificates of insurance showing compliance with all requirements. Such certificates shall provide for [**] day advance written notice to Cornell of any modification. LICENSEE shall use reasonable best efforts to extend the coverage referred to above within [**] months after the Effective Date to include Cornell as an additionally insured party and shall furnish Cornell with a certificate of insurance evidencing any such extension.

 

10.5

The provisions of this Article 10 shall survive termination of this Agreement.

ARTICLE 11:    WARRANTIES AND LIMITATIONS

 

11.1

Each of Cornell and LICENSEE represent and warrant that it has the right to enter into this Agreement. Cornell warrants that it has the right to convey to LICENSEE the rights granted under this Agreement.

 

11.2

Cornell warrants that it is the owner of the Applications as outlined in Appendix A.

 

11.3

Cornell makes no representation or warranty that Applications will result in issued Patents.

 

11.4

Cornell makes no representations or warranties concerning the validity or scope of Patents.

 

11.5

Cornell does not warrant that Products made, used, sold, leased, imported, exported or otherwise disposed of under the license of this Agreement is or will be free from infringement of patents of third parties.

 

11.6

Nothing herein shall be construed as granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of Cornell or other persons other than Patents, regardless of whether such patents or other rights are dominant or subordinate to any Patents.

 

11.7

Cornell is under no obligation to furnish any technology or information other than that described and claimed in Applications and Patents.

 

11.8

Nothing herein shall be construed to grant LICENSEE rights under any applications or patents other than Applications and Patents.

 

11.9

Cornell does not make any representations, extend any warranties of any kind, express or implied, or assume any responsibility whatever concerning the manufacture, use, or sale, lease or other disposition by LICENSEE or its vendees or transferees of Products.

 

11.10

Except as expressly set forth in this Agreement, CORNELL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF

 

12


  MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.

ARTICLE 12:    MARKING

 

12.1

Prior to the issuance of patents on the Applications, LICENSEE shall mark, and agrees to require that Sublicensees shall mark, Products (or their containers or labels) made, sold, leased, imported, exported or otherwise disposed of by it under the license granted in this Agreement with the words “Patent Pending”, and following the issuance of one or more Patents, with each Patent’s Number.

ARTICLE 13:    MISCELLANEOUS PROVISIONS

 

13.1

Terms in this Agreement which appear capitalized, other than the names of the Parties and article headings, have the meanings given in Article 2 and retain those meanings whether used in the singular or plural.

 

13.2

This Agreement shall be binding upon and be to the benefit of the Parties and their heirs, successors and permitted assigns. However, neither Party shall assign this Agreement, in whole or in part, without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

 

13.3

All issues and questions concerning the construction, validity and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement, even though under that jurisdiction’s choice of law or conflict of law analysis, the substantive law of such other jurisdiction would ordinarily apply. The Parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any State court sitting in Tompkins County, State of New York or Federal court sitting in Syracuse, New York over any suit, action or proceeding arising out of or relating to this Agreement and agree that no such suit, action or proceeding shall be brought in any other court, forum or jurisdiction. The Parties hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

 

13.4

All notices required or permitted hereunder shall be in writing and be served on the Parties at the addresses set forth below. Any such notices shall be either (a) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered when

 

13


  delivery is made according to the records of such courier, (b) sent by facsimile, in which case notice shall be deemed delivered upon receipt of confirmation of transmission of such facsimile notice, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt. Any notice by facsimile or personal delivery and delivered after 5:00 p.m., Eastern Daylight Time, shall be deemed received on the next Business Day. A Party’s address may be changed by written notice to the other Party; provided, however , that no notice of a change of address shall be affected until actual receipt of such notice.

In the case of Cornell:

Cornell Center for Technology Enterprise and Commercialization

Attn: Executive Director

395 Pine Tree Road, Suite 310

Ithaca, NY 14850

With a copy to:

Brian J. Kelly, Vice President

Cornell Research Foundation, Inc.

418 East 71 st Street

New York, NY 10021

Phone: (212)746-6186

Fax: (212) 746-6662

In the case of LICENSEE:

Stealth Peptides International Inc.

c/o Stealth Peptides Inc.

Attn: Travis Wilson

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807

All payments shall be made to Cornell:

Cornell Center for Technology Enterprise and Commercialization

P.O. Box 6899

Ithaca, NY 14850-6899

Attention: Accounting Department

 

14


If remitted by electronic payments via ACH or Fed Wire :

 

Receiving bank name:

   [**]

Bank account no.:

   [**]

Bank routing (ABA) no.:

   [**]

SWIFT Code:

   [**]

Bank account name:

   [**]

Bank ACH format code:

   [**]

Bank address:

   [**]

Additional information:

   [**]

A FAX copy of the transaction receipt shall be sent to Associate Director for Finance and Operations at: 607-254-5454. LICENSEE is responsible for all bank charges of wire transfer of funds for payments. The bank charges shall not be deducted from total amount due to Cornell.

 

13.5

No term or provision of this Agreement shall be waived and no breach excused unless such waiver or consent shall be in writing and signed by the Party claimed to have waived or consented. No waiver of a breach shall be deemed to be a waiver of a different or subsequent breach.

 

13.6

This Agreement may not be modified, changed or terminated orally. No change, modification, addition or amendment shall be valid unless in writing and signed by the Parties.

 

13.7

In the event any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.

 

13.8

This Agreement constitutes and contains the entire agreement of the Parties respecting its subject matter and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether written or oral, between the Parties respecting its subject matter.

 

13.9

This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document by both Parties as listed below. Any photocopy or facsimile copy of this fully executed Agreement shall have the same legal force and effect as any copy bearing original signatures. Signatures transmitted by facsimile shall be deemed valid as original signatures.

 

13.10

For clarity, in furtherance of fulfilling its obligations and exercising its rights under this Agreement, LICENSEE may employ third parties, including but not limited to contract manufacturers, contract research organizations and contract sales organizations, to carry out activities on LICENSEE’s behalf, without any obligation to obtain consent from Cornell therefor.

 

15


IN WITNESS of this Agreement, INSTITUTIONS and LICENSEE have caused this Agreement to be executed by their duly authorized officers on the dates indicated.

 

CORNELL UNIVERSITY     STEALTH PEPTIDES INTERNATIONAL INC.
By:   /s/ Alan Paau     By:   /s/ Lonso Garbarino
Name:   Alan Paau, Ph.D., MBA     Name:   Lonso Garbarino
Title:   Vice Provost for Technology Transfer & Economic Development     Title:   Authorized Signatory
Date:   November 19, 2010     Date:   22 November 2010

 

16


Appendix A

Patent Applications

 

[**]

[**]

[**]

Docket Number

  

Cornell

Docket Number

  

Country

  

Status

  

App. No.

  

App. Date

  

Pat. No.

  

Grant Date

[**]

   [**]    [**]    [**]    [**]    [**]      

[**]

   [**]    [**]    [**]    [**]    [**]      

[**]

   [**]    [**]    [**]    [**]    [**]      

[**]

   [**]    [**]    [**]    [**]    [**]      

[**]

   [**]    [**]    [**]    [**]    [**]      

[**]

   [**]    [**]    [**]    [**]    [**]      

 

A-1

Exhibit 10.10

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

EXCLUSIVE LICENSE AGREEMENT

BETWEEN

STEALTH PEPTIDES INTERNATIONAL INC.

AND

CORNELL UNIVERSITY

FOR

DOCKET NO. [**]


Confidential

EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is made effective as of the date last signed below (“Effective Date”) by and between Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business and offices at 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, and Cornell University (“Cornell”) as represented by its Cornell Center for Technology Enterprise and Commercialization (“CCTEC”) at 395 Pine Tree Road, Ithaca, NY. LICENSEE and Cornell are each referred to individually as “Party” and collectively as “Parties.” The Parties hereby agree as follows :

ARTICLE 1: INTRODUCTION

 

1.1

Cornell has filed the various patent applications listed in Appendix A related to the invention of [**], an employee of Cornell, and [**], an employee of the University of Florida, entitled [**] and docketed at Cornell as [**], hereinafter the “Invention”.

 

1.2

LICENSEE has exercised its right under Section 4.7 of that certain Exclusive License Agreement, dated April 20, 2006, as amended by the First Amendment dated as of October 7, 2010, to which LICENSEE and Cornell are parties (the “Amended License Agreement”), to obtain the right to develop and to commercialize the inventions disclosed in the Applications, which are co-owned by Cornell and the University of Florida Research Foundation, Inc. (“UFRF”).

 

1.3

In the Inter-Institutional Agreement between UFRF and Cornell, effective August 3, 2011, UFRF has granted Cornell the exclusive right to license UFRF’s right, title and interest in and to the Applications and the oversight of the patenting of the Invention.

 

1.4

The work leading to the inventions was supported in part by an agency of the United States Government, and Cornell is obligated to comply with United States OMB Circular A-124 and 37 CFR Part 401. This license is subject to the applicable terms of United States Government regulations concerning Government-funded inventions.

 

1.5

The Parties agree to the terms and conditions herein below in order to develop the inventions for commercial purposes, and utilize them in the public interest.

ARTICLE 2: DEFINITIONS

 

2.1

“Affiliate” shall mean (1) any corporation or other noncorporate entity owning directly, or indirectly controlling, at least fifty percent (50%) of the stock normally entitled to vote for election of directors of LICENSEE; (2) any corporation owned or controlled by LICENSEE through ownership of at least fifty percent (50%) of the stock entitled to elect directors or any other entity actually controlled by LICENSEE, (3) any corporate or noncorporate entity under common control with LICENSEE.

 

2.2

“Applications” shall mean (a) the patent applications listed in Appendix A, (b) any foreign patent applications based thereon, (c) all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing applications and are


  enabled by subject matter that is disclosed in such application, (d) all divisionals and continuations of any of the patent applications described in (a)-(c) above, and (e) any patent application sharing a common claim of priority with any of the patent applications described in (a)-(d) above.

 

2.3

“Covered” shall mean, with respect to a Product and a country, that, in the absence of ownership of or a license granted under a Valid Claim in such country, the manufacture, use, offer for sale, sale or importation of such Product would infringe such Valid Claim (or, in the case of a Valid Claim in an Application, would reasonably likely infringe such Valid Claim if it were to issue in a Patent).

 

2.4

“Dollars” or “$” shall mean United States Dollars.

 

2.5

“Exclusive” shall mean that during the term of this Agreement Cornell will not grant commercial rights to Patents and/or Applications to any other party in the Field-of-Use.

 

2.6

“Field-of-Use” shall mean any and all fields.

 

2.7

“Human Therapeutic Products” shall mean Products marketed as therapeutics for human use.

 

2.8

“Licensed Territory” shall mean the world.

 

2.9

“License Year” shall mean each twelve-month period beginning on January 1 and ending on December 31. However, the first License Year (alternatively, License Year 1) shall commence on the Effective Date and end on December 31 of the same calendar year.

 

2.10

“Net Sales” shall mean the gross amount invoiced for sales, leases and other dispositions of Products by LICENSEE, and Sublicensees, to an independent third party on sale or use of Products where Products are either made, used, sold, imported, exported, or otherwise commercialized less (i) all trade, quantity, and cash discounts actually allowed on Products, (ii) all credits and allowances actually granted on Products on account of rejection, returns, billing errors, and retroactive price reductions, (iii) duties actually paid on Products, and (iv) excise, sale and use taxes, and equivalent taxes actually paid on Products.

 

2.11

“Patents” shall mean (a) all patents issuing from any Application, (b) all reissues, reexaminations and extensions of any patent described in (a) above, and (c) any patent sharing a common claim of priority with any of the patents described in (a) and (b) above.

 

2.12

“Products” shall mean any product or service that incorporates, utilizes or is otherwise described and claimed by one or more Valid Claims in Applications or Patents or that are made by a process that utilizes, incorporates or is otherwise described and claimed by one or more Valid Claims in Applications or Patents, and any services that incorporate or utilize or are otherwise described and claimed in Applications or Patents.

 

2


2.13

“Sublicense” shall mean a rights-granting contract with an independent third party or with a subsidiary or an Affiliate in which LICENSEE conveys rights granted to LICENSEE in Sections 4.1 and 4.2 of this Agreement.

 

2.14

“Sublicensee” shall mean any entity granted a Sublicense by LICENSEE, and acceptable to Cornell, under this Agreement.

 

2.15

“Valid Claim” shall mean a claim of (i) an issued Patent which has not been declared invalid in a court of appropriate jurisdiction, or (ii) a pending patent Application which is being diligently prosecuted by or on behalf of Cornell.

ARTICLE 3: APPLICATIONS AND PATENTS

 

3.1

Cornell represents that Cornell and UFRF jointly hold title to all Applications and Patents.

 

3.2

Cornell agrees to use reasonable efforts to file and prosecute Applications and maintain Patents. At any time during the term of this Agreement, LICENSEE may elect in writing to be released from its license in any of the Patents or Applications, in which event LICENSEE shall thereafter have no obligation to reimburse Cornell for any future expenses relating to such Patents or Applications, and Cornell shall have the option at its sole discretion and expense to file, prosecute, maintain and license to a third party such Patents or Applications.

 

3.3

LICENSEE shall reimburse Cornell for all out-of-pocket expenses for preparation, filing, prosecution and maintenance of Applications and Patents except for those Applications and Patents for which it has waived its rights, in writing, as described in Section 3.2. Such reimbursable expenses shall include those incurred prior to Effective Date. Such expenses shall be paid to Cornell by LICENSEE within [**] days of receipt of an invoice therefore unless Cornell has otherwise agreed, in writing. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge, or the highest rate allowed by New York State Law.

 

3.4

Cornell shall have final authority over selection of patent attorneys and all decisions concerning filing and prosecution of Applications and maintenance of Patents. However, Cornell shall keep LICENSEE reasonably informed of its filing, prosecution and maintenance activities and shall give LICENSEE the opportunity to comment on major decisions concerning such activities.

 

3.5

LICENSEE shall not at any time, directly or indirectly, oppose the grant of, nor dispute the validity or enforceability of, nor cooperate in any suit, claim, counterclaim or defense against any patent or claim included in the Patents.

 

3


ARTICLE 4: LICENSE GRANT AND COMMERCIAL EFFORTS

 

4.1

Subject to the terms and conditions of this Agreement and to the rights of and obligations to the United States Government as set forth in United States Office of Management & Budget Circular A-124 or 37 CFR Part 401 et seq., Cornell hereby grants and LICENSEE hereby accepts an exclusive right to make, use, sell, lease, import, export or otherwise dispose of Products under all (including Cornell’s and UFRF’s) rights, title and interest in and to the Applications and Patents in the Field-of-Use in the Licensed Territory for the term of this Agreement as specified in Section 7.1.

The right of LICENSEE to make Products includes the right to have Products made by contract with third parties within the Licensed Territory. Such contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of Cornell and to supply all production of Products exclusively to LICENSEE.

 

4.2

LICENSEE shall also have the right to grant Sublicenses under this Agreement provided LICENSEE: (1) consults with Cornell regarding the potential sublicensee, (2) provides Cornell with a draft sublicense at least [**] days prior to its execution and (3) provides Cornell with a copy of the fully executed sublicense within [**] days of execution. Any such Sublicense shall contain all the provisions of this Agreement which are protective of and beneficial to Cornell and UFRF and LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee as though they were sales by LICENSEE. Any such Sublicenses shall be subject to an obligation for LICENSEE to pay to Cornell [**] percent ([**]%) of any consideration received by LICENSEE under a Sublicense, other than (1) consideration consisting of royalties on sales or net sales made by the Sublicensee (which shall be handled in accordance with Section 5.3 hereunder) under such a Sublicense, (2) payments made to LICENSEE for equity securities at or near fair market value and (3) payments made to LICENSEE to fund research and development of Products.

 

4.3

LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee in accordance with Section 5.3 hereof as though such sales were made by LICENSEE. LICENSEE and Cornell agree to negotiate in good faith an appropriate value for all non-cash consideration or non-cash cross-licenses. LICENSEE’s obligation to pay Cornell’s share of Sublicense consideration shall be considered incurred as of the date on which such Sublicense consideration is received by LICENSEE.

 

4.4

Cornell and UFRF, subject to the terms of the material transfer agreement between the Joan and Sanford I Weill Medical College of Cornell University and University of Florida effective May 14, 2008, each retain an irrevocable and nonexclusive right to practice for its own educational and research purposes, the inventions claimed in Applications and Patents and such purposes shall include limited, non-commercial collaboration with other non-profit research institutes, subject to the requirements of Section 4.7(vii) of the Amended License Agreement relating to Material Transfer Agreements (as defined therein).

 

4


4.5

Nothing in this Agreement shall be construed to give LICENSEE rights in any technologies currently owned or developed in the future by Cornell other than those explicitly specified in this Agreement. Nothing in this Agreement shall be construed to give Cornell rights in technologies currently owned or developed in the future by LICENSEE other than those explicitly specified in this Agreement.

 

4.6

The rights granted by this Agreement are to LICENSEE alone and not to any third parties or to any subsidiary or Affiliate of LICENSEE. However, with prior written approval of Cornell (such approval not to be unreasonably withheld), LICENSEE may transfer this Agreement by way of sale of LICENSEE, through sale of assets and/or sale of stock, provided that such sale is not primarily for the benefit of creditors. If LICENSEE fails to obtain the prior written approval from Cornell for such transfer, Cornell shall have the right to terminate this Agreement and the right to require that the transfer of this Agreement be voided.

 

4.7

LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to use it “Best Efforts” to meet the diligence milestones of this Section 4.7 shall be a material breach of this Agreement. “Best Efforts” shall mean the efforts that a reasonable person in the position of LICENSEE would make so as to achieve that goal as expeditiously as practicable; notwithstanding the foregoing, LICENSEE shall be deemed to have used Best Efforts with respect to a milestone if it achieves the milestone by the corresponding target achievement date. LICENSEE will provide additional milestones on the [**] anniversary of the Effective Date and on the anniversary of the Effective Date every [**] years thereafter until the first commercial sale of a Human Therapeutic Product.

LICENSEE shall use Best Efforts to achieve the following milestone by the date indicated:

 

Milestone

   Target
achievement date

[**]

   [**]

If LICENSEE has not achieved a milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**] thereafter to achieve such milestone. If LICENSEE has not achieved such milestone by the end of such cure period, the license granted pursuant to Section 4.1 shall thereafter convert to a non-exclusive license.

 

4.8

Beginning with the second License Year, within [**] days after the start of each License Year and until LICENSEE markets Products, LICENSEE shall make a written annual report to Cornell covering the preceding License Year, regarding the progress of LICENSEE toward commercial development of Products. Such report shall include, at a minimum, information sufficient to enable Cornell to satisfy reporting requirements of the United States Government and for Cornell to ascertain progress by LICENSEE toward meeting the Best Efforts of this Article 4. For clarity, LICENSEE may satisfy its obligations under this Section 4.8 by including the applicable information in each annual report submitted pursuant to Section 4.9 of the Amended License Agreement provided that the applicable information references this Agreement.

 

5


4.9

If Cornell should identify any Product that (i) LICENSEE is not actively developing or commercializing, as evidenced by the reports provided to Cornell under Section 4.8; and (ii) is in a field (which shall include for the purpose of this section: human therapeutics, animal health, drug delivery, research reagents and medical device reagents) and/or territorial market that Cornell indicates is significant, (such Product, an “Undeveloped Product”), Cornell shall provide written notice to LICENSEE of said Undeveloped Product. Within [**] days after receipt of such notice from Cornell, LICENSEE shall provide written notice to Cornell that it elects to: a) affect development and commercialization of said Undeveloped Product itself; or b) affect development and commercialization of said Undeveloped Product through an appropriate sublicensee; or c) terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product. Should LICENSEE elect to affect development and commercialization of said Undeveloped Product itself, Cornell and LICENSEE will negotiate reasonable diligence goals. Should such an amendment containing such diligence goals not be executed within [**] days after LICENSEE’s election, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE. Should LICENSEE elect to sublicense its rights, said sublicense shall be executed within [**] months after LICENSEE’s election. Should said sublicense not be so executed, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE.

 

4.10

LICENSEE shall not use , nor shall LICENSEE permit Sublicensee to use, the names, trademarks and indicia of Cornell, nor the names of any employee, student or faculty member of Cornell without prior written approval from Cornell. Cornell shall not use the names, trademarks and indicia of LICENSEE nor disclose to any third party any non-public information relating to the subject matter of this Agreement without prior written approval from LICENSEE.

 

4.11

LICENSEE shall alone have the obligation to ensure that Products it makes, uses, sells, leases, imports, exports or otherwise disposes of are not defective, that Products satisfy all applicable government regulations and that export of Products satisfies government export requirements.

ARTICLE 5: PAYMENTS, ROYALTIES, REPORTS AND RECORDS

 

5.1

As consideration for entering into this Agreement, LICENSEE shall pay Cornell a license fee of [**] Dollars ($[**]) within [**] days after the Effective Date. Cornell acknowledges that it has received [**] Dollars ($[**]) from LICENSEE toward such fee prior to the Effective Date.

 

5.2

Commencing upon the second (2 nd ) anniversary of the Effective Date and continuing until the first commercial sale of the first Human Therapeutic Product, LICENSEE will pay FOUNDATION an annual license maintenance fee of $[**] on each anniversary of the Effective Date.

 

6


5.3

For the rights granted hereunder, LICENSEE shall pay or cause to be paid to Cornell a royalty on Net Sales of Products, on a Product-by-Product and country-by-country basis, where the manufacture, use, sale, offer for sale or importation of such Product by LICENSEE in such country is Covered by a Valid Claim, as per the following table:

 

Product

   Royalty   If Annual Sales:

All Human Therapeutic Products

   [**]   [**]
   [**]   [**]
   [**]   [**]
   [**]   [**]

In lieu of the royalty in the table above, the royalty shall be [**] percent ([**]%) of Net Sales of Products made, used, sold, offered for sale, or imported in any country where such activities are not Covered by a Valid Claim, except that no royalty shall be due for any sales of any such Product that occur after the fifteenth (15 th ) anniversary of the first commercial sale of such Product. LICENSEE shall pay royalties in accordance with this Section 5.3 on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to the Effective Date or are produced before but sold after the termination of this Agreement.

 

5.4

Royalties shall be payable only once with respect to the same unit of Product, and no royalty shall be payable hereunder with respect to any unit of Product for which royalties are payable under the Amended License Agreement. However, LICENSEE will use reasonable efforts to provide Cornell with information Cornell can use to determine sales of Products relating to the indication Covered by the Applications and Patents of this Agreement.

 

5.5

If a Product contains technology subject to royalties payable to a third party, the royalty due hereunder shall be reduced by [**] percent ([**]%) for every [**] percent ([**]%) of royalty due to such third party, but in no event shall royalties due be reduced by more than [**] percent ([**]%) of the applicable royalty rate payable for such Products.

 

5.6

LICENSEE shall provide Cornell with quarterly written reports of all sales, leases or other dispositions of Products by LICENSEE during the quarter ending March 31, June 30, September 30 and December 31, due within [**] days of the end of each quarter .      LICENSEE shall require that Sublicensees provide LICENSEE with quarterly written reports of all sales, leases or other dispositions of Products by Sublicensees, during the quarter ending March 31, June 30, September 30 and December 31, and copies of Sublicensee’s reports shall accompany LICENSEE’s reports to Cornell. In order to minimize LICENSEE time spent on royalty reports, a brief one-page Royalty Report Form is provided in Appendix C to the Amended License Agreement that will satisfy Cornell’s reporting requirements. Cornell agrees to keep the information in these reports confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. Royalty payments for sales, leases, and other dispositions of the Products invoiced during a calendar quarter shall accompany the Royalty Report Form for that particular quarter. The Royalty Report Form shall be submitted regardless of whether or not royalties are owed. All amounts reported and all payments made shall

 

7


  be in United States dollars. Conversion from foreign currencies, if any, shall be based upon the conversion rate published in The Wall Street Journal on the last day of the particular quarterly accounting period (or on the last business day on which The Wall Street Journal is published during said quarterly period) for which royalties are due. Royalty checks shall be made payable to Cornell University and mailed to the address specified in Section 13.4.

 

5.7

LICENSEE shall keep and maintain , and LICENSEE shall require that Sublicensees keep and maintain, any and all records necessary to certify compliance of LICENSEE with the terms of this agreement, including but not limited to accounting general ledgers, Sublicense and distributor agreements, price lists, catalogs, and marketing materials, audited financial statements, income tax returns, sales tax returns, inventory records, and shipping documents of Products. Such records shall be open to inspection at reasonable times by a certified public accountant chosen by Cornell and acceptable to LICENSEE, which shall not unreasonably withhold such acceptance. Such inspection shall be made at Cornell’s expense. However, if the results of any audit reveal additional royalties owed to Cornell that differ by more the [**]% ([**] percent) from those royalties already paid, LICENSEE shall also reimburse Cornell for the costs of the audit. Cornell agrees to hold such records confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. The records required by this paragraph shall be maintained and available for inspection for a period of [**] years following the calendar quarter to which they pertain. This paragraph shall survive termination of this Agreement.

 

5.8

LICENSEE shall reimburse Cornell for the expenses specified in Section 3.3 within [**] days of written invoice from Cornell. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates.

 

5.9

Royalty payments due under Section 5.3 of this Agreement and payment of Cornell’s share of Sublicense consideration shall become late if not paid within [**] days after the end of the quarter in which the payment obligation was incurred. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge.

 

5.10

LICENSEE agrees to make a written report to Cornell within [**] days after the expiration of this Agreement pursuant to Section 7.1. LICENSEE shall continue to make reports pursuant to the provisions of this Section 5.9 concerning royalties payable in accordance with Section 5.3 in connection with the sale of Products after expiration of the license, until such time as all such Products produced under the license have been sold or destroyed. Concurrent with the submittal of each post-termination report, LICENSEE shall pay Cornell all applicable royalties.

ARTICLE 6: INFRINGEMENT

 

6.1

In the event that either Party determines that a third party is making, using or selling a product that may infringe Patents, it will promptly notify the other Party in writing. LICENSEE may elect, with the prior written consent of Cornell, to bring suit against such

 

8


  alleged infringer. Such election must be made within [**] days after receipt of said written consent from Cornell. All recoveries in such suit shall belong to LICENSEE except that Cornell shall have the right to elect to pay up to [**] percent ([**]%) of the litigation costs and receive a percentage of any recovery equal to the percentage of litigation costs paid. Cornell must make such election within [**] days after its receipt of notice that LICENSEE has elected to bring suit. Cornell shall also have the right to choose to be represented by separate counsel in any such suit at its own expense. Such expense for separate counsel shall not be considered as part of “litigation costs” for purposes of determining Cornell’s share of any recovery in accordance with the sentence above. If LICENSEE elects not to bring a suit against the alleged infringer, it shall promptly notify Cornell of that fact and Cornell shall have the right to commence such actions at its own cost and expense, in which case any recoveries shall belong to Cornell. In such suits by Cornell, LICENSEE shall have rights of participation and recovery that are the same as Cornell’s rights as provided above when LICENSEE elects to sue.

 

6.2

Regardless of which Party controls a suit brought against an infringer, each Party shall participate in any settlement discussions and each will be a signatory to any settlement agreement.

ARTICLE 7: TERM AND TERMINATION

 

7.1

This Agreement shall commence on the Effective Date, and shall continue as an Exclusive license until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction and no Applications remain pending, and provided this Agreement is not earlier terminated as provided for herein.

 

7.2

Cornell may terminate this Agreement if LICENSEE:

 

  (i)

is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

 

  (ii)

is in material breach of any provision of this Agreement; or

 

  (iii)

intentionally provides any false report;

and LICENSEE fails to remedy any such default, breach, or false report within [**]days after written notice thereof by Cornell. LICENSEE’s right to terminate this Agreement on a Product-by-Product basis is as set forth in Paragraph 7.4.

 

7.3

Cornell may terminate this Agreement upon thirty (30) days written notice by Cornell if LICENSEE fails to obtain prior written Cornell approval for the transfer of this Agreement upon the sale of LICENSEE in accordance with Section 4.6, provided that such notice is given within sixty (60) days after such transfer.

 

7.4

LICENSEE may terminate the license granted hereunder, in its entirety or on a Patent-by- Patent basis, a Product-by-Product, and/or a country-by-country basis if LICENSEE has a reasonable basis for doing so, at any time upon sixty (60) days’ notice to Cornell. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments under this Agreement.

 

9


7.5

Upon termination of this Agreement for any reason, including the end of term as specified above, all rights and obligations under this Agreement shall terminate, except those that have accrued prior to termination and except as specified in this Agreement.

ARTICLE 8: PUBLICATION AND CONFIDENTIALITY

 

8.1

It is the policy of Cornell to promote and safeguard free and open inquiry by faculty, students and others. To further this policy, Cornell shall retain the right to publish information described in Applications and Patents.

 

8.2

Each Party agrees to keep any information identified as confidential by the disclosing Party confidential using methods at least as stringent as each Party uses to protect its own confidential information, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement or to audit LICENSEE as specified under Section 5.6. “Confidential Information” shall include the progress report required under Section 4.8 and any other information marked confidential or accompanied by correspondence indicating such information is confidential exchanged between the Parties hereunder. The confidentiality and use obligations set forth above apply to all or any part of the Confidential Information disclosed hereunder except to the extent that:

 

  (a)

LICENSEE or Cornell can show by written record that it possessed the information prior to its receipt from the other Party;

 

  (b)

The information was already available to the public or became so through no fault of the LICENSEE or Cornell;

 

  (c)

The information is subsequently disclosed to LICENSEE or Cornell by a third party that has the right to disclose it free of any obligations of confidentiality; or

 

  (d)

[**] years have elapsed from the expiration of this Agreement.

ARTICLE 9: ARBITRATION AND JUDICIAL REMEDIES

 

9.1

If a controversy arises under or related to this Agreement, and any disputed claim by either Party against the other Party under this Agreement, excluding any dispute relating to patent validity or infringement arising under this Agreement, the Parties shall endeavor to resolve such controversy or dispute by mutual, good faith conciliation and, failing that, may mutually agree to settle the controversy or dispute by mediation in accordance with the WIPO Mediation Rule. The place of mediation shall be New York, New York. The language to be used in the mediation shall be English.

Cornell reserves the right and power to proceed with direct judicial remedies without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of [**] days in which to cure such breach. In collecting overdue royalty payments and securing compliance with reporting obligations, Cornell may use all judicial remedies available.

 

10


ARTICLE 10: INDEMNIFICATION

 

10.1

LICENSEE agrees to indemnify, defend and hold harmless UFRF, Cornell, and their respective trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Product purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, or (iii) a third party’s manufacture or provision of a Product at the request of LICENSEE or Sublicensee.

 

10.2

Cornell and UFRF shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. Cornell and UFRF shall not have any responsibilities or liabilities whatsoever with respect to Products.

 

10.3

LICENSEE and Sublicensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement.

 

10.4

In addition to the foregoing, LICENSEE shall cause Stealth Peptides, Inc., an Affiliate of LICENSEE, to maintain, during the term of this Agreement, Comprehensive General Liability Insurance to cover the activities of LICENSEE. Such insurance shall provide minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate. Such insurance shall be written as primary coverage to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with financial strength ratings of at least A- as rated by A.M. Best. LICENSEE shall obtain appropriate clinical trial coverage before initiating any clinical trials of Products. The coverage and limits referred to above shall not in any way limit the liability of LICENSEE. LICENSEE shall, within [**] days after the Effective Date, furnish Cornell with certificates of insurance showing compliance with all requirements. Such certificates shall provide for [**] day advance written notice to Cornell of any modification. LICENSEE shall use reasonable best efforts to extend the coverage referred to above within [**] months after the Effective Date to include Cornell as an additionally insured party and shall furnish Cornell with a certificate of insurance evidencing any such extension.

 

10.5

The provisions of this Article 10 shall survive termination of this Agreement.

ARTICLE 11: WARRANTIES AND LIMITATIONS

 

11.1

Each of Cornell and LICENSEE represent and warrant that it has the right to enter into this Agreement. Cornell warrants that it has the right to convey to LICENSEE the rights granted under this Agreement.

 

11


11.2

Cornell represents that to the best of its knowledge the inventorship and ownership of the Applications is as set forth in Appendix A.

 

11.3

Cornell makes no representation or warranty that Applications will result in issued Patents.

 

11.4

Cornell makes no representations or warranties concerning the validity or scope of Patents.

 

11.5

Cornell does not warrant that Products made, used, sold, leased, imported, exported or otherwise disposed of under the license of this Agreement is or will be free from infringement of patents of third parties.

 

11.6

Nothing herein shall be construed as granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of Cornell or other persons other than Patents, regardless of whether such patents or other rights are dominant or subordinate to any Patents.

 

11.7

Cornell is under no obligation to furnish any technology or information other than that described and claimed in Applications and Patents.

 

11.8

Nothing herein shall be construed to grant LICENSEE rights under any applications or patents other than Applications and Patents.

 

11.9

Cornell does not make any representations, extend any warranties of any kind, express or implied, or assume any responsibility whatever concerning the manufacture, use, or sale, lease or other disposition by LICENSEE or its vendees or transferees of Products.

 

11.10

Except as expressly set forth in this Agreement, CORNELL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.

ARTICLE 12: MARKING

 

12.1

Prior to the issuance of patents on the Applications, LICENSEE shall mark, and agrees to require that Sublicensees shall mark, Products (or their containers or labels) made, sold, leased, imported, exported or otherwise disposed of by it under the license granted in this Agreement with the words “Patent Pending”, and following the issuance of one or more Patents, with each Patent’s Number.

 

12


ARTICLE 13: MISCELLANEOUS PROVISIONS

 

13.1

Terms in this Agreement which appear capitalized, other than the names of the Parties and article headings, have the meanings given in Article 2 and retain those meanings whether used in the singular or plural.

 

13.2

This Agreement shall be binding upon and be to the benefit of the Parties and their heirs, successors and permitted assigns. However, neither Party shall assign this Agreement, in whole or in part, without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

 

13.3

All issues and questions concerning the construction, validity and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement, even though under that jurisdiction’s choice of law or conflict of law analysis, the substantive law of such other jurisdiction would ordinarily apply. The Parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any State court sitting in Tompkins County, State of New York or Federal court sitting in Syracuse, New York over any suit, action or proceeding arising out of or relating to this Agreement and agree that no such suit, action or proceeding shall be brought in any other court, forum or jurisdiction. The Parties hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

 

13.4

All notices required or permitted hereunder shall be in writing and be served on the Parties at the addresses set forth below. Any such notices shall be either (a) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered when delivery is made according to the records of such courier, (b) sent by facsimile, in which case notice shall be deemed delivered upon receipt of confirmation of transmission of such facsimile notice, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt. Any notice by facsimile or personal delivery and delivered after 5:00 p.m., Eastern Daylight Time, shall be deemed received on the next Business Day. A Party’s address may be changed by written notice to the other Party; provided, however , that no notice of a change of address shall be affected until actual receipt of such notice.

In the case of Cornell:

Cornell Center for Technology Enterprise and Commercialization

Attn: Executive Director

395 Pine Tree Road, Suite 310

Ithaca, NY 14850

 

13


With a copy to:

Brian J. Kelly, Vice President

Cornell Research Foundation, Inc.

418 East 71 st Street

New York, NY 10021

Phone: (212)746-6186

Fax: (212) 746-6662

In the case of LICENSEE:

Stealth Peptides International Inc.

c/o Stealth Peptides Inc.

Attn: Travis Wilson

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807

All payments shall be made to Cornell:

Cornell Center for Technology Enterprise and Commercialization

P.O. Box 6899

Ithaca, NY 14850-6899

Attention: Accounting Department

If remitted by electronic payments via ACH or Fed Wire :

 

Receiving bank name:

   [**]

Bank account no.:

   [**]

Bank routing (ABA) no.:

   [**]

SWIFT Code:

   [**]

Bank account name:

   [**]

Bank ACH format code:

   [**]

Bank address:

   [**]

Additional information:

   [**]

A FAX copy of the transaction receipt shall be sent to Associate Director for Finance and Operations at: 607-254-5454. LICENSEE is responsible for all bank charges of wire transfer of funds for payments. The bank charges shall not be deducted from total amount due to Cornell.

 

13.5

No term or provision of this Agreement shall be waived and no breach excused unless such waiver or consent shall be in writing and signed by the Party claimed to have waived or consented. No waiver of a breach shall be deemed to be a waiver of a different or subsequent breach.

 

14


13.6

This Agreement may not be modified, changed or terminated orally. No change, modification, addition or amendment shall be valid unless in writing and signed by the Parties.

 

13.7

In the event any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.

 

13.8

This Agreement constitutes and contains the entire agreement of the Parties respecting its subject matter and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether written or oral, between the Parties respecting its subject matter.

 

13.9

This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document by both Parties as listed below. Any photocopy or facsimile copy of this fully executed Agreement shall have the same legal force and effect as any copy bearing original signatures. Signatures transmitted by facsimile shall be deemed valid as original signatures.

 

13.10

For clarity, in furtherance of fulfilling its obligations and exercising its rights under this Agreement, LICENSEE may employ third parties, including but not limited to contract manufacturers, contract research organizations and contract sales organizations, to carry out activities on LICENSEE’s behalf, without any obligation to obtain consent from Cornell therefor.

IN WITNESS of this Agreement, INSTITUTIONS and LICENSEE have caused this Agreement to be executed by their duly authorized officers on the dates indicated.

 

CORNELL UNIVERSITY     STEALTH PEPTIDES INTERNATIONAL INC.
By:  

/s/ Alan Paau, Ph.d., MBA

    By:  

/s/ Lars Sorensen

Name:   Alan Paau, Ph.D., MBA     Name:   Lars Sorensen
Title:   Vice Provost for Technology Transfer & Economic Development     Title:   Authorized Signatory
Date: October 28, 2011     Date: 3 November 2011

 

15


Appendix A

Patent Applications

 

[**]

[**]

[**]

Docket Number

 

Cornell
Docket Number

 

Country

 

Status

 

App. No

 

App. Date

 

Pat. No.

 

Grant Date

[**]   [**]   [**]   [**]   [**]   [**]    
[**]   [**]   [**]   [**]   [**]   [**]    

 

A-1

Exhibit 10.11

Execution Copy

Confidential

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

LICENSE AGREEMENT

BETWEEN

STEALTH PEPTIDES INTERNATIONAL INC.

AND

CORNELL UNIVERSITY

FOR

DOCKET NO. [**]


EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is made effective as of the date last signed below (“Effective Date”) by and between Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business and offices at 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, and Cornell University (“Cornell”) as represented by its Cornell Center for Technology Enterprise and Commercialization (“CCTEC”) at 395 Pine Tree Road, Ithaca, NY. LICENSEE and Cornell are each referred to individually as “Party” and collectively as “Parties.” The Parties hereby agree as follows:

ARTICLE 1: INTRODUCTION

 

1.1

Cornell has filed the various patent applications listed in Appendix A.

 

1.2

LICENSEE has exercised its right under Section 4.7 of that certain Exclusive License Agreement, dated April 20, 2006, as amended by the First Amendment dated as of October 7, 2010, to which LICENSEE and Cornell are parties (the “Amended License Agreement”), to obtain the right to develop and to commercialize the inventions disclosed in the Applications, which are co-owned by Cornell and LICENSEE.

 

1.3

The work leading to the inventions was supported in part by an agency of the United States Government, and Cornell is obligated to comply with United States OMB Circular A-124 and 37 CFR Part 401. This license is subject to the applicable terms of United States Government regulations concerning Government-funded inventions.

 

1.4

The Parties agree to the terms and conditions hereinbelow in order to develop the inventions for commercial purposes, and utilize them in the public interest.

ARTICLE 2: DEFINITIONS

 

2.1

“Affiliate” shall mean (1) any corporation or other noncorporate entity owning directly, or indirectly controlling, at least fifty percent (50%) of the stock normally entitled to vote for election of directors of LICENSEE; (2) any corporation owned or controlled by LICENSEE through ownership of at least fifty percent (50%) of the stock entitled to elect directors or any other entity actually controlled by LICENSEE, (3) any corporate or noncorporate entity under common control with LICENSEE.

 

2.2

“Applications” shall mean (a) the patent applications listed in Appendix A, (b) any foreign patent applications based thereon, (c) all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing applications and are enabled by subject matter that is disclosed in such application, (d) all divisionals and continuations of any of the patent applications described in (a)-(c) above, and (e) any patent application sharing a common claim of priority with any of the patent applications described in (a)-(d) above.

 

2


2.3

“Covered” shall mean, with respect to a Product and a country, that, in the absence of ownership of or a license granted under a Valid Claim in such country, the manufacture, use, offer for sale, sale or importation of such Product would infringe such Valid Claim (or, in the case of a Valid Claim in an Application, would reasonably likely infringe such Valid Claim if it were to issue in a Patent).

 

2.4

“Dollars” or “$” shall mean United States Dollars.

 

2.5

“Exclusive” shall mean that during the term of this Agreement Cornell will not grant commercial rights to Patents and/or Applications to any other party in the Field-of-Use.

 

2.6

“Field-of-Use” shall mean any and all fields.

 

2.7

“Licensed Territory” shall mean the world.

 

2.8

“License Year” shall mean each twelve-month period beginning on January 1 and ending on December 31. However, the first License Year (alternatively, License Year 1) shall commence on the Effective Date and end on December 31 of the same calendar year.

 

2.9

“Net Sales” shall mean the gross amount invoiced for sales, leases and other dispositions of Products by LICENSEE, and Sublicensees, to an independent third party on sale or use of Products where Products are either made, used, sold, imported, exported, or otherwise commercialized less (i) all trade, quantity, and cash discounts actually allowed on Products, (ii) all credits and allowances actually granted on Products on account of rejection, returns, billing errors, and retroactive price reductions, (iii) duties actually paid on Products, and (iv) excise, sale and use taxes, and equivalent taxes actually paid on Products.

 

2.10

“Patents” shall mean (a) all patents issuing from any Application, (b) all reissues, reexaminations and extensions of any patent described in (a) above, and (c) any patent sharing a common claim of priority with any of the patents described in (a) and (b) above.

 

2.11

“Products” shall mean any product or service that incorporates, utilizes or is otherwise described and claimed by one or more Valid Claims in Applications or Patents or that are made by a process that utilizes, incorporates or is otherwise described and claimed by one or more Valid Claims in Applications or Patents, and any services that incorporate or utilize or are otherwise described and claimed in Applications or Patents.

 

2.12

“Sublicense” shall mean a rights-granting contract with an independent third party or with a subsidiary or an Affiliate in which LICENSEE conveys rights granted to LICENSEE in Sections 4.1 and 4.2 of this Agreement.

 

2.13

“Sublicensee” shall mean any entity granted a Sublicense by LICENSEE, and acceptable to Cornell, under this Agreement.

 

3


2.14

“Valid Claim” shall mean a claim of (i) an issued Patent which has not been declared invalid in a court of appropriate jurisdiction, or (ii) a pending patent Application which is being diligently prosecuted by or on behalf of Cornell.

ARTICLE 3: APPLICATIONS AND PATENTS

 

3.1

Cornell represents that Cornell and LICENSEE jointly hold title to all Applications and Patents.

 

3.2

Cornell agrees to use reasonable efforts to file and prosecute Applications and maintain Patents. At any time during the term of this Agreement, LICENSEE may elect in writing to be released from its license in any of the Patents or Applications, in which event LICENSEE shall thereafter have no obligation to reimburse Cornell for any future expenses relating to such Patents or Applications, and Cornell shall have the option at its sole discretion and expense to file, prosecute, maintain and license to a third party such Patents or Applications.

 

3.3

LICENSEE shall reimburse Cornell for all out-of-pocket expenses for preparation, filing, prosecution and maintenance of Applications and Patents except for those Applications and Patents for which it has waived its rights, in writing, as described in Section 3.2. Such reimbursable expenses shall include those incurred prior to Effective Date. Such expenses shall be paid to Cornell by LICENSEE within [**] days of receipt of an invoice therefore unless Cornell has otherwise agreed, in writing. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge, or the highest rate allowed by New York State Law.

 

3.4

Cornell shall have final authority over selection of patent attorneys and all decisions concerning filing and prosecution of Applications and maintenance of Patents. However, Cornell shall keep LICENSEE reasonably informed of its filing, prosecution and maintenance activities and shall give LICENSEE the opportunity to comment on major decisions concerning such activities.

 

3.5

LICENSEE shall not at any time, directly or indirectly, oppose the grant of, nor dispute the validity or enforceability of, nor cooperate in any suit, claim, counterclaim or defense against any patent or claim included in the Patents.

ARTICLE 4: LICENSE GRANT AND COMMERCIAL EFFORTS

 

4.1

Subject to the terms and conditions of this Agreement and to the rights of and obligations to the United States Government as set forth in United States Office of Management & Budget Circular A-124 or 37 CFR Part 401 et seq., Cornell hereby grants and LICENSEE hereby accepts an exclusive right to make, use, sell, lease, import, export or otherwise dispose of Products under all Cornell’s rights, title and interest in and to the Applications and Patents in the Field-of-Use in the Licensed Territory for the term of this Agreement as specified in Section 7.1.

 

4


The right of LICENSEE to make Products includes the right to have Products made by contract with third parties within the Licensed Territory. Such contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of Cornell and to supply all production of Products exclusively to LICENSEE.

 

4.2

LICENSEE shall also have the right to grant Sublicenses under this Agreement provided LICENSEE: (1) consults with Cornell regarding the potential sublicensee, (2) provides Cornell with a draft sublicense at least [**] days prior to its execution and (3) provides Cornell with a copy of the fully executed sublicense within [**] days after execution. Any such Sublicense shall contain all the provisions of this Agreement which are protective of and beneficial to Cornell and LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee as though they were sales by LICENSEE. Any such Sublicenses shall be subject to an obligation for LICENSEE to pay to Cornell [**] percent ([**]%) of any consideration received by LICENSEE under a Sublicense, other than (1) consideration consisting of royalties on sales or net sales made by the Sublicensee (which shall be handled in accordance with Section 5.3 hereunder) under such a Sublicense, (2) payments made to LICENSEE for equity securities at or near fair market value and (3) payments made to LICENSEE to fund research and development of Products.

 

4.3

LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee in accordance with Section 5.3 hereof as though such sales were made by LICENSEE. LICENSEE and Cornell agree to negotiate in good faith an appropriate value for all non-cash consideration or non-cash cross-licenses. LICENSEE’s obligation to pay Cornell’s share of Sublicense consideration shall be considered incurred as of the date on which such Sublicense consideration is received by LICENSEE.

 

4.4

Cornell retains an irrevocable and nonexclusive right to practice for its own educational and research purposes, the inventions claimed in Applications and Patents and such purposes shall include limited, non-commercial collaboration with other non-profit research institutes, subject to the requirements of Section 4.7(vii) of the Amended License Agreement relating to Material Transfer Agreements (as defined therein).

 

4.5

Nothing in this Agreement shall be construed to give LICENSEE rights in any technologies currently owned or developed in the future by Cornell other than those explicitly specified in this Agreement. Nothing in this Agreement shall be construed to give Cornell rights in technologies currently owned or developed in the future by LICENSEE other than those explicitly specified in this Agreement.

 

4.6

The rights granted by this Agreement are to LICENSEE alone and not to any third parties or to any subsidiary or Affiliate of LICENSEE. However, with prior written approval of

 

5


  Cornell (such approval not to be unreasonably withheld), LICENSEE may transfer this Agreement by way of sale of LICENSEE, through sale of assets and/or sale of stock, provided that such sale is not primarily for the benefit of creditors. If LICENSEE fails to obtain the prior written approval from Cornell for such transfer, Cornell shall have the right to terminate this Agreement and the right to require that the transfer of this Agreement be voided.

 

4.7

LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to use its Best Efforts to meet the diligence milestones of this Section 4.7 shall be a material breach of this Agreement. “Best Efforts” shall mean the efforts that a reasonable person in the position of LICENSEE would make so as to achieve that goal as expeditiously as practicable; notwithstanding the foregoing, LICENSEE shall be deemed to have used Best Efforts with respect to a milestone if it achieves the milestone by the corresponding target achievement date. LICENSEE will provide additional milestones on the [**] anniversary of the Effective Date and on the anniversary of the Effective Date every [**] years thereafter until the first commercial sale of a Product.

LICENSEE shall use Best Efforts to achieve the following milestone by the date indicated:

 

Milestone

   Target
achievement date

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

If LICENSEE has not achieved a milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**] thereafter to achieve such milestone. If LICENSEE has not achieved such milestone by the end of such cure period, the license granted pursuant to Section 4.1 shall thereafter convert to a non-exclusive license.

 

4.8

Beginning with the second License Year, within [**] days after the start of each License Year and until LICENSEE markets Products, LICENSEE shall make a written annual report to Cornell covering the preceding License Year, regarding the progress of LICENSEE toward commercial development of Products. Such report shall include, at a minimum, information sufficient to enable Cornell to satisfy reporting requirements of the United States Government and for Cornell to ascertain progress by LICENSEE toward meeting the Best Efforts of this Article 4. For clarity, LICENSEE may satisfy its

 

6


  obligations under this Section 4.8 by including the applicable information in each annual report submitted pursuant to Section 4.9 of the Amended License Agreement provided that the applicable information references this Agreement.

 

4.9

If Cornell should identify any Product that (i) LICENSEE is not actively developing or commercializing, as evidenced by the reports provided to Cornell under Section 4.8; and (ii) is in the Field-of-Use and/or territorial market that Cornell indicates is significant, (such Product, an “Undeveloped Product”), Cornell shall provide written notice to LICENSEE of said Undeveloped Product. Within [**] days after receipt of such notice from Cornell, LICENSEE shall provide written notice to Cornell that it elects to: a) affect development and commercialization of said Undeveloped Product itself; or b) affect development and commercialization of said Undeveloped Product through an appropriate sublicensee; or c) terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product. Should LICENSEE elect to affect development and commercialization of said Undeveloped Product itself, Cornell and LICENSEE will negotiate reasonable diligence goals. Should an amendment containing such diligence goals not be executed within [**] days after LICENSEE’s election, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE. Should LICENSEE elect to sublicense its rights, said sublicense shall be executed within [**] months after LICENSEE’s election. Should said sublicense not be so executed, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE.

 

4.10

LICENSEE shall not use , nor shall LICENSEE permit Sublicensee to use, the names, trademarks and indicia of Cornell, nor the names of any employee, student or faculty member of Cornell without prior written approval from Cornell. Cornell shall not use the names, trademarks and indicia of LICENSEE nor disclose to any third party any non-public information relating to the subject matter of this Agreement without prior written approval from LICENSEE.

 

4.11

LICENSEE shall alone have the obligation to ensure that Products it makes, uses, sells, leases, imports, exports or otherwise disposes of are not defective, that Products satisfy all applicable government regulations and that export of Products satisfies government export requirements.

 

7


ARTICLE 5: PAYMENTS, ROYALTIES, REPORTS AND RECORDS

 

5.1

As consideration for entering into this Agreement, Cornell acknowledges that it has received [**] Dollars ($[**]) from LICENSEE prior to the Effective Date.

 

5.2

Commencing upon the third (3 rd ) anniversary of the Effective Date and continuing until the first commercial sale of the first Product, LICENSEE will pay FOUNDATION an annual license maintenance fee of $[**] on each anniversary of the Effective Date.

 

5.3

For the rights granted hereunder, LICENSEE shall pay or cause to be paid to Cornell a royalty on Net Sales of Products, on a Product-by-Product and country-by-country basis, where the manufacture, use, sale, offer for sale or importation of such Product by LICENSEE in such country is Covered by a Valid Claim, as per the following table:

 

Product

   Royalty   If Annual Sales:

All Products

   [**]   [**]
   [**]   [**]
   [**]   [**]
   [**]   [**]

In lieu of the royalty in the table above, the royalty shall be [**] percent ([**]%) of Net Sales of Products made, used, sold, offered for sale, or imported in any country where such activities are not Covered by a Valid Claim, except that no royalty shall be due for any sales of any such Product that occur after the fifteenth (15 th ) anniversary of the first commercial sale of such Product. LICENSEE shall pay royalties in accordance with this Section 5.3 on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to the Effective Date or are produced before but sold after the termination of this Agreement.

 

5.4

Royalties shall be payable only once with respect to the same unit of Product, and no royalty shall be payable hereunder with respect to any unit of Product for which royalties are payable under the Amended License Agreement. However, LICENSEE will use reasonable efforts to provide Cornell with information Cornell can use to determine sales of Products relating to the indication Covered by the Applications and Patents of this Agreement.

 

5.5

If a Product contains technology subject to royalties payable to a third party, the royalty due hereunder shall be reduced by [**] percent ([**]%) for every [**] percent ([**]%) of royalty due to such third party, but in no event shall royalties due be reduced by more than [**] percent ([**]%) of the applicable royalty rate payable for such Products.

 

5.6

LICENSEE shall provide Cornell with quarterly written reports of all sales, leases or other dispositions of Products by LICENSEE during the quarter ending March 31, June 30, September 30 and December 31, due within [**] days of the end of each quarter. LICENSEE shall require that Sublicensees provide LICENSEE with quarterly written reports of all sales, leases or other dispositions of Products by Sublicensees, during the

 

8


  quarter ending March 31, June 30, September 30 and December 31, and copies of Sublicensee’s reports shall accompany LICENSEE’s reports to Cornell. In order to minimize LICENSEE time spent on royalty reports, a brief one-page Royalty Report Form is provided in Appendix C to the Amended License Agreement that will satisfy Cornell’s reporting requirements. Cornell agrees to keep the information in these reports confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. Royalty payments for sales, leases, and other dispositions of the Products invoiced during a calendar quarter shall accompany the Royalty Report Form for that particular quarter. The Royalty Report Form shall be submitted regardless of whether or not royalties are owed. All amounts reported and all payments made shall be in United States dollars. Conversion from foreign currencies, if any, shall be based upon the conversion rate published in The Wall Street Journal on the last day of the particular quarterly accounting period (or on the last business day on which The Wall Street Journal is published during said quarterly period) for which royalties are due. Royalty checks shall be made payable to Cornell University and mailed to the address specified in Section 13.4.

 

5.7

LICENSEE shall keep and maintain , and LICENSEE shall require that Sublicensees keep and maintain, any and all records necessary to certify compliance of LICENSEE with the terms of this agreement, including but not limited to accounting general ledgers, Sublicense and distributor agreements, price lists, catalogs, and marketing materials, audited financial statements, income tax returns, sales tax returns, inventory records, and shipping documents of Products. Such records shall be open to inspection at reasonable times by a certified public accountant chosen by Cornell and acceptable to LICENSEE, which shall not unreasonably withhold such acceptance. Such inspection shall be made at Cornell’s expense. However, if the results of any audit reveal additional royalties owed to Cornell that differ by more the [**]% ([**] percent) from those royalties already paid, LICENSEE shall also reimburse Cornell for the costs of the audit. Cornell agrees to hold such records confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. The records required by this paragraph shall be maintained and available for inspection for a period of [**] years following the calendar quarter to which they pertain. This paragraph shall survive termination of this Agreement.

 

5.8

LICENSEE shall reimburse Cornell for the expenses specified in Section 3.3 within [**] days of written invoice from Cornell. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates.

 

5.9

Royalty payments due under Section 5.3 of this Agreement and payment of Cornell’s share of Sublicense consideration shall become late if not paid within [**] days after the end of the quarter in which the payment obligation was incurred. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge.

 

5.10

LICENSEE agrees to make a written report to Cornell within [**] days after the expiration of this Agreement pursuant to Section 7.1. LICENSEE shall continue to make reports pursuant to the provisions of this Section 5.10 concerning royalties payable in accordance

 

9


  with Section 5.3 in connection with the sale of Products after expiration of the license, until such time as all such Products produced under the license have been sold or destroyed. Concurrent with the submittal of each post-termination report, LICENSEE shall pay Cornell all applicable royalties.

ARTICLE 6: INFRINGEMENT

 

6.1

In the event that either Party determines that a third party is making, using or selling a product that may infringe Patents, it will promptly notify the other Party in writing. LICENSEE may elect, with the prior written consent of Cornell, to bring suit against such alleged infringer. Such election must be made within [**] days after receipt of said written consent from Cornell. All recoveries in such suit shall belong to LICENSEE except that Cornell shall have the right to elect to pay up to [**] percent ([**]%) of the litigation costs and receive a percentage of any recovery equal to the percentage of litigation costs paid. Cornell must make such election within [**] days after its receipt of notice that LICENSEE has elected to bring suit. Cornell shall also have the right to choose to be represented by separate counsel in any such suit at its own expense. Such expense for separate counsel shall not be considered as part of “litigation costs” for purposes of determining Cornell’s share of any recovery in accordance with the sentence above. If LICENSEE elects not to bring a suit against the alleged infringer, it shall promptly notify Cornell of that fact and Cornell shall have the right to commence such actions at its own cost and expense, in which case any recoveries shall belong to Cornell. In such suits by Cornell, LICENSEE shall have rights of participation and recovery that are the same as Cornell’s rights as provided above when LICENSEE elects to sue.

 

6.2

Regardless of which Party controls a suit brought against an infringer, each Party shall participate in any settlement discussions and each will be a signatory to any settlement agreement.

ARTICLE 7: TERM AND TERMINATION

 

7.1

This Agreement shall commence on the Effective Date, and shall continue as an Exclusive license, subject to Section 4.7, until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction and no Applications remain pending, and provided this Agreement is not earlier terminated as provided for herein.

 

7.2

Cornell may terminate this Agreement if LICENSEE:

(i)    is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

 

10


(ii)    subject to Section 4.7, is in material breach of any provision of this Agreement; or

(iii)    intentionally provides any false report;

and LICENSEE fails to remedy any such default, breach, or false report within [**] days after written notice thereof by Cornell. LICENSEE’s right to terminate this Agreement on a Product-by-Product basis is as set forth in Paragraph 7.4.

 

7.3

Cornell may terminate this Agreement upon thirty (30) days written notice by Cornell if LICENSEE fails to obtain prior written Cornell approval for the transfer of this Agreement upon the sale of LICENSEE in accordance with Section 4.6, provided that such notice is given within sixty (60) days after such transfer.

 

7.4

LICENSEE may terminate the license granted hereunder, in its entirety or on a Patent-by- Patent basis, a Product-by-Product, and/or a country-by-country basis if LICENSEE has a reasonable basis for doing so, at any time upon sixty (60) days notice to Cornell. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments under this Agreement.

 

7.5

Upon termination of this Agreement for any reason, including the end of term as specified above, all rights and obligations under this Agreement shall terminate, except those that have accrued prior to termination and except as specified in this Agreement.

ARTICLE 8: PUBLICATION AND CONFIDENTIALITY

 

8.1

It is the policy of Cornell to promote and safeguard free and open inquiry by faculty, students and others. To further this policy, Cornell shall retain the right to publish information described in Applications and Patents.

 

8.2

Each Party agrees to keep any information identified as confidential by the disclosing Party confidential using methods at least as stringent as each Party uses to protect its own confidential information, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement or to audit LICENSEE as specified under Section 5.7. “Confidential Information” shall include the progress report required under Section 4.8 and any other information marked confidential or accompanied by correspondence indicating such information is confidential exchanged between the Parties hereunder. The confidentiality and use obligations set forth above apply to all or any part of the Confidential Information disclosed hereunder except to the extent that:

 

  (a)

LICENSEE or Cornell can show by written record that it possessed the information prior to its receipt from the other Party;

 

  (b)

The information was already available to the public or became so through no fault of the LICENSEE or Cornell;

 

11


  (c)

The information is subsequently disclosed to LICENSEE or Cornell by a third party that has the right to disclose it free of any obligations of confidentiality; or

 

  (d)

[**] years have elapsed from the expiration of this Agreement.

ARTICLE 9: ARBITRATION AND JUDICIAL REMEDIES

 

9.1

If a controversy arises under or related to this Agreement, and any disputed claim by either Party against the other Party under this Agreement, excluding any dispute relating to patent validity or infringement arising under this Agreement, the Parties shall endeavor to resolve such controversy or dispute by mutual, good faith conciliation and, failing that, may mutually agree to settle the controversy or dispute by mediation in accordance with the WIPO Mediation Rule. The place of mediation shall be New York, New York. The language to be used in the mediation shall be English.

Cornell reserves the right and power to proceed with direct judicial remedies without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of [**] days in which to cure such breach. In collecting overdue royalty payments and securing compliance with reporting obligations, Cornell may use all judicial remedies available.

ARTICLE 10: INDEMNIFICATION

 

10.1

LICENSEE agrees to indemnify, defend and hold harmless Cornell and its trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Product purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, or (iii) a third party’s manufacture or provision of a Product at the request of LICENSEE or Sublicensee.

 

10.2

Cornell shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. Cornell shall not have any responsibilities or liabilities whatsoever with respect to Products.

 

10.3

LICENSEE and Sublicensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement.

 

10.4

In addition to the foregoing, LICENSEE shall cause Stealth Peptides, Inc., an Affiliate of LICENSEE, to maintain, during the term of this Agreement, Comprehensive General Liability Insurance to cover the activities of LICENSEE. Such insurance shall provide

 

12


  minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate. Such insurance shall be written as primary coverage to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with financial strength ratings of at least A- as rated by A.M. Best. LICENSEE shall obtain appropriate clinical trial coverage before initiating any clinical trials of Products. The coverage and limits referred to above shall not in any way limit the liability of LICENSEE. LICENSEE shall, within [**] days after the Effective Date, furnish Cornell with certificates of insurance showing compliance with all requirements. Such certificates shall provide for [**] day advance written notice to Cornell of any modification. LICENSEE shall use reasonable best efforts to extend the coverage referred to above within [**] months after the Effective Date to include Cornell as an additionally insured party and shall furnish Cornell with a certificate of insurance evidencing any such extension.

 

10.5

The provisions of this Article 10 shall survive termination of this Agreement.

ARTICLE 11: WARRANTIES AND LIMITATIONS

 

11.1

Each of Cornell and LICENSEE represent and warrant that it has the right to enter into this Agreement. Cornell warrants that it has the right to convey to LICENSEE the rights granted under this Agreement.

 

11.2

Cornell represents that to the best of its knowledge the inventorship and ownership of the Applications is as set forth in Appendix A.

 

11.3

Cornell makes no representation or warranty that Applications will result in issued Patents.

 

11.4

Cornell makes no representations or warranties concerning the validity or scope of Patents.

 

11.5

Cornell does not warrant that Products made, used, sold, leased, imported, exported or otherwise disposed of under the license of this Agreement is or will be free from infringement of patents of third parties.

 

11.6

Nothing herein shall be construed as granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of Cornell or other persons other than Patents, regardless of whether such patents or other rights are dominant or subordinate to any Patents.

 

11.7

Cornell is under no obligation to furnish any technology or information other than that described and claimed in Applications and Patents.

 

11.8

Nothing herein shall be construed to grant LICENSEE rights under any applications or patents other than Applications and Patents.

 

13


11.9

Cornell does not make any representations, extend any warranties of any kind, express or implied, or assume any responsibility whatever concerning the manufacture, use, or sale, lease or other disposition by LICENSEE or its vendees or transferees of Products.

 

11.10

Except as expressly set forth in this Agreement, CORNELL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.

ARTICLE 12: MARKING

 

12.1

Prior to the issuance of patents on the Applications, LICENSEE shall mark, and agrees to require that Sublicensees shall mark, Products (or their containers or labels) made, sold, leased, imported, exported or otherwise disposed of by it under the license granted in this Agreement with the words “Patent Pending”, and following the issuance of one or more Patents, with each Patent’s Number.

ARTICLE 13: MISCELLANEOUS PROVISIONS

 

13.1

Terms in this Agreement which appear capitalized, other than the names of the Parties and article headings, have the meanings given in Article 2 and retain those meanings whether used in the singular or plural.

 

13.2

This Agreement shall be binding upon and be to the benefit of the Parties and their heirs, successors and permitted assigns. However, neither Party shall assign this Agreement, in whole or in part, without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

 

13.3

All issues and questions concerning the construction, validity and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement, even though under that jurisdiction’s choice of law or conflict of law analysis, the substantive law of such other jurisdiction would ordinarily apply. The Parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any State court sitting in Tompkins County, State of New York or Federal court sitting in Syracuse, New York over any suit, action or proceeding arising out of or relating to this Agreement and agree that no such suit, action or proceeding shall be brought in any other court, forum or jurisdiction. The Parties hereby irrevocably and

 

14


  unconditionally waive any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

 

13.4

All notices required or permitted hereunder shall be in writing and be served on the Parties at the addresses set forth below. Any such notices shall be either (a) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered when delivery is made according to the records of such courier, (b) sent by facsimile, in which case notice shall be deemed delivered upon receipt of confirmation of transmission of such facsimile notice, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt. Any notice by facsimile or personal delivery and delivered after 5:00 p.m., Eastern Daylight Time, shall be deemed received on the next Business Day. A Party’s address may be changed by written notice to the other Party; provided, however , that no notice of a change of address shall be affected until actual receipt of such notice.

In the case of Cornell:

Cornell Center for Technology Enterprise and Commercialization

Attn: Executive Director

395 Pine Tree Road, Suite 310

Ithaca, NY 14850

With a copy to:

Brian J. Kelly, Vice President

Cornell Research Foundation, Inc.

418 East 71 st Street

New York, NY 10021

Phone: (212)746-6186

Fax: (212) 746-6662

In the case of LICENSEE:

Stealth Peptides International Inc.

c/o Stealth Peptides Inc.

Attn: Travis Wilson

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807

All payments shall be made to Cornell:

Cornell Center for Technology Enterprise and Commercialization

P.O. Box 6899

Ithaca, NY 14850-6899

Attention: Accounting Department

 

15


If remitted by electronic payments via ACH or Fed Wire :

 

Receiving bank name:

   [**]

Bank account no.:

   [**]

Bank routing (ABA) no.:

   [**]

SWIFT Code:

   [**]

Bank account name:

   [**]

Bank ACH format code:

   [**]

Bank address:

   [**]

Additional information:

   [**]

A FAX copy of the transaction receipt shall be sent to Associate Director for Finance and Operations at: 607-254-5454. LICENSEE is responsible for all bank charges of wire transfer of funds for payments. The bank charges shall not be deducted from total amount due to Cornell.

 

13.5

No term or provision of this Agreement shall be waived and no breach excused unless such waiver or consent shall be in writing and signed by the Party claimed to have waived or consented. No waiver of a breach shall be deemed to be a waiver of a different or subsequent breach.

 

13.6

This Agreement may not be modified, changed or terminated orally. No change, modification, addition or amendment shall be valid unless in writing and signed by the Parties.

 

13.7

In the event any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.

 

13.8

This Agreement constitutes and contains the entire agreement of the Parties respecting its subject matter and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether written or oral, between the Parties respecting its subject matter.

 

13.9

This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document by both Parties as listed below. Any photocopy or facsimile copy of this fully executed Agreement shall have the same legal force and effect as any copy bearing original signatures. Signatures transmitted by facsimile shall be deemed valid as original signatures.

 

13.10

For clarity, in furtherance of fulfilling its obligations and exercising its rights under this Agreement, LICENSEE may employ third parties, including but not limited to contract manufacturers, contract research organizations and contract sales organizations, to carry out activities on LICENSEE’s behalf, without any obligation to obtain consent from Cornell therefor.

 

16


IN WITNESS of this Agreement, Cornell and LICENSEE have caused this Agreement to be executed by their duly authorized officers on the dates indicated.

 

CORNELL UNIVERSITY     STEALTH PEPTIDES INTERNATIONAL INC.
By:  

/s/ Alan Paau

    By:  

/s/ Lars Soren Sorensen

Name:   Alan Paau, Ph.D., MBA     Name:   Lars Soren Sorensen
Title:   Vice Provost for Technology Transfer & Economic Development     Title:   Director
Date: 12/6/2012     Date: 27-Dec-2012

 

17


Appendix A

Patent Applications

 

[**]

FL Docket No.

 

Cornell Docket
No.

 

Country

 

Status

 

App. No.

 

App. Date

 

Pat. No.

 

Grant Date

[**]   [**]   [**]   [**]   [**]   [**]    
[**]   [**]   [**]   [**]   [**]   [**]    
[**]   [**]   [**]   [**]   [**]   [**]    
[**]   [**]   [**]   [**]   [**]   [**]    

 

A-1

Exhibit 10.12

Execution Copy

Confidential

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

LICENSE AGREEMENT

BETWEEN

STEALTH PEPTIDES INTERNATIONAL INC.

AND

CORNELL UNIVERSITY

FOR

DOCKET NO. [**]


EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is made effective as of the date last signed below (“Effective Date”) by and between Stealth Peptides International Inc. (“LICENSEE”), a corporation of the Cayman Islands, that has a principal place of business and offices at 2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, Monaco, and Cornell University (“Cornell”) as represented by its Cornell Center for Technology Enterprise and Commercialization (“CCTEC”) at 395 Pine Tree Road, Ithaca, NY. LICENSEE and Cornell are each referred to individually as “Party” and collectively as “Parties.” The Parties hereby agree as follows:

ARTICLE 1: INTRODUCTION

 

1.1

Cornell has filed the various patent applications listed in Appendix A.

 

1.2

LICENSEE has exercised its right under Section 4.7 of that certain Exclusive License Agreement, dated April 20, 2006, as amended by the First Amendment dated as of October 7, 2010, to which LICENSEE and Cornell are parties (the “Amended License Agreement”), to obtain the right to develop and to commercialize the inventions disclosed in the Applications, which are co-owned by Cornell and LICENSEE.

 

1.3

The work leading to the inventions was supported in part by an agency of the United States Government, and Cornell is obligated to comply with United States OMB Circular A-124 and 37 CFR Part 401. This license is subject to the applicable terms of United States Government regulations concerning Government-funded inventions.

 

1.4

The Parties agree to the terms and conditions hereinbelow in order to develop the inventions for commercial purposes, and utilize them in the public interest.

ARTICLE 2: DEFINITIONS

 

2.1

“Affiliate” shall mean (1) any corporation or other noncorporate entity owning directly, or indirectly controlling, at least fifty percent (50%) of the stock normally entitled to vote for election of directors of LICENSEE; (2) any corporation owned or controlled by LICENSEE through ownership of at least fifty percent (50%) of the stock entitled to elect directors or any other entity actually controlled by LICENSEE, (3) any corporate or noncorporate entity under common control with LICENSEE.

 

2.2

“Applications” shall mean (a) the patent applications listed in Appendix A, (b) any foreign patent applications based thereon, (c) all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing applications and are enabled by subject matter that is disclosed in such application, (d) all divisionals and continuations of any of the patent applications described in (a)-(c) above, and (e) any patent application sharing a common claim of priority with any of the patent applications described in (a)-(d) above.

 

2


2.3

“Covered” shall mean, with respect to a Product and a country, that, in the absence of ownership of or a license granted under a Valid Claim in such country, the manufacture, use, offer for sale, sale or importation of such Product would infringe such Valid Claim (or, in the case of a Valid Claim in an Application, would reasonably likely infringe such Valid Claim if it were to issue in a Patent).

 

2.4

“Dollars” or “$” shall mean United States Dollars.

 

2.5

“Exclusive” shall mean that during the term of this Agreement Cornell will not grant commercial rights to Patents and/or Applications to any other party in the Field-of-Use.

 

2.6

“Field-of-Use” shall mean any and all fields.

 

2.7

“Licensed Territory” shall mean the world.

 

2.8

“License Year” shall mean each twelve-month period beginning on January 1 and ending on December 31. However, the first License Year (alternatively, License Year 1) shall commence on the Effective Date and end on December 31 of the same calendar year.

 

2.9

“Net Sales” shall mean the gross amount invoiced for sales, leases and other dispositions of Products by LICENSEE, and Sublicensees, to an independent third party on sale or use of Products where Products are either made, used, sold, imported, exported, or otherwise commercialized less (i) all trade, quantity, and cash discounts actually allowed on Products, (ii) all credits and allowances actually granted on Products on account of rejection, returns, billing errors, and retroactive price reductions, (iii) duties actually paid on Products, and (iv) excise, sale and use taxes, and equivalent taxes actually paid on Products.

 

2.10

“Patents” shall mean (a) all patents issuing from any Application, (b) all reissues, reexaminations and extensions of any patent described in (a) above, and (c) any patent sharing a common claim of priority with any of the patents described in (a) and (b) above.

 

2.11

“Products” shall mean any product or service that incorporates, utilizes or is otherwise described and claimed by one or more Valid Claims in Applications or Patents or that are made by a process that utilizes, incorporates or is otherwise described and claimed by one or more Valid Claims in Applications or Patents, and any services that incorporate or utilize or are otherwise described and claimed in Applications or Patents.

 

2.12

“Sublicense” shall mean a rights-granting contract with an independent third party or with a subsidiary or an Affiliate in which LICENSEE conveys rights granted to LICENSEE in Sections 4.1 and 4.2 of this Agreement.

 

2.13

“Sublicensee” shall mean any entity granted a Sublicense by LICENSEE, and acceptable to Cornell, under this Agreement.

 

3


2.14

“Valid Claim” shall mean a claim of (i) an issued Patent which has not been declared invalid in a court of appropriate jurisdiction, or (ii) a pending patent Application which is being diligently prosecuted by or on behalf of Cornell.

ARTICLE 3: APPLICATIONS AND PATENTS

 

3.1

Cornell represents that Cornell and LICENSEE jointly hold title to all Applications and Patents.

 

3.2

Cornell agrees to use reasonable efforts to file and prosecute Applications and maintain Patents. At any time during the term of this Agreement, LICENSEE may elect in writing to be released from its license in any of the Patents or Applications, in which event LICENSEE shall thereafter have no obligation to reimburse Cornell for any future expenses relating to such Patents or Applications, and Cornell shall have the option at its sole discretion and expense to file, prosecute, maintain and license to a third party such Patents or Applications.

 

3.3

LICENSEE shall reimburse Cornell for all out-of-pocket expenses for preparation, filing, prosecution and maintenance of Applications and Patents except for those Applications and Patents for which it has waived its rights, in writing, as described in Section 3.2. Such reimbursable expenses shall include those incurred prior to Effective Date. Such expenses shall be paid to Cornell by LICENSEE within [**] days of receipt of an invoice therefore unless Cornell has otherwise agreed, in writing. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge, or the highest rate allowed by New York State Law.

 

3.4

Cornell shall have final authority over selection of patent attorneys and all decisions concerning filing and prosecution of Applications and maintenance of Patents. However, Cornell shall keep LICENSEE reasonably informed of its filing, prosecution and maintenance activities and shall give LICENSEE the opportunity to comment on major decisions concerning such activities.

 

3.5

LICENSEE shall not at any time, directly or indirectly, oppose the grant of, nor dispute the validity or enforceability of, nor cooperate in any suit, claim, counterclaim or defense against any patent or claim included in the Patents.

ARTICLE 4: LICENSE GRANT AND COMMERCIAL EFFORTS

 

4.1

Subject to the terms and conditions of this Agreement and to the rights of and obligations to the United States Government as set forth in United States Office of Management & Budget Circular A-124 or 37 CFR Part 401 et seq., Cornell hereby grants and LICENSEE hereby accepts an exclusive right to make, use, sell, lease, import, export or otherwise dispose of Products under all Cornell’s rights, title and interest in and to the Applications and Patents in the Field-of-Use in the Licensed Territory for the term of this Agreement as specified in Section 7.1.

 

4


The right of LICENSEE to make Products includes the right to have Products made by contract with third parties within the Licensed Territory. Such contractual arrangements with third parties shall be subject to and conditioned upon appropriate supervision and quality assurance and control of the third party by LICENSEE and the third party shall be bound in writing to respect all rights of Cornell and to supply all production of Products exclusively to LICENSEE.

 

4.2

LICENSEE shall also have the right to grant Sublicenses under this Agreement provided LICENSEE: (1) consults with Cornell regarding the potential sublicensee, (2) provides Cornell with a draft sublicense at least [**] days prior to its execution and (3) provides Cornell with a copy of the fully executed sublicense within [**] days after execution. Any such Sublicense shall contain all the provisions of this Agreement which are protective of and beneficial to Cornell and LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee as though they were sales by LICENSEE. Any such Sublicenses shall be subject to an obligation for LICENSEE to pay to Cornell [**] percent ([**]%) of any consideration received by LICENSEE under a Sublicense, other than (1) consideration consisting of royalties on sales or net sales made by the Sublicensee (which shall be handled in accordance with Section 5.3 hereunder) under such a Sublicense, (2) payments made to LICENSEE for equity securities at or near fair market value and (3) payments made to LICENSEE to fund research and development of Products. The Parties intend the foregoing sentence to mean that, to the extent a Sublicense includes rights granted by Cornell to LICENSEE for patents or patent applications with inventorship that includes [**] (a “Cornell License”) under more than one Cornell License, the [**] percent ([**]%) of any Sublicense consideration shall be payable by LICENSEE under this Section 4.2 for all such Cornell Licenses included in the Sublicense, in the aggregate, and is not separately payable by LICENSEE under any other applicable agreement(s) for each Cornell License included in the Sublicense.

 

4.3

LICENSEE shall be responsible to Cornell for the payment of royalties on sales made by a Sublicensee in accordance with Section 5.3 hereof as though such sales were made by LICENSEE. LICENSEE and Cornell agree to negotiate in good faith an appropriate value for all non-cash consideration or non-cash cross-licenses. LICENSEE’s obligation to pay Cornell’s share of Sublicense consideration shall be considered incurred as of the date on which such Sublicense consideration is received by LICENSEE.

 

4.4

Cornell retains an irrevocable and nonexclusive right to practice for its own educational and research purposes, the inventions claimed in Applications and Patents and such purposes shall include limited, non-commercial collaboration with other non-profit research institutes, subject to the requirements of Section 4.7(vii) of the Amended License Agreement relating to Material Transfer Agreements (as defined therein).

 

5


4.5

Nothing in this Agreement shall be construed to give LICENSEE rights in any technologies currently owned or developed in the future by Cornell other than those explicitly specified in this Agreement. Nothing in this Agreement shall be construed to give Cornell rights in technologies currently owned or developed in the future by LICENSEE other than those explicitly specified in this Agreement.

 

4.6

The rights granted by this Agreement are to LICENSEE alone and not to any third parties or to any subsidiary or Affiliate of LICENSEE. However, with prior written approval of Cornell (such approval not to be unreasonably withheld), LICENSEE may transfer this Agreement by way of sale of LICENSEE, through sale of assets and/or sale of stock, provided that such sale is not primarily for the benefit of creditors. If LICENSEE fails to obtain the prior written approval from Cornell for such transfer, Cornell shall have the right to terminate this Agreement and the right to require that the transfer of this Agreement be voided.

 

4.7

LICENSEE shall use its Best Efforts, consistent with sound and reasonable business practices and judgment, to affect commercialization of Products as soon as practicable and to maximize sales thereof. Failure of LICENSEE to use its Best Efforts to meet the diligence milestones of this Section 4.7 shall be a material breach of this Agreement. “Best Efforts” shall mean the efforts that a reasonable person in the position of LICENSEE would make so as to achieve that goal as expeditiously as practicable; notwithstanding the foregoing, LICENSEE shall be deemed to have used Best Efforts with respect to the period preceding the achievement of a milestone if it achieves the milestone by the corresponding target achievement date. If LICENSEE has not achieved a milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**]thereafter to achieve such milestone or other mutually agreed upon milestone that represents Best Efforts.. If LICENSEE has not commenced such Best Efforts, or if applicable, achieved the milestone in question, by the end of such cure period, then the license granted pursuant to Section 4.1 shall thereafter convert to a non-exclusive license and such failure to use Best Efforts shall not be considered a material breach of this Agreement.

LICENSEE shall use Best Efforts to achieve the following milestones by the date indicated:

 

Milestone

   Target achievement
date

[**]

[**]

[**]

   [**]

[**]

[**]

[**]

   [**]

 

6


If LICENSEE has not achieved a milestone by the corresponding target achievement date, LICENSEE shall have a cure period of [**] thereafter to achieve such milestone or other mutually agreed upon milestone that represents Best Efforts. If LICENSEE has not commenced such Best Efforts, or if applicable, achieved the milestone in question, by the end of such cure period, then the license granted pursuant to Section 4.1 shall thereafter convert to a non-exclusive license and such failure to use Best Efforts shall not be considered a material breach of this Agreement.

 

4.8

Beginning with the second License Year, within [**] days after the start of each License Year and until LICENSEE markets Products, LICENSEE shall make a written annual report to Cornell covering the preceding License Year, regarding the progress of LICENSEE toward commercial development of Products. Such report shall include, at a minimum, information sufficient to enable Cornell to satisfy reporting requirements of the United States Government and for Cornell to ascertain progress by LICENSEE toward meeting the Best Efforts of this Article 4. For clarity, LICENSEE may satisfy its obligations under this Section 4.8 by including the applicable information in each annual report submitted pursuant to Section 4.9 of the Amended License Agreement provided that the applicable information references this Agreement.

 

4.9

If Cornell should identify any Product that (i) LICENSEE is not actively developing or commercializing, as evidenced by the reports provided to Cornell under Section 4.8; and (ii) is in the Field-of-Use and/or territorial market that Cornell indicates is significant, (such Product, an “Undeveloped Product”), Cornell shall provide written notice to LICENSEE of said Undeveloped Product. Within [**] days after receipt of such notice from Cornell, LICENSEE shall provide written notice to Cornell that it elects to: a) affect development and commercialization of said Undeveloped Product itself; or b) affect development and commercialization of said Undeveloped Product through an appropriate sublicensee; or c) terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product. Should LICENSEE elect to affect development and commercialization of said Undeveloped Product itself, Cornell and LICENSEE will negotiate reasonable diligence goals. Should an amendment containing such diligence goals not be executed within [**] days after LICENSEE’s election, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE. Should LICENSEE elect to sublicense its rights, said sublicense shall be executed within [**] months after LICENSEE’s election. Should said sublicense not be so executed, Cornell may immediately terminate LICENSEE’s rights under this Agreement only for said Undeveloped Product by means of written notice to LICENSEE.

 

4.10

LICENSEE shall not use , nor shall LICENSEE permit Sublicensee to use, the names, trademarks and indicia of Cornell, nor the names of any employee, student or faculty member of Cornell without prior written approval from Cornell. Cornell shall not use the names, trademarks and indicia of LICENSEE nor disclose to any third party any non-public information relating to the subject matter of this Agreement without prior written approval from LICENSEE.

 

7


4.11

LICENSEE shall alone have the obligation to ensure that Products it makes, uses, sells, leases, imports, exports or otherwise disposes of are not defective, that Products satisfy all applicable government regulations and that export of Products satisfies government export requirements.

ARTICLE 5: PAYMENTS, ROYALTIES, REPORTS AND RECORDS

 

5.1

As consideration for entering into this Agreement, Cornell acknowledges that it has received the license fee of [**] Dollars ($[**]) from LICENSEE prior to the Effective Date.

 

5.2

Commencing upon the third (3 rd ) anniversary of the Effective Date and continuing until the first commercial sale of the first Product, LICENSEE will pay FOUNDATION an annual license maintenance fee of $[**] on each anniversary of the Effective Date.

 

5.3

For the rights granted hereunder, LICENSEE shall pay or cause to be paid to Cornell a royalty on Net Sales of Products, on a Product-by-Product and country-by-country basis, where the manufacture, use, sale, offer for sale or importation of such Product by LICENSEE in such country is Covered by a Valid Claim, as per the following table:

 

Product

   Royalty   If Annual Sales:

All Products

   [**]   [**]
   [**]   [**]
   [**]   [**]
   [**]   [**]

In lieu of the royalty in the table above, the royalty shall be [**] percent ([**]%) of Net Sales of Products made, used, sold, offered for sale, or imported in any country where such activities are not Covered by a Valid Claim, except that no royalty shall be due for any sales of any such Product that occur after the fifteenth (15 th ) anniversary of the first commercial sale of such Product. LICENSEE shall pay royalties in accordance with this Section 5.3 on all Products that are either sold or produced under the license granted in Article 4, regardless of whether such Products are produced prior to the Effective Date or are produced before but sold after the termination of this Agreement.

 

5.4

Royalties shall be payable only once with respect to the same unit of Product, and no royalty shall be payable hereunder with respect to any unit of Product for which royalties are payable to Cornell under the Amended License Agreement or under any other license agreement pursuant to which Cornell has granted rights to LICENSEE. However, LICENSEE will use reasonable efforts to provide Cornell with information Cornell can use to determine sales of Products relating to the indication Covered by the Applications and Patents of this Agreement.

 

5.5

If a Product contains technology subject to royalties payable to a third party, the royalty due hereunder shall be reduced by [**] percent ([**]%) for every [**] percent ([**]%) of royalty due to such third party, but in no event shall royalties due be reduced by more than [**] percent ([**]%) of the applicable royalty rate payable for such Products.

 

8


5.6

LICENSEE shall provide Cornell with quarterly written reports of all sales, leases or other dispositions of Products by LICENSEE during the quarter ending March 31, June 30, September 30 and December 31, due within [**] days of the end of each quarter. LICENSEE shall require that Sublicensees provide LICENSEE with quarterly written reports of all sales, leases or other dispositions of Products by Sublicensees, during the quarter ending March 31, June 30, September 30 and December 31, and copies of Sublicensee’s reports shall accompany LICENSEE’s reports to Cornell. In order to minimize LICENSEE time spent on royalty reports, a brief one-page Royalty Report Form is provided in Appendix C to the Amended License Agreement that will satisfy Cornell’s reporting requirements. Cornell agrees to keep the information in these reports confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. Royalty payments for sales, leases, and other dispositions of the Products invoiced during a calendar quarter shall accompany the Royalty Report Form for that particular quarter. The Royalty Report Form shall be submitted regardless of whether or not royalties are owed. All amounts reported and all payments made shall be in United States dollars. Conversion from foreign currencies, if any, shall be based upon the conversion rate published in The Wall Street Journal on the last day of the particular quarterly accounting period (or on the last business day on which The Wall Street Journal is published during said quarterly period) for which royalties are due. Royalty checks shall be made payable to Cornell University and mailed to the address specified in Section 13.4.

 

5.7

LICENSEE shall keep and maintain , and LICENSEE shall require that Sublicensees keep and maintain, any and all records necessary to certify compliance of LICENSEE with the terms of this agreement, including but not limited to accounting general ledgers, Sublicense and distributor agreements, price lists, catalogs, and marketing materials, audited financial statements, income tax returns, sales tax returns, inventory records, and shipping documents of Products. Such records shall be open to inspection at reasonable times by a certified public accountant chosen by Cornell and acceptable to LICENSEE, which shall not unreasonably withhold such acceptance. Such inspection shall be made at Cornell’s expense. However, if the results of any audit reveal additional royalties owed to Cornell that differ by more the [**]% ([**] percent) from those royalties already paid, LICENSEE shall also reimburse Cornell for the costs of the audit. Cornell agrees to hold such records confidential, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement. The records required by this paragraph shall be maintained and available for inspection for a period of [**] years following the calendar quarter to which they pertain. This paragraph shall survive termination of this Agreement.

 

5.8

LICENSEE shall reimburse Cornell for the expenses specified in Section 3.3 within [**] days of written invoice from Cornell. Such invoice shall specify the date the expense was incurred, the purpose of the expense (including, as applicable, a summary of patent attorney services giving rise to the expense), and the Applications or Patents to which the expense relates.

 

9


5.9

Royalty payments due under Section 5.3 of this Agreement and payment of Cornell’s share of Sublicense consideration shall become late if not paid within [**] days after the end of the quarter in which the payment obligation was incurred. Late payments shall be subject to a [**] percent ([**]%) per annum interest charge.

 

5.10

LICENSEE agrees to make a written report to Cornell within [**] days after the expiration of this Agreement pursuant to Section 7.1. LICENSEE shall continue to make reports pursuant to the provisions of this Section 5.10 concerning royalties payable in accordance with Section 5.3 in connection with the sale of Products after expiration of the license, until such time as all such Products produced under the license have been sold or destroyed. Concurrent with the submittal of each post-termination report, LICENSEE shall pay Cornell all applicable royalties.

ARTICLE 6: INFRINGEMENT

 

6.1

In the event that either Party determines that a third party is making, using or selling a product that may infringe Patents, it will promptly notify the other Party in writing. LICENSEE may elect with the prior written consent of Cornell, to bring suit against such alleged infringer. Such election must be made within [**] days after receipt of said written consent from Cornell. All recoveries in such suit shall belong to LICENSEE except that Cornell shall have the right to elect to pay up to [**] percent ([**]%) of the litigation costs and receive a percentage of any recovery equal to the percentage of litigation costs paid. Cornell must make such election within [**] days after its receipt of notice that LICENSEE has elected to bring suit. Cornell shall also have the right to choose to be represented by separate counsel in any such suit at its own expense. Such expense for separate counsel shall not be considered as part of “litigation costs” for purposes of determining Cornell’s share of any recovery in accordance with the sentence above. If LICENSEE elects not to bring a suit against the alleged infringer, it shall promptly notify Cornell of that fact and Cornell shall have the right to commence such actions at its own cost and expense, in which case any recoveries shall belong to Cornell. In such suits by Cornell, LICENSEE shall have rights of participation and recovery that are the same as Cornell’s rights as provided above when LICENSEE elects to sue.

 

6.2

Regardless of which Party controls a suit brought against an infringer, each Party shall participate in any settlement discussions and each will be a signatory to any settlement agreement.

ARTICLE 7: TERM AND TERMINATION

 

7.1

This Agreement shall commence on the Effective Date, and shall continue as an Exclusive license, subject to Section 4.7, until the last of all Patents has either expired or been invalidated in an unappealed decision by a court having jurisdiction and no Applications remain pending, and provided this Agreement is not earlier terminated as provided for herein.

 

10


7.2

Cornell may terminate this Agreement if LICENSEE:

(i)    is in default in payment of license fees, royalties or cost reimbursements or in providing reports;

(ii)    subject to Section 4.7, is in material breach of any provision of this Agreement; or

(iii)    intentionally provides any false report;

and LICENSEE fails to remedy any such default, breach, or false report within [**] days after written notice thereof by Cornell. LICENSEE’s right to terminate this Agreement on a Product-by-Product basis is as set forth in Paragraph 7.4.

 

7.3

Cornell may terminate this Agreement upon thirty (30) days written notice by Cornell if LICENSEE fails to obtain prior written Cornell approval for the transfer of this Agreement upon the sale of LICENSEE in accordance with Section 4.6, provided that such notice is given within sixty (60) days after such transfer.

 

7.4

LICENSEE may terminate the license granted hereunder, in its entirety or on a Patent-by- Patent basis, a Product-by-Product, and/or a country-by-country basis if LICENSEE has a reasonable basis for doing so, at any time upon sixty (60) days notice to Cornell. Such notice must be in writing and obligations under this Agreement shall continue to accrue during the sixty (60) day notice period, including the obligation to make any payments under this Agreement.

 

7.5

Upon termination of this Agreement for any reason, including the end of term as specified above, all rights and obligations under this Agreement shall terminate, except those that have accrued prior to termination and except as specified in this Agreement.

ARTICLE 8: PUBLICATION AND CONFIDENTIALITY

 

8.1

It is the policy of Cornell to promote and safeguard free and open inquiry by faculty, students and others. To further this policy, Cornell shall retain the right to publish information described in Applications and Patents.

 

8.2

Each Party agrees to keep any information identified as confidential by the disclosing Party confidential using methods at least as stringent as each Party uses to protect its own confidential information, except as may be necessary to maintain an action against LICENSEE for breach of this Agreement or to audit LICENSEE as specified under Section 5.7. “Confidential Information” shall include the progress report required under Section 4.8 and any other information marked confidential or accompanied by correspondence indicating such information is confidential exchanged between the Parties hereunder. The confidentiality and use obligations set forth above apply to all or any part of the Confidential Information disclosed hereunder except to the extent that:

 

  (a)

LICENSEE or Cornell can show by written record that it possessed the information prior to its receipt from the other Party;

 

11


  (b)

The information was already available to the public or became so through no fault of the LICENSEE or Cornell;

 

  (c)

The information is subsequently disclosed to LICENSEE or Cornell by a third party that has the right to disclose it free of any obligations of confidentiality; or

 

  (d)

[**] years have elapsed from the expiration of this Agreement.

ARTICLE 9: ARBITRATION AND JUDICIAL REMEDIES

 

9.1

If a controversy arises under or related to this Agreement, and any disputed claim by either Party against the other Party under this Agreement, excluding any dispute relating to patent validity or infringement arising under this Agreement, the Parties shall endeavor to resolve such controversy or dispute by mutual, good faith conciliation and, failing that, may mutually agree to settle the controversy or dispute by mediation in accordance with the WIPO Mediation Rule. The place of mediation shall be New York, New York. The language to be used in the mediation shall be English.

Cornell reserves the right and power to proceed with direct judicial remedies without conciliation, mediation or arbitration for breach of the royalty payment and sales reporting provisions of this Agreement after giving written notice of such breach to LICENSEE followed by an opportunity period of [**] days in which to cure such breach. In collecting overdue royalty payments and securing compliance with reporting obligations, Cornell may use all judicial remedies available.

ARTICLE 10: INDEMNIFICATION

 

10.1

LICENSEE agrees to indemnify, defend and hold harmless Cornell and its trustees, officers, employees, students, and agents against any and all claims for death, illness, personal injury, property damage, damages, expenses, losses and improper business practices arising out of (i) the manufacture, use, sale, or other disposition of Patents or Products by LICENSEE, Sublicensee, or their customers, (ii) a third party’s use of a Product purchased, leased, or otherwise acquired from LICENSEE or Sublicensee, or (iii) a third party’s manufacture or provision of a Product at the request of LICENSEE or Sublicensee.

 

10.2

Cornell shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. Cornell shall not have any responsibilities or liabilities whatsoever with respect to Products.

 

12


10.3

LICENSEE and Sublicensee shall at all times comply, through insurance or self-insurance, with all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement.

 

10.4

In addition to the foregoing, LICENSEE shall cause Stealth Peptides, Inc., an Affiliate of LICENSEE, to maintain, during the term of this Agreement, Comprehensive General Liability Insurance to cover the activities of LICENSEE. Such insurance shall provide minimum limits of liability of $[**] dollars per incident and $[**] dollars in aggregate. Such insurance shall be written as primary coverage to cover claims incurred, discovered, manifested, or made during or after the expiration of this Agreement and should be placed with carriers with financial strength ratings of at least A- as rated by A.M. Best. LICENSEE shall obtain appropriate clinical trial coverage before initiating any clinical trials of Products. The coverage and limits referred to above shall not in any way limit the liability of LICENSEE. LICENSEE shall, within [**] days after the Effective Date, furnish Cornell with certificates of insurance showing compliance with all requirements. Such certificates shall provide for [**] day advance written notice to Cornell of any modification. LICENSEE shall use reasonable best efforts to extend the coverage referred to above within [**] months after the Effective Date to include Cornell as an additionally insured party and shall furnish Cornell with a certificate of insurance evidencing any such extension.

 

10.5

The provisions of this Article 10 shall survive termination of this Agreement.

ARTICLE 11: WARRANTIES AND LIMITATIONS

 

11.1

Each of Cornell and LICENSEE represent and warrant that it has the right to enter into this Agreement. Cornell warrants that it has the right to convey to LICENSEE the rights granted under this Agreement.

 

11.2

Cornell represents that to the best of its knowledge the inventorship and ownership of the Applications is as set forth in Appendix A.

 

11.3

Cornell makes no representation or warranty that Applications will result in issued Patents.

 

11.4

Cornell makes no representations or warranties concerning the validity or scope of Patents.

 

11.5

Cornell does not warrant that Products made, used, sold, leased, imported, exported or otherwise disposed of under the license of this Agreement is or will be free from infringement of patents of third parties.

 

11.6

Nothing herein shall be construed as granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of Cornell or other persons other than Patents, regardless of whether such patents or other rights are dominant or subordinate to any Patents.

 

13


11.7

Cornell is under no obligation to furnish any technology or information other than that described and claimed in Applications and Patents.

 

11.8

Nothing herein shall be construed to grant LICENSEE rights under any applications or patents other than Applications and Patents.

 

11.9

Cornell does not make any representations, extend any warranties of any kind, express or implied, or assume any responsibility whatever concerning the manufacture, use, or sale, lease or other disposition by LICENSEE or its vendees or transferees of Products.

 

11.10

Except as expressly set forth in this Agreement, CORNELL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.

ARTICLE 12: MARKING

 

12.1

Prior to the issuance of patents on the Applications, LICENSEE shall mark, and agrees to require that Sublicensees shall mark, Products (or their containers or labels) made, sold, leased, imported, exported or otherwise disposed of by it under the license granted in this Agreement with the words “Patent Pending”, and following the issuance of one or more Patents, with each Patent’s Number.

ARTICLE 13: MISCELLANEOUS PROVISIONS

 

13.1

Terms in this Agreement which appear capitalized, other than the names of the Parties and article headings, have the meanings given in Article 2 and retain those meanings whether used in the singular or plural.

 

13.2

This Agreement shall be binding upon and be to the benefit of the Parties and their heirs, successors and permitted assigns. However, neither Party shall assign this Agreement, in whole or in part, without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed.

 

13.3

All issues and questions concerning the construction, validity and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. In furtherance of the foregoing, the internal law of the State of New York shall control the interpretation and construction of this Agreement, even though under that jurisdiction’s choice of law or

 

14


  conflict of law analysis, the substantive law of such other jurisdiction would ordinarily apply. The Parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of any State court sitting in Tompkins County, State of New York or Federal court sitting in Syracuse, New York over any suit, action or proceeding arising out of or relating to this Agreement and agree that no such suit, action or proceeding shall be brought in any other court, forum or jurisdiction. The Parties hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

 

13.4

All notices required or permitted hereunder shall be in writing and be served on the Parties at the addresses set forth below. Any such notices shall be either (a) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered when delivery is made according to the records of such courier, (b) sent by facsimile, in which case notice shall be deemed delivered upon receipt of confirmation of transmission of such facsimile notice, or (c) sent by personal delivery, in which case notice shall be deemed delivered upon receipt. Any notice by facsimile or personal delivery and delivered after 5:00 p.m., Eastern Daylight Time, shall be deemed received on the next Business Day. A Party’s address may be changed by written notice to the other Party; provided, however , that no notice of a change of address shall be affected until actual receipt of such notice.

In the case of Cornell:

Cornell Center for Technology Enterprise and Commercialization

Attn: Executive Director

395 Pine Tree Road, Suite 310

Ithaca, NY 14850

With a copy to:

Brian J. Kelly, Vice President

Cornell Research Foundation, Inc.

418 East 71 st Street

New York, NY 10021

Phone: (212)746-6186

Fax: (212) 746-6662

In the case of LICENSEE:

Stealth Peptides International Inc.

c/o Stealth Peptides Inc.

Attn: Travis Wilson

1188 Centre Street

Newton Centre, MA 02459

Phone: 617-244-2800

Fax: 617-244-2807

 

15


All payments shall be made to Cornell:

Cornell Center for Technology Enterprise and Commercialization

P.O. Box 6899

Ithaca, NY 14850-6899

Attention: Accounting Department

If remitted by electronic payments via ACH or Fed Wire :

 

Receiving bank name:

   [**]   

Bank account no.:

   [**]   

Bank routing (ABA) no.:

   [**]   

SWIFT Code:

   [**]   

Bank account name:

   [**]   

Bank ACH format code:

   [**]   

Bank address:

   [**]   

Additional information:

   [**]   

A FAX copy of the transaction receipt shall be sent to Associate Director for Finance and Operations at: 607-254-5454. LICENSEE is responsible for all bank charges of wire transfer of funds for payments. The bank charges shall not be deducted from total amount due to Cornell.

 

13.5

No term or provision of this Agreement shall be waived and no breach excused unless such waiver or consent shall be in writing and signed by the Party claimed to have waived or consented. No waiver of a breach shall be deemed to be a waiver of a different or subsequent breach.

 

13.6

This Agreement may not be modified, changed or terminated orally. No change, modification, addition or amendment shall be valid unless in writing and signed by the Parties.

 

13.7

In the event any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect.

 

13.8

This Agreement constitutes and contains the entire agreement of the Parties respecting its subject matter and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether written or oral, between the Parties respecting its subject matter.

 

13.9

This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document by both Parties as listed below. Any photocopy or facsimile copy of this fully executed Agreement shall have the same legal force and effect as any copy bearing original signatures. Signatures transmitted by facsimile shall be deemed valid as original signatures.

 

16


13.10

For clarity, in furtherance of fulfilling its obligations and exercising its rights under this Agreement, LICENSEE may employ third parties, including but not limited to contract manufacturers, contract research organizations and contract sales organizations, to carry out activities on LICENSEE’s behalf, without any obligation to obtain consent from Cornell therefor.

IN WITNESS of this Agreement, Cornell and LICENSEE have caused this Agreement to be executed by their duly authorized officers on the dates indicated.

 

CORNELL UNIVERSITY     STEALTH PEPTIDES INTERNATIONAL INC.
By:  

/s/ Alan Paau

    By:  

/s/ Lars Sorensen

Name:   Alan Paau, Ph.D., MBA     Name:   Lars Sorensen

Title:

  Vice Provost for Technology Transfer & Economic Development     Title:   Authorized Signatory
Date: 8/1/13     Date: 12 August 2013

 

17


Appendix A

Patent Applications

 

[**]

FL Docket No.

 

Cornell Docket No.

 

Country

 

Status

 

App. No.

 

App. Date

[**]   [**]   [**]   [**]   [**]   [**]
[**]   [**]   [**]   [**]   [**]   [**]

 

A-1

EXHIBIT 10.13

RIVERSIDE CENTER

THREE RIVERSIDE CENTER

NEWTON, MASSACHUSETTS

OFFICE LEASE AGREEMENT

BETWEEN

HINES GLOBAL REIT RIVERSIDE CENTER, LLC.,

a Delaware limited liability company

(“LANDLORD”)

AND

STEALTH PEPTIDES INCORPORATED, a Delaware corporation

(“TENANT”)


OFFICE LEASE AGREEMENT

THIS OFFICE LEASE AGREEMENT (this “ Lease ”) is made and entered into as of October 31, 2014 (“ Execution Date ”), by and between HINES GLOBAL REIT RIVERSIDE CENTER , LLC ., a Delaware limited liability company (“ Landlord ”), and STEALTH PEPTIDES INCORPORATED , a Delaware corporation ( “Tenant” ). The following exhibits and attachments are incorporated into and made a part of this Lease: Exhibit A (Outline and Location of Premises), Exhibit B (Expenses and Taxes), Exhibit C (Work Letter), Exhibit D (Commencement Letter), Exhibit E (Building Rules and Regulations), Exhibit F (Additional Provisions) and Exhibit G (Form of Letter of Credit).

 

1.

Basic Lease Information .

 

  1.01

“Building” shall mean the building located at 275 Grove Street, Newton, Massachusetts 02466, and commonly known as Riverside Center. Landlord and Tenant acknowledge that the “Building”, as defined herein, consists of three buildings commonly known as One Riverside Center, Two Riverside Center and Three Riverside Center. “Rentable Square Footage of the Building” is deemed to be 504,945 square feet.

 

  1.02

The parties acknowledge that Tenant is currently occupying 6,761 square feet on the first (1 st ) floor of Three Riverside Center ( “Area A” ) pursuant to a sublease by and between Valassis Interactive, as sublandlord, and Tenant, as subtenant, dated October 15, 2013, with Consent to Sublet dated November 5, 2013 (collectively, the “Sublease” ), the term of which Sublease expires on November 30, 2015, and that, commencing as of December 1, 2015 ( “Area A Commencement Date” ), Tenant shall lease Area A directly from Landlord on the terms and conditions hereof.

The parties hereby further acknowledge that, in addition to leasing Area A, commencing as of the Area B Commencement Date, as hereinafter defined, Tenant shall lease additional premises containing 7,685 square feet on the first (1 st ) floor of Three Riverside Center ( “Area B” ) on the terms and conditions hereof. From and after the Area B Commencement Date (defined below), the “Premises” shall be deemed to mean Area B, and from and after the Area A Commencement Date, the “Premises” shall be deemed to mean Area A and Area B, collectively, both as shown on Exhibit A to this Lease. From and after the Area A Commencement Date, the “Rentable Square Footage of the Premises” is deemed to be 14,446 square feet. Landlord and Tenant stipulate and agree that the Rentable Square Footage of the Building and the Rentable Square Footage of the Premises are correct.


  1.03

“Base Rent-Area A” : Commencing as of the Area A Commencement Date, Tenant shall pay Base Rent with respect to Area A as follows:

 

Period

   Annual  Rate Per
Square Foot
     Monthly
Base  Rent
 

12/1/15-11/30/16:

   $ 40.00      $ 22,536.80  

12/1/16-11/30/17:

   $ 41.00      $ 23,100.22  

12/1/17-11/30/18:

   $ 42.00      $ 23,663.64  

12/1/18-11/30/19:

   $ 43.00      $ 24,227.06  

12/1/19-11/30/20:

   $ 44.00      $ 24,790.48  

“Base Rent-Area B” : Commencing as of the Area B Commencement Date, Tenant shall pay Base Rent with respect to Area B as follows:

 

Period

   Annual Rate Per
Square Foot
     Monthly Base Rent  

Area B Commencement Date -11/30/16*:

   $ 40.00      $ 25,616.80  

12/1/16-11/30/17:

   $ 41.00      $ 26,257.22  

12/1/17-11/30/18:

   $ 42.00      $ 26,897.64  

12/1/18-11/30/19:

   $ 43.00      $ 27,538.06  

12/1/19-11/30/20:

   $ 44.00      $ 28,178.48  

 

*

Tenant shall have no obligation to pay Base Rent with respect to Area B for the period commencing as of Area B Commencement Date, and expiring as of the date that is three (3) full months after the Area B Commencement Date (the “Rent Abatement Period” ). During the Rent Abatement Period, only Base Rent shall be abated, and all additional rent and other costs and charges specified in the Lease shall remain as due and payable pursuant to the provisions of the Lease.

 

  1.04

“Tenant’s Pro Rata Share” : Area A : 1.34%. Area B : 1.52%.

“Base Year” for Taxes (defined in Exhibit B ) : Fiscal Year (defined below) 2016 (i.e., July 1, 2015 to June 30, 2016); “Base Year” for Expenses (defined in Exhibit  B ): calendar year 2015.

For purposes hereof, “Fiscal Year” shall mean the Base Year for Taxes and each period of July 1 to June 30 thereafter.

 

  1.05

Term ”:

Area A: The period commencing on the Area A Commencement Date and, unless terminated earlier in accordance with this Lease, ending on November 30, 2020 (the “Termination Date” ).

Area B: The date that is the later to occur of (i) April 1, 2015, and (ii) the date on which Landlord delivers full and exclusive possession of Area B to Tenant, free of all tenants and occupants ( “Area B Commencement Date” ) and, unless terminated earlier in accordance with this Lease, ending on November 30, 2020.

 

- 2 -


The Area B Commencement Date is estimated to be April 1, 2015. Reference is made to the fact that Area B is currently occupied by another tenant in Three Riverside Center (the “Existing Tenant” ). Landlord and Tenant anticipate that the Existing Tenant will vacate Area B and deliver up possession thereof, on or before April 1, 2015, and that the same will be delivered to Tenant (which delivery shall be considered to have occurred as of the date on which Landlord notifies Tenant that Area B has been vacated by the Existing Tenant and possession thereof is available to Tenant) broom clean and free of any personal property. Landlord shall not be liable for a failure to deliver possession of Area B due to the holdover or unlawful possession of Area B by the Existing Tenant, provided, however, Landlord shall use reasonable efforts to obtain possession of Area B. Notwithstanding the foregoing, in the event the Area B Commencement Date has not occurred by October 31, 2015, Tenant, may terminate this Lease at any time thereafter on sixty (60) days’ prior written notice, whereupon this Lease shall terminate at the expiration of such 60-day period unless the Area B Commencement Date occurs on or before the expiration of such 60-day period. The termination remedy set forth in this Section 1.05 is Tenant’s sole remedy for delay in the Area B Commencement Date.

 

  1.06

Allowance ( s ): An amount not to exceed $150,000.00, as further described in the attached Exhibit C .

 

  1.07

“Security Deposit” : $325,000.00, as more fully described in Section 6, and subject to reduction as provided in said Section 6.

 

  1.08

Guarantor ”: None.

 

  1.09

Tenant’s Broker ”: Transwestern/RBJ.

 

  1.10

“Permitted Use”: General business offices.

 

  1.11

Notice Address(es) ”:

 

  

Landlord:

 

Hines Global REIT Riverside Center, LLC
c/o Hines Global REIT Inc.
2800 Post Oak Boulevard, Suite 4800 Houston, Texas 77056
Attention: Sherri Shugart

 

With copies of any notices to Landlord shall be sent to:

 

Hines Interests Limited Partners
275 Grove Street
Newton, Massachusetts 02466
Attention: Property Manager

  

Tenant:

 

Stealth Peptides Incorporated
Three Riverside Center
275 Grove Street, Suite 3-107
Newton, Massachusetts 02466

 

With copies of any notices to Tenant sent to:

 

Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109

 

- 3 -


  And

  Goulston & Storrs, P.C.

  400 Atlantic Avenue

  Boston, Massachusetts 02110

  Attention: Riverside Center/Newton, Massachusetts

 

  1.12

“Business Day ( s ) are Monday through Friday of each week, exclusive of New Year’s Day, Presidents’ Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ( “Holidays” ). Landlord may designate additional Holidays that are commonly recognized by other office buildings in the area where the Building is located. “Building Service Hours” are 8:00 A.M. to 6:00 P.M. on Business Days and 8:00 A.M. to 1:00 P.M. on Saturdays.

 

  1.13

Intentionally Omitted.

 

  1.14

“Property” means the Building and the parcel(s) of land on which it is located and, at Landlord’s discretion, the parking facilities and other improvements, if any, serving the Building and the parcel(s) of land on which they are located.

 

  1.15

Tenant shall not record this Lease or any memorandum or notice hereof without Landlord’s prior written consent. If this Lease is terminated before the Term expires, upon Landlord’s request, the parties shall execute, deliver and record an instrument acknowledging the above and the date of the termination of this Lease.

 

  1.16

“Letter of Credit” is as described in Section 6 hereof and in Exhibit G attached hereto.

 

2.

Lease Grant .

Landlord hereby leases the Premises to Tenant and Tenant hereby leases the Premises from Landlord. Tenant has the non-exclusive right to use any portions of the Property that are designated by Landlord for the common use of tenants and others (the “Common Areas” ).

 

3.

Adjustment of Commencement Date; Possession .

3.01    [Intentionally Omitted.]

3.02    Effective as of the commencement of the Term for Area A and Area B, respectively, Area A and Area B shall be accepted by Tenant in “as is” condition and configuration without any representations or warranties by Landlord. By taking possession of the Premises, Tenant agrees that the Premises are in good order and satisfactory condition. Landlord shall not be liable for a failure to deliver possession of the Premises or any other space due to the holdover or unlawful possession of such space by another party, provided, however, Landlord shall use reasonable efforts to obtain possession of any such space. In such event, the

 

- 4 -


Commencement Date for the Premises, or the commencement date for such other space, as applicable, shall be postponed until the date Landlord delivers possession of such space to Tenant free from occupancy by any party. Except as otherwise provided in this Lease, Tenant shall not be permitted to take possession of or enter the Premises prior to the Commencement Date without Landlord’s permission. If Tenant takes possession of or enters the Premises before the Commencement Date, Tenant shall be subject to the terms and conditions of this Lease; provided, however, except for the cost of services requested by Tenant (e.g. after hours HVAC service), Tenant shall not be required to pay Rent for any entry or possession before the Commencement Date during which Tenant, with Landlord’s approval, has entered, or is in possession of, the Premises for the sole purpose of performing improvements or installing furniture, equipment or other personal property.

 

4.

Rent .

4.01    Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in this Lease, all Base Rent and Additional Rent due for the Term (collectively referred to as “Rent” ). “Additional Rent” means all sums (exclusive of Base Rent) that Tenant is required to pay Landlord under this Lease. Tenant shall pay and be liable for all rental, sales and use taxes (but excluding income taxes), if any, imposed upon or measured by Rent. Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand. All other items of Rent shall be due and payable by Tenant on or before thirty (30) days after billing by Landlord. Rent shall be made payable to the entity, and sent to the address, Landlord designates and shall be made by good and sufficient check payable in United States of America currency or by other means acceptable to Landlord. If Tenant does not pay any Rent when due hereunder, Tenant shall pay Landlord an administration fee in the amount of $250.00, provided that Tenant shall be entitled to a grace period of up to five (5) days for the first late payment of Rent in a calendar year. In addition, past due Rent shall accrue interest at twelve percent (12%) per annum, and Tenant shall pay Landlord a reasonable fee for any checks returned by Tenant’s bank for any reason. Landlord’s acceptance of less than the correct amount of Rent shall be considered a payment on account of the oldest obligation due from Tenant hereunder, then to any current Rent then due hereunder, notwithstanding any statement to the contrary contained on or accompanying any such payment from Tenant. Rent for any partial month during the Term shall be prorated. No endorsement or statement on a check or letter accompanying payment shall be considered an accord and satisfaction. Tenant’s covenant to pay Rent is independent of every other covenant in this Lease.

4.02    Tenant shall pay Tenant’s Pro Rata Share of Taxes and Expenses in accordance with Exhibit B of this Lease.

 

5.

Compliance with Laws; Use .

The Premises shall be used for the Permitted Use and for no other use whatsoever. Tenant shall comply with all statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity whether in effect now or later, including the Americans with Disabilities Act ( Law ( s ) ), regarding the operation of Tenant’s business, the use, condition, configuration and occupancy of the Premises and the Building systems located in or exclusively serving the Premises. In addition, Tenant shall, at its sole cost and expense,

 

- 5 -


promptly comply with any Laws that relate to the “Base Building” (defined below), but only to the extent such obligations are triggered by Tenant’s particular use of the Premises, i.e., other than for office use generically, or by any Alterations or improvements in the Premises performed or requested by Tenant. “Base Building” shall include the structural portions of the Building, the public restrooms and the Building mechanical, electrical and plumbing systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. Tenant shall promptly provide Landlord with copies of any notices it receives regarding an alleged violation of Law. Tenant shall not exceed the standard density limit for the Building. Tenant shall comply with the rules and regulations of the Building attached as Exhibit E and such other reasonable rules and regulations adopted by Landlord from time to time, including rules and regulations for the performance of Alterations (defined in Section 9.03).

 

6.

Security Deposit .

As described below, the Security Deposit shall be delivered to Landlord upon the execution of this Lease by Tenant and held by Landlord without liability for interest (unless required by Law) as security for the performance of Tenant’s obligations. The Security Deposit is not an advance payment of Rent or a measure of damages. Landlord may from time to time and without prejudice to any other remedy provided in this Lease or by Law, use all or a portion of the Security Deposit to the extent necessary to satisfy past due Rent or to satisfy any other loss or damage resulting from Tenant’s breach under this Lease. If Landlord uses any portion of the Security Deposit, Tenant, within five (5) days after demand, shall restore the Security Deposit to its original amount. Landlord shall return the Letter of Credit (defined below) and/or any unapplied portion of the Security Deposit to Tenant within forty-five (45) days after the Termination Date or the date Tenant surrenders the Premises to Landlord in compliance with Section 25. Landlord may assign the Security Deposit to a successor or transferee and, following the assignment, Landlord shall have no further liability for the return of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts.

The Security Deposit shall be in the initial amount of $325,000.00 payable as follows: (i) $162,500.00 due and payable upon execution of this Lease, and (ii) $162,500.00 due and payable upon the Area B Commencement Date. The Security Deposit shall be in the form of an irrevocable letter of credit (the Letter of Credit ), which Letter of Credit shall (a) be issued on the form attached hereto as Exhibit G; (b) name Landlord as its beneficiary; (c) be drawn on an FDIC insured financial institution reasonably satisfactory to the Landlord that satisfies both the Minimum Rating Agency Threshold and the Minimum Capital Threshold (as those terms are defined below), and (d) provide that draws upon the Letter of Credit may be made at an office of the issuer located in the continental United States (the Draw Requirement ). The Minimum Rating Agency Threshold shall mean that the issuing bank has outstanding unsecured, uninsured and unguaranteed senior long-term indebtedness that is then rated (without regard to qualification of such rating by symbols such as “+” or “-” or numerical notation) “Baa” or better by Moody’s Investors Service, Inc. and/or “BBB” or better by Standard & Poor’s Rating Services, or a comparable rating by a comparable national rating agency designated by Landlord in its discretion. The Minimum Capital Threshold shall mean that the Issuing Bank has combined capital, surplus and undivided profits of not less than $10,000,000,000. The Letter of Credit (and any renewals or replacements thereof) shall be for a term of not less than one (1) year.

 

- 6 -


If the issuer of the Letter of Credit gives notice of its election not to renew such Letter of Credit for any additional period, Tenant shall be required to deliver a substitute Letter of Credit satisfying the conditions hereof at least thirty (30) days prior to the expiration of the term of such Letter of Credit. If the issuer of the Letter of Credit fails to satisfy any of the Minimum Rating Agency Threshold, the Minimum Capital Threshold, or the Draw Requirement, Tenant shall be required to deliver a substitute letter of credit from another issuer reasonably satisfactory to the Landlord and that satisfies all of the Minimum Rating Agency Threshold, the Minimum Capital Threshold, and the Draw Requirement not later than ten (10) Business Days after Landlord notifies Tenant of such failure, at which time Landlord shall return the existing Letter of Credit to Tenant. Tenant agrees that it shall from time to time, as necessary, whether as a result of a draw on the Letter of Credit by Landlord pursuant to the terms hereof or as a result of the expiration of the Letter of Credit then in effect, renew or replace the original and any subsequent Letter of Credit so that a Letter of Credit, in the amount required hereunder, is in effect until a date which is at least sixty (60) days after the Termination Date of the Lease. If Tenant fails to furnish such renewal or replacement at least sixty (60) days prior to the stated expiration date of the Letter of Credit then held by Landlord, Landlord may draw upon such Letter of Credit and hold the proceeds thereof (and such proceeds need not be segregated) as a Security Deposit pursuant to the terms of this Article 6. Any renewal or replacement of the original or any subsequent Letter of Credit shall meet the requirements for the original Letter of Credit as set forth above, except that such replacement or renewal shall be issued by a national bank reasonably satisfactory to Landlord at the time of the issuance thereof. Tenant shall initially provide a Letter of Credit in the amount of $162,500.00 upon execution of this Lease. On or before the Area B Commencement Date, Tenant shall (i) provide Landlord with an amendment to the Letter of Credit increasing the amount available under the Letter of Credit to $325,000.00 or (ii) provide Landlord with an additional Letter of Credit in the amount of $162,500.00. From and after the Area B Commencement Date, all references to the “Letter of Credit” shall mean such Letter of Credit, as amended, or both such Letters of Credit, as the case may be.

If Landlord draws on the Letter of Credit as permitted in this Lease or the Letter of Credit, then, upon demand of Landlord, Tenant shall restore the amount available under the Letter of Credit to its original amount by providing Landlord with an amendment to the Letter of Credit evidencing that the amount available under the Letter of Credit has been restored to its original amount.

Subject to the remaining terms of this Section 6, and provided that (i) Tenant is not then in Default (defined below) hereunder, and (ii) Tenant has timely paid all Rent due under this Lease during the twelve (12) month period immediately preceding the Reduction Date (defined below), Tenant shall have the right to reduce the amount of the Security Deposit (i.e., the Letter of Credit) to $250,000.00 effective as of December 1, 2018 (the “Reduction Date” ). Any reduction in the Letter of Credit shall be accomplished by Tenant providing Landlord with a substitute letter of credit in the reduced amount, whereupon Landlord shall return to Tenant the original Letter of Credit.

Notwithstanding the foregoing, Tenant shall have the right to pay either or both installments of the Security Deposit in cash. If Tenant does so, it may subsequently provide a Letter of Credit in accordance with the foregoing provisions of this Section 6 in substitution of the cash Security Deposit. Upon receipt of the Letter of Credit, Landlord shall return the cash Security Deposit to Tenant.

 

- 7 -


7.

Building Services .

7.01    Landlord shall furnish Tenant with the following services: (a) water for use in the Base Building lavatories; (b) customary heat and air conditioning in season during Building Service Hours as necessary for reasonably comfortable occupation of the Premises, although (i) Tenant shall have the right to receive HVAC service during hours other than Building Service Hours by paying Landlord’s then standard charge for additional HVAC service and providing such prior notice as is reasonably specified by Landlord, and (ii) if Tenant is permitted to connect any supplemental HVAC units to the Building’s condenser water loop or chilled water line, such permission shall be conditioned upon Landlord having adequate excess capacity from time to time and such connection and use shall be subject to Landlord’s reasonable approval and reasonable restrictions imposed by Landlord, and Landlord shall have the right to charge Tenant a connection fee and/or a monthly usage fee, as reasonably determined by Landlord; (c) standard janitorial service on Business Days; (d) elevator service; (e) electricity in accordance with the terms and conditions in Section 7.02; (f) access to the Building for Tenant and its employees twenty-four (24) hours per day, seven (7) days per week, subject to the terms of this Lease and such protective services or monitoring systems, if any, as Landlord may reasonably impose, including, without limitation, sign-in procedures and/or presentation of identification cards; and (g) such other services as Landlord reasonably determines are necessary or appropriate for the Property or as are generally available in similar class A office buildings. If Landlord, at Tenant’s request, provides any services which are not Landlord’s express obligation under this Lease, including, without limitation, any repairs which are Tenant’s responsibility pursuant to Section 9 below, Tenant shall pay Landlord, or such other party designated by Landlord, the cost of providing such service plus a reasonable administrative charge.

7.02    Electricity used by Tenant in the Premises shall be paid for by Tenant by a separate monthly charge payable by Tenant to Landlord as estimated by Landlord (and reconciled annually by a submeter or check meter currently installed in the Premises that measures only the electric service consumed in the Premises). Without the consent of Landlord, Tenant’s use of electrical service shall not exceed the Building standard usage, per square foot, as reasonably determined by Landlord, based upon the Building standard electrical design load. Landlord shall have the right to measure electrical usage by commonly accepted methods, including the installation of measuring devices such as submeters and check meters.

7.03    Landlord’s failure to furnish, or any interruption, diminishment or termination of services due to the application of Laws, the failure of any equipment, the performance of maintenance, repairs, improvements or alterations, utility interruptions or the occurrence of an event of Force Majeure (defined in Section 26.03) (collectively a Service Failure ) shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises, or a material portion of the Premises, are made untenantable for a period in excess of three (3) consecutive Business Days as a result of a Service Failure that is reasonably within the control of Landlord to correct, then Tenant, as its sole remedy, shall be entitled to receive an abatement of Rent payable hereunder during the period beginning on the

 

- 8 -


fourth (4 th ) consecutive Business Day of the Service Failure and ending on the day the service has been restored. If the entire Premises have not been rendered untenantable by the Service Failure, the amount of abatement shall be equitably prorated.

 

8.

Leasehold Improvements .

All improvements in and to the Premises, including any Alterations (defined in Section 9.03) (collectively, “Leasehold Improvements” ) shall remain upon the Premises at the end of the Term without compensation to Tenant, provided that Tenant, at its expense, shall remove any Cable (defined in Section 9.01 below). In addition, Landlord, by written notice to Tenant at least thirty (30) days prior to the Termination Date, may require Tenant, at Tenant’s expense, to remove any Landlord Work or Alterations that, in Landlord’s reasonable judgment, are of a nature that would require removal and repair costs that are materially in excess of the removal and repair costs associated with standard office improvements (the Cable and such other items collectively are referred to as “Required Removables” ). Required Removables shall include, without limitation, internal stairways, raised floors, personal baths and showers, vaults, rolling file systems and structural alterations and modifications. The Required Removables shall be removed by Tenant before the Termination Date. Tenant shall repair damage caused by the installation or removal of Required Removables. If Tenant fails to perform its obligations in a timely manner, Landlord may perform such work at Tenant’s expense. Tenant, at the time it requests approval for a proposed Alteration, including any Initial Alterations or Landlord Work, as such terms may be defined in the Work Letter attached as Exhibit C , may request in writing that Landlord advise Tenant whether the Alteration, including any Initial Alterations or Landlord Work, or any portion thereof, is a Required Removable. Within ten (10) days after receipt of Tenant’s request, Landlord shall advise Tenant in writing as to which portions of the alteration or other improvements are Required Removables.

 

9.

Repairs and Alterations .

9.01    Tenant shall periodically inspect the Premises to identify any conditions that are dangerous or in need of maintenance or repair. Tenant shall promptly provide Landlord with notice of any such conditions. Tenant, at its sole cost and expense, shall perform all maintenance and repairs to the Premises that are not Landlord’s express responsibility under this Lease, and keep the Premises in good condition and repair, reasonable wear and tear excepted. Tenant’s repair and maintenance obligations include, without limitation, repairs to: (a) floor covering; (b) interior partitions; (c) doors; (d) the interior side of demising walls; (e) Alterations (described in Section 9.03); (f) supplemental air conditioning units, kitchens, including hot water heaters, plumbing, and similar facilities exclusively serving Tenant, whether such items are installed by Tenant or are currently existing in the Premises; and (g) electronic, fiber, phone and data cabling and related equipment that is installed by or for the exclusive benefit of Tenant (collectively, “Cable” ). All repairs and other work performed by Tenant or its contractors, including that involving Cable, shall be subject to the terms of Section 9.03 below. If Tenant fails to make any repairs to the Premises for more than fifteen (15) days after notice from Landlord (although notice shall not be required in an emergency), Landlord may make the repairs, and, within thirty (30) days after demand, Tenant shall pay the reasonable cost of the repairs, together with an administrative charge in an amount equal to ten percent (10%) of the cost of the repairs.

 

- 9 -


9.02    Landlord shall keep and maintain in good repair and working order and perform maintenance upon the: (a) structural elements of the Building; (b) mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building in general; (c) Common Areas; (d) roof of the Building; (e) exterior windows of the Building; (f) all parking areas, and (g) elevators serving the Building. Landlord shall promptly make repairs for which Landlord is responsible.

9.03    Tenant shall not make alterations, repairs, additions or improvements or install any Cable (collectively referred to as “Alterations” ) without first obtaining the written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. However, Landlord’s consent shall not be required for any Alteration that satisfies all of the following criteria (a “Cosmetic Alteration” ): (a) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (b) is not visible from the exterior of the Premises or Building; (c) will not affect the Base Building (defined in Section 5); and (d) does not require work to be performed inside the walls or above the ceiling of the Premises. Cosmetic Alterations shall be subject to all the other provisions of this Section 9.03. Prior to starting work, Tenant shall furnish Landlord with plans and specifications (which shall be in CAD format if requested by Landlord); names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to Base Building and vertical Cable, as may be described more fully below); required permits and approvals; evidence of contractor’s and subcontractor’s insurance in amounts reasonably required by Landlord and naming Landlord and the managing agent for the Building (or any successor(s)) as additional insureds. Landlord may designate specific contractors with respect to oversight, installation, repair, connection to, and removal of vertical Cable. All Cable shall be clearly marked with adhesive plastic labels (or plastic tags attached to such Cable with wire) to show Tenant’s name, suite number, and the purpose of such Cable (i) every 6 feet outside the Premises (specifically including, but not limited to, the electrical room risers and any Common Areas), and (ii) at the termination point(s) of such Cable. Changes to the plans and specifications must also be submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike manner using materials of a quality reasonably approved by Landlord, and Tenant shall ensure that no Alteration impairs any Building system or Landlord’s ability to perform its obligations hereunder. Tenant shall reimburse Landlord for any reasonable sums paid by Landlord for third party examination of Tenant’s plans for non-Cosmetic Alterations. In addition, Tenant shall pay Landlord a fee for Landlord’s oversight and coordination of any non-Cosmetic Alterations equal to ten percent (10%) of the cost of the non-Cosmetic Alterations. Upon completion, Tenant shall furnish “as-built” plans (in CAD format, if requested by Landlord) for non-Cosmetic Alterations, completion affidavits and full and final waivers of lien. Landlord’s approval of an Alteration shall not be deemed a representation by Landlord that the Alteration complies with Law.

 

10.

Entry by Landlord .

Landlord may enter the Premises to inspect, show or clean the Premises or to perform or facilitate the performance of repairs, alterations or additions to the Premises or any portion of the Building. Except in emergencies or to provide Building services, Landlord shall provide Tenant with reasonable prior verbal notice of entry and shall use reasonable efforts to minimize any interference with Tenant’s use of the Premises. If reasonably necessary, Landlord may temporarily close all or a portion of the Premises to perform repairs, alterations and additions.

 

- 10 -


However, except in emergencies, Landlord will not close the Premises if the work can reasonably be completed on weekends and after Building Service Hours. Entry by Landlord shall not constitute a constructive eviction or entitle Tenant to an abatement or reduction of Rent. Landlord shall show the Premises to prospective tenants only during the last twelve (12) months of the Term.

 

11.

Assignment and Subletting .

11.01    Except in connection with a Business Transfer (defined in Section 11.04), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use any portion of the Premises (collectively or individually, a “Transfer” ) without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed if Landlord does not exercise its recapture rights under Section 11.02. Without limitation, it is agreed that Landlord’s consent shall not be considered unreasonably withheld if the proposed transferee is a governmental entity or an occupant of the Building or an occupant of any other buildings within the same project or if the proposed transferee, whether or not an occupant of the Building or an occupant of any other buildings within the same project, is in discussions with Landlord regarding the leasing of space within the Building or within any other buildings within the same project. Any Transfer in violation of this Section shall, at Landlord’s option, be deemed a Default by Tenant as described in Section 18, and shall be voidable by Landlord. In no event shall any Transfer, including a Business Transfer, release or relieve Tenant from any obligation under this Lease, and Tenant shall remain primarily liable for the performance of the tenant’s obligations under this Lease, as amended from time to time.

11.02    Tenant shall provide Landlord with financial statements for the proposed transferee (or, in the case of a change of ownership or control, for the proposed new controlling entity(ies)), a fully executed copy of the proposed assignment, sublease or other Transfer documentation and such other information as Landlord may reasonably request. Within fifteen (15) Business Days after receipt of the required information and documentation, Landlord shall either: (a) consent to the Transfer by execution of a consent agreement in a form reasonably designated by Landlord; (b) reasonably refuse to consent to the Transfer in writing; or (c) in the event of an assignment of this Lease or subletting of more than twenty percent (20%) of the Rentable Square Footage of the Premises for more than fifty percent (50%) of the remaining Term (excluding unexercised options), recapture the portion of the Premises that Tenant is proposing to Transfer. If Landlord exercises its right to recapture, this Lease shall automatically be amended (or terminated if the entire Premises is being assigned or sublet) to delete the applicable portion of the Premises effective on the proposed effective date of the Transfer, although Landlord may require Tenant to execute a reasonable amendment or other document reflecting such reduction or termination. Tenant shall pay Landlord a review fee of $1,500.00 for Landlord’s review of any requested Transfer. Notwithstanding anything to the contrary contained herein, the provisions of this Section 11.02 shall not apply to a transaction permitted without Landlord consent pursuant to Section 11.04 below.

11.03    Tenant shall pay Landlord fifty percent (50%) of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlord’s share of the excess within thirty (30) days after Tenant’s receipt of the excess. In

 

- 11 -


determining the excess due Landlord, Tenant may deduct from the excess, on a straight-line basis, all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer, plus, in the event of an assignment, the reasonable market value of any property or rights (other than Tenant’s rights under the Lease) being transferred to the assignee at the same time as the assignment. If Tenant is in Default, Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of Tenant’s share of payments received by Landlord.

11.04    Tenant may assign this Lease to a successor to Tenant by merger, consolidation or the purchase of substantially all of Tenant’s assets, or assign this Lease or sublet all or a portion of the Premises to an Affiliate (defined below), without the consent of Landlord, provided that all of the following conditions are satisfied (a “Business Transfer” ): (a) Tenant must not be in Default; (b) Tenant must give Landlord written notice at least fifteen (15) Business Days before such Transfer; and (c) except in the case of an assignment or sublease to an Affiliate, the Credit Requirement (defined below) must be satisfied. Tenant’s notice to Landlord shall include information and documentation evidencing the Business Transfer and showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant’s successor shall sign and deliver to Landlord a commercially reasonable form of assumption agreement. “Affiliate” shall mean an entity controlled by, controlling or under common control with Tenant. The “Credit Requirement” shall be deemed satisfied if, as of the date immediately preceding the date of the Business Transfer, the financial strength of (i) the entity with which Tenant is to merge or consolidate or (ii) the purchaser of substantially all of the assets of Tenant is not less than that of Tenant, as determined (x) based on credit ratings of such entity and Tenant by both Moody’s and Standard & Poor’s (or by either such agency alone, if applicable ratings by the other agency do not exist), or (y) if such credit ratings do not exist, then in accordance with Moody’s KMV RiskCalc (i.e., the on-line software tool offered by Moody’s for analyzing credit risk) based on CFO-certified financial statements for such entity and Tenant covering their last two (2) fiscal years ending before the Transfer. Notwithstanding the foregoing, any public offering on a recognized stock exchange of shares or other ownership interest in Tenant shall not be deemed an assignment, Transfer or Business Transfer under this Lease and such public offering shall not trigger Landlord’s recapture right pursuant to Section 11.02 above.

11.05    Notwithstanding anything to the contrary contained in this Section 11, neither Tenant nor any other person having a right to possess, use, or occupy (for convenience, collectively referred to in this subsection as “Use” ) the Premises shall enter into any lease, sublease, license, concession or other agreement for Use of all or any portion of the Premises which provides for rental or other payment for such Use based, in whole or in part, on the net income or profits derived by any person that leases, possesses, uses, or occupies all or any portion of the Premises (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a transfer of any right or interest in the Use of all or any part of the Premises.

 

12.

Liens .

Tenant shall not permit mechanics’ or other liens to be placed upon the Property, Premises or Tenant’s leasehold interest in connection with any work or service done or

 

- 12 -


purportedly done by or for the benefit of Tenant or its subtenants or transferees. Tenant shall give Landlord notice at least fifteen (15) days prior to the commencement of any work in the Premises to afford Landlord the opportunity, where applicable, to post and record notices of non-responsibility. Tenant, within twenty (20) days of notice from Landlord, shall fully discharge any lien by settlement, by bonding or by insuring over the lien in the manner prescribed by the applicable lien Law and, if Tenant fails to do so, Tenant shall be deemed in Default under this Lease and, in addition to any other remedies available to Landlord as a result of such Default by Tenant, Landlord, at its option, may bond, insure over or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by Landlord necessary to bond or insure over such lien (including, without limitation, reasonable attorneys’ fees). Tenant acknowledges and agrees that all such work or service is being performed for the sole benefit of Tenant and not for the benefit of Landlord.

 

13.

Indemnity and Waiver of Claims .

Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties (defined below), Tenant shall indemnify, defend and hold Landlord and Landlord Related Parties harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Law) (collectively referred to as “Losses” ), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties by any third party and arising out of or in connection with any damage or injury occurring in the Premises or any acts or omissions (including violations of Law) of Tenant, its trustees, managers, members, principals, beneficiaries, partners, officers, directors, employees and agents (the “Tenant Related Parties” ) or any of Tenant’s transferees, contractors or licensees. Tenant hereby waives all claims against and releases Landlord and its trustees, managers, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagees (defined in Section 23) and agents (the “Landlord Related Parties” ) from all claims for any damage to property of Tenant or anyone claiming by, through, or under Tenant, or business loss in any manner related to (a) Force Majeure, (b) acts of third parties, (c) the bursting or leaking of any tank, water closet, drain or other pipe, (d) the inadequacy or failure of any security or protective services, personnel or equipment, or (e) any matter not within the reasonable control of Landlord.

Except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Related Parties, Landlord shall indemnify, defend and hold Tenant and Tenant Related Parties harmless against and from all Losses, which may be imposed upon, incurred by or asserted against Tenant or any of the Tenant Related Parties by any third party and arising out of or in connection with any damage or injury (i) occurring in the Common Areas or (ii) occurring elsewhere in the Building and resulting from any negligent acts or omissions (including violations of Law) of Landlord, or any of Landlord’s agents, contractors or employees.

 

14.

Tenant’s Insurance . Tenant shall maintain the following coverages in the following amounts:

14.01    Commercial General Liability Insurance covering claims of bodily injury, personal injury and property damage arising out of Tenant’s operations and contractual

 

- 13 -


liabilities, including coverage formerly known as broad form, on an occurrence basis, with minimum primary limits of $2,000,000 each occurrence and $2,000,000 annual aggregate and a minimum excess/umbrella limit of $10,000,000.

14.02    Property insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant’s property in the Premises installed by, for, or at the expense of Tenant ( “Tenant’s Property” ), and (ii) any Leasehold Improvements installed by or for the benefit of Tenant, whether pursuant to this Lease, but in each case only to the extent the same exceeds building standard scope and materials ( “Tenant-Insured Improvements” ). Such insurance shall be written on a special cause of loss form for physical loss or damage, for the full replacement cost value (subject to reasonable deductible amounts) without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance, and shall include coverage for damage or other loss caused by fire or other peril, including vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one year.

14.03    Worker’s Compensation and Employer’s Liability or other similar insurance to the extent required by Law.

14.04     Form of Policies . The minimum limits of insurance required to be carried by Tenant shall not limit Tenant’s liability. Such insurance shall (i) be issued by an insurance company that has an A.M. Best rating of not less than A-VIII; (ii) be in form and content reasonably acceptable to Landlord; and (iii) provide that it shall not be canceled or materially changed without thirty (30) days’ prior notice to Landlord, except that ten (10) days’ prior notice may be given in the case of nonpayment of premiums. Tenant’s Commercial General Liability Insurance shall (a) name Landlord, Landlord’s managing agent, and any other party designated by Landlord ( “Additional Insured Parties” ) as additional insureds; and (b) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and non-contributing with Tenant’s insurance. Landlord shall be designated as a loss payee with respect to Tenant’s Property insurance on any Tenant-Insured Improvements. Tenant shall deliver to Landlord, on or before the Commencement Date and at least fifteen (15) days before the expiration dates thereof, certificates from Tenant’s insurance company on the forms currently designated “ACORD 28” (Evidence of Commercial Property Insurance) and “ACORD 25-S” (Certificate of Liability Insurance) or the equivalent. Attached to the ACORD 25-S (or equivalent) there shall be an endorsement naming the Additional Insured Parties as additional insureds which shall be binding on Tenant’s insurance company and shall expressly require the insurance company to notify each Additional Insured Party in writing at least thirty (30) days before any termination or material change to the policies, except that ten (10) days’ prior notice may be given in the case of nonpayment of premiums. Upon Landlord’s request, Tenant shall deliver to Landlord, in lieu of such certificates, copies of the policies of insurance required to be carried under Section 14.01 showing that the Additional Insured Parties are named as additional insureds.

14.05    Tenant shall maintain such increased amounts of the insurance required to be carried by Tenant under this Section 14, and such other types and amounts of insurance covering

 

- 14 -


the Premises and Tenant’s operations therein, as may be reasonably requested by Landlord, but not in excess of the amounts and types of insurance then being required by landlords of buildings comparable to and in the vicinity of the Building.

14.06    At all times during the Term, Landlord will carry and maintain (a) fire and extended coverage insurance covering the Building, its equipment and common area furnishings, and leasehold improvements (to the extent the same do not exceed building standard) in the Premises to the extent of any initial build out of the Premises by the Landlord in an amount not less than their full replacement value exclusive of foundations (b) bodily injury and property damage insurance in amounts consistent with what responsible landlords of similar first class office buildings in the Boston metropolitan area would carry; and (c) such other insurance as Landlord reasonably determines from time to time.

 

15.

Subrogation .

Subject to Section 16, each party waives, and shall cause its insurance carrier to waive, any right of recovery against the other for any loss of or damage to property which loss or damage is (or, if the insurance required hereunder had been carried, would have been) covered by insurance. For purposes of this Section 15, any deductible with respect to a party’s insurance shall be deemed covered by, and recoverable by such party under, valid and collectable policies of insurance.

 

16.

Casualty Damage .

16.01    If all or any portion of the Premises is damaged or becomes untenantable or inaccessible by fire or other casualty to the Premises or the Common Areas (collectively a Casualty ), Landlord, with reasonable promptness, shall cause a general contractor selected by Landlord to provide Landlord with a written estimate of the amount of time required, using standard working methods, to substantially complete the repair and restoration of the Premises and any Common Areas necessary to provide access to the Premises ( Completion Estimate ). Landlord shall promptly forward a copy of the Completion Estimate to Tenant. If the Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to the Premises cannot be made tenantable within two hundred ten (210) days from the date of the Casualty, then either party shall have the right to terminate this Lease upon written notice to the other within ten (10) days after Tenant’s receipt of the Completion Estimate. Tenant, however, shall not have the right to terminate this Lease if the Casualty was caused by the intentional misconduct of Tenant or any Tenant Related Parties. In addition, Landlord, by notice to Tenant within sixty (60) days after the date of the Casualty, shall have the right to terminate this Lease if: (1) the Premises have been materially damaged and there is less than one (1) year of the Term remaining on the date of the Casualty; (2) any Mortgagee requires that the insurance proceeds be applied to the payment of the mortgage debt; or (3) a material uninsured loss to the Building or Premises occurs. Notwithstanding the foregoing, if Tenant was entitled to but elected not to exercise its right to terminate the Lease and Landlord does not substantially complete the repair and restoration of the Premises within two (2) months after the later to occur of (x) the date that is two hundred ten (210) days after the date of the Casualty, or (y) the expiration of the estimated period of time set forth in the Completion Estimate, which period shall be extended to the extent of any Reconstruction Delays, then Tenant may, as its sole and

 

- 15 -


exclusive remedy therefor, terminate this Lease by written notice to Landlord at any time after the expiration of such period, as the same may be extended. If Tenant so elects, then this Lease shall terminate on the date that is sixty (60) days after delivery of such termination notice to Landlord, unless, on or before the expiration of such sixty (60) day period, Landlord substantially completes such restoration, in which event Tenant’s election to terminate shall become void. For purposes of this Lease, the term “Reconstruction Delays” shall mean: any delays caused by the insurance adjustment process; (ii) any delays caused by Tenant; and (iii) any delays caused by events of Force Majeure (as defined in Section 25.03).

16.02    If this Lease is not terminated, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord’s reasonable control, restore the Premises and Common Areas. Such restoration shall be to substantially the same condition that existed prior to the Casualty, except for modifications required by Law or any other modifications to the Common Areas deemed desirable by Landlord. Notwithstanding Section 15 above, upon notice from Landlord, Tenant shall assign or endorse over to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant’s insurance with respect to any Leasehold Improvements performed by or for the benefit of Tenant to the extent the same exceed Building standard scope and finish; provided if the estimated cost to repair such excess Leasehold Improvements exceeds the amount of insurance proceeds received by Landlord from Tenant’s insurance carrier, the excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlord’s commencement of repairs, unless Tenant elects to reduce the scope and finish of such excess Leasehold Improvements to Building standard scope and finish. In no event shall Landlord be required to spend more for the restoration of the Premises and Common Areas than the proceeds received by Landlord, whether insurance proceeds or proceeds from Tenant. Landlord shall not be liable for any inconvenience to Tenant, or injury to Tenant’s business resulting in any way from the Casualty or the repair thereof. During any period of time that all or a material portion of the Premises is rendered untenantable or access thereto is substantially impaired as a result of a Casualty, the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant for the conduct of its business.

 

17.

Condemnation .

Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a Taking ). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Property which would have a material adverse effect on Landlord’s ability to profitably operate the remainder of the Building. The terminating party shall provide written notice of termination to the other party within forty-five (45) days after it first receives notice of the Taking. The termination shall be effective as of the effective date of any order granting possession to, or vesting legal title in, the condemning authority. If this Lease is not terminated, Base Rent and Tenant’s Pro Rata Share shall be appropriately adjusted to account for any reduction in the square footage of the Building or Premises. All compensation awarded for a Taking shall be the property of Landlord. The right to receive compensation or proceeds are expressly waived by Tenant, provided, however, Tenant may file a separate claim for Tenant’s Property and Tenant’s reasonable relocation expenses, provided the filing of the claim does not diminish the amount

 

- 16 -


of Landlord’s award. If only a part of the Premises is subject to a Taking and this Lease is not terminated, Landlord, with reasonable diligence, will restore the remaining portion of the Premises as nearly as practicable to the condition immediately prior to the Taking.

 

18.

Events of Default .

In addition to any other default specifically described in this Lease, each of the following occurrences shall be a “Default”: (a) Tenant’s failure to pay any portion of Rent when due, if the failure continues for five (5) days after written notice to Tenant ( “Monetary Default” ); (b) Tenant’s failure (other than a Monetary Default) to comply with any term, provision, condition or covenant of this Lease, if the failure is not cured within thirty (30) days after written notice to Tenant provided, however, if Tenant’s failure to comply cannot reasonably be cured within thirty (30) days, Tenant shall be allowed additional time (not to exceed ninety (90) days) as is reasonably necessary to cure the failure so long as Tenant begins the cure within thirty (30) days and diligently pursues the cure to completion; (c) Tenant permits a Transfer without Landlord’s required approval or otherwise in violation of Section 11 of this Lease; (d) Tenant or any Guarantor becomes insolvent, makes a transfer in fraud of creditors, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts when due or forfeits or loses its right to conduct business; or (e) the leasehold estate is taken by process or operation of Law. All notices sent under this Section shall be in satisfaction of, and not in addition to, notice required by Law.

 

19.

Remedies .

19.01    Upon Default, Landlord shall have the right to pursue any one or more of the following remedies:

(a)    Terminate this Lease upon written notice to Tenant, in which case Tenant shall immediately surrender the Premises to Landlord. If, in such event, Tenant fails to surrender the Premises, Landlord, in compliance with Law, may enter upon and take possession of the Premises and remove Tenant, Tenant’s Property and any party occupying the Premises. Tenant shall pay Landlord, on demand, all past due Rent and other losses and damages Landlord suffers as a direct result of Tenant’s Default, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises, which deficiency shall be paid monthly on the days Rent would have been payable had the Lease not been terminated. “Costs of Reletting” shall include all reasonable costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowances granted to a new tenant.

(b)    Terminate Tenant’s right to possession of the Premises and, in compliance with Law, remove Tenant, Tenant’s Property and any parties occupying the Premises. Landlord may (but shall not be obligated to) relet all or any part of the Premises, without notice to Tenant, for such period of time and on such terms and conditions (which may include concessions, free rent and work allowances) as Landlord in its absolute discretion shall determine. Landlord may collect and receive all rents and other income from the reletting. Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease.

 

- 17 -


19.02    In lieu of calculating damages under Section 19.01, Landlord may elect to receive as damages the sum of (a) all Rent accrued through the date of termination of this Lease or Tenant’s right to possession, and (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at the rate then payable on a United States treasury bill with a maturity as close as practicable to what would have been the remainder of the Term but for Tenant’s Default, minus the then present fair rental value of the Premises for the remainder of the Term, similarly discounted, after deducting all anticipated Costs of Reletting. Landlord agrees to use reasonable efforts to mitigate damages, provided that those efforts shall not require Landlord to relet the Premises in preference to any other space in the Building or to relet the Premises to any party that Landlord could reasonably reject as a transferee pursuant to Article XI.

19.03    If Tenant is in Default of any of its non-monetary obligations under this Lease, Landlord shall have the right to perform such obligations. Tenant shall reimburse Landlord for the cost of such performance upon demand together with an administrative charge equal to ten percent (10%) of the cost of the work performed by Landlord. The repossession or re-entering of all or any part of the Premises shall not relieve Tenant of its liabilities and obligations under this Lease. No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity.

 

20.

Limitation of Liability .

NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) SHALL BE LIMITED TO THE LESSER OF (A) THE INTEREST OF LANDLORD IN THE PROPERTY, OR (B) THE EQUITY INTEREST LANDLORD WOULD HAVE IN THE PROPERTY IF THE PROPERTY WERE ENCUMBERED BY THIRD PARTY DEBT IN AN AMOUNT EQUAL TO SEVENTY PERCENT (70%) OF THE VALUE OF THE PROPERTY. TENANT SHALL LOOK SOLELY TO LANDLORD’S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD OR ANY LANDLORD RELATED PARTY. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY, AND IN NO EVENT SHALL LANDLORD OR ANY LANDLORD RELATED PARTY BE LIABLE TO TENANT FOR ANY LOST PROFIT, DAMAGE TO OR LOSS OF BUSINESS OR ANY FORM OF SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN SECTION 23 BELOW), NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. WITHOUT LIMITING THE FOREGOING, (1) IN NO EVENT SHALL LANDLORD OR ANY MORTGAGEES OR LANDLORD RELATED PARTIES EVER BE LIABLE FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES OR ANY LOST PROFITS OF TENANT AND (2) EXCEPT AS OTHERWISE PROVIDED IN SECTION 22 BELOW, IN NO EVENT SHALL TENANT OR TENANT RELATED PARTIES EVER BE LIABLE FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES OR ANY LOST PROFITS OF LANDLORD.

 

- 18 -


21.

Intentionally Omitted .

 

22.

Holding Over .

If Tenant fails to surrender all or any part of the Premises at the termination of this Lease, occupancy of the Premises after termination shall be that of a tenancy at sufferance. Tenant’s occupancy shall be subject to all the terms and provisions of this Lease, and Tenant shall pay an amount (on a daily basis) equal to one hundred fifty percent (150%) of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover. No holdover by Tenant or payment by Tenant after the termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. If Landlord is unable to deliver possession of the Premises to a new tenant or to perform improvements for a new tenant as a result of Tenant’s holdover and Tenant fails to vacate the Premises within thirty (30) days after notice from Landlord, Tenant shall be liable for all damages that Landlord suffers from the holdover.

 

23.

Subordination to Mortgages; Estoppel Certificate .

23.01    Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, deeds to secure debt, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the Property, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a “Mortgage” ). The party having the benefit of a Mortgage shall be referred to as a “Mortgagee” . This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall execute a commercially reasonable subordination agreement in favor of the Mortgagee. As an alternative, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request, Tenant, without charge, shall attorn to any successor to Landlord’s interest in this Lease. Notwithstanding the foregoing provisions of this Article to the contrary, as a condition precedent to the future subordination of this Lease to a future Mortgage, Landlord shall be required to provide Tenant with a non-disturbance, subordination, and attornment agreement in favor of Tenant from any Mortgagee who comes into existence after the Area A Commencement Date. Such non-disturbance, subordination, and attornment agreement in favor of Tenant shall provide that, so long as Tenant is paying the Rent due under the Lease and is not otherwise in default under the Lease beyond any applicable cure period, its right to possession and the other terms of the Lease shall remain in full force and effect. Landlord represents and warrants that, as of the Execution Date, there is no Mortgage that constitutes a lien or charge on the whole or any portion of the Property. Landlord and Tenant shall each, within ten (10) business days after receipt of a written request from the other, execute and deliver a commercially reasonable estoppel certificate to those parties as are reasonably requested by the other (including a Mortgagee or prospective purchaser). Without limitation, such estoppel certificate may include a certification as to the status of this Lease, the existence of any defaults and the amount of Rent that is due and payable.

23.02    In the event Mortgagee enforces it rights under the Mortgage, Tenant, at Mortgagee’s option, will attorn to Mortgagee or its successor; provided, however, that

 

- 19 -


Mortgagee or its successor shall not be liable for or bound by (i) any payment of any Rent installment which may have been made more than thirty (30) days before the due date of such installment, (ii) any act or omission of or default by Landlord under this Lease (but Mortgagee, or such successor, shall be subject to the continuing obligations of landlord under the Lease to the extent arising from and after such succession to the extent of Mortgagee’s, or such successor’s, interest in the Property), (iii) any credits, claims, setoffs or defenses which Tenant may have against Landlord or (iv) any obligation under this Lease to maintain a fitness facility at the Building, if any. Tenant, upon the reasonable request by Mortgagee or such successor in interest, shall execute and deliver an instrument or instruments confirming such attornment.

 

24.

Notice .

All demands, approvals, consents or notices (collectively referred to as a “notice” ) shall be in writing and delivered by hand or sent by registered, express, or certified mail, with return receipt requested or with delivery confirmation requested from the U.S. postal service, or sent by overnight or same day courier service at the party’s respective Notice Address(es) set forth in Section 1; provided, however, notices sent by Landlord regarding general Building operational matters may be posted in the Building mailroom or the general Building newsletter and shall be sent via e-mail to the e-mail address provided by Tenant to Landlord for such purpose. In addition, if the Building is closed (whether due to emergency, governmental order or any other reason), then any notice address at the Building shall not be deemed a required notice address during such closure, and, unless Tenant has provided an alternative valid notice address to Landlord for use during such closure, any notices sent during such closure may be sent via e-mail or in any other practical manner reasonably designed to ensure receipt by the intended recipient. Each notice shall be deemed to have been received on the earlier to occur of actual delivery or the date on which delivery is refused, or, if Tenant has vacated the Premises or any other Notice Address of Tenant without providing a new Notice Address, three (3) days after notice is deposited in the U.S. mail or with a courier service in the manner described above. Either party may, at any time, change its Notice Address (other than to a post office box address) by giving the other party written notice of the new address.

 

25.

Surrender of Premises .

At the termination of this Lease or Tenant’s right of possession, Tenant shall remove Tenant’s Property from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage which Landlord is obligated to repair hereunder excepted. In addition, Landlord may elect to require Tenant to remove the demountable glass partitions in the Premises and repair any damage to the ceiling and carpet as a result of such removal at the termination of this Lease or Tenant’s right of possession by giving Tenant written notice of such election not later than sixty (60) days before the expiration of the Term (or, if this Lease is sooner terminated, within ten (10) days after such earlier termination). If Tenant fails to remove any of Tenant’s Property, or to restore the Premises to the required condition, within two (2) days after termination of this Lease or Tenant’s right to possession, Landlord, at Tenant’s sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant’s Property and/or perform such restoration of the Premises. Landlord shall not be responsible for the value, preservation or safekeeping of Tenant’s Property. Tenant shall pay Landlord, upon demand, the expenses and storage charges

 

- 20 -


incurred. If Tenant fails to remove Tenant’s Property from the Premises or storage, within thirty (30) days after notice, Landlord may deem all or any part of Tenant’s Property to be abandoned and, at Landlord’s option, title to Tenant’s Property shall vest in Landlord or Landlord may dispose of Tenant’s Property in any manner Landlord deems appropriate.

 

26.

Miscellaneous .

26.01    This Lease shall be interpreted and enforced in accordance with the Laws of the state or commonwealth in which the Building is located and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state or commonwealth. If any term or provision of this Lease shall to any extent be void or unenforceable, the remainder of this Lease shall not be affected. If there is more than one Tenant or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities, and requests or demands from any one person or entity comprising Tenant shall be deemed to have been made by all such persons or entities. Notices to any one person or entity shall be deemed to have been given to all persons and entities. Tenant represents and warrants to Landlord, and agrees, that each individual executing this Lease on behalf of Tenant is authorized to do so on behalf of Tenant and that the entity(ies) or individual(s) constituting Tenant or Guarantor or which may own or control Tenant or Guarantor or which may be owned or controlled by Tenant or Guarantor are not and at no time will be (i) in violation of any Laws relating to terrorism or money laundering, or (ii) among the individuals or entities identified on any list compiled pursuant to Executive Order 13224 for the purpose of identifying suspected terrorists or on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website, http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx or any replacement website or other replacement official publication of such list.

26.02    If Landlord retains an attorney or institutes legal proceedings due to Tenant’s failure to pay Rent when due, then Tenant shall be required to pay Additional Rent in an amount equal to the reasonable attorneys’ fees and costs actually incurred by Landlord in connection therewith. Notwithstanding the foregoing, in any action or proceeding between Landlord and Tenant, including any appellate or alternative dispute resolution proceeding, the prevailing party shall be entitled to recover from the non-prevailing party all of its costs and expenses in connection therewith, including, but not limited to, reasonable attorneys’ fees actually incurred. Landlord and Tenant hereby waive any right to trial by jury in any proceeding based upon a breach of this Lease. No failure by either party to declare a default immediately upon its occurrence, nor any delay by either party in taking action for a default, nor Landlord’s acceptance of Rent with knowledge of a default by Tenant, shall constitute a waiver of the default, nor shall it constitute an estoppel.

26.03    Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant (other than the payment of the Security Deposit or Rent), the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist acts, pandemics, civil disturbances and other causes beyond the reasonable control of the performing party ( “Force Majeure” ).

 

- 21 -


26.04    Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations under this Lease and in the Building and Property. Upon transfer, Landlord shall be released from any further obligations hereunder arising from and after the date of transfer and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations, provided that any successor pursuant to a voluntary, third party transfer (but not as part of an involuntary transfer resulting from a foreclosure or deed in lieu thereof) shall have assumed Landlord’s obligations under this Lease from and after the date of the transfer.

26.05    Landlord has delivered a copy of this Lease to Tenant for Tenant’s review only and the delivery of it does not constitute an offer to Tenant or an option. Tenant represents that it has dealt directly with and only with Tenant’s Broker (described in Section 1.10) as a broker, agent or finder in connection with this Lease. Tenant shall indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers, agents or finders claiming to have represented Tenant in connection with this Lease. Landlord shall indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers, agents or finders claiming to have represented Landlord in connection with this Lease.

26.06    Time is of the essence with respect to Tenant’s exercise of any expansion, renewal or extension rights granted to Tenant. The expiration of the Term, whether by lapse of time, termination or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or termination of this Lease.

26.07    Tenant may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease, provided Tenant pays the Rent and fully performs all of its covenants and agreements. This covenant shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Building.

26.08    This Lease does not grant any rights to light or air over or about the Building. Landlord excepts and reserves exclusively to itself any and all rights not specifically granted to Tenant under this Lease. Landlord reserves the right to make changes to the Property, Building and Common Areas as Landlord deems appropriate so long as the same do not materially adversely affect Tenant’s use of the Premises. This Lease constitutes the entire agreement between the parties and supersedes all prior agreements and understandings related to the Premises, including all lease proposals, letters of intent and other documents. Neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by an authorized representative of Landlord and Tenant. Wherever this Lease requires Landlord to provide a customary service or to act in a reasonable manner (whether in incurring an expense, establishing a rule or regulation, providing an approval or consent, or performing any other act), this Lease shall be deemed also to provide that whether such service is customary or such conduct is reasonable shall be determined by reference to the practices of owners of buildings that (i) are comparable to the Building in size, age, class, quality and location, and (ii) at Landlord’s option, have been, or are being prepared to be, certified under the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating system or a similar rating system.

 

- 22 -


26.09    Landlord represents that, as of the Execution Date of this Lease, Landlord has not received any written notice of any violation of environmental laws that has not been cured or remediated as required by law.

26.10    Submission of this Lease by Landlord is not an offer to enter into this Lease but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Lease until Landlord has executed and delivered the same to Tenant.

26.11    If Landlord is advised by its counsel at any time that any part of the payments by Tenant to Landlord under this Lease may be characterized as unrelated business income under the United States Internal Revenue Code and its regulations, then Tenant shall enter into any amendment proposed by Landlord to avoid such income, so long as the amendment does not require Tenant to make more payments or accept fewer services from Landlord, than this Lease provides.

26.12    This Lease may be executed in counterparts and shall constitute an agreement binding on all parties notwithstanding that all parties are not signatories to the original or the same counterpart provided that all parties are furnished a copy or copies thereof reflecting the signature of all parties. Transmission of a facsimile or by email of a pdf copy of the signed counterpart of the Lease shall be deemed the equivalent of the delivery of the original, and any party so delivering a facsimile or pdf copy of the signed counterpart of the Lease by email transmission shall in all events deliver to the other party an original signature promptly upon request.

 

- 23 -


Landlord and Tenant have executed this Lease under seal in two or more counterparts as of the day and year first above written.

 

LANDLORD :
HINES GLOBAL REIT RIVERSIDE CENTER. LLC., a Delaware limited liability company
By:  

/s/ A. Blake Williams

Name:   A. Blake Williams
Title:   Authorized Agent
TENANT :
STEALTH PEPTIDES INCORPORATED, a Delaware corporation
By:  

/s/ Travis Wilson

Name:   Travis Wilson
Title:   CEO

 

- 24 -


EXHIBIT A

OUTLINE AND LOCATION OF PREMISES

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease” ) by and between HINES GLOBAL REIT RIVERSIDE CENTER , LLC ., a Delaware limited liability company ( “Landlord” ), and STEALTH PEPTIDES CORPORATION , a Delaware corporation ( “Tenant” ), for space in the Building located at 275 Grove Street, Newton, Massachusetts 02466.

 

LOGO

 

A-1


EXHIBIT B

EXPENSES AND TAXES

This Exhibit is attached to and made a part of the Office Lease Agreement (the “ Lease ”) by and between HINES GLOBAL REIT RIVERSIDE CENTER, LLC., a Delaware limited liability company (“Landlord” ), and STEALTH PEPTIDES CORPORATION, a Delaware corporation ( “Tenant” ), for space in the Building located at 275 Grove Street, Newton, Massachusetts 02466. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

 

1.     Payments .

1.01    Tenant shall pay Tenant’s Pro Rata Share of the amount, if any, by which Expenses (defined below) for each calendar year during the Term (after calendar year 2015) exceed Expenses for the Base Year (the “Expense Excess” ) and also the amount, if any, by which Taxes (defined below) for each Fiscal Year during the Term (after Fiscal Year ending June 30, 2016) exceed Taxes for the Base Year (the “Tax Excess” ). If Expenses or Taxes in any calendar year or Fiscal Year decrease below the amount of Expenses or Taxes for the Base Year, Tenant’s Pro Rata Share of Expenses or Taxes, as the case may be, for that calendar year or Fiscal Year shall be $0. Landlord shall provide Tenant with a good faith estimate of the Expense Excess and of the Tax Excess for each calendar year or Fiscal Year during the Term. On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one-twelfth of Tenant’s Pro Rata Share of Landlord’s estimate of both the Expense Excess and Tax Excess. If Landlord determines that its good faith estimate of the Expense Excess or of the Tax Excess was incorrect by a material amount, Landlord may provide Tenant with a revised estimate. After its receipt of a revised estimate, Tenant’s monthly payments shall be based upon the revised estimate. If Landlord does not provide Tenant with an estimate of the Expense Excess or the Tax Excess by the first day of a calendar year or Fiscal Year, as the case may be, Tenant shall continue to pay monthly installments based on the previous year’s estimate(s) until Landlord provides Tenant with the new estimate. Upon delivery of the new estimate, an adjustment shall be made for any month for which Tenant paid monthly installments based on the previous year’s estimate. Tenant shall pay Landlord the amount of any underpayment within thirty (30) days after receipt of the new estimate. Any overpayment shall be refunded to Tenant within thirty (30) days or credited against the next due future installment(s) of Additional Rent.

1.02    As soon as is practical following the end of each calendar year or Fiscal Year but no later than one hundred eighty (180) days thereafter, as the case may be, Landlord shall furnish Tenant with a statement of the actual Expenses and Expense Excess and the actual Taxes and Tax Excess for the prior calendar year or Fiscal Year, as the case may be. If the estimated Expense Excess or estimated Tax Excess for the prior calendar year or Fiscal Year, as the case may be, is more than the actual Expense Excess or actual Tax Excess for the prior calendar year or Fiscal Year, as the case may be, Landlord shall either provide Tenant with a refund or apply any overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall refund any overpayment to Tenant after first deducting the amount of Rent due. If the estimated Expense Excess or estimated Tax Excess for the prior calendar year or Fiscal Year, as the case may be, is

 

B-1


less than the actual Expense Excess or actual Tax Excess, for such prior calendar year or Fiscal Year, as the case may be, Tenant shall pay Landlord, within thirty (30) days after its receipt of the statement of Expenses or Taxes, any underpayment for the prior calendar year or Fiscal Year, as the case may be.

2.      Expenses .

2.01     “Expenses” means all costs and expenses incurred in each calendar year in connection with operating, maintaining, repairing, and managing the Building and the Property. Landlord shall act in a reasonable manner in incurring Expenses. Expenses include, without limitation: (a) all labor and labor related costs, including wages, salaries, bonuses, taxes, insurance, uniforms, training, retirement plans, pension plans and other employee benefits for employees at or below the level of Property Manager (which term shall include all employees of Landlord who directly provide property management services to the Property, which costs shall be equitably allocated for any employees who provide management services to other properties in addition to the Property); (b) management fees in an amount equal to three percent (3%) of the gross revenues from the Building and the Property; (c) the cost of equipping, staffing and operating an on-site and/or off-site management office for the Building, provided if the management office services one or more other buildings or properties, the shared costs and expenses of equipping, staffing and operating such management office(s) shall be equitably prorated and apportioned between the Building and the other buildings or properties; (d) accounting costs; (e) the cost of services; (f) rental and purchase cost of parts, supplies, tools and equipment; (g) insurance premiums and commercially reasonable deductibles; (h) electricity, gas and other utility costs; and (i) the amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) made subsequent to the Base Year which are: (1) intended to effect economies in the operation or maintenance of the Property, reduce current or future Expenses, enhance the safety or security of the Property or its occupants, (2) replacements or modifications of nonstructural items located in the Base Building or Common Areas that are required to keep the Base Building or Common Areas in good condition, or (3) required under any Law. The cost of capital improvements shall be amortized by Landlord over the lesser of the Payback Period (defined below) or the useful life of the capital improvement as reasonably determined by Landlord in accordance with generally accepted accounting principles, consistently applied. The amortized cost of capital improvements may, at Landlord’s option, include actual or imputed interest at the rate that Landlord would reasonably be required to pay to finance the cost of the capital improvement. “Payback Period” means the reasonably estimated period of time that it takes for the cost savings resulting from a capital improvement to equal the total cost of the capital improvement. Landlord, by itself or through an affiliate, shall have the right to directly perform, provide and be compensated for any services under the Lease. If Landlord incurs Expenses for the Building or Property together with one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, the shared costs and expenses shall be equitably prorated and apportioned between the Building and Property and the other buildings or properties.

2.02    Expenses shall not include:

(i)    the cost of capital improvements (except as set forth above);

 

B-2


(ii)    depreciation;

(iii)    principal payments of mortgage and other non-operating debts of Landlord;

(iv)    the cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds;

(v)    costs in connection with leasing space in the Building, including brokerage commissions;

(vi)    lease concessions, rental abatements and construction allowances granted to specific tenants;

(vii)    costs incurred in connection with the sale, financing or refinancing of the Building;

(viii)    fines, interest and penalties incurred due to the late payment of Taxes or Expenses;

(ix)    organizational expenses associated with the creation and operation of the entity which constitutes Landlord;

(x)    any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Building under their respective leases.

(xi)    interest on debt or amortization payments on any mortgage or mortgages (except to the extent that such interest is included together with the amortization of capital expenditures which are permitted to be passed through pursuant to the provisions of this Section 2).

(xii)    any bad debt loss, rent loss or reserves for bad debts or rent loss.

(xiii)    fixed or percentage rent under any ground or underlying lease or leases.

(xiv)    payments for rented equipment, the cost of which equipment would constitute a capital expenditure if the equipment were purchased, to the extent that such payments exceed the amount which could have been included in Expenses had Landlord purchased such equipment rather than leasing such equipment.

(xv)    all capital expenditures, depreciation and amortization, except as otherwise explicitly provided in this Section 2.

(xvi)    any advertising, promotional or marketing expenses for the Building.

(xvii)    leasing fees or commissions, advertising and promotional expenses, legal fees, the cost of tenant improvements, build out allowances, moving expenses, assumption of rent under existing leases and other concessions incurred in connection with leasing space in the Building.

(xviii)    costs of renovating or otherwise improving, decorating, painting or redecorating space for tenants or other occupants of the Building.

 

B-3


(xix)    any fines or penalties incurred due to violations by Landlord of any governmental rule or regulation.

(xx)    management fees in excess of three percent (3%) of the gross revenues of the Property.

(xxi)    wages, salaries, or other compensation paid to any executive employees above the grade of Property manager, except that if any such employee performs a service which would have been performed by an outside consultant, the compensation paid to such employee for performing such service shall be included in Expenses, to the extent only that the cost of such service does not exceed competitive cost of such service had such service been rendered by an outside consultant.

(xxii)    any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord.

(xxiii)    Landlord’s charitable and political contributions.

(xxiv)    all costs of purchasing major sculptures, paintings or other major works or objects of art (as opposed to decorations purchased or leased by Landlord for display in the common areas of the Building).

(xxv)    costs of selling, syndicating, financing, refinancing, mortgaging or hypothecating any of Landlord’s interest in all or any part of the Building, including, but not limited to, points and commissions in connection therewith.

(xxvi)    costs which may be considered capital improvements, capital repairs, capital changes or any other capital costs as determined under generally accepted accounting principles, except as expressly provided above.

(xxvii)    costs incurred by Landlord to the extent that Landlord is reimbursed by insurance proceeds or is otherwise reimbursed.

(xxviii)     expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged directly.

(xxix)    costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building.

(xxx)    rent for any office space occupied by Building management personnel to the extent the size or rental rate for of such office space exceeds the size or fair market rental value of office space occupied by management personnel of comparable buildings in the vicinity of the Building.

(xxxi)    amounts paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Building to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis provided however, that this subparagraph (xxxi) shall not apply to the management fee, which shall be governed by subparagraph (xx).

 

B-4


(xxxii)    costs incurred in connection with upgrading the Building to comply with laws, rules, regulations and codes in effect prior to the Area B Commencement Date.

(xxxiii)    all assessments and premiums which are not specifically charged to Tenant because of what Tenant has done, which can be paid by Landlord in installments, shall be paid by Landlord in the maximum number of installments permitted by law and not included as Expenses except in the year in which the assessment or premium installment is actually paid.

(xxxiv)    costs arising from the gross negligence or willful misconduct of Landlord or other tenants or occupants of the Building or their respective agents, employees, licensees, vendors, contractors or providers of materials or services.

2.03    If at any time during a calendar year the Building is not at least ninety-five percent (95%) occupied (or a service provided by Landlord to tenants of the Building generally is not provided by Landlord to a tenant that provides such service itself, or any tenant of the Building is entitled to free rent, rent abatement or the like), Expenses shall, at Landlord’s option, be determined as if the Building had been ninety-five percent (95%) occupied (and all services provided by Landlord to tenants of the Building generally had been provided by Landlord to all tenants, and no tenant of the Building had been entitled to free rent, rent abatement or the like) during that calendar year. If Expenses for a calendar year are determined as provided in the prior sentence, Expenses for the Base Year shall also be determined in such manner. Notwithstanding the foregoing, Landlord may calculate the extrapolation of Expenses under this Section based on one hundred percent (100%) occupancy and service so long as such percentage is used consistently for each year of the Term. The extrapolation of Expenses under this Section shall be performed in accordance with the methodology specified by the Building Owners and Managers Association.

3.      Taxes shall mean: (a) all real property taxes and other assessments on the Building and/or Property, including, but not limited to, gross receipts taxes, assessments for special improvement districts and building improvement districts, governmental charges, fees and assessments for police, fire, traffic mitigation or other governmental service of purported benefit to the Property, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Property’s share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Property; (b) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Property; and (c) all costs and fees incurred in connection with seeking reductions in any tax liabilities described in (a) and (b), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall be determined without regard to any “green building” credit and shall not include any income, capital levy, transfer, capital stock, gift, estate or inheritance tax. If a change in Taxes is obtained for any year of the Term during which Tenant paid Tenant’s Pro Rata Share of any Tax Excess, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment. Likewise, if a change is obtained for Taxes for the Base Year,

 

B-5


Taxes for the Base Year shall be restated and the Tax Excess for all subsequent years shall be recomputed. Tenant shall pay Landlord the amount of Tenant’s Pro Rata Share of any such increase in the Tax Excess within thirty (30) days after Tenant’s receipt of a statement from Landlord.

4.     If any Taxes, by law, may at the option of the taxpayer be paid in installments, then such Taxes, regardless of how actually paid, shall be deemed to be paid in the maximum number of installments permitted by the taxing authority imposing any such assessment, together with interest calculated at a rate equal to the rate then being charged by the taxing authority imposing such assessment.

5.    Audit Rights .

5.01    Within 60 days after receiving Landlord’s statement of Expenses (or, with respect to the Expenses, within 60 days after receiving Landlord’s initial statement of Expenses for the Base Year) (each such period is referred to as the “Review Notice Period” ), Tenant may give Landlord written notice ( “Review Notice” ) that Tenant intends to review Landlord’s records of the Expenses for the calendar year (or Base Year, as applicable) to which the statement applies, and within 60 days after sending the Review Notice to Landlord (such period is referred to as the “Request for Information Period” ), Tenant shall send Landlord a written request identifying, with a reasonable degree of specificity, the information that Tenant desires to review (the “Request for Information” ). Within a reasonable time after Landlord’s receipt of a timely Request for Information and executed Audit Confidentiality Agreement (referenced below), Landlord, as determined by Landlord, shall forward to Tenant, or make available for inspection on site at such location deemed reasonably appropriate by Landlord, such records (or copies thereof) for the applicable calendar year (or Base Year, as applicable) that are reasonably necessary for Tenant to conduct its review of the information appropriately identified in the Request for Information. Within 60 days after any particular records are made available to Tenant (such period is referred to as the “Objection Period” ), Tenant shall have the right to give Landlord written notice (an “Objection Notice” ) stating in reasonable detail any objection to Landlord’s statement of Expenses for that year which relates to the records that have been made available to Tenant. If Tenant provides Landlord with a timely Objection Notice, Landlord and Tenant shall work together in good faith to resolve any issues raised in Tenant’s Objection Notice. If Landlord and Tenant determine that Expenses for the calendar year are less than reported, Landlord shall provide Tenant with a credit against the next installment of Rent in the amount of the overpayment by Tenant. Likewise, if Landlord and Tenant determine that Expenses for the calendar year are greater than reported, Tenant shall pay Landlord the amount of any underpayment within 30 days. If Tenant fails to give Landlord an Objection Notice with respect to any records that have been made available to Tenant prior to expiration of the Objection Period applicable to the records which have been provided to Tenant, Tenant shall be deemed to have approved Landlord’s statement of Expenses with respect to the matters reflected in such records and shall be barred from raising any claims regarding the Expenses relating to such records for that year. If Tenant fails to provide Landlord with a Review Notice prior to expiration of the Review Notice Period or fails to provide Landlord with a Request for Information prior to expiration of the Request for Information Period described above, Tenant shall be deemed to have approved Landlord’s statement of Expenses and shall be barred from raising any claims regarding the Expenses for that year.

 

B-6


5.02    If Tenant retains an agent to review Landlord’s records, the agent must be with a CPA firm licensed to do business in the state or commonwealth where the Property is located. Tenant shall be solely responsible for all costs, expenses and fees incurred for the audit, and the fees charged cannot be based in whole or in part on a contingency basis. The records and related information obtained by Tenant shall be treated as confidential, and applicable only to the Building, by Tenant and its auditors, consultants and other parties reviewing such records on behalf of Tenant (collectively, “Tenant’s Auditors” ), and, prior to making any records available to Tenant or Tenant’s Auditors, Landlord may require Tenant and Tenant’s Auditors to each execute a reasonable confidentiality agreement ( “Audit Confidentiality Agreement” ) in accordance with the foregoing. In no event shall Tenant be permitted to examine Landlord’s records or to dispute any statement of Expenses unless Tenant has paid and continues to pay all Rent when due.

 

B-7


EXHIBIT C

WORK LETTER

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between HINES GLOBAL REIT RIVERSIDE CENTER, LLC., a Delaware, limited liability company (“ Landlord ”), and STEALTH PEPTIDES CORPORATION, a Delaware corporation (“ Tenant ”), for space in the Building located at 275 Grove Street, Newton, Massachusetts 02466. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

 

1.

Alterations and Allowance .

 

  A.

Tenant, following the delivery of the Premises by Landlord and the full and final execution and delivery of the Lease to which this Exhibit is attached and all prepaid rental and security deposits required under such agreement have been made, shall have the right to perform alterations and improvements in the Premises (the “Initial Alterations” ). Notwithstanding the foregoing, Tenant and its contractors shall not have the right to perform Initial Alterations in the Premises unless and until Tenant has complied with all of the terms and conditions of Section 9 of the Lease, including, without limitation, approval by Landlord of the final plans for the Initial Alterations and the contractors to be retained by Tenant to perform such Initial Alterations. Landlord’s consent is solely for the benefit of Landlord, and neither Tenant nor any third party shall have the right to rely on Landlord’s consent, or its approval of Tenant’s plans, for any purpose whatsoever. Tenant shall be responsible for all elements of the design of Tenant’s plans (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the premises and the placement of Tenant’s furniture, appliances and equipment), and Landlord’s approval of Tenant’s plans shall in no event relieve Tenant of the responsibility for such design. Landlord’s approval of the contractors to perform the Initial Alterations shall not be unreasonably withheld. The parties agree that Landlord’s approval of the general contractor to perform the Initial Alterations shall not be considered to be unreasonably withheld if any such general contractor (i) does not have trade references reasonably acceptable to Landlord, does not maintain insurance as required pursuant to the terms of this Lease, (iii) does not have the ability to be bonded for the work in an amount of no less than 150% of the total estimated cost of the Initial Alterations, (iv) does not provide current financial statements reasonably acceptable to Landlord, or (v) is not licensed as a contractor in the state/municipality in which the Premises is located. Tenant acknowledges the foregoing is not intended to be an exclusive list of the reasons why Landlord may reasonably withhold its consent to a general contractor.

 

  B.

Commencing as of April 1, 2015, provided Tenant is not in Default, Landlord agrees to contribute the sum of $150,000.00 (the Allowance ) toward the cost of performing the Initial Alterations in preparation of Tenant’s occupancy of the Premises. The Allowance may be used for hard costs, which term shall include,

 

C-1


  without limitation, the cost to construct demountable glass partitions in the Premises in connection with the Initial Alterations. Tenant shall have the right to apply up to $15,000.00 of the Allowance toward furniture, fixtures and equipment and telecommunications and data wiring. The Allowance, less a 10% retainage (which retainage shall be payable as part of the final draw), shall be paid to Tenant or, at Landlord’s option, to the order of the general contractor that performs the Initial Alterations, in periodic disbursements within 30 days after receipt of the following documentation: (i) an application for payment and sworn statement of contractor substantially in the form of AIA Document G-702 covering all work for which disbursement is to be made to a date specified therein; (ii) a certification from an AIA architect substantially in the form of the Architect’s Certificate for Payment which is located on AIA Document G702, Application and Certificate of Payment; Contractor’s, subcontractor’s and material supplier’s waivers of liens which shall cover all Initial Alterations for which disbursement is being requested and all other statements and forms required for compliance with the mechanics’ lien laws of the state in which the Premises is located, together with all such invoices, contracts, or other supporting data as Landlord or Landlord’s Mortgagee may reasonably require; (iv) a cost breakdown for each trade or subcontractor performing the Initial Alterations; (v) plans and specifications for the Initial Alterations, together with a certificate from an AIA architect that such plans and specifications comply in all material respects with all laws affecting the Building, Property and Premises; (vi) copies of all construction contracts for the Initial Alterations, together with copies of all change orders, if any; and (vii) a request to disburse from Tenant containing an approval by Tenant or its Architect of the work done and a good faith estimate of the cost to complete the Initial Alterations. Upon completion of the Initial Alterations, and prior to final disbursement of the Allowance, Tenant shall furnish Landlord with: (1) general contractor and architect’s completion affidavits, (2) full and final waivers of lien, (3) receipted bills covering all labor and materials expended and used, (4) as-built plans of the Initial Alterations, and (5) the certification of Tenant and its architect that the Initial Alterations have been installed in a good and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances. In no event shall Landlord be required to disburse the Allowance more than one time per month. If the Initial Alterations exceed the Allowance, Tenant shall be entitled to the Allowance in accordance with the terms hereof, but each individual disbursement of the Allowance shall be disbursed in the proportion that the Allowance bears to the total cost for the Initial Alterations, less the 10% retainage referenced above. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Allowance during the continuance of an uncured Default under the Lease, and Landlord’s obligation to disburse shall only resume when and if such Default is cured.

 

  C.

Except as expressly provided above, the Allowance shall not be used for the purchase of equipment, furniture or other items of personal property of Tenant. If Tenant does not submit a request for payment of the entire Allowance to Landlord in accordance with the provisions contained in this Exhibit by September 1, 2016,

 

C-2


  any unused amount shall accrue to the sole benefit of Landlord, it being understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith. Tenant shall be responsible for all applicable state sales or use taxes, if any, payable in connection with the Initial Alterations and/or Allowance.

 

  D.

Tenant agrees to accept the Premises in its “as-is” condition and configuration, it being agreed that Landlord shall not be required to perform any work or, except as provided above with respect to the Allowance, incur any costs in connection with the construction or demolition of any improvements in the Premises.

 

  E.

This Exhibit shall not be deemed applicable to any additional space added to the Premises at any time or from time to time, whether by any options under the Lease or otherwise, or any additions to the Premises in the event of a renewal or extension of the original Term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease.

 

C-3


EXHIBIT D

COMMENCEMENT LETTER

(EXAMPLE)

 

Date

 

 

Tenant

 

 

Address

 

 

 

 

 

 

 

Re:

Commencement Letter with respect to that certain Lease dated as of          20    , by and between HINES GLOBAL REIT RIVERSIDE CENTER , LLC ., a Delaware limited liability company , as Landlord, and                     , as Tenant, for                      rentable square feet on the                      floor of                      Riverside Center located at 275 Grove Street, Newton, Massachusetts 02466.

Lease Id:                                 

Business Unit Number:                                 

Dear                          :

In accordance with the terms and conditions of the above referenced Lease, Tenant accepts possession of the Premises and acknowledges:

1.    The Commencement Date of the Lease is                     .

2.    The Termination Date of the Lease is                     .

Please acknowledge the foregoing and your acceptance of possession by signing both counterparts of this Commencement Letter in the space provided and returning a fully executed counterpart to my attention.

Sincerely,

 

                                                 

Authorized Signatory

Acknowledged and Accepted:

 

  Tenant:  

 

  By:  

 

  Name:  

 

  Title:  

 

  Date:  

 

 

D-1


EXHIBIT E

BUILDING RULES AND REGULATIONS

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease” ) by and between HINES GLOBAL REIT RIVERSIDE CENTER , LLC ., a Delaware limited liability company ( “Landlord” ), and STEALTH PEPTIDES CORPORATION , a Delaware corporation ( “Tenant” ), for space in the Building located at 275 Grove Street, Newton, Massachusetts 02466. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking facilities (if any), the Property and the appurtenances. In the event of a conflict between the following rules and regulations and the remainder of the terms of the Lease, the remainder of the terms of the Lease shall control.

1.    Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material shall be placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant’s employees to loiter in Common Areas or elsewhere about the Building or Property.

2.    Plumbing fixtures and appliances shall be used only for the purposes for which designed and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the fixtures or appliances.

3.    No signs, advertisements or notices shall be painted or affixed to windows, doors or other parts of the Building, except those of such color, size, style and in such places as are first approved in writing by Landlord. All tenant identification and suite numbers at the entrance to the Premises shall be installed by Landlord, at Landlord’s cost and expense, using the standard graphics for the Building. Landlord shall, at Landlord’s cost, list the name of Tenant on the ground floor lobby directory and on the first (1 st ) floor directory of the Building. The initial listing of Tenant’s name shall be at Landlord’s cost and expense. Any changes, replacements or additions by Tenant to such directory shall be at Tenant’s sole cost and expense. Except in connection with the hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be inserted into any part of the Premises or Building except by the Building maintenance personnel without Landlord’s prior approval, which approval shall not be unreasonably withheld.

4.    Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board or other directory device listing tenants and no other directory shall be permitted unless previously consented to by Landlord in writing.

5.    Tenant shall not place any lock(s) on any door in the Premises or Building without Landlord’s prior written consent, which consent shall not be unreasonably withheld, and Landlord shall have the right at all times to retain and use keys or other access codes or devices to all locks within and into the Premises. A reasonable number of keys to the locks on the entry doors in the Premises shall be furnished by Landlord to Tenant at Tenant’s cost and Tenant shall not make any duplicate keys. All keys shall be returned to Landlord at the expiration or early termination of the Lease.

 

E-1


6.    All contractors, contractor’s representatives and installation technicians performing work in the Building shall be subject to Landlord’s prior approval, which approval shall not be unreasonably withheld, and shall be required to comply with Landlord’s standard rules, regulations, policies and procedures, which may be revised from time to time. Landlord has no obligation to allow any particular telecommunication service provider to have access to the Building or to the Premises. If Landlord permits access, Landlord may condition the access upon the payment to Landlord by the service provider of fees assessed by Landlord in Landlord’s sole discretion.

7.    Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas or loading dock areas, shall be performed in a manner and restricted to hours reasonably designated by Landlord. Tenant shall obtain Landlord’s prior approval by providing a detailed listing of the activity, including the names of any contractors, vendors or delivery companies, which approval shall not be unreasonably withheld. Tenant shall assume all risk for damage, injury or loss in connection with the activity.

8.    Landlord shall have the right to approve the weight, size, or location of heavy equipment or articles in and about the Premises, which approval shall not be unreasonably withheld; provided that approval by Landlord shall not relieve Tenant from liability for any damage in connection with such heavy equipment or articles.

9.    Corridor doors, when not in use, shall be kept closed.

10.    Tenant shall not: (a) make or permit any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (b) solicit business or distribute or cause to be distributed, in any portion of the Building, handbills, promotional materials or other advertising; or (c) conduct or permit other activities in the Building that might, in Landlord’s sole opinion, constitute a nuisance.

11.    No animals, except those assisting handicapped persons, shall be brought into the Building or kept in or about the Premises.

12.    No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant in the Premises, Building or about the Property, except for those substances as are typically found in similar premises used for general office purposes and are being used by Tenant in a safe manner and in accordance with all applicable Laws. Tenant shall not, without Landlord’s prior written consent, use, store, install, spill, remove, release or dispose of, within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq., M.G.L. c. 21C, M.G.L. c. 21E or any other applicable environmental Law which may now or later be in effect. Tenant shall comply with all Laws pertaining to and governing the use of these materials by Tenant and shall remain solely liable for the costs of abatement and removal resulting from Tenant’s use or any violation of this Section 12.

 

E-2


13.    Tenant shall not use or occupy the Premises in any manner or for any purpose which might injure the reputation or impair the present or future value of the Premises or the Building. Tenant shall not use, or permit any part of the Premises to be used for lodging, sleeping or for any illegal purpose.

14.    Tenant shall not take any action which would violate Landlord’s labor contracts or which would cause a work stoppage, picketing, labor disruption or dispute or interfere with Landlord’s or any other tenant’s or occupant’s business or with the rights and privileges of any person lawfully in the Building (“ Labor Disruption ”). Tenant shall take the actions necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request of Landlord, immediately terminate any work in the Premises that gave rise to the Labor Disruption, until Landlord gives its written consent for the work to resume. Tenant shall have no claim for damages against Landlord or any of the Landlord Related Parties nor shall the Commencement Date of the Term be extended as a result of the above actions.

15.    Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, electrical equipment that would overload the electrical system beyond its capacity for proper, efficient and safe operation as determined solely by Landlord. Tenant shall not furnish cooling or heating to the Premises, including, without limitation, the use of electric or gas heating devices, without Landlord’s prior written consent. Tenant shall not use more than its proportionate share of telephone lines and other telecommunication facilities available to service the Building.

16.    Tenant shall not operate or permit to be operated a coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except for machines for the exclusive use of Tenant’s employees and invitees.

17.    Bicycles and other vehicles are not permitted inside the Building or on the walkways outside the Building, except in areas designated by Landlord.

18.    Landlord may from time to time adopt systems and procedures for the security and safety of the Building and Property, their occupants, entry, use and contents. Tenant, its agents, employees, contractors, guests and invitees shall comply with Landlord’s systems and procedures.

19.    Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord’s sole opinion may impair the reputation of the Building or its desirability. Upon written notice from Landlord, Tenant shall refrain from and discontinue such publicity immediately.

20.    Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or permit smoking in the Common Areas, unless a portion of the Common Areas have been declared a designated smoking area by Landlord, nor shall the above parties allow smoke from the Premises to emanate into the Common Areas or any other part of the Building. Landlord shall have the right to designate the Building (including the Premises) as a non-smoking building.

 

E-3


21.    Landlord shall have the right to designate and approve standard window coverings for the Premises and to establish rules to assure that the Building presents a uniform exterior appearance. Tenant shall ensure, to the extent reasonably practicable, that window coverings are closed on windows in the Premises while they are exposed to the direct rays of the sun.

22.    Deliveries to and from the Premises shall be made only at the times in the areas and through the entrances and exits reasonably designated by Landlord. Tenant shall not make deliveries to or from the Premises in a manner that might interfere with the use by any other tenant of its premises or of the Common Areas, any pedestrian use, or any use which is inconsistent with good business practice.

23.    The work of cleaning personnel shall not be hindered by Tenant after 5:30 P.M., and cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles to prevent unreasonable hardship to the cleaning service.

 

E-4


EXHIBIT F

ADDITIONAL PROVISIONS

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease” ) by and between HINES GLOBAL REIT RIVERSIDE CENTER , LLC ., a Delaware limited liability company ( “Landlord” ), and STEALTH PEPTIDES CORPORATION , a Delaware corporation ( “Tenant” ), for space in the Building located at 275 Grove Street, Newton, Massachusetts 02466. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

 

1.

Parking .

 

  1.01

During the initial Term, Tenant shall have the right to use up to 40 unreserved parking spaces in the parking facility garage and surface lots ( “Unreserved Parking” ) and 4 allotted spaces in the underground executive parking garage under Building One ( “Reserved Parking” ) (collectively, the “Spaces” ). The Unreserved Parking shall be on a non-exclusive first come, first served basis, for the use of Tenant and its employees, in the parking facility and surface lots and the Reserved Parking shall be in the underground executive parking garage under Building One owned by Landlord that serves the Building (collectively, the “Parking Facility” ), and if the Parking Facility includes a garage, then such Spaces may be in, or on the roof of, such garage. No deductions or allowances shall be made for days when Tenant or any of its employees does not utilize the Parking Facility or for Tenant utilizing less than all of the Spaces. Tenant shall not have the right to lease or otherwise use more than the number of reserved and unreserved Spaces set forth above.

 

  1.02

There is currently no charge for Reserved Parking in the underground executive parking garage under Building One (the “Garage” ). For and with respect to spaces in the Garage, Landlord reserves the right at any time, from and after December 1, 2016, to assess a charge for the use of spaces in the Garage, which charge shall reflect the then current rate for parking in the Garage. Tenant shall have the right at any time to substitute all or any portion of its Reserved Parking for an equal number of additional Unreserved Parking by giving Landlord written notice of same.

 

  1.03

Except for particular spaces and areas designated by Landlord for Reserved Parking, all parking in the Parking Facility shall be on an unreserved, first-come, first-served basis.

 

  1.04

Landlord shall not be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Parking Facility regardless of whether such loss or theft occurs when the Parking Facility is locked or otherwise secured. Except as caused by the negligence or willful misconduct of Landlord and without limiting the terms of the preceding sentence, Landlord shall not be liable for any loss, injury or damage to persons using the Parking Facility or automobiles or other property therein, it being agreed that, to the fullest extent permitted by law, the use of the Spaces shall be at the sole risk of Tenant and its employees.

 

F-1


  1.05

Landlord shall have the right from time to time to designate the location of the Spaces and to promulgate reasonable rules and regulations regarding the Parking Facility, the Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations as well as all reasonable additions and amendments thereto.

 

  1.06

Tenant shall not store or permit its employees to store any automobiles in the Parking Facility without the prior written consent of Landlord. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the Parking Facility or on the Property. If it is necessary for Tenant or its employees to leave an automobile in the Parking Facility overnight, Tenant shall provide Landlord with prior notice thereof designating the license plate number and model of such automobile.

 

  1.07

Landlord shall have the right to temporarily close the Parking Facility or certain areas therein in order to perform necessary repairs, maintenance and improvements to the Parking Facility.

 

  1.08

Tenant shall not assign or sublease any of the Spaces without the consent of Landlord. Landlord shall have the right to terminate this Parking Agreement with respect to any Spaces that Tenant desires to sublet or assign.

 

  1.09

Landlord may elect to provide parking cards or keys to control access to the Parking Facility. In such event, Landlord shall provide Tenant with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord shall have the right to require Tenant or its employees to place a deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys.

 

  1.10

Landlord hereby reserves the right to enter into a management agreement or lease with an entity for the Parking Facility ( “Parking Facility Operator” ). In such event, Tenant, upon request of Landlord, shall enter into a parking agreement with the Parking Facility Operator and, if and to the extent Landlord assesses a charge under Section 1.02 hereof, pay the Parking Facility Operator the monthly charge established hereunder, and Landlord shall have no liability for claims arising through acts or omissions of the Parking Facility Operator unless caused by Landlord’s negligence or willful misconduct. It is understood and agreed that the identity of the Parking Facility Operator may change from time to time during the Term. In connection therewith, any parking lease or agreement entered into between Tenant and a Parking Facility Operator shall be freely assignable by such Parking Facility Operator or any successors thereto.

 

F-2


2.

Extension Option .

A.     Grant of Option; Conditions . Tenant shall have, subject to the following terms and conditions, the right to extend the Term (the “Extension Option” ) for one (1) additional period of five (5) years, commencing on the day following the Termination Date of the initial Term, and ending on the fifth (5 th ) anniversary of the Termination Date (the “Extension Term” ), if:

 

  (i)

Landlord receives notice of exercise ( “Initial Extension Notice” ) not less than twelve (12) full calendar months prior to the expiration of the initial Term, and not more than fifteen (15) full calendar months prior to the expiration of the initial Term; and

 

  (ii)

Tenant is not in Default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Extension Notice, or at the time Tenant delivers its Binding Notice (as defined below); and

 

  (iii)

Not more than twenty-five percent (25%) of the Premises is sublet (other than pursuant to a Business Transfer) at the time that Tenant delivers its Initial Extension Notice, or at the time Tenant delivers its Binding Notice; and

 

  (iv)

The Lease has not been assigned (other than pursuant to a Business Transfer, as defined in Article 11 of the Lease) prior to the date that Tenant delivers its Initial Extension Notice, or prior to the date Tenant delivers its Binding Notice.

 

  B.

Terms Applicable to Premises During Extension Term .

 

  (i)

The Lease of the Premises for the Extension shall be upon all of the same terms and conditions as set forth in the Lease for the initial Term, except that (a) Tenant shall have no further option to extend the Term, and (b) the initial Base Rent rate per rentable square foot for the Premises during the Extension Term shall equal the Prevailing Market rate (hereinafter defined) per rentable square foot for the Premises. Base Rent during the Extension Term may increase in accordance with the increases assumed in the determination of Prevailing Market rate. Base Rent attributable to the Premises shall be payable in monthly installments in accordance with the terms and conditions of Article 4 of the Lease. The Base Year for Expenses during the Extension Term shall be the calendar year in which the Extension Term commences and the Base Year for Taxes during the Extension Term shall be the Fiscal Year in which the Extension Term commences.

 

  (ii)

Tenant shall pay Additional Rent (i.e., Taxes and Expenses) for the Premises during the Extension Term in accordance with the terms of Article 4 of the Lease, and the manner and method in which Tenant reimburses Landlord for Tenant’s share of Taxes and Expenses and the Base Year, if any, applicable to such matter, shall be some of the factors considered in determining the Prevailing Market rate for the Extension Term.

 

F-3


  C.

Initial Procedure for Determining Prevailing Market . Within thirty (30) days after receipt of Tenant’s Initial Extension Notice, Landlord shall advise Tenant of the applicable Base Rent rate for the Premises for the Extension Term. Tenant, within fifteen (15) days after the date on which Landlord advises Tenant of the applicable Base Rent rate for the Extension Term, shall either (i) give Landlord final binding written notice ( “Binding Notice” ) of Tenant’s exercise of its Extension Option, or (ii) if Tenant disagrees with Landlord’s determination, provide Landlord with written notice of rejection (the “Rejection Notice” ). If Tenant fails to provide Landlord with either a Binding Notice or Rejection Notice within such fifteen-(15)-day period, Tenant shall be deemed to have provided a Binding Notice. If Tenant provides or is deemed to have provided Landlord with a Binding Notice, Landlord and Tenant shall enter into the Extension Amendment (as defined below) upon the terms and conditions set forth herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall work together in good faith to agree upon the Prevailing Market rate for the Premises during the Extension Term. Upon agreement, Landlord and Tenant shall enter into the Extension Amendment in accordance with the terms and conditions hereof. Notwithstanding the foregoing, if Landlord and Tenant fail to agree upon the Prevailing Market rate within thirty (30) days after the date Tenant provides Landlord with the Rejection Notice, then the Prevailing Market rate shall be determined in accordance with the arbitration procedures described in Section D below.

 

  D.

Arbitration Procedure .

 

  (i)

If Landlord and Tenant have failed to reach agreement as to the Prevailing Market rate within thirty (30) days after the date of the Rejection Notice, then, within five (5) days after the expiration of such thirty-(30)-day period, Landlord and Tenant shall each simultaneously submit to the other, in a sealed envelope, its good faith estimate of the Prevailing Market rate for the Premises during the Extension Term (collectively referred to as the Estimates ). If the higher of such Estimates is not more than 105% of the lower of such Estimates, then Prevailing Market rate shall be the average of the two Estimates. If the Prevailing Market rate is not resolved by the exchange of Estimates, then, within seven (7) days after the exchange of Estimates, Landlord and Tenant shall each select an appraiser to determine which of the two Estimates most closely reflects the Prevailing Market rate for the Premises during the Extension Term. Each appraiser so selected shall be certified as an MAI appraiser or as an ASA appraiser and shall have had at least five (5) years’ experience within the previous ten (10) years as a real estate appraiser working in the Newton/Wellesley, Massachusetts area, with working knowledge of current rental rates and practices. For purposes hereof, an MAI

 

F-4


  appraiser means an individual who holds an MAI designation conferred by, and is an independent member of, the American Institute of Real Estate Appraisers (or its successor organization, or in the event there is no successor organization, the organization and designation most similar), and an “ASA” appraiser means an individual who holds the Senior Member designation conferred by, and is an independent member of, the American Society of Appraisers (or its successor organization, or, in the event there is no successor organization, the organization and designation most similar).

 

  (ii)

Upon selection, Landlord’s and Tenant’s appraisers shall work together in good faith to agree upon which of the two Estimates most closely reflects the Prevailing Market rate for the Premises. The Estimate chosen by such appraisers shall be binding on both Landlord and Tenant as the Base Rent rate for the Premises during the Extension Term. If either Landlord or Tenant fails to appoint an appraiser within the seven-(7)-day period referred to above, and such failure continues for three (3) Business Days after written notice thereof, the appraiser appointed by the other party shall be the sole appraiser for the purposes hereof. If the two appraisers cannot agree upon which of the two Estimates most closely reflects the Prevailing Market within twenty (20) days after their appointment, then, within ten (10) days after the expiration of such twenty-(20)-day period, the two appraisers shall select a third appraiser meeting the aforementioned criteria. Once the third appraiser (Le. arbitrator) has been selected as provided for above, then, as soon thereafter as practicable but in any case within fourteen (14) days, the arbitrator shall make his determination of which of the two Estimates most closely reflects the Prevailing Market rate and such Estimate shall be binding on both Landlord and Tenant as the Base Rent for the Premises. If the arbitrator believes that expert advice would materially assist him, he may retain one or more qualified persons to provide such expert advice. The parties shall share equally in the costs of the arbitrator and of any experts retained by the arbitrator. Any fees of any appraiser, counsel or experts engaged directly by Landlord or Tenant, however, shall be borne by the party retaining such appraiser, counsel or expert.

 

  (iii)

If the Prevailing Market rate has not been determined by the commencement date of the Extension Term, Tenant shall pay Base Rent upon the terms and conditions in effect during the last month of the initial Term for the Premises until such time as the Prevailing Market rate has been determined. Upon such determination, the Base Rent for the Premises shall be retroactively adjusted to the commencement of the Extension Term for the Premises. If such adjustment results in an underpayment of Base Rent by Tenant, Tenant shall pay Landlord the amount of such underpayment within thirty (30) days after the determination thereof.

 

F-5


  E.

Extension Amendment . If Tenant is entitled to and properly exercises its Extension Option, Landlord shall prepare an amendment (the “Extension Amendment” ) to reflect changes in the Base Rent, Term, Termination Date and other appropriate terms. The Extension Amendment shall be sent to Tenant within a reasonable time after receipt of the Binding Notice, or Rejection Notice, as the case may be, and Tenant shall execute and return the Extension Amendment to Landlord within fifteen (15) days after Tenant’s receipt of same, but, upon delivery of the Initial Extension Notice, an otherwise valid exercise of the Extension Option shall be fully effective whether or not the Extension Amendment is executed.

 

  F.

Prevailing Market . For purposes hereof, “Prevailing Market” shall mean the arm’s length fair market annual rental rate per rentable square foot under extension leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and office buildings comparable to the Building in the Newton/Wellesley, Massachusetts area. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease or amendment, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes.

 

F-6


EXHIBIT G

FORM OF LETTER OF CREDIT

 

 

[Name of Financial Institution]

Irrevocable Standby                             

Letter of Credit                                    

No.                                                        

Issuance Date:                                      

Expiration Date:                                   

Applicant:                                             

Beneficiary

[[[LANDLORD NAME]]]

 

                                                 

                                                 

Ladies/Gentlemen:

We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of the above referenced Applicant in the amount of                      U.S. Dollars ($        ) available for payment at sight by your draft drawn on us when accompanied by the following documents:

 

1.

An original copy of this Irrevocable Standby Letter of Credit.

 

2.

Beneficiary’s dated statement signed by a purportedly authorized officer/official certifying that the Beneficiary is entitled to draw upon this Letter of Credit (in the amount of the draft submitted herewith) pursuant to this Lease (the “ Lease ”) dated                      by and between                     , as Landlord, and                     , as Tenant and/or any amendment to the lease or any other agreement between such parties related to the lease.

It is a condition of this Irrevocable Standby Letter of Credit that it will be considered automatically renewed for a one year period upon the expiration date set forth above and upon each anniversary of such date, unless at least sixty (60) days prior to such expiration date or applicable anniversary thereof, we notify you in writing by certified mail return receipt requested or by recognized overnight courier service, that we elect not to so renew this Irrevocable Standby Letter of Credit. A copy of any such notice shall also be sent, in the same manner, to:

                    . In addition to the foregoing, we understand and agree that you shall be entitled to draw upon this Irrevocable Standby Letter of Credit in accordance with 1 and 2 above in the event that we elect not to renew this Irrevocable Standby Letter of Credit and, in addition, you provide us with a dated statement purportedly signed by an authorized signatory or agent of Beneficiary stating that the Applicant has failed to provide you with an acceptable

 

G-1


substitute irrevocable standby letter of credit in accordance with the terms of the above referenced lease. We further acknowledge and agree that: (a) upon receipt of the documentation required herein, we will honor your draws against this Irrevocable Standby Letter of Credit without inquiry into the accuracy of Beneficiary’s signed statement and regardless of whether Applicant disputes the content of such statement; (b) this Irrevocable Standby Letter of Credit shall permit partial draws and, in the event you elect to draw upon less than the full stated amount hereof, the stated amount of this Irrevocable Standby Letter of Credit shall be automatically reduced by the amount of such partial draw; and (c) you shall be entitled to transfer your interest in this Irrevocable Standby Letter of Credit from time to time and more than one time without our approval and without charge. In the event of a transfer, we reserve the right to require reasonable evidence of such transfer as a condition to any draw hereunder.

This Irrevocable Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) ICC Publication No. 500.

We hereby engage with you to honor drafts and documents drawn under and in compliance with the terms of this Irrevocable Standby Letter of Credit.

All communications to us with respect to this Irrevocable Standby Letter of Credit must be addressed to our office located at                      to the attention of                     .

 

Very truly yours,

 

[name]

[title]

 

G-2


COMMENCEMENT LETTER

 

Date:    8/13/2015
Tenant:    Stealth BioTherapeutics
Address    275 Grove Street 3-107
   Newton, MA 02466

 

Re:

Commencement of the Office Space with respect to that certain Office Lease Agreement dated as of October 31, 2014, by and between HINES GLOBAL REIT RIVERSIDE CENTER LLC., a Delaware limited liability company , as Landlord, and Stealth Peptides Incorporated , a Delaware Corporation as Tenant, for 7 , 685 rentable square feet on the 1st floor of Three Riverside Center located at 275 Grove Street, Newton, Massachusetts 02466,

Lease Id: EH20132586

Business Unit Number: 80109

Dear Henry:

In accordance with the terms and conditions of the above referenced Lease Amendment, Tenant accepts possession of the Premises and acknowledges:

 

  1.

The “Area B” Office Space Effective Date is 4/1/2015;

 

  2.

The Termination Date of the Lease is 11/30/2020.

Please sign both counterparts of this Commencement Letter in the space provided and returning a fully executed counterpart to my attention. Tenant’s failure to execute and return this letter, or to provide written objection to the statements contained in this letter, within 30 days after the date of this letter shall be deemed an approval by Tenant of the statements contained herein.

Sincerely,

 

/s/ David T. Pete

Authorized Signatory
Acknowledged and Accepted:

 

  Tenant: Stealth BioTherapeutics Inc.
  By:  

/s/ Henry H. Hess

  Name:   Henry H. Hess
  Title:   Corporate Counsel
  Date: September 21, 2015

Exhibit 10.14

STEALTH BIOTHERAPEUTICS CORP

AMENDMENT

This Amendment (this “ Amendment ”) is made as of June 13, 2018, by and between Stealth BioTherapeutics Corp, a company incorporated under the laws of the Cayman Islands (the “ Company ”), and Danforth Advisors, LLC (the “ Registered Holder ”).

WHEREAS, the Company issued and sold to the Registered Holder an equity interest as evidenced by that certain Ordinary Share Purchase Warrant, dated as of January 19, 2017 (the “ Award ”);

WHEREAS, the Award constituted compensatory equity for U.S. Tax purposes;

WHEREAS, the Company and the Registered Holder desire to amend the Award such that the Award will be subject to the terms and conditions of the Company’s 2006 Share Incentive Plan, as amended (the “ Plan ”);

WHEREAS, pursuant to Section 11 of the Award, any amendment of the Award requires the written consent signed by the Company and the Registered Holder;

NOW, THEREFORE, in consideration of the foregoing, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Registered Holder hereby agree as follows:

1.    The Award is amended and restated in its entirety in the form set forth as Exhibit A .

2.    The Award, as amended by this Amendment, together with any other writings referred to in the Award or delivered pursuant thereto which form a part thereof, contain the entire agreement among the parties with respect to the subject matter thereof and amend, restate and supersede all prior and contemporaneous arrangements or understandings with respect thereto.

3.    The Company and the Registered Holder agree that this Amendment does not represent a new or additional award of equity compensation or an exercise, transfer or exchange, in any form, of the Award such that the compensation element of the Award becomes measureable for U.S. federal income tax purposes. The Company and the Registered Holder agree to treat this Amendment consistently with such intended treatment for all U.S. federal income tax purposes unless otherwise required by a “determination” within the meaning of Section 1313 of the Code.

4.    This Amendment shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Amendment shall be governed by, the internal laws of the Commonwealth of Massachusetts, without giving effect to any choice of law or conflict of law provision or rule (whether of the Commonwealth of Massachusetts or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the Commonwealth of Massachusetts.


5.    This Amendment may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

[Remainder of Page Intentionally Left Blank]

 

- 2 -


IN WITNESS WHEREOF , this Amendment has been executed by the parties hereto as of the day and year first above written.

 

STEALTH BIOTHERAPEUTICS CORP
By:   /s/ Louise Garbarino
Name:   Louise Garbarino
Title:   Director
REGISTERED HOLDER:
DANFORTH ADVISORS, LLC
By:  

/s/ Daniel Geffken

Name:   Daniel Geffken
Title:   Managing Director

 

Amendment


EXHIBIT A

STEALTH BIOTHERAPEUTICS CORP.

Nonstatutory Option Agreement

 

1.

Grant of Option .

This agreement evidences the grant by Stealth BioTherapeutics Corp, a corporation incorporated under the laws of the Cayman Islands (the “Company”), granted January 19, 2017, as amended and restated in the form hereof, effective June 13, 2018 (the “Grant Date”) to Danforth Advisors, LLC, a consultant to the Company or a subsidiary thereof (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2006 Share Incentive Plan, as amended (the “Plan”), a total of 695,967 Ordinary Shares (the “Shares”), of a nominal par value of $0.0001 per share, of the Company (the “Ordinary Shares”) at $0.46 per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on January 19, 2022 (the “Final Exercise Date”).

It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

 

2.

Vesting Schedule .

This option will become exercisable (“vest”) as to the entire original number of Shares on the Vesting Commencement Date (as defined below). For purposes of this Agreement, “Vesting Commencement Date” shall mean January 19, 2017.

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

 

3.

Exercise and Termination of Option; Repurchase Right .

(a)     Form of Exercise . Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b)     Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time it exercises this option, is, and has been at all times since the Grant Date, an employee, officer, director, or consultant or advisor to the Company or any other entity the employees, officers, directors, consultants or advisors of which are eligible to receive option grants under the Plan (an “Eligible Participant”).

 

Amendment


(c)     Termination of Relationship with the Company . If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation.

(d)     Exercise Period Upon Death or Disability . If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while it is an Eligible Participant and the Company has not terminated such relationship for Cause (as defined in paragraph (e) below), this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of its death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

(e)     Termination for Cause; Breach of Certain Obligations . If, prior to the Final Exercise Date, the Participant is discharged by the Company for Cause (as defined below) or the Participant violates the non-competition or confidentiality provisions of any agreement between the Participant and the Company, then immediately upon notice from the Company to the Participant (i) the right to exercise this option, to the extent not previously exercised, shall terminate, and (ii) the Company shall have the right to repurchase all shares previously issued upon exercise of this option at a repurchase price equal to the exercise price therefor. If the Company exercises the foregoing repurchase right, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the shares to be repurchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer to the Company, and the Company shall promptly thereafter deliver or mail to the Participant a check in payment of the repurchase price for such shares. The foregoing repurchase right shall terminate upon the earlier of the events specified in Section 4(g) below. “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform its responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for Cause if the Company determines, within 60 days after the Participant’s resignation, that discharge for Cause was warranted.

 

4.

Company Right of First Refusal .

(a)     Notice of Proposed Transfer . If the Participant proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively, “transfer”) any Shares acquired upon exercise of this option, then the Participant shall first give written notice of the proposed transfer (the “Transfer Notice”) to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares the Participant proposes to transfer (the “Offered Shares”), the price per share and all other material terms and conditions of the transfer.

 

2


(b)     Company Right to Purchase . For 60 days following its receipt of such Transfer Notice, the Company shall have the option to repurchase (subject to applicable law) all or part of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all or part of the Offered Shares, it shall give written notice of such election to the Participant within such 60-day period. Within 10 days after its receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares to be purchased by the Company, duly endorsed in blank by the Participant or with duly endorsed stock/share powers attached thereto, all in a form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for such Offered Shares; provided that if the terms of payment set forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice; and provided further that any delay in making such payment shall not invalidate the Company’s exercise of its option to purchase the Offered Shares.

(c)     Shares Not Purchased By Company . If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 60-day period following the expiration of the option granted to the Company under Section 4(b) above, transfer the Offered Shares which the Company has not elected to acquire to the proposed transferee, provided that such transfer shall not be on terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 4 shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(d)     Consequences of Non-Delivery . After the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to Section 4(b) above, the Company shall not pay any dividend to the Participant on account of such Offered Shares or permit the Participant to exercise any of the privileges or rights of a shareholder with respect to such Offered Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares.

(e)     Exempt Transactions . The following transactions shall be exempt from the provisions of this Section 4:

(1)    any transfer of Shares to or for the benefit of any spouse, children, parents, uncles, aunts, siblings, nieces, nephews, grandchildren and any other relatives approved by the Board of Directors (collectively, “Approved Relatives”) or to a trust, corporation, limited liability company, partnership or other entity established solely for the benefit of the Participant and/or Approved Relatives;

 

3


(2)    any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the “Securities Act”); and

(3)    the sale of all or substantially all of the shares of the Company (including pursuant to a merger or consolidation);

provided , however , that in the case of a transfer pursuant to clause (1) above, such Shares shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4.

(f)     Assignment of Company Right . The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 4 to one or more persons or entities.

(g)     Termination . The provisions of this Section 4 shall terminate upon the earlier of the following events:

(1)    the closing of the sale of Ordinary Shares in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act; or

(2)    the sale of all or substantially all of the share capital, assets or business of the Company, by merger, consolidation, sale of assets or otherwise (other than a merger or consolidation in which all or substantially all of the individuals and entities who were beneficial owners of the Ordinary Shares immediately prior to such transaction beneficially own, directly or indirectly, more than 75% of the outstanding securities entitled to vote generally in the election of directors of the resulting, surviving or acquiring corporation in such transaction).

(h)     No Obligation to Recognize Invalid Transfer . The Company shall not be required (1) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Section 4, or (2) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred.

(i)     Legends . The certificate representing Shares shall bear a legend substantially in the following form (in addition to, or in combination with, any legend required by applicable federal and state securities laws and agreements relating to the transfer of the Company securities):

“The shares represented by this certificate are subject to a right of first refusal in favor of the Company, as provided in a certain option agreement with the Company.”

 

5.

Agreement in Connection with Public Offering .

The Participant agrees, in connection with the initial underwritten public offering of the Company’s securities pursuant to a registration statement under the Securities Act, (i) not to sell,

 

4


make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any Ordinary Shares held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company’s securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering.

 

6.

Tax Matters .

(a)     Withholding . No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

(b)     Disqualifying Disposition . If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition.

 

7.

Nontransferability of Option .

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

 

8.

Provisions of the Plan .

This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option.

[ Remainder of page left blank. ]

 

5


IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

 

        STEALTH BIOTHERAPEUTICS CORP.
Dated: June 13, 2018    By:  

/s/ Louise Garbarino

   Name:  

Louise Garbarino

   Title:  

Director


PARTICIPANT’S ACCEPTANCE

The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2006 Share Incentive Plan, as amended.

 

PARTICIPANT:
Danforth Advisors, LLC
By:  

/s/ Daniel Geffken

Name:  

Daniel Geffken

Title:  

Managing Director

Address:  

278 Elm Street, Suite 228

      

Somerville, MA 02144

 

7

Exhibit 10.15

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT is made and dated as of June 30, 2017 and is entered into by and among Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands with registered number 165223 (“Stealth Cayman”), Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware”), and each of their Subsidiaries (other than the MSC) from time to time party hereto (hereinafter collectively referred to as the “Borrower”), HERCULES CAPITAL, INC., formerly known as Hercules Technology Growth Capital, Inc., a Maryland corporation, as lender and any other banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “Lender”) and HERCULES CAPITAL, INC., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and the Lender (in such capacity, the “Agent”).

RECITALS

A.    Borrower has requested Lender to make available to Borrower a loan in an aggregate principal amount of up to Forty Million Dollars ($40,000,000) (the “Term Loan”);

B.    Lender is willing to make the Term Loan on the terms and conditions set forth in this Agreement.

AGREEMENT

NOW, THEREFORE, Borrower, Agent and Lender agree as follows:

SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION

1.1    Unless otherwise defined herein, the following capitalized terms shall have the following meanings:

“Account Control Agreement(s)” means any agreement entered into by and among the Agent, Borrower and a third party Bank or other institution (including a Securities Intermediary) in which Borrower maintains a Deposit Account or an account holding Investment Property and which grants Agent a perfected first priority security interest in the subject account or accounts, including as provided for in the Cayman Security Documents.

“ACH Authorization” means the ACH Debit Authorization Agreement in substantially the form of Exhibit H, which account numbers may be redacted for security purposes if and when filed publicly by the Borrower.

“Advance(s)” means a Term Loan Advance.

“Advance Date” means the funding date of any Advance.


“Advance Request” means a request for an Advance submitted by Borrower to Agent in substantially the form of Exhibit A, which account numbers may be redacted for security purposes if and when filed publicly by the Borrower.

“Affiliate” means (a) any Person that directly or indirectly controls, is controlled by, or is under common control with the Person in question, (b) any Person directly or indirectly owning, controlling or holding with power to vote ten percent (10%) or more of the outstanding voting securities of another Person, or (c) any Person ten percent (10%) or more of whose outstanding voting securities are directly or indirectly owned, controlled or held by another Person with power to vote such securities. As used in the definition of “Affiliate,” the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

“Agent” has the meaning given to it in the preamble to this Agreement.

“Agreement” means this Loan and Security Agreement, as amended from time to time.

“Amortization Date” means August 1, 2018; provided however , if Performance Milestone 4 is satisfied prior to July 31, 2018, then February 1, 2019; provided further , if Performance Milestone 5 is satisfied prior to January 31, 2019, then August 1, 2019.

“Anti-Corruption Laws” shall mean all laws, rules, and regulations of any jurisdiction applicable to Borrower or any of its Subsidiaries from time to time concerning or relating to bribery or corruption, including without limitation the United States Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act 2010 and other similar legislation in any other applicable jurisdictions.

“Anti-Terrorism Laws” means any laws, rules, regulations or orders relating to terrorism or money laundering, including without limitation Executive Order No. 13224 (effective September 24, 2001), the USA PATRIOT Act, the laws comprising or implementing the Bank Secrecy Act, and the laws administered by OFAC.

“Assignee” has the meaning given to it in Section 11.13.

“Authorized Signatory” means (i) in the case of Stealth Delaware, the Chief Executive Officer or Chief Financial Officer and (ii) in the case of Stealth Cayman, a director.

“Blocked Person” means any Person: (a) listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (c) a Person with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti Terrorism Law, (d) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in Executive Order No. 13224, or (e) a Person that is named a “specially designated national” or “blocked person” on the most current list published by OFAC or other similar list.

 

2


“Borrower Products” means all products, technical data or technology currently being developed, manufactured or sold by Borrower or which Borrower intends to sell, manufacture, license, or distribute in the future including any products or service offerings under development, collectively, together with all products, software, service offerings, technical data or technology that have been sold, developed, licensed or distributed by Borrower since its incorporation.

“Business Day” means any day other than Saturday, Sunday and any other day on which banking institutions in the State of California are closed for business.

“Cash” means all cash, cash equivalents and liquid funds.

“Cayman Security Documents” means the following documents, each in form and substance reasonably satisfactory to Agent: (a) that certain Debenture among Stealth Cayman and Agent, and any schedules or ancillary documents thereto, (b) any account charge and (c) such other documents incidental to the foregoing documents as Agent may determine necessary.

“CHALLENGE-HD Milestone” means the achievement of the protocol-specified primary endpoint as described in clinical study protocol CHDR1628 for the Phase 1b clinical trial for the treatment of early stage Huntington’s disease with an acceptable safety profile and initial signs of efficacy such that the data support in accordance with prevailing FDA guidelines and, as applicable, Stealth Delaware’s executive officers and/or Stealth Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved the advancement of SBT- 20 into a Phase 2 clinical trial for the treatment of Huntington’s disease or another neurodegenerative disease, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Change in Control” means any (i) reorganization, recapitalization, consolidation or merger (or similar transaction or series of related transactions) of Borrower in which the holders of Borrower’s outstanding shares immediately before consummation of such transaction or series of related transactions do not, immediately after consummation of such transaction or series of related transactions, retain shares representing more than fifty percent (50%) of the voting power of the surviving entity of such transaction or series of related transactions (or the parent of such surviving entity if such surviving entity is wholly owned by such parent), in each case without regard to whether Borrower is the surviving entity; or (ii) sale or issuance by Borrower of equity securities to investors, none of whom are current investors in Borrower (or their Affiliates), which securities represent, as of immediately following the closing (or, if there be more than one, any closing) thereof, fifty percent (50%) or more of the then-outstanding total combined voting power of Borrower; provided that the Company Reorganization shall not be deemed a Change in Control; provided further that a bona fide equity financing for the purposes of raising capital from institutional investors shall not constitute a Change in Control if the Agent or Required Lenders, upon Borrower’s written request and upon reasonable prior written notice (which in any event shall not be less than ten (10) days’ prior notice to the proposed effective date of such consent), provide written consent that the institutional investors are acceptable to Agent or Required Lenders in their reasonable discretion.

 

3


“Claims” has the meaning given to it in Section 11.10.

“Closing Date” means the date of this Agreement.

“Code” means the Internal Revenue Code of 1986, as amended.

“Collateral” means the property described in Section 3.

“Company Reorganization” means a reorganization of the Borrower in connection with an Initial Public Offering such that Stealth Cayman will become a wholly-owned subsidiary of a newly formed Delaware corporation that shall be the registrant in such Initial Public Offering, which reorganization shall be implemented (a) substantially as described in the preliminary prospectus constituting part of the registration statement relating to such Initial Public Offering and provided to Agent on June 10, 2017 (the “Registration Statement”) or (b) otherwise with Agent’s prior written consent (which shall not be unreasonably withheld or delayed), so long as Borrower provides no less than ten (10) days’ prior written notice of any changes or deviations from the Registration Statement.

“Confidential Information” has the meaning given to it in Section 11.12.

“Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

“Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any Indebtedness of another Person, including any such obligation guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

“Control” means, in respect of a particular Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

 

4


“Copyright License” means any written agreement granting any right to use any Copyright or Copyright registration, now owned or hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.

“Copyrights” means all copyrights, whether registered or unregistered, held pursuant to the laws of the United States of America, any State thereof, or of any other country.

“Cornell License” means that certain Exclusive License Agreement dated as of April 20, 2006, among Stealth Cayman (f/k/a Stealth Peptides International Inc.) and Cornell Research Foundation, Inc. and Institut de Recherches Cliniques de Montreal, as amended as of October 7, 2010.

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the UCC, and includes any checking account, savings account, or certificate of deposit.

“Due Diligence Fee” means $30,000, which fee is due to and has been paid to Lender on or prior to the Closing Date, which fee shall be used to pay the Lender’s non-legal transaction costs and due diligence expenses, and shall be deemed fully earned on such date regardless of the early termination of this Agreement.

“Equity Interests” means, with respect to any Person, the capital stock, partnership or limited liability company interest, or other equity securities or equity ownership interests of such Person.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

“Event of Default” has the meaning given to it in Section 9.

“Excluded Taxes” means any of the following Taxes imposed on or with respect to a Lender or Agent or required to be withheld or deducted from a payment to a Lender or Agent, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes and branch profits Taxes, in each case, (i) imposed as a result of such Lender or Agent being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Term Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.9, amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Lender or Agent’s failure to comply with Section 2.9(g) and (d) any U.S. federal withholding Taxes imposed under FATCA.

“FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement, or any amended or successor version that is substantively comparable and not materially more onerous to comply with, any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Code.

 

5


“FDA” means the U.S. Food and Drug Administration or any successor thereto or any other comparable Governmental Authority.

“Financial Statements” has the meaning given to it in Section 7.1.

“Foreign Lender” means (a) if the Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (b) if the Borrower is not a U.S. Person, a Lender that is resident or organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes.

“GAAP” means generally accepted accounting principles in the United States of America, as in effect from time to time provided that the parties agree that GAAP as in effect on the date of this Agreement shall be applicable for the interpretation of “capital lease obligations” in the definition of “Indebtedness”, unless the parties otherwise agree in writing.

“Governmental Authority” means the government of any nation or any political subdivision thereof, whether state, local, territory, province or otherwise, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supranational bodies such as the European Union or the European Central Bank).

“IDDEA-HF Milestone” means the achievement of the protocol-specified primary endpoint as described in clinical study protocol SPIHF-204 for the Phase 2 clinical trial of elamipretide for the treatment of heart failure with reduced ejection fraction with an acceptable safety profile and initial signs of efficacy such that the data support in accordance with prevailing FDA guidelines and, as applicable, Stealth Delaware’s executive officers and/or Stealth Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved the advancement of elamipretide into a Phase 3 clinical trial in heart failure, subject to verification by Agent in its reasonable discretion (including supporting documentation requested by Agent).

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services (excluding trade credit entered into in the ordinary course of business due within one hundred eighty (180) days), including reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations.

“Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of Borrower under any Loan Document and (b) to the extent not otherwise described in (a), Other Taxes.

“Initial Facility Charge” means $200,000.

 

6


“Initial Patient Milestone” means Borrower’s first patient has been dosed in a FDA-compliant Phase 3 clinical trial of elamipretide, subject to verification by Agent in its reasonable discretion (including supporting documentation requested by Agent).

“Initial Public Offering” means the initial firm commitment underwritten offering of common stock pursuant to a registration statement under the Securities Act of 1933 filed with and declared effective by the Securities and Exchange Commission.

“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions or compromises or other arrangements generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

“Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents; Licenses; trade secrets and inventions; mask works; Borrower’s applications therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill associated with any of the foregoing, together with Borrower’s rights to sue for past, present and future infringement of Intellectual Property and the goodwill associated therewith.

“Inventory” means “inventory” as defined in Article 9 of the UCC.

“Investment” means any beneficial ownership (including stock, partnership or limited liability company interests) of or in any Person, or any loan, advance or capital contribution to any Person or the acquisition of all, or substantially all, of the assets of another Person.

“Joinder Agreements” means for each Subsidiary (other than the MSC), a completed and executed (i) Joinder Agreement in substantially the form attached hereto as Exhibit G with respect to Subsidiaries formed or organized under the laws of the United States of America or any state, commonwealth or territory thereof, or (ii) joinder documentation in form and substance reasonably satisfactory to Agent joining such Subsidiary as a party under the Cayman Security Documents or similar security documents under the relevant jurisdictions, as applicable, with respect to Subsidiaries organized outside of the United States or the Cayman Islands.

“Lender” has the meaning given to it in the preamble to this Agreement.

“License” means any Copyright License, Patent License, Trademark License or other license of rights or interests.

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security interest, encumbrance, levy, lien or charge of any kind, whether voluntarily incurred or arising by operation of law or otherwise, against any property, any conditional sale or other title retention agreement, and any lease in the nature of a security interest.

“Loan” means the Advances made under this Agreement.

 

7


“Loan Documents” means this Agreement, the Notes (if any), the ACH Authorization, the Account Control Agreements, the Joinder Agreements, all UCC Financing Statements, the Warrant, the Subordination Agreement, the Pledge Agreement, the Cayman Security Documents, each Process Letter and any other documents executed in connection with the Secured Obligations or the transactions contemplated hereby, as the same may from time to time be amended, modified, supplemented or restated.

“Material Adverse Effect” means an occurrence that has a material adverse effect upon: (i) the business, operations, properties, assets or financial condition of Borrower and its Subsidiaries taken as a whole; or (ii) the ability of Borrower to perform when due the Secured Obligations in accordance with the terms of the Loan Documents, or the ability of Agent or Lender to enforce any of its rights or remedies with respect to the Secured Obligations; or (iii) the Collateral or Agent’s Liens on the Collateral or the priority of such Liens.

“Maximum Term Loan Amount” means Forty Million and No/100 Dollars ($40,000,000).

“Maximum Rate” shall have the meaning assigned to such term in Section 2.3.

“Minimum MSC Cash Amount” shall have the meaning assigned to such term in Section 7.14.

“MSC” shall have the meaning assigned to such term in Section 7.14.

“Net Financing Proceeds” means unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) (a) net cash proceeds from one or more bona fide equity financings of Borrower, (b) net cash proceeds from one or more Subordinated Indebtedness financings of Borrower and/or (c) upfront net cash proceeds from corporate collaborations, licensing arrangements or similar arrangements, in each case received in an account subject to an Account Control Agreement.

“Note(s)” means a Term Note.

“OFAC” is the U.S. Department of Treasury Office of Foreign Assets Control.

“OFAC Lists” are, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or other restricted Persons maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.

“Other Connection Taxes” means, with respect to any Lender, Taxes imposed as a result of a present or former connection between such Lender and the jurisdiction imposing such Tax (other than connections arising from such Lender having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

 

8


“Other Taxes” means (i) all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment and (ii) any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) imposed by a change in law on a Lender’s or Agent’s loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto that result to increase the cost to such Lender or Agent of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make any such Loan, or to reduce the amount of any sum received or receivable by such Lender or Agent.

“Patent License” means any written agreement granting any right with respect to any invention on which a Patent is in existence or a Patent application is pending, in which agreement Borrower now holds or hereafter acquires any interest.

“Patents” means all letters patent of, or rights corresponding thereto, in the United States of America or in any other country, all registrations and recordings thereof, and all applications for letters patent of, or rights corresponding thereto, in the United States of America or any other country.

“Performance Milestone 1” means satisfaction of each of the following events: (a) after May 31, 2017, receipt by Borrower of at least Thirty Million Dollars ($30,000,000) of Net Financing Proceeds (inclusive of amounts raised in satisfaction of Section 4.1(f)) and (b) achievement of either the Phase 3 Pathway Milestone or the ReSTORE-HF Milestone, in each case, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Performance Milestone 2” means satisfaction of each of the following events: (a) after May 31, 2017, and prior to June 30, 2018, receipt by Borrower of at least One Hundred Million Dollars ($100,000,000) (inclusive of amounts raised in satisfaction of Section 4.1(f) and Performance Milestone 1) of Net Financing Proceeds and (b) achievement of either the PROGRESS-HF Milestone or the IDDEA-HF Milestone, in each case, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Performance Milestone 3” means satisfaction of each of the following events: (a) prior to June 30, 2018, achievement of the Initial Patient Milestone and (b) achievement of at least one of following prior to June 30, 2018: (i) the ReSTORE-HF Milestone, (ii) the PROGRESS-HF Milestone, (ii) the IDDEA-HF Milestone, (iv) the ReCLAIM Milestone, or (v) the CHALLENGE-HD Milestone; provided however , that the event satisfying clause (c) shall not be in the same therapeutic indication as the Initial Patient Milestone satisfying clause (b), in each case, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

 

9


“Performance Milestone 4” means satisfaction of each of the following events: (a) after May 31, 2017, receipt by Borrower of at least One Hundred Fifty Million Dollars ($150,000,000) (inclusive of amounts raised in satisfaction of Section 4.1(f) and Performance Milestone 1, Performance Milestone 2 and Performance Milestone 3) of Net Financing Proceeds and (b) achievement of at least two of the following: (i) the Initial Patient Milestone, (ii) the ReSTORE-HF Milestone, (iii) the PROGRESS-HF Milestone, (iv) the IDDEA-HF Milestone, (v) the ReCLAIM Milestone and (vi) the CHALLENGE-HD Milestone, in each case, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Performance Milestone 5” means satisfaction of each of the following events: (a) achievement of Performance Milestone 4; and (b) after May 31, 2017, receipt by Borrower of at least Two Hundred Fifty Million Dollars ($250,000,000) (inclusive of amounts raised in satisfaction of Section 4.1(f) and Performance Milestone 1, Performance Milestone 2, Performance Milestone 3 and Performance Milestone 4) of Net Financing Proceeds and (d) achievement of at least three of the following: (i) the Initial Patient Milestone, (ii) the ReSTORE-HF Milestone, (iii) the PROGRESS-HF Milestone, (iv) the IDDEA-HF Milestone, (v) the ReCLAIM Milestone and (vi) the CHALLENGE-HD Milestone, in each case, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Permitted Acquisition” shall mean any acquisition (including by way of merger) by Borrower of all or substantially all of the assets of another Person, or of a division or line of business of another Person, or capital stock of another Person, in each case located entirely within the United States of America, which is conducted in accordance with the following requirements:

(a)    such acquisition is of a business or Person engaged in a line of business related to that of the Borrower or its Subsidiaries;

(b)    if such acquisition is structured as a stock acquisition, then the Person so acquired shall either (i) become a wholly-owned Subsidiary of Borrower or of a Subsidiary and the Borrower shall comply, or cause such Subsidiary to comply, with 7.13 hereof or (ii) such Person shall be merged with and into Borrower (with the Borrower being the surviving entity);

(c)    if such acquisition is structured as the acquisition of assets, such assets shall be acquired by Borrower;

(d)    the Borrower shall have delivered to Lender not less than fifteen (15) nor more than forty five (45) days prior to the date of such acquisition, notice of such acquisition together with pro forma projected financial information, copies of all material documents relating to such acquisition, and historical financial statements for such acquired entity, division or line of business, in each case in form and substance satisfactory to Lender and demonstrating compliance with the covenants set forth in Section 7.21 hereof on a pro forma basis as if the acquisition occurred on the first day of the most recent measurement period;

(e)    both immediately before and after such acquisition no default or Event of Default shall have occurred and be continuing; and

 

10


(f)    if the sum of the purchase price of such proposed new acquisition, computed on the basis of total acquisition consideration paid or incurred, or to be paid or incurred, by Borrower with respect thereto, including the amount of Permitted Indebtedness assumed or to which such assets, businesses or business or ownership interest or shares, or any Person so acquired, is subject, shall not be greater than $500,000 for all such acquisitions during the term of this Agreement.

“Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender or Agent arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the Closing Date which is disclosed in Schedule 1A; (iii) Indebtedness of up to $250,000 outstanding at any time secured by a Lien described in clause (vii) of the defined term “Permitted Liens”, provided such Indebtedness does not exceed the cost of the Equipment financed with such Indebtedness; (iv) Indebtedness to trade creditors incurred in the ordinary course of business, including Indebtedness incurred in the ordinary course of business with corporate credit cards (v) Indebtedness that also constitutes a Permitted Investment; (vi) Subordinated Indebtedness; (vii) reimbursement obligations in connection with letters of credit that are unsecured or are secured by Cash and issued on behalf of the Borrower or a Subsidiary thereof in an amount not to exceed $300,000 at any time outstanding, (viii) other unsecured (or secured solely by specific assets of the Borrower) Indebtedness in an amount not to exceed $300,000 at any time outstanding, (ix) intercompany Indebtedness as long as either (A) the Indebtedness is among the Borrowers, (B) the Indebtedness is of any Borrower to any Subsidiary, and such Indebtedness constitutes Subordinated Indebtedness and otherwise qualifies as a Permitted Investment, or (C) each of the Subsidiary obligor and the Subsidiary obligee under such Indebtedness is a Subsidiary that has executed a Joinder Agreement; (x) guarantees of any items of Permitted Indebtedness; (xi) security deposits in Cash in connection with real property leases in an aggregate amount not to exceed $250,000; and (xii) extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose materially more burdensome terms upon Borrower or its Subsidiary, as the case may be.

“Permitted Investment” means: (i) Investments existing on the Closing Date which are disclosed in Schedule 1B; (ii) (a) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year from the date of acquisition thereof, (b) commercial paper maturing no more than one year from the date of creation thereof and at the time of the Investment by Borrower or the applicable Subsidiary having a rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (c) certificates of deposit issued by any bank with assets of at least $500,000,000 maturing no more than one year from the date of investment therein, and (d) money market accounts; and (e) corporate debt obligations maturing no more than 12 months from the date of acquisition thereof and at the time of investment having a rating of at least A3 or A- from either Standard & Poors or Moody’s Investor Service; (iii) repurchases of stock from former employees, directors, or consultants of Borrower under agreements approved by the Borrower’s board of directors in an aggregate amount not to exceed $250,000 in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases; (iv) Investments accepted in connection with Permitted Transfers, and Investments permitted pursuant to Section 7.7 hereof; (v) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or

 

11


suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of Borrower’s business; (vi) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (vi) shall not apply to Investments of Borrower in any Subsidiary; (vii) Investments consisting of loans not involving the net transfer on a substantially contemporaneous basis of cash proceeds to employees, officers or directors relating to the purchase of capital stock of Borrower pursuant to employee stock purchase plans or other similar agreements approved by Borrower’s board of directors; (viii) Investments consisting of travel advances, reimbursement of moving expenses, commuter and travel expenses, and tax gross up payments to employees or consultants relating to income received by such employees or consultants in connection with the same, in an aggregate amount not to exceed $350,000 per fiscal year; (ix) Investments in existing or newly-formed Subsidiaries organized in the United States, provided that such Subsidiaries enter into a Joinder Agreement and execute such other documents as shall be reasonably requested by Lender; (x) Investments in subsidiaries organized outside of the United States approved in advance by the Required Lenders; (xi) licenses, joint ventures or strategic alliances and similar arrangements in the ordinary course of Borrower’s business consisting of licenses permitted hereunder or the providing of technical support, provided that any cash Investments by Borrower in another Person (other than another Borrower or a Subsidiary that has entered into a Joinder pursuant to the terms hereof) do not exceed $100,000 in the aggregate in any fiscal year; (xii) Investments in the MSC as permitted under Section 7.14; (xiii) Permitted Indebtedness that constitutes Investments; (xiv) Investments in Permitted Acquisitions and (xv) additional Investments that do not exceed $250,000 in the aggregate per fiscal year.

“Permitted Liens” means any and all of the following: (i) Liens in favor of Agent or Lender; (ii) Liens existing on the Closing Date which are disclosed in Schedule 1C; (iii) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; provided, that Borrower maintains adequate reserves therefor in accordance with GAAP; (iv) Liens securing claims or demands of materialmen, artisans, mechanics, carriers, warehousemen, landlords and other like Persons arising in the ordinary course of Borrower’s business and imposed without action of such parties; provided, that the payment thereof is not yet required; (v) Liens arising from judgments, decrees or attachments in circumstances which do not constitute an Event of Default hereunder; (vi) the following deposits, to the extent made in the ordinary course of business: deposits under worker’s compensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations (other than Liens arising under ERISA or environmental Liens) or surety or appeal bonds, or to secure indemnity, performance or other similar bonds; (vii) Liens on Equipment, software, other Intellectual Property in connection with such Equipment or other capital assets constituting purchase money Liens and Liens in connection with capital leases securing Indebtedness permitted in clause (iii) of “Permitted Indebtedness”; (viii) Liens incurred in connection with Subordinated Indebtedness; (ix) leasehold interests in leases or subleases and licenses granted in the ordinary course of business and not interfering in any material respect with the business of the licensor; (x) Liens in favor of customs and revenue authorities arising as a matter of law to

 

12


secure payment of custom duties that are promptly paid on or before the date they become due; (xi) Liens on insurance proceeds securing the payment of financed insurance premiums that are promptly paid on or before the date they become due (provided that such Liens extend only to such insurance proceeds and not to any other property or assets); (xii) statutory, common law and contractual rights of set-off and other similar rights as to deposits of cash and securities in favor of banks, other depository institutions and brokerage firms; (xiii) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business so long as they do not materially impair the value or marketability of the related property; (xiv) (A) Liens on Cash securing obligations permitted under clause (vii) of the definition of Permitted Indebtedness and (B) security deposits in connection with real property leases, the combination of (A) and (B) in an aggregate amount not to exceed $250,000 at any time; and (xv) precautionary filings in connection with operating leases in the Equipment that is the subject of such leases; (xvi) contractual liens in connection with Permitted Transfers; and (xvii) Liens incurred in connection with the extension, renewal or refinancing of the Indebtedness secured by Liens of the type described in clauses (i) through (xvii) above; provided, that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced (as may have been reduced by any payment thereon) does not increase.

“Permitted Transfers” means (i) sales of Inventory in the ordinary course of business, (ii) non-exclusive licenses and similar arrangements for the use of Intellectual Property or Borrower Products in the ordinary course of business and exclusive licenses for the use of the Intellectual Property of Borrower or Borrower Products or any of its Subsidiaries entered into in the ordinary course of business, provided , that, with respect to each such license described in this clause (ii), the license (A) constitutes an arms-length transaction, the terms of which, on their face, do not provide for a sale or assignment of any Intellectual Property and do not restrict the ability of Borrower or any of its Subsidiaries, as applicable, to pledge, grant a security interest in or lien on, or assign or otherwise transfer any Intellectual Property, (B) (I) is limited in territory with respect to a specific geographic country or region (i.e. Japan, Germany, northern China) outside of the United States or (II) with respect to no more than one (1) license entered into during the term of this Agreement, is limited in therapeutic indication with respect to a single therapeutic indication and (C) with respect to any such license other than the Specified License, Borrower has obtained the consent and acknowledgement of the counterparty to such license for the collateral assignment of such license to the Agent for the benefit of the Lenders, or (iii) dispositions of worn-out, obsolete or surplus Equipment at fair market value in the ordinary course of business, (iv) Permitted Investments to the extent constituting transfers of property, (v) Permitted Liens to the extent constituting transfers of property, and (vi) other transfers of assets having a fair market value of not more than $250,000 in the aggregate in any fiscal year.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, other entity or government.

“Phase 3 Pathway Milestone” means confirmation by Agent that Borrower’s Type C Meeting for elamipretide in mitochondrial myopathy results in an acceptable pathway to a Phase 3 study for elamipretide in mitochondrial myopathy such that Borrower can continue

 

13


towards an Initial Patient Milestone event and, as applicable, Stealth Delaware’s executive officers and/or Stealth Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved moving towards an Initial Patient Milestone, subject to verification by Agent in its reasonable discretion (including supporting documentation requested by Agent).

“Prepayment Charge” shall have the meaning assigned to such term in Section 2.5.

“Prime Rate” means the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the United States or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519) (Selected Interest Rates) as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by the Agent) or any similar release by the Federal Reserve Board (as determined by the Agent).

“Pledge Agreement” means the Pledge Agreement to be executed between Borrower and Agent following the Company reorganization, as the same may from time to time be amended, restated, modified or otherwise supplemented.

“Process Letter” means each of (a) that certain letter agreement whereby Stealth Cayman and each Subsidiary that is organized outside of the United States appoint CT Corporation System, or other agent reasonably acceptable to Agent, as its agent for the purpose of accepting service of any process in the United States and (b) that certain letter agreement whereby Morningside Venture (I) Investments Limited appoints CT Corporation System, or other agent reasonably acceptable to Agent, as its agent for the purpose of accepting service of any process in the United States.

“PROGRESS-HF Milestone” means the achievement of the protocol-specified primary endpoint as described in clinical study protocol SPIHF-201 for the Phase 2 clinical trial of elamipretide for the treatment of patients hospitalized with congestion due to heart failure with an acceptable safety profile and initial signs of efficacy such that the data support in accordance with prevailing FDA guidelines and, as applicable, Stealth Delaware’s executive officers and/or Stealth Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved the advancement of elamipretide into a Phase 3 clinical trial in heart failure, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Receivables” means all of Borrower’s Accounts, Instruments, Documents, Chattel Paper, Supporting Obligations, letters of credit, proceeds of any letter of credit, and Letter of Credit Rights.

“ReCLAIM Milestone” means the achievement of the protocol-specified primary endpoint as described in clinical study protocol SPIAM-101 for the Phase 1b clinical trial of elamipretide for the treatment of intermediate age-related macular degeneration with an acceptable safety profile and initial signs of efficacy such that the data support in accordance with prevailing FDA guidelines and, as applicable, Stealth Delaware’s executive officers and/or Stealth

 

14


Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved the advancement of elamipretide into a Phase 2 clinical trial for the treatment of age- related macular degeneration, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Register of Mortgages and Charges” means the register of mortgages and charges of and maintained by the Stealth Cayman in accordance with the Companies Law (2016 Revision) of the Cayman Islands.

“Required Lenders” means at any time, the holders of more than 50% of the sum of the aggregate unpaid principal amount of the Term Loans then outstanding.

“ReSTORE-HF Milestone” means the achievement of the protocol-specified primary endpoint as described in clinical study protocol SPIHF-203 for the Phase 2 clinical trial of elamipretide for the treatment of heart failure with preserved ejection fraction with an acceptable safety profile and initial signs of efficacy such that the data support in accordance with prevailing FDA guidelines and, as applicable, Stealth Delaware’s executive officers and/or Stealth Cayman’s Board of Directors, acting in good faith and within their corporate authority, have approved the advancement of elamipretide into a Phase 3 clinical trial in heart failure, subject to verification by Agent in its reasonable discretion (including supporting documentation reasonably requested by Agent).

“Sanctioned Country” shall mean, at any time, a country or territory which is the subject or target of any Sanctions.

“Sanctioned Person” shall mean, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, or by the United Nations Security Council, the European Union or any EU member state, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person controlled by any such Person.

“Sanctions” shall mean economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.

“SEC” means the Securities and Exchange Commission.

“Secured Obligations” means Borrower’s obligations under this Agreement and any Loan Document (other than the Warrant), including any obligation to pay any amount now owing or later arising.

“Specified License” means a licensing or similar arrangement with respect to Asian rights for elamipretide and an option for Asian and US rights for SBT-20 with a non- Affiliated investment-grade recognized and established strategic investor (as determined by Lender) with upfront unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) net cash proceeds equal to or greater than Twenty Million Dollars ($20,000,000) and standard (as determined by Lender) milestone and royalty payments.

 

15


“Subordinated Indebtedness” means Indebtedness subordinated to the Secured Obligations in amounts and on terms and conditions satisfactory to Agent in its sole discretion.

“Subordination Agreement” means that certain subordination agreement among Borrower, Agent and Morningside Venture (I) Investments Limited, dated as of the Closing Date.

“Subsequent Financing” means the closing of any equity financing of Borrower or any direct or indirect parent entity of Borrower offered to multiple investors primarily for the purposes of raising capital which becomes effective after the Closing Date (including, for the avoidance of doubt, after the Company Reorganization) and prior to the closing of an Initial Public Offering.

“Subsidiary” means an entity, whether corporate, partnership, limited liability company, joint venture or otherwise, in which Borrower owns or controls more than 50% of the outstanding voting securities, including each entity listed on Schedule 1 hereto.

“Tax” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Term Commitment” means as to any Lender, the obligation of such Lender, if any, to make a Term Loan Advance to the Borrower in a principal amount not to exceed the amount set forth under the heading “Term Commitment” opposite such Lender’s name on Schedule 1.1.

“Term Loan Advance” means each Tranche 1 Advance, Tranche 2 Advance, Tranche 3 Advance, Tranche 4 Advance and any other Term Loan funds advanced under this Agreement.

“Term Loan Interest Rate” means for any day a per annum rate of interest equal to the greater of either (i) the Prime Rate plus 5.50% or (ii) 9.50%.

“Term Loan Maturity Date” means January 1, 2021; provided that if Performance Milestone 4 is satisfied prior to July 31, 2018, then July 1, 2021.

“Term Note” means a Promissory Note in substantially the form of Exhibit B. “Trademark License” means any written agreement granting any right to use any Trademark or Trademark registration, now owned or hereafter acquired by Borrower or in which Borrower now holds or hereafter acquires any interest.

“Trademarks” means all trademarks (registered, common law or otherwise) and any applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States of America, any State thereof or any other country or any political subdivision thereof.

 

16


“Tranche 1 Advance” shall have the meaning assigned to such term in Section 2.2(a).

“Tranche 2 Advance” shall have the meaning assigned to such term in Section 2.2(a).

“Tranche 3 Advance” shall have the meaning assigned to such term in Section 2.2(a).

“Tranche 4 Advance” shall have the meaning assigned to such term in Section 2.2(a).

“Tranche 4 Facility Charge” means one percent (1%) of each Tranche 4 Advance.

“Type C Meeting” means a ‘Type C Meeting’ as described in the FDA draft guidance for industry F ormal Meetings Between the FDA and Sponsors or Applicants of PDUFA Products issued in March 2015.

“UCC” means the Uniform Commercial Code as the same is, from time to time, in effect in the State of California; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Agent’s Lien on any Collateral is governed by the Uniform Commercial Code as the same is, from time to time, in effect in a jurisdiction other than the State of California, then the term “UCC” shall mean the Uniform Commercial Code as in effect, from time to time, in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions.

“Unrestricted Cash” means Cash held by Borrower in account(s) subject to an Account Control Agreement in favor of Agent.

“U.S. Person” means any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.

“U.S. Tax Compliance Certificate” has the meaning specified in Section 2.9(g)(ii)(2)(III).

“Warrant” means any warrant entered into on the date hereof by and between Borrower and Hercules Capital, Inc., as may be amended, restated or modified from time to time.

“Withholding Agent” means the Borrower and the Agent.

Unless otherwise specified, all references in this Agreement or any Annex or Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” or “Schedule” shall refer to the corresponding Section, subsection, Exhibit, Annex, or Schedule in or to this Agreement. Unless otherwise specifically provided herein, any accounting term used in this Agreement or the other Loan Documents shall have the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP, consistently applied. Unless otherwise defined herein or in the other Loan Documents, terms that are used herein or in the other Loan Documents and defined in the UCC shall have the meanings given to them in the UCC.

 

17


SECTION 2. THE LOAN

2.1    [Reserved].

2.2    Term Loan.

(a)    Advances. Subject to the terms and conditions of this Agreement, Lender will severally (and not jointly) make in an amount not to exceed its respective Term Commitment, and Borrower agrees to draw, a Term Loan Advance of $12,500,000 on the Closing Date (the “Tranche 1 Advance”). Subject to the terms and conditions of this Agreement, beginning on the date Borrower achieves Performance Milestone 1 and continuing through September 30, 2017, Borrower may request and Lender shall make an additional Term Loan Advance in a principal amount of $2,500,000 (the “Tranche 2 Advance”). Subject to the terms and conditions of this Agreement, beginning on the date Borrower achieves Performance Milestone 3 and continuing through June 30, 2018, Borrower may request and Lender shall make additional Term Loan Advances in an aggregate principal amount of $5,000,000 (the “Tranche 3 Advance”). Subject to the terms and conditions of this Agreement, and conditioned on approval by Lenders’ investment committee in its sole and unfettered discretion, beginning on the date Borrower achieves Performance Milestone 4 and continuing through September 30, 2018, Borrower may request additional Term Loan Advances in an aggregate principal amount up to $20,000,000, in minimum increments of $5,000,000 (each, a “Tranche 4 Advance”). The aggregate outstanding Term Loan Advances may be up to the Maximum Term Loan Amount.

(b)    Advance Request. To obtain a Term Loan Advance, Borrower shall complete, sign and deliver an Advance Request (at least three (3) Business Days before the Advance Date other than the Closing Date, which shall be at least one (1) Business Day) to Agent. Lender shall fund the Term Loan Advance in the manner requested by the Advance Request provided that each of the conditions precedent to such Term Loan Advance is satisfied or waived by Agent in writing as of the requested Advance Date.

(c)    Interest. The principal balance of each Term Loan Advance shall bear interest thereon from such Advance Date at the Term Loan Interest Rate based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed. The Term Loan Interest Rate will float and change on the day the Prime Rate changes from time to time.

(d)    Payment. Borrower will pay interest in arrears on each Term Loan Advance on the first Business Day of each month, beginning the month after the Advance Date. Borrower shall repay the aggregate Term Loan principal balance that is outstanding on the day immediately preceding the Amortization Date, in equal monthly installments of principal and interest (mortgage style) beginning on the Amortization Date and continuing on the first Business Day of each month thereafter until the Secured

 

18


Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) are repaid. The entire Term Loan principal balance and all accrued but unpaid interest hereunder, shall be due and payable on Term Loan Maturity Date. Borrower shall make all payments under this Agreement without setoff, recoupment or deduction and regardless of any counterclaim or defense. Lender will initiate debit entries to the Borrower’s account as authorized on the ACH Authorization (i) on each payment date of all periodic obligations payable to Lender under each Term Advance and (ii) out-of-pocket legal fees and costs incurred by Agent or Lender in connection with Section 11.11 of this Agreement.

2.3    Maximum Interest. Notwithstanding any provision in this Agreement or any other Loan Document, it is the parties’ intent not to contract for, charge or receive interest at a rate that is greater than the maximum rate permissible by law that a court of competent jurisdiction shall deem applicable hereto (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans) (the “Maximum Rate”). If a court of competent jurisdiction shall finally determine that Borrower has actually paid to Lender an amount of interest in excess of the amount that would have been payable if all of the Secured Obligations had at all times borne interest at the Maximum Rate, then such excess interest actually paid by Borrower shall be applied as follows: first, to the payment of the Secured Obligations consisting of the outstanding principal amount of the Term Loan Advances; second, after all principal is repaid, to the payment of Lender’s accrued interest, costs, expenses, professional fees and any other Secured Obligations; and third, after all Secured Obligations are repaid, the excess (if any) shall be refunded to Borrower.

2.4    Default Interest. In the event any payment is not paid on the scheduled payment date (other than due to ACH failure), an amount equal to four percent (4%) of the past due amount shall be payable on demand. In addition, upon the occurrence and during the continuation of an Event of Default hereunder, all Secured Obligations, including principal, interest, compounded interest, and professional fees, shall bear interest at a rate per annum equal to the rate set forth in Section 2.2(c) plus four percent (4%) per annum. In the event any interest is not paid when due hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded at the rate set forth in Section 2.2(c) or Section 2.4, as applicable.

2.5    Prepayment. At its option upon at least five (5) Business Days prior notice to Agent, Borrower may prepay all, but not less than all, of the outstanding Advances by paying the entire principal balance, all accrued and unpaid interest thereon, together with a prepayment charge equal to the following percentage of the Advance amount being prepaid: if such Advance amounts are prepaid in any of the first twelve (12) months following the Closing Date, 3.0%; after twelve (12) months but prior to twenty four (24) months, 2.0%; and thereafter, 0.5% (each, a “Prepayment Charge”). Borrower agrees that the Prepayment Charge is a reasonable calculation of Lender’s lost profits in view of the difficulties and impracticality of determining actual damages resulting from an early repayment of the Advances. Borrower shall prepay the outstanding amount of all principal and accrued interest through the prepayment date and the Prepayment Charge upon the occurrence of a

 

19


Change in Control. Notwithstanding the foregoing, Agent and Lender agree to waive the Prepayment Charge if Agent, Lender or any of their respective Affiliates (in its sole and absolute discretion) agree in writing to refinance the Advances on or prior to the Maturity Date.

2.6    End of Term Charge. On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge of the greater of (a) $750,000 and (b) five percent (5%) of the aggregate principal amount of all Advances. Notwithstanding the required payment date of such charge, it shall be deemed earned by Lender as of the Closing Date.

2.7    Notes. If so requested by Lender by written notice to Borrower, then Borrower shall execute and deliver to Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee of Lender pursuant to Section 11.13) (promptly after the Borrower’s receipt of such notice) a Note or Notes to evidence Lender’s Loans.

2.8    Pro Rata Treatment. Each payment (including prepayment) on account of any fee and any reduction of the Term Loans shall be made pro rata according to the Term Commitments of the relevant Lender.

2.9    Taxes.

(a)    Defined Terms. For purposes of this Section 2.9, the term “applicable law” includes FATCA.

(b)    Payments Free of Taxes. Any and all payments by or on account of any obligation of Borrower under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by Borrower shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section) the Lender or Agent, as applicable, receives an amount equal to the sum it would have received had no such deduction or withholding been made.

(c)     Payment of Other Taxes by Borrower. Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of Agent timely reimburse it for the payment of, any Other Taxes.

 

20


(d)    Indemnification by Borrower. Borrower shall indemnify the Lender or Agent, as applicable, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section) payable or paid by such Lender or Agent, as applicable, or required to be withheld or deducted from a payment to such Lender or Agent, as applicable, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to Borrower by a Lender (with a copy to Agent), or by Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

(e)    Indemnification by the Lenders. Each Lender shall severally indemnify Agent, within 10 days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that Borrower has not already indemnified Agent for such Indemnified Taxes and without limiting the obligation of Borrower to do so) and (ii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by Agent shall be conclusive absent manifest error. Each Lender hereby authorizes Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by Agent to the Lender from any other source against any amount due to Agent under this paragraph (e).

(f)    Evidence of Payments. As soon as practicable after any payment of Taxes by Borrower to a Governmental Authority pursuant to this Section 2.9, Borrower shall deliver to Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to Agent.

(g)    Status of Lenders.

(i)    Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to Borrower and Agent, at the time or times reasonably requested by Borrower or Agent, such properly completed and executed documentation reasonably requested by Borrower or Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by Borrower or Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by Borrower or Agent as will enable Borrower or Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such

 

21


documentation set forth in Section 2.9(g)(ii)(1), (ii)(2) and (ii)(4) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.

(ii)    Without limiting the generality of the foregoing, in the event that Borrower is a U.S. Borrower,

 

  1.

any Lender that is a U.S. Person shall deliver to Borrower and Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;

 

  2.

any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and Agent (in such number of copies as shall be requested by Borrower or Agent) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Agent), whichever of the following is applicable:

 

  I.

in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed copies of IRS Form W-8BEN or W- 8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN or W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;

 

  II.

executed copies of IRS Form W-8ECI;

 

  III.

in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit I-1 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) executed copies of IRS Form W-8BEN or W-8BEN-E; or

 

22


  IV.

to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN or W-8BEN-E, a U.S. Tax Compliance Certificate substantially in the form of Exhibit I-2 or Exhibit I-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit I-4 on behalf of each such direct and indirect partner;

 

  3.

any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Agent), executed copies of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit Borrower or Agent to determine the withholding or deduction required to be made; and

 

  4.

if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to Borrower and Agent at the time or times prescribed by law and at such time or times reasonably requested by Borrower or Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by Borrower or Agent as may be necessary for Borrower and Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause 4, “FATCA” shall include any amendments made to FATCA after the date of this Agreement.

 

23


  Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify Borrower and Agent in writing of its legal inability to do so.

(h)    Treatment of Certain Refunds. If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 2.9 (including by the payment of additional amounts pursuant to this Section 2.9), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (h) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (h), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

(i)    Survival. Each party’s obligations under this Section 2.9 shall survive the resignation or replacement of Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Term Commitment and the repayment, satisfaction or discharge of all obligations under any Loan Document.

SECTION 3. SECURITY INTEREST

3.1    As security for the prompt and complete payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Borrower grants to Agent a security interest in all of Borrower’s right, title, and interest in and to the following personal property whether now owned or hereafter acquired (collectively, the “Collateral”): (a) Receivables; (b) Equipment; (c) Fixtures; (d) General Intangibles (other than Intellectual Property); (e) Inventory; (f) Investment Property; (g) Deposit Accounts; (h) Cash; (i) Goods; and all other tangible and intangible personal property of Borrower whether now or hereafter owned or existing, or acquired by, Borrower and wherever located, and any of Borrower’s property in the possession or under the control of Agent; and, to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing.

 

24


3.2    Notwithstanding the broad grant of the security interest set forth in Section 3.1, above, the Collateral shall not include (i) Borrower’s Intellectual Property; provided , however, that the Collateral shall include all Accounts and General Intangibles that consist of rights to payment and proceeds from the sale, licensing or disposition of all or any part, or rights in, the Intellectual Property (the “Rights to Payment”) or (ii) any interest of Borrower as a lessee under an Equipment lease if Borrower is prohibited by the terms of such lease from granting a security interest in such lease or under which such an assignment or Lien would cause a default to occur under such lease; provided, however, that upon termination or cessation of such prohibition, such interest shall immediately become Collateral without any action by Borrower, Agent or Lenders. Notwithstanding the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, and effective as of the date of this Agreement, include the Intellectual Property to the extent necessary to permit perfection of Agent’s security interest in the Rights to Payment.

SECTION 4. CONDITIONS PRECEDENT TO LOAN

The obligations of Lender to make the Loan hereunder are subject to the satisfaction by Borrower of the following conditions:

4.1    Initial Advance. On or prior to the Closing Date, Borrower shall have delivered to Agent the following:

(a)    executed copies of the Loan Documents (other than the Warrant, which shall be an original), Account Control Agreements, a legal opinion of Borrower’s Cayman Islands counsel and all other documents and instruments reasonably required by Agent to effectuate the transactions contemplated hereby or to create and perfect the Liens of Agent with respect to all Collateral, in all cases in form and substance reasonably acceptable to Agent;

(b)    certified copy of resolutions of Borrower’s board of directors evidencing approval of (i) the Loan and other transactions evidenced by the Loan Documents; and (ii) the Warrant and transactions evidenced thereby;

(c)    certified copies of the Certificate of Incorporation and the Bylaws, as amended through the Closing Date, of Borrower;

(d)    a draft of the updated Register of Mortgages and Charges of Stealth Cayman including the details of the security being granted under the Loan Documents to the satisfaction of Agent;

(e)    a certificate of good standing for Borrower from its state of incorporation and similar certificates from all other jurisdictions in which it does business and where the failure to be qualified could have a Material Adverse Effect;

 

25


(f)    receipt by Borrower after May 31, 2017 and prior to the Closing Date of at least Ten Million Dollars ($10,000,000) of Net Financing Proceeds;

(g)    payment of the Due Diligence Fee and the Initial Facility Charge and reimbursement of Agent’s and Lender’s current expenses reimbursable pursuant to this Agreement, which amounts may be deducted (if not already paid by Borrower) from the initial Advance;

(h)    copies of each insurance policy required hereunder; and

(i)    such other documents as Agent may reasonably request.

4.2    All Advances. On each Advance Date:

(a)    Agent shall have received (i) an Advance Request for the relevant Advance as required by Section 2.2(b), as applicable, each duly executed by an Authorized Signatory, and (ii) any other documents Agent may reasonably request to demonstrate satisfaction of any applicable performance milestone.

(b)    With respect to each Tranche 4 Advance, Agent shall have received payment of the Tranche 4 Facility Charge for such Advance.

(c)    The representations and warranties set forth in this Agreement shall be true and correct in all material respects on and as of the Advance Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

(d)    Immediately after and before such Advance no default or Event of Default shall have occurred and be continuing.

(e)    Each Advance Request shall be deemed to constitute a representation and warranty by Borrower on the relevant Advance Date as to the matters specified in paragraphs (c) and (d) of this Section 4.2 and as to the matters set forth in the Advance Request.

4.3    No Default. As of the Closing Date and each Advance Date, as applicable, (i) no fact or condition exists that could (or could, with the passage of time, the giving of notice, or both) constitute an Event of Default and (ii) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER

Borrower represents and warrants that:

5.1    Corporate Status. Stealth Delaware is a corporation duly organized, legally existing and in good standing under the laws of the State of Delaware, Stealth Cayman is an exempted company duly incorporated, legally existing and in good standing under the

 

26


laws of the Cayman Islands and each Borrower is duly qualified as a foreign corporation in all jurisdictions in which the nature of its business or location of its properties require such qualifications and where the failure to be qualified could reasonably be expected to have a Material Adverse Effect. Borrower’s present name, former names (if any), owned and leased locations, place of formation, tax identification number, organizational identification number and other information are correctly set forth in Exhibit C, as may be updated by Borrower in a written notice (including any Compliance Certificate) provided to Agent after the Closing Date.

5.2    Collateral. Borrower owns the Collateral and owns or has the right to use the Intellectual Property, free of all Liens, except for Permitted Liens. Borrower has the power and authority to grant to Agent a Lien in the Collateral as security for the Secured Obligations.

5.3    Consents. Borrower’s execution, delivery and performance of this Agreement and all other Loan Documents, and Borrower’s execution of the Warrant, (i) have been duly authorized by all necessary corporate action of Borrower, (ii) will not result in the creation or imposition of any Lien upon the Collateral, other than Permitted Liens and the Liens created by this Agreement and the other Loan Documents, (iii) do not violate any provisions of Borrower’s Certificate or Articles of Incorporation (as applicable), bylaws, or any material law, regulation, order, injunction, judgment, decree or writ to which Borrower is subject and (iv) except as described on Schedule 5.3, do not violate any contract or agreement or require the consent or approval of any other Person which has not already been obtained. The individual or individuals executing the Loan Documents and the Warrant on behalf of Borrower are duly authorized to do so.

5.4    Material Adverse Effect. No event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing.

5.5    Actions Before Governmental Authorities. There are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, that is reasonably expected to result in a Material Adverse Effect.

5.6    Laws. Neither Borrower nor any of its Subsidiaries is in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default is reasonably expected to result in a Material Adverse Effect. Borrower is not in default in any manner under any provision of any agreement or instrument evidencing Indebtedness, or any other agreement to which it is a party or by which it is bound, which default would constitute an Event of Default or reasonably be expected to have a Material Adverse Effect.

Neither Borrower nor any of its Subsidiaries is an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Neither Borrower nor any of its Subsidiaries is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower and each of its Subsidiaries has

 

27


complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. Neither Borrower’s nor any of its Subsidiaries’ properties or assets has been used by Borrower or such Subsidiary or, to Borrower’s Knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than in compliance with applicable laws. Borrower and each of its Subsidiaries has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted except where the failure to do so would not reasonably be expected to have a Material Adverse Effect.

None of Borrower or any of its Subsidiaries is (i) in violation of any Anti Terrorism Law, (ii) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding or attempts to violate, any of the prohibitions set forth in any Anti Terrorism Law, or (iii) is a Blocked Person. None of Borrower or any of its Subsidiaries, (x) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (y) deals in, or otherwise engages in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti Terrorism Law. None of the funds to be provided under this Agreement will be used, directly or indirectly, (a) for any activities in violation of any applicable anti- money laundering, economic sanctions and anti-bribery laws and regulations laws and regulations or (b) for any payment to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

5.7    Information Correct and Current. No information, report, Advance Request, financial statement, exhibit or schedule furnished, by or on behalf of Borrower to Agent in connection with any Loan Document or included therein or delivered pursuant thereto contained, or, when taken together with all such other reports, statements or other documents or writings, contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not materially misleading at the time such statement was made or deemed made (it being recognized by Agent and the Lenders that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results). Additionally, any and all financial or business projections provided by Borrower to Agent, are at the time delivered (i) provided in good faith and based on the most current data and information available to Borrower, and (ii) the most current of such projections provided to Borrower’s board of directors (it being understood that such projections are subject to significant uncertainties and contingencies, many of which are beyond the control of Borrower, that no assurance is given that any particular projections will be realized, that actual results may differ).

 

28


5.8    Tax Matters. Except as described on Schedule 5.8 and except those being contested in good faith with adequate reserves under GAAP, (a) Borrower has filed all material federal tax returns, state income tax returns and other material state and local tax returns that it is required to file, (b) Borrower has duly paid or fully reserved for all such taxes or installments thereof (including any interest or penalties) as and when due, which have or may become due pursuant to such returns, and (c) Borrower has paid or fully reserved for any tax assessment received by Borrower for the three (3) years preceding the Closing Date, if any (including any taxes being contested in good faith and by appropriate proceedings).

5.9    Intellectual Property Claims. Except for Permitted Liens, Borrower is the sole owner of, or otherwise has the right to use, the Intellectual Property owned by Borrower and material to Borrower’s business. Except as described on Schedule 5.9, (i) to Borrower’s knowledge, each of the material Copyrights, Trademarks and Patents is valid and enforceable, (ii) no material part of the Intellectual Property of Borrower has been judged by a decision of a court of competent jurisdiction, invalid or unenforceable, in whole or in part, and (iii) no claim has been made to Borrower in writing that any material Intellectual Property of Borrower violates the rights of any third party except to the extent such claim would reasonably be expected to have a Material Adverse Effect. Exhibit D is a true, correct and complete list of each of Borrower’s Patents, registered Trademarks, registered Copyrights, and material agreements under which Borrower licenses Intellectual Property from third parties (other than shrink-wrap software licenses), together with application or registration numbers, as applicable, owned by Borrower or any Subsidiary, in each case as of the Closing Date. Borrower is not in breach of, nor has Borrower failed to perform any obligations under, any of the foregoing contracts, licenses or agreements and, to Borrower’s knowledge, no third party to any such contract, license or agreement is in breach thereof or has failed to perform any obligations thereunder, in each case, except where such breach or failure to perform would not reasonably be expected to have a Material Adverse Effect.

5.10    Intellectual Property. Except as described on Schedule 5.10, Borrower has or in the case of any proposed business, will have, all material rights with respect to Intellectual Property necessary or material in the operation or conduct of Borrower’s business as currently conducted and proposed to be conducted by Borrower. Without limiting the generality of the foregoing, and in the case of Licenses, except for restrictions that are unenforceable under Division 9 of the UCC and except as provided in Schedule 5.10, Borrower has the right, to the extent required to operate Borrower’s business, to freely transfer, license or assign Borrower’s owned Intellectual Property without condition, restriction or payment of any kind (other than license payments in the ordinary course of business) to any third party, and to the extent applicable, Borrower owns or has the right to use, pursuant to valid licenses, all material software development tools, library functions, compilers and all other third-party software and other items that are used in the design, development, promotion, sale, license, manufacture, import, export, use or distribution of

 

29


Borrower Products. For the avoidance of doubt, shrink-wrap licenses, click on license agreements, equipment leases where Borrower is the licensee or lessee, open source code and other licenses available to the public without customization shall not be considered a material License.

5.11    Borrower Products. Except as described on Schedule 5.11, no material Intellectual Property owned by Borrower or Borrower Product has been or is subject to any actual or, to the knowledge of Borrower, threatened (in writing) litigation, inter-party proceeding (including any proceeding in the United States Patent and Trademark Office or any corresponding foreign office or agency) or outstanding decree, order, judgment, settlement agreement or stipulation that restricts in any material respect Borrower’s use, transfer or licensing thereof or that may affect the validity, use or enforceability thereof. To Borrower’s knowledge, there is no decree, order, judgment, agreement, stipulation, arbitral award or other provision entered into in connection with any litigation or proceeding that obligates Borrower to grant licenses or ownership interest in any future material Intellectual Property related to the operation or conduct of the business of Borrower or Borrower Products. Borrower has not received any written notice or claim, or, to the knowledge of Borrower, oral notice or claim, challenging Borrower’s ownership in or right to use any material Intellectual Property (or written notice of any claim challenging or questioning the ownership in any licensed Intellectual Property of the owner thereof) or suggesting that any third party has any claim of legal or beneficial ownership with respect thereto. To Borrower’s knowledge, neither Borrower’s use of its material Intellectual Property nor the production and sale of Borrower Products infringes in any material respect the Intellectual Property or other rights of others.

5.12    Financial Accounts. Exhibit E, as may be updated by the Borrower in a written notice provided to Agent after the Closing Date, is a true, correct and complete list of (a) all banks and other financial institutions at which Borrower or any Subsidiary maintains Deposit Accounts and (b) all institutions at which Borrower or any Subsidiary maintains an account holding Investment Property, and such exhibit correctly identifies in all non-ministerial respects, the name, address and telephone number of each bank or other institution, the name in which the account is held, a description of the purpose of the account, and the complete account number therefor.

5.13    Employee Loans. Except as permitted in clause (viii) of Permitted Investments, Borrower has no outstanding loans to any employee, officer or director of the Borrower nor has Borrower guaranteed the payment of any loan made to an employee, officer or director of the Borrower by a third party.

5.14    Capitalization and Subsidiaries. Borrower’s capitalization as of the Closing Date is set forth on Schedule 5.14 annexed hereto. Borrower does not own any stock, partnership interest or other securities of any Person, except for Permitted Investments. Attached as Schedule 5.14, as may be updated by Borrower in a written notice provided after the Closing Date, is a true, correct and complete list of each Subsidiary.

 

30


SECTION 6. INSURANCE; INDEMNIFICATION

6.1    Coverage. Borrower shall cause to be carried and maintained commercial general liability insurance, on an occurrence form, against risks customarily insured against in Borrower’s line of business. Such risks shall include the risks of bodily injury, including death, property damage, personal injury, advertising injury, and contractual liability per the terms of the indemnification agreement found in Section 6.3. Borrower must maintain a minimum of $2,000,000 of commercial general liability insurance for each occurrence. Borrower has and agrees to maintain (a) prior to the consummation of the Company Reorganization, a minimum of $1,000,000 of directors’ and officers’ insurance for each occurrence and $1,000,000 in the aggregate and (b) on and after the consummation of the Company Reorganization, a minimum of $2,000,000 of directors’ and officers’ insurance for each occurrence and $5,000,000 in the aggregate. So long as there are any Secured Obligations outstanding, Borrower shall also cause to be carried and maintained insurance upon the Collateral, insuring against all risks of physical loss or damage howsoever caused, in an amount not less than the full replacement cost of the Collateral, provided that such insurance may be subject to standard exceptions and deductibles.

6.2    Certificates. Borrower shall deliver to Agent certificates of insurance that evidence Borrower’s compliance with its insurance obligations in Section 6.1 and the obligations contained in this Section 6.2. Borrower’s insurance certificate shall state Agent (shown as “Hercules Capital, Inc.”, as Agent”) is an additional insured for commercial general liability, a loss payee for all risk property damage insurance, subject to the insurer’s approval, and a loss payee and subrogation is waived against Agent for property insurance and additional insured for liability insurance for any future insurance that Borrower may acquire from such insurer. Attached to the certificates of insurance will be additional insured endorsements for liability and lender’s loss payable and waiver of subrogation against Agent endorsements for all risk property damage insurance. All certificates of insurance will provide for a minimum of thirty (30) days advance written notice to Agent of cancellation (other than cancellation for non-payment of premiums, for which ten (10) days’ advance written notice shall be sufficient) or any other change adverse to Agent’s interests. Any failure of Agent to scrutinize such insurance certificates for compliance is not a waiver of any of Agent’s rights, all of which are reserved. At Agent’s request, Borrower shall provide Agent with copies of each insurance policy, and upon entering or amending any insurance policy required hereunder, Borrower shall provide Agent with copies of such policies and shall promptly deliver to Agent updated insurance certificates with respect to such policies.

6.3    Indemnity. Borrower agrees to indemnify and hold Agent, Lender and their officers, directors, employees, agents, in-house attorneys, representatives and shareholders (each, an “Indemnified Person”) harmless from and against any and all claims, costs, expenses, damages and liabilities (including such claims, costs, expenses, damages and liabilities based on liability in tort, including strict liability in tort), including reasonable attorneys’ fees and disbursements and other costs of investigation or defense (including those incurred upon any appeal) (collectively, “Liabilities”), that may be instituted or asserted against or incurred by such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents or the administration of such credit, or in connection with or arising out of the transactions

 

31


contemplated hereunder and thereunder, or any actions or failures to act in connection therewith, or arising out of the disposition or utilization of the Collateral, excluding in all cases Liabilities to the extent resulting directly from any Indemnified Person’s gross negligence or willful misconduct. Borrower agrees to pay, and to save Agent and Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other similar taxes (excluding taxes imposed on or measured by the net income of Agent or Lender) that may be payable or determined to be payable with respect to any of the Collateral or this Agreement. In no event shall any Indemnified Person be liable on any theory of liability for any special, indirect, consequential or punitive damages (including any loss of profits, business or anticipated savings). This Section 6.3 shall survive the repayment of indebtedness under, and otherwise shall survive the expiration or other termination of, the Loan Agreement.

SECTION 7. COVENANTS OF BORROWER

Borrower agrees as follows:

7.1    Financial Reports. Borrower shall furnish to Agent the financial statements and reports listed hereinafter (the “Financial Statements”):

(a)    as soon as practicable (and in any event within 30 days) after the end of each month, unaudited interim and year-to-date financial statements as of the end of such month (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows accompanied by details (which may be provided in the accompanying Compliance Certificate) of any material contingencies (including the commencement of any material litigation by or against Borrower) or any other occurrence that could reasonably be expected to have a Material Adverse Effect, all certified by Borrower’s Chief Executive Officer or Chief Financial Officer to the effect that they have been prepared in accordance with GAAP, except (i) for the absence of footnotes, (ii) that they are subject to normal year-end adjustments, and (iii) they do not contain certain non-cash items that are customarily included in quarterly and annual financial statements;

(b)    as soon as practicable (and in any event within 45 days) after the end of each of the first three calendar quarters of each year, unaudited interim and year-to-date financial statements as of the end of such calendar quarter (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows accompanied by details (which may be provided in the accompanying Compliance Certificate) of any material contingencies (including the commencement of any material litigation by or against Borrower) or any other occurrence that could reasonably be expected to have a Material Adverse Effect, certified by Borrower’s Chief Executive Officer or Chief Financial Officer to the effect that they have been prepared in accordance with GAAP, except (i) for the absence of footnotes, (ii) that they are subject to normal year-end adjustments; as well as the most recent capitalization table for Borrower, including the weighted average exercise price of employee stock options and (iii) that they do not contain certain equity-related non-cash items that are customarily included in annual financial statements ( e.g., warrant liabilities and stock-based compensation);

 

32


(c)    as soon as practicable (and in any event (i) prior to the Company Reorganization, within one hundred eighty (180) days and (ii) on and after the Company Reorganization, ninety (90) days) after the end of each fiscal year unqualified audited financial statements as of the end of such year (prepared on a consolidated and consolidating basis, if applicable), including balance sheet and related statements of income and cash flows, and setting forth in comparative form the corresponding figures for the preceding fiscal year, certified by a firm of independent certified public accountants selected by Borrower and reasonably acceptable to Agent, accompanied by any audit report from such accountants; provided that Borrower’s unqualified opinion on financial statements may contain a limitation as to going concern;

(d)    as soon as practicable (and in any event within 30 days) after the end of each month, a Compliance Certificate in the form of Exhibit F;

(e)    as soon as practicable (and in any event within 30 days) after the end of each month, a report showing agings of accounts receivable and accounts payable;

(f)    promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports that Borrower has made available generally to holders of its preferred stock and copies of any regular, periodic and special reports or registration statements that Borrower files with the SEC or any Governmental Authority that may be substituted therefor, or any national securities exchange;

(g)    financial and business projections promptly following their approval by Borrower’s board of directors, and in any event no later than 60 days after the end of each fiscal year, as well as budgets, operating plans and other financial information reasonably requested by Agent;

(h)    promptly following each meeting of the Board, copies of all presentation materials that Borrower provides to its directors in connection with meetings of the Board shall be made available for inspection by Agent at Borrower’s premises at reasonable times and upon reasonable notice, provided that all in all cases Borrower may exclude any information or materials related to executive compensation, confidential information, any attorney-client privileged information and any information that would raise a conflict of interest with Agent or Lenders and

(i)    prompt notice if Borrower or any Subsidiary has knowledge that Borrower, or any Subsidiary of Borrower, is listed on the OFAC Lists or (a) is convicted on, (b) pleads nolo contendere to, or (c) is indicted on charges involving money laundering.

Borrower shall not make any change in its (a) accounting policies or reporting practices, except as required or permitted by GAAP or (b) fiscal years or fiscal quarters. The fiscal year of Borrower shall end on December 31.

 

33


The executed Compliance Certificate may be sent via email to Agent at legal@herculestech.com and kkosofsky@htgc.com. All Financial Statements required to be delivered pursuant to clauses (a), (b) and (c) shall be sent via e-mail to financialstatements@herculestech.com with a copy to legal@herculestech.com and kkosofsky@htgc.com; provided, that if e-mail is not available or sending such Financial Statements via e-mail is not possible, they shall be faxed to Agent at: (650) 473-9194, attention Chief Credit Officer. Notwithstanding the foregoing, after the Company Reorganization, documents required to be delivered under Sections 7.1(a), (b), (c) or (f) (to the extent any such documents are included in materials otherwise filed with the SEC or posted on the Borrower’s website) shall be deemed to have been delivered on the date on which such information is so filed or posted.

7.2    Management Rights. Borrower shall permit any representative that Agent or Lender authorizes, including its attorneys and accountants, to inspect the Collateral and examine and make copies and abstracts of the books of account and records of Borrower at reasonable times and upon reasonable notice during normal business hours (but in any event no more than once in any 12 month period unless an Event of Default has occurred and is continuing). In addition, any such representative shall have the right to meet with management and officers of Borrower to discuss such books of account and records. In addition, Agent or Lender shall be entitled at reasonable times and intervals to consult with and advise the management and officers of Borrower concerning significant business issues affecting Borrower. Such consultations shall not unreasonably interfere with Borrower’s business operations. The parties intend that the rights granted Agent and Lender shall constitute “management rights” within the meaning of 29 C.F.R. Section 2510.3- 101(d)(3)(ii), but that any advice, recommendations or participation by Agent or Lender with respect to any business issues shall not be deemed to give Agent or Lender, nor be deemed an exercise by Agent or Lender of, control over Borrower’s management or policies.

7.3    Further Assurances. Borrower shall from time to time execute, deliver and file, alone or with Agent, any financing statements, security agreements, collateral assignments, notices, control agreements, or other documents to perfect or give to Agent a first priority Lien on the Collateral (subject to Permitted Liens. Borrower shall from time to time procure any instruments or documents as may be reasonably requested by Agent, and take all further action that may be necessary, or that Agent may reasonably request, to perfect and protect the Liens granted hereby and thereby. In addition, and for such purposes only, Borrower hereby authorizes Agent to execute and deliver on behalf of Borrower and to file such financing statements, collateral assignments, notices, control agreements, security agreements and other documents without the signature of Borrower either in Agent’s name or in the name of Agent as agent and attorney-in-fact for Borrower. Borrower shall in its reasonable business judgment protect and defend Borrower’s title to the Collateral and Agent’s Lien thereon against all Persons claiming any interest adverse to Borrower or Agent other than Permitted Liens.

7.4    Indebtedness. Borrower shall not create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose

 

34


on Borrower an obligation to prepay any Indebtedness, except for (a) the conversion of Indebtedness into equity securities and the payment of cash in lieu of fractional shares in connection with such conversion, (b) purchase money Indebtedness, (c) prepayment by any Subsidiary of (i) inter-company Indebtedness owed by such Subsidiary to any Borrower, or (ii) if such Subsidiary is not a Borrower, intercompany Indebtedness owed by such Subsidiary to another Subsidiary that is not a Borrower, (d) obligations providing for the payment in full of the Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement), or (e) as otherwise permitted hereunder or approved in writing by Agent.

7.5    Collateral. Borrower shall at all times keep the Collateral, the Intellectual Property and all its other property and assets free and clear from any Liens whatsoever (except for Permitted Liens), and shall give Agent prompt written notice when Borrower knows of any legal process affecting such, or any Liens thereon, provided however, that the Collateral and such other property and assets may be subject to Permitted Liens except that there shall be no Liens whatsoever on Intellectual Property. Borrower shall not agree with any Person other than Agent or Lender not to encumber its property, other than Permitted Liens. Borrower shall not enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of any Borrower to create, incur, assume or suffer to exist any Lien upon any of its Intellectual Property, whether now owned or hereafter acquired, to secure its obligations under the Loan Documents to which it is a party other than (a) this Agreement and the other Loan Documents, (b) any agreements governing any purchase money Liens or capital lease obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby), (c) in connection with Permitted Liens and Permitted Transfers, and (d) customary restrictions on the assignment of leases, licenses and other agreements. Borrower shall cause its Subsidiaries to protect and defend such Subsidiary’s title to its assets from and against all Persons claiming any interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries at all times to keep such Subsidiary’s property and assets free and clear from any Liens whatsoever (except for Permitted Liens), and shall give Agent prompt written notice of any legal process affecting such Subsidiary’s assets.

7.6    Investments. Borrower shall not directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments.

7.7    Distributions. Borrower shall not, and shall not allow any Subsidiary to, (a) repurchase or redeem any class of stock or other Equity Interest of the Borrower or such Subsidiary other than pursuant to employee, director or consultant repurchase plans or other similar agreements, in an aggregate amount not to exceed $250,000 per fiscal year, (b) declare or pay any cash dividend or make a cash distribution on any class of stock or other Equity Interest of the Borrower or such Subsidiary, except that a Subsidiary or a Borrower may pay dividends or make distributions to Borrower.

7.8    Transfers. Except for Permitted Transfers, Borrower shall not, and shall not allow any Subsidiary to, voluntarily or involuntarily transfer, sell, lease, license, lend or in any other manner convey any equitable, beneficial or legal interest in any material portion of its assets.

 

35


7.9    Mergers or Acquisitions. Borrower shall not merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of (a) a Subsidiary which is not a Borrower into another Subsidiary or into Borrower, (b) a Borrower into another Borrower or (c) in connection with the Company Reorganization), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, other than Permitted Investments. Borrower may dissolve any Subsidiary so long as such assets are promptly distributed or transferred to the Subsidiary’s shareholder.

7.10    Taxes. Borrower and its Subsidiaries shall pay when due all material taxes, fees or other charges of any nature whatsoever (together with any related interest or penalties) now or hereafter imposed or assessed against Borrower, Agent, or Lender related to the Loan or this Agreement (other than taxes imposed on or measured by the net income of Agent and/or Lender and any other Excluded Taxes) or the Collateral or upon Borrower’s ownership, possession, use, operation or disposition thereof or upon Borrower’s rents, receipts or earnings arising therefrom. Borrower shall file on or before the due date therefor all personal property tax returns (or extensions) in respect of the Collateral. Notwithstanding the foregoing, Borrower may contest, in good faith and by appropriate proceedings, taxes for which Borrower maintains adequate reserves therefor in accordance with GAAP.

7.11    Corporate Changes. Except in connection with the Company Reorganization, neither Borrower nor any Subsidiary shall change its corporate name, legal form or jurisdiction of formation without twenty (20) days’ prior written notice to Agent. The Borrower shall not suffer a Change in Control. Neither Borrower nor any Subsidiary shall relocate its chief executive office or its principal place of business unless: (i) it has provided prior written notice to Agent; and (ii) such relocation shall be within the continental United States of America. Neither Borrower nor any Subsidiary shall relocate any item of Collateral (other than (v) relocations of Borrower Products (including compounds and materials used to manufacture biopharmaceuticals or which are used for nonclinical or clinical studies, testing or trials) to Subsidiaries who have entered into a Joinder, contract manufacturing organizations, distribution service firms, contract research organizations, clinical sites, clinical investigators and other institutions necessary for the conduct of clinical studies, in each case, in the ordinary course of business, (w) Permitted Transfers (x) Inventory in the ordinary course of business, (y) relocations of Equipment having an aggregate value of up to $250,000 in any fiscal year, and (z) relocations of Collateral from a location described on Exhibit C to another location described on Exhibit C) unless (i) it has provided prompt written notice to Agent, (ii) such relocation is within the continental United States of America and, (iii) if such relocation is to a third party bailee and the Collateral has a value in excess of $250,000, it has delivered a bailee agreement in form and substance reasonably acceptable to Agent.

 

36


7.12    Deposit Accounts. Neither Borrower nor any Subsidiary (other than the MSC) shall maintain any Deposit Accounts, or accounts holding Investment Property, except with respect to which Agent has an Account Control Agreement. The provisions of the previous sentence shall not apply to (i) Borrower’s account number XXXX6289 held at Standard Chartered Bank (HK) Ltd; provided that the amount deposited therein shall not exceed (a) prior to July 30, 2017, $2,400,000 and (b) on and after July 30, 2017, $250,000, and (ii) until July 30, 2017, Borrower’s account number XXXXXX1858 held at Citizens Bank, National Association; provided that the amount deposited therein shall not exceed (a) prior to July 7, 2017, $3,100,000 and (b) from July 7, 2017 through and including July 30, 2017, $200,000.

7.13    Borrower shall notify Agent of each Subsidiary formed subsequent to the Closing Date and, within 15 days of formation, shall cause any such Subsidiary (other than the MSC) to execute and deliver to Agent a Joinder Agreement.

7.14    Massachusetts Securities Corporation. Borrower may make Investments in one Subsidiary qualifying as a “security corporation” under Massachusetts General Laws Ch. 63, Section 38B(a), as amended, supplemented and/or modified (a “MSC”) or permit such MSC to hold any Cash or other assets, as long as Borrower maintain Unrestricted Cash in an amount greater than or equal to 115% of the outstanding Secured Obligations plus the amount of Borrower’s accounts payable under GAAP not paid after the 90th day following the invoice date for such accounts payable (such amount, the “Minimum MSC Cash Amount”).

7.15    Notification of Event of Default. Borrower shall notify Agent immediately of the occurrence of any Event of Default.

7.16    Cornell License. Borrower shall not materially amend or terminate the Cornell License or permit the Cornell License to be terminated.

7.17    Use of Proceeds. Borrower agrees that the proceeds of the Loans shall be used solely to pay related fees and expenses in connection with this Agreement and for working capital and general corporate purposes. The proceeds of the Loans Credit will not be used in violation of Anti-Corruption Laws or applicable Sanctions.

7.18    Joinder/Security in Connection with Company Reorganization. Borrower, including any successor in interest of Borrower after the Company Reorganization, shall execute the Pledge Agreement, amend Section 11.19(a) as may be necessary and take all other steps reasonably requested by Agent so that immediately upon the consummation of such Company Reorganization, Agent shall have a perfected first priority security interest in all assets of the Borrower and its Subsidiaries as required under the Loan Documents.

7.19    [Reserved.]

7.20    Neither Borrower nor any of its Subsidiaries shall, nor shall Borrower or any of its Subsidiaries permit any controlled Affiliates, directly or indirectly, knowingly enter into any documents, instruments, agreements or contracts with any Person listed on the

 

37


OFAC Lists. Neither Borrower nor any of its Subsidiaries shall, nor shall Borrower or any of its Subsidiaries, permit any controlled Affiliates, directly or indirectly, (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 or any similar executive order or other Anti-Terrorism Law, or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order No. 13224 or other Anti-Terrorism Law.

 On and after July 30, 2017, Borrower shall implement and maintain in effect policies and procedures designed to ensure compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions. Borrower, its Subsidiaries and their respective officers and employees and to the knowledge of Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects.

 None of Borrower, any of its Subsidiaries or any of their respective directors, officers or employees, or to the knowledge of Borrower, any agent for Borrower or its Subsidiaries that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Loan, use of proceeds or other transaction contemplated by this Agreement will violate Anti-Corruption Laws or applicable Sanctions.

7.21    Minimum Cash. At all times prior to achievement of the earliest to occur of Performance Milestone 1 and Performance Milestone 2, Borrower shall maintain Unrestricted Cash in an amount greater than or equal to Six Million Dollars ($6,000,000) plus the amount of Borrower’s accounts payable under GAAP not paid after the 90th day following the invoice date for such accounts payable. Borrower shall provide Agent evidence of compliance with the financial covenants under this Section 7.21 in each Compliance Certificate to be executed by an Authorized Signatory of the Borrower and upon request in form and substance reasonably acceptable to Agent and supporting documentation reasonably requested by Agent.

7.22    Post-Closing Obligations. Notwithstanding any provision herein or in any other Loan Document to the contrary, to the extent not actually delivered on or prior to the Closing Date, Borrower shall:

(a)    deliver to Agent on or before July 30, 2017, each Process Letters;

(b)    deliver to Agent on or before July 30, 2017, appropriate evidence showing closure of Borrower’s account number XXXXXX1858 held at Citizens Bank, National Association;

 

38


(c)    use commercially reasonable efforts to deliver to Agent on or before August 29, 2017, a landlord waiver in form and substance satisfactory to Agent for 275 Grove Street, Suite 3-107, Newton, Middlesex County, MA 02466;

(d)    use commercially reasonable efforts to deliver to Agent on or before August 29, 2017, a bailee waiver in form and substance satisfactory to Agent for Virginia Polytechnic Institute and State University, 1051 Integrated Life Science Building, 1981 Kraft Drive, Blacksburg, VA 24060;

(e)    deliver to the Agent on or before July 6, 2017, certificates of insurance in favor of Agent that evidence Borrower’s compliance with its insurance obligations as described in Sections 6.1 and 6.2; and

(f)    deliver to the Agent on or before August 7, 2017, appropriate evidence showing loss payable, waiver of subrogation and/or additional insured clauses or endorsements in favor of Agent as described in Section 6.2.

SECTION 8. RIGHT TO INVEST

8.1    Lender or its assignee or nominee shall have the right, in its discretion, to participate in the next Subsequent Financing in an amount no less than $250,000 and up to $1,000,000 on the same terms, conditions and pricing afforded to other investors purchasing securities for cash in any such Subsequent Financing. For any purchase by Lender or its assignee or nominee, the purchasing entity shall be an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended, and such purchasing entity shall execute the definitive purchase agreement and other agreements executed by such other investors in connection with such Subsequent Financing.

In addition, if Borrower or any direct or indirect parent entity of Borrower undertakes an Initial Public Offering, Borrower will use its commercially reasonable efforts to cause the managing underwriter(s) of the Initial Public Offering to designate a number of shares equal to $1,000,000 of the common stock to be offered in the Initial Public Offering for sale under a “directed shares program” (such shares, the “Directed Shares”) and shall instruct such underwriter(s) to allocate the Directed Shares to be offered for sale, and to the extent such offer is accepted, sold to Lender and/or its designated affiliates. Lender acknowledges and agrees that (i) despite Borrower’s use of its commercially reasonable efforts, the underwriter(s) may determine their sole discretion that it is not advisable to designate all such shares as Directed Shares in the Initial Public Offering, in which case the number of Directed Shares may be reduced or no Directed Shares may be designated, as applicable; and (ii) notwithstanding the terms of this Agreement, the sale of any Directed Shares to any person pursuant hereto will only be made in compliance with all applicable FINRA Rules and federal, state and local laws, rules and regulations.

This Section 8.1, and all rights and obligations hereunder, shall survive the repayment of indebtedness under, and otherwise shall survive the expiration or other termination of, the Loan Agreement and shall terminate on the 10th anniversary of this Agreement.

 

39


SECTION 9. EVENTS OF DEFAULT

The occurrence of any one or more of the following events shall be an Event of Default:

9.1    Payments. Borrower fails to pay any amount due under this Agreement or any of the other Loan Documents on the due date; provided, however, that an Event of Default shall not occur on account of a failure to pay due solely to an administrative or operational error of Agent or Lender or Borrower’s bank if Borrower had the funds to make the payment when due and makes the payment within three (3) Business Days following Borrower’s knowledge of such failure to pay; or

9.2    Covenants. Borrower breaches or defaults in the performance of any covenant or Secured Obligation under this Agreement, or any of the other Loan Documents, and (a) with respect to a default under any covenant under this Agreement (other than under Sections 6, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.14, 7.15, 7.16, 7.17, 7.18, 7.20, 7.21 and 7.22) or any other Loan Document, such breach or default continues for more than ten (10) Business Days after the earlier of the date on which (i) Agent or Lender has given notice of such default to Borrower and (ii) Borrower has actual knowledge of such default or (b) with respect to a default under any of Sections 6, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.14, 7.15, 7.16, 7.17, 7.18, 7.20, 7.21 and 7.22 the occurrence of such default; or

9.3    Material Adverse Effect. A circumstance has occurred that has had a Material Adverse Effect; provided that solely for purposes of this Section 9.3, the failure to achieve Performance Milestone 1, Performance Milestone 2, Performance Milestone 3, Performance Milestone 4 or Performance Milestone 5, in each case in and of itself, shall not constitute a Material Adverse Effect.; or

9.4    Representations. Any representation or warranty made by Borrower in any Loan Document or in the Warrant shall have been false or misleading in any material respect when made or when deemed made; or

9.5    Insolvency. Borrower (A) (i) shall make an assignment for the benefit of creditors; or (ii) shall be unable to pay its debts as they become due, or be unable to pay the Secured Obligations under the Loan Documents, or shall become insolvent; or (iii) shall file a voluntary petition in bankruptcy; or (iv) shall file any petition, answer, or document seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation pertinent to such circumstances; or (v) shall seek or consent to or acquiesce in the appointment of any trustee, receiver, or liquidator of Borrower or of all or any substantial part (i.e., 33-1/3% or more) of the assets or property of Borrower; or (vi) shall cease operations of its business as its business has normally been conducted for 3 consecutive Business Days, or terminate substantially all of its employees; or (vii) Borrower or its directors or majority shareholders shall take any action initiating any of the foregoing actions described in clauses (i) through (vi); or (B) either (i) forty-five (45) days shall have expired after the

 

40


commencement of an involuntary action against Borrower seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, without such action being dismissed or all orders or proceedings thereunder affecting the operations or the business of Borrower being stayed; or (ii) a stay of any such order or proceedings shall thereafter be set aside and the action setting it aside shall not be timely appealed; or (iii) Borrower shall file any answer admitting or not contesting the material allegations of a petition filed against Borrower in any such proceedings; or (iv) the court in which such proceedings are pending shall enter a decree or order granting the relief sought in any such proceedings; or (v) forty five (45) days shall have expired after the appointment, without the consent or acquiescence of Borrower, of any trustee, receiver or liquidator of Borrower or of all or any substantial part of the properties of Borrower without such appointment being vacated; or

9.6    Attachments; Judgments. Any portion of Borrower’s assets attached or seized, or a levy is filed against any such assets, or a judgment or judgments is/are entered for the payment of money (not covered by independent third party insurance as to which liability has not been rejected by such insurance carrier), individually or in the aggregate, of at least $250,000 and remains unstayed, unbonded and unsatisfied for more than ten (10) days, or Borrower is enjoined or in any way prevented by court order from conducting any material part of its business; or

9.7    Other Obligations. The occurrence of any default under any agreement or obligation of Borrower involving any Indebtedness in excess of $250,000.

SECTION 10. REMEDIES

10.1    General. Upon and during the continuance of any one or more Events of Default, (i) Agent may, and at the direction of the Required Lenders shall, accelerate and demand payment of all or any part of the Secured Obligations together with a Prepayment Charge and declare them to be immediately due and payable (provided, that upon the occurrence of an Event of Default of the type described in Section 9.5, all of the Secured Obligations shall automatically be accelerated and made due and payable, in each case without any further notice or act), (ii) Agent may, at its option, sign and file in Borrower’s name any and all collateral assignments, notices, control agreements, security agreements and other documents it deems necessary or appropriate to perfect or protect the repayment of the Secured Obligations, and in furtherance thereof, Borrower hereby grants Agent an irrevocable power of attorney coupled with an interest, and (iii) Agent may notify any of Borrower’s account debtors to make payment directly to Agent, compromise the amount of any such account on Borrower’s behalf and endorse Agent’s name without recourse on any such payment for deposit directly to Agent’s account. Agent may, and at the direction of the Required Lenders shall, exercise all rights and remedies with respect to the Collateral under the Loan Documents or otherwise available to it under the UCC and other applicable law, including the right to release, hold, sell, lease, liquidate, collect, realize upon, or otherwise dispose of all or any part of the Collateral and the right to occupy, utilize, process and commingle the Collateral. All Agent’s rights and remedies shall be cumulative and not exclusive.

 

41


10.2    Collection; Foreclosure. Upon the occurrence and during the continuance of any Event of Default, Agent may, and at the direction of the Required Lenders shall, at any time or from time to time, apply, collect, liquidate, sell in one or more sales, lease or otherwise dispose of, any or all of the Collateral, in its then condition or following any commercially reasonable preparation or processing, in such order as Agent may elect. Any such sale may be made either at public or private sale at its place of business or elsewhere. Borrower agrees that any such public or private sale may occur upon ten (10) calendar days’ prior written notice to Borrower. Agent may require Borrower to assemble the Collateral and make it available to Agent at a place designated by Agent that is reasonably convenient to Agent and Borrower. The proceeds of any sale, disposition or other realization upon all or any part of the Collateral shall be applied by Agent in the following order of priorities:

First, to Agent and Lender in an amount sufficient to pay in full Agent’s and Lender’s reasonable costs and professionals’ and advisors’ fees and expenses as described in Section 11.11;

Second, to Lender in an amount equal to the then unpaid amount of the Secured Obligations (including principal, interest, and the Default Rate interest), in such order and priority as Agent may choose in its sole discretion; and

Finally, after the full and final payment in Cash of all of the Secured Obligations (other than inchoate obligations and obligations that are stated to survive the payment of the Secured Obligations), to any creditor holding a junior Lien on the Collateral, or to Borrower or its representatives or as a court of competent jurisdiction may direct.

Agent shall be deemed to have acted reasonably in the custody, preservation and disposition of any of the Collateral if it complies with the obligations of a secured party under the UCC.

10.3    No Waiver. Agent shall be under no obligation to marshal any of the Collateral for the benefit of Borrower or any other Person, and Borrower expressly waives all rights, if any, to require Agent to marshal any Collateral.

10.4    Cumulative Remedies. The rights, powers and remedies of Agent hereunder shall be in addition to all rights, powers and remedies given by statute or rule of law and are cumulative. The exercise of any one or more of the rights, powers and remedies provided herein shall not be construed as a waiver of or election of remedies with respect to any other rights, powers and remedies of Agent.

10.5    Notices. The Agent agrees not to issue a notice of exclusive control under any Account Control Agreement unless an Event of Default has occurred and Agent has exercised any remedies under the Loan Documents.

SECTION 11. MISCELLANEOUS

11.1    Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any

 

42


provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent and duration of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

11.2    Notice. Except as otherwise provided herein, any notice, demand, request, consent, approval, declaration, service of process or other communication (including the delivery of Financial Statements) that is required, contemplated, or permitted under the Loan Documents or with respect to the subject matter hereof shall be in writing, and shall be deemed to have been validly served, given, delivered, and received upon the earlier of: (i) the day of transmission by electronic mail or hand delivery or delivery by an overnight express service or overnight mail delivery service; or (ii) the third calendar day after deposit in the United States of America mails, with proper first class postage prepaid, in each case addressed to the party to be notified as follows:

 

  (a)

If to Agent:

HERCULES CAPITAL, INC.

Legal Department

Attention: Chief Legal Officer and Kristen Kosofsky

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

email: legal@herculestech.com ; kkosofsky@htgc.com

Telephone: 650-289-3060

 

  (b)

If to Lender:

HERCULES CAPITAL, INC.

Legal Department

Attention: Chief Legal Officer and Kristen Kosofsky

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

email: legal@herculestech.com ; kkosofsky@htgc.com

Telephone: 650-289-3060

 

  (c)

If to Borrower:

Stealth BioTherapeutics Inc.

Attention: Henry Hess

275 Grove Street, Ste. 3-107

Newton, MA 02466

email: henry.hess@stealthbt.com

Telephone: 617-340-3289

or to such other address as each party may designate for itself by like notice.

11.3    Entire Agreement; Amendments.

 

43


(a)    This Agreement, the Notes (if any) and the other Loan Documents constitute the entire agreement and understanding of the parties hereto in respect of the subject matter hereof and thereof, and supersede and replace in their entirety any prior proposals, term sheets, non-disclosure or confidentiality agreements, letters, negotiations or other documents or agreements, whether written or oral, with respect to the subject matter hereof or thereof (including Agent’s revised proposal letter dated June 1, 2017, and prior versions thereof).

(b)    Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 11.3(b). The Required Lenders and Borrower party to the relevant Loan Document may, or, with the written consent of the Required Lenders, the Agent and the Borrower party to the relevant Loan Document may, from time to time, (i) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (ii) waive, on such terms and conditions as the Required Lenders or the Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (A) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest or fee payable hereunder) or extend the scheduled date of any payment thereof, without the written consent of each Lender directly affected thereby (provided that the milestones to establish the maturity date and amortization payments may be modified with the consent of the Required Lenders and the Borrower); (B) eliminate or reduce the voting rights of any Lender under this Section 11.3(b) without the written consent of such Lender; (C) reduce any percentage specified in the definition of Required Lenders, or, except as otherwise permitted under this Agreement, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or substantially all of the Collateral or release a Borrower from its obligations under the Loan Documents, in each case without the written consent of all Lenders; or (D) amend, modify or waive any provision of Section 11.17 without the written consent of the Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each Lender and shall be binding upon Borrower, the Lender, the Agent and all future holders of the Loans.

11.4    No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

11.5    No Waiver. The powers conferred upon Agent and Lender by this Agreement are solely to protect its rights hereunder and under the other Loan Documents

 

44


and its interest in the Collateral and shall not impose any duty upon Agent or Lender to exercise any such powers. No omission or delay by Agent or Lender at any time to enforce any right or remedy reserved to it, or to require performance of any of the terms, covenants or provisions hereof by Borrower at any time designated, shall be a waiver of any such right or remedy to which Agent or Lender is entitled, nor shall it in any way affect the right of Agent or Lender to enforce such provisions thereafter.

11.6    Survival. All agreements, representations and warranties contained in this Agreement and the other Loan Documents or in any document delivered pursuant hereto or thereto shall be for the benefit of Agent and Lender and shall survive the execution and delivery of this Agreement. Sections 6.3 and 8.1 shall survive the termination of this Agreement.

11.7    Successors and Assigns. The provisions of this Agreement and the other Loan Documents shall inure to the benefit of and be binding on Borrower and its permitted assigns (if any). Other than in connection with the Company Reorganization and subject to the terms of this Agreement, Borrower shall not assign its obligations under this Agreement or any of the other Loan Documents without Agent’s express prior written consent, and any such attempted assignment shall be void and of no effect. Agent and Lender may assign, transfer, or endorse its rights hereunder and under the other Loan Documents without prior notice to Borrower, and all of such rights shall inure to the benefit of Agent’s and Lender’s successors and assigns; provided, however, that Lender, acting solely for this purpose as an agent of the Borrower, shall maintain a register for the recordation of the names and addresses of the Lenders and the principal amounts owing to each Lender; provided further that upon Borrower’s request, Borrower shall have right to inspect register; provided further that as long as no Event of Default has occurred and is continuing, neither Agent nor any Lender may assign, transfer or endorse its rights hereunder or under the Loan Documents to any party that is a direct competitor of Borrower (as reasonably determined by Agent), it being acknowledged that in all cases, any transfer to an Affiliate of any Lender or Agent shall be allowed.

11.8    Governing Law. This Agreement and the other Loan Documents have been negotiated and delivered to Agent and Lender in the State of California, and shall have been accepted by Agent and Lender in the State of California. Payment to Agent and Lender by Borrower of the Secured Obligations is due in the State of California. This Agreement and the other Loan Documents (other than the Cayman Security Documents) shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction.

11.9    Consent to Jurisdiction and Venue. All judicial proceedings (to the extent that the reference requirement of Section 11.10 is not applicable) arising in or under or related to this Agreement or any of the other Loan Documents may be brought in any state or federal court located in the State of California. By execution and delivery of this Agreement, each party hereto generally and unconditionally: (a) consents to nonexclusive personal jurisdiction in Santa Clara County, State of California; (b) waives any objection as

 

45


to jurisdiction or venue in Santa Clara County, State of California; (c) agrees not to assert any defense based on lack of jurisdiction or venue in the aforesaid courts; and (d) irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement or the other Loan Documents. Service of process on any party hereto in any action arising out of or relating to this Agreement shall be effective if given in accordance with the requirements for notice set forth in Section 11.2, and shall be deemed effective and received as set forth in Section 11.2. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of either party to bring proceedings in the courts of any other jurisdiction.

11.10    Mutual Waiver of Jury Trial / Judicial Reference.

(a)    Because disputes arising in connection with complex financial transactions are most quickly and economically resolved by an experienced and expert Person and the parties wish applicable state and federal laws to apply (rather than arbitration rules), the parties desire that their disputes be resolved by a judge applying such applicable laws. EACH OF BORROWER, AGENT AND LENDER SPECIFICALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM (COLLECTIVELY, “CLAIMS”) ASSERTED BY BORROWER AGAINST AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE OR BY AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE AGAINST BORROWER. This waiver extends to all such Claims, including Claims that involve Persons other than Agent, Borrower and Lender; Claims that arise out of or are in any way connected to the relationship among Borrower, Agent and Lender; and any Claims for damages, breach of contract, tort, specific performance, or any equitable or legal relief of any kind, arising out of this Agreement, any other Loan Document.

(b)    If the waiver of jury trial set forth in Section 11.10(a) is ineffective or unenforceable, the parties agree that all Claims shall be resolved by reference to a private judge sitting without a jury, pursuant to Code of Civil Procedure Section 638, before a mutually acceptable referee or, if the parties cannot agree, a referee selected by the Presiding Judge of the Santa Clara County, California. Such proceeding shall be conducted in Santa Clara County, California, with California rules of evidence and discovery applicable to such proceeding.

(c)    In the event Claims are to be resolved by judicial reference, either party may seek from a court identified in Section 11.9, any prejudgment order, writ or other relief and have such prejudgment order, writ or other relief enforced to the fullest extent permitted by law notwithstanding that all Claims are otherwise subject to resolution by judicial reference.

11.11    Professional Fees. Borrower promises to pay Agent’s and Lender’s reasonable fees and expenses necessary to finalize the loan documentation, including but not limited to reasonable attorneys’ fees, UCC searches, filing costs, and other miscellaneous expenses. In addition, Borrower promises to pay any and all reasonable attorneys’ and other reasonable professionals’ fees and expenses incurred by Agent and

 

46


Lender after the Closing Date in connection with or related to: (a) the Loan; (b) the administration, collection, or enforcement of the Loan; (c) the amendment or modification of the Loan Documents; (d) any waiver, consent, release, or termination under the Loan Documents; (e) the protection, preservation, audit, field exam, sale, lease, liquidation, or disposition of Collateral or the exercise of remedies with respect to the Collateral; (f) any legal, litigation, administrative, arbitration, or out of court proceeding in connection with or related to Borrower or the Collateral, and any appeal or review thereof; and (g) any bankruptcy, restructuring, reorganization, assignment for the benefit of creditors, workout, foreclosure, or other action related to Borrower, the Collateral, the Loan Documents, including representing Agent or Lender in any adversary proceeding or contested matter commenced or continued by or on behalf of Borrower’s estate, and any appeal or review thereof.

11.12    Confidentiality. Agent and Lender acknowledge that certain items of Collateral and information provided to Agent and Lender by Borrower in connection with this Agreement, the Loan Documents, and the diligence and term sheet negotiation relating to same, are confidential and proprietary information of Borrower, if and to the extent such information either (x) is marked as confidential, proprietary or secret by Borrower at the time of disclosure, or (y) should reasonably be understood to be confidential, proprietary or secret (the “Confidential Information”). Accordingly, Agent and Lender agree that any Confidential Information it may obtain in the course of acquiring, administering, or perfecting Agent’s security interest in the Collateral shall not be disclosed to any other Person or entity in any manner whatsoever, in whole or in part, without the prior written consent of Borrower, except that Agent and Lender may disclose any such information: (a) to its own directors, officers, employees, accountants, counsel and other professional advisors and to its controlled affiliates if Agent or Lender in their sole discretion determines that any such party should have access to such information in connection with such party’s responsibilities in connection with the Loan or this Agreement and, provided that such recipient of such Confidential Information either (i) agrees to be bound by the confidentiality provisions of this paragraph or (ii) is otherwise subject to confidentiality restrictions that reasonably protect against the disclosure of Confidential Information; (b) if such information is generally available to the public without any disclosure by Agent or Lender that would otherwise breach this Section; (c) if required or appropriate in any report, statement or testimony submitted to any Governmental Authority having or claiming to have jurisdiction over Agent or Lender; (d) if required or appropriate in response to any summons or subpoena or in connection with any litigation, to the extent permitted or deemed advisable by Agent’s or Lender’s counsel; (e) to comply with any legal requirement or law applicable to Agent or Lender; (f) to the extent reasonably necessary in connection with the exercise of any right or remedy under any Loan Document, including Agent’s sale, lease, or other disposition of Collateral during the continuation of an Event of Default; (g) to any participant or assignee of Agent or Lender or any prospective participant or assignee; provided, that such participant or assignee or prospective participant or assignee agrees in writing to be bound by this Section prior to disclosure; or (h) otherwise with the prior written consent of Borrower; provided, that any disclosure made in violation of this Agreement shall not affect the obligations of Borrower or any of its Affiliates or any guarantor under this Agreement or the other Loan Documents.

 

47


11.13    Assignment of Rights. Borrower acknowledges and understands that Agent or Lender may, subject to Section 11.7, sell and assign all or part of its interest hereunder and under the Loan Documents to any Person or entity (an “Assignee”). After such assignment the term “Agent” or “Lender” as used in the Loan Documents shall mean and include such Assignee, and such Assignee shall be vested with all rights, powers and remedies of Agent and Lender hereunder with respect to the interest so assigned; but with respect to any such interest not so transferred, Agent and Lender shall retain all rights, powers and remedies hereby given. No such assignment by Agent or Lender shall relieve Borrower of any of its obligations hereunder. Lender agrees that in the event of any transfer by it of the Note(s) (if any), it will endorse thereon a notation as to the portion of the principal of the Note(s), which shall have been paid at the time of such transfer and as to the date to which interest shall have been last paid thereon.

11.14    Revival of Secured Obligations. This Agreement and the Loan Documents shall remain in full force and effect and continue to be effective if any petition is filed by or against Borrower for liquidation or reorganization, if Borrower becomes insolvent or makes an assignment for the benefit of creditors, if a receiver or trustee is appointed for all or any significant part of Borrower’s assets, or if any payment or transfer of Collateral is recovered from Agent or Lender. The Loan Documents and the Secured Obligations and Collateral security shall continue to be effective, or shall be revived or reinstated, as the case may be, if at any time payment and performance of the Secured Obligations or any transfer of Collateral to Agent, or any part thereof is rescinded, avoided or avoidable, reduced in amount, or must otherwise be restored or returned by, or is recovered from, Agent, Lender or by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment, performance, or transfer of Collateral had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, avoided, avoidable, restored, returned, or recovered, the Loan Documents and the Secured Obligations shall be deemed, without any further action or documentation, to have been revived and reinstated except to the extent of the full, final, and indefeasible payment to Agent or Lender in Cash.

11.15    Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so delivered shall be deemed an original, but all of which counterparts shall constitute but one and the same instrument.

11.16    No Third Party Beneficiaries. No provisions of the Loan Documents are intended, nor will be interpreted, to provide or create any third-party beneficiary rights or any other rights of any kind in any Person other than Agent, Lender and Borrower unless specifically provided otherwise herein, and, except as otherwise so provided, all provisions of the Loan Documents will be personal and solely among Agent, the Lender and the Borrower.

11.17    Agency.

 

48


(a)    Lender hereby irrevocably appoints Hercules Capital, Inc. to act on its behalf as the Agent hereunder and under the other Loan Documents and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.

(b)    Lender agrees to indemnify the Agent in its capacity as such (to the extent not reimbursed by Borrower and without limiting the obligation of Borrower to do so), according to its respective Term Commitment percentages (based upon the total outstanding Term Loan Commitments) in effect on the date on which indemnification is sought under this Section 11.17, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder.

(c)    Agent in Its Individual Capacity. The Person serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent and the term “Lender” shall, unless otherwise expressly indicated or unless the context otherwise requires, include each such Person serving as Agent hereunder in its individual capacity.

(d)    Exculpatory Provisions. The Agent shall have no duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Agent shall not:

 

  (i)

be subject to any fiduciary or other implied duties, regardless of whether any default or any Event of Default has occurred and is continuing;

 

  (ii)

have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Agent is required to exercise as directed in writing by the Lender, provided that the Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Agent to liability or that is contrary to any Loan Document or applicable law; and

 

  (iii)

except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and the Agent shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by any Person serving as the Agent or any of its Affiliates in any capacity.

 

49


(e)    The Agent shall not be liable to the Lender for any action taken or not taken by it (i) with the consent or at the request of the Lender or as the Agent shall believe in good faith shall be necessary, under the circumstances or (ii) in the absence of its own gross negligence or willful misconduct.

(f)    The Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any default or Event of Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Section 4 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Agent.

(g)    Reliance by Agent. Agent may rely, and shall be fully protected in acting, or refraining to act, upon, any resolution, statement, certificate, instrument, opinion, report, notice, request, consent, order, bond or other paper or document that it has no reason to believe to be other than genuine and to have been signed or presented by the proper party or parties or, in the case of cables, telecopies and telexes, to have been sent by the proper party or parties. In the absence of its gross negligence or willful misconduct, Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to Agent and conforming to the requirements of the Loan Agreement or any of the other Loan Documents. Agent may consult with counsel, and any opinion or legal advice of such counsel shall be full and complete authorization and protection in respect of any action taken, not taken or suffered by Agent hereunder or under any Loan Documents in accordance therewith. Agent shall have the right at any time to seek instructions concerning the administration of the Collateral from any court of competent jurisdiction. Agent shall not be under any obligation to exercise any of the rights or powers granted to Agent by this Agreement, the Loan Agreement and the other Loan Documents at the request or direction of Lenders unless Agent shall have been provided by Lender with adequate security and indemnity against the costs, expenses and liabilities that may be incurred by it in compliance with such request or direction.

11.18    Publicity. None of the parties hereto nor any of its respective member businesses and Affiliates shall, without the other parties’ prior written consent (which shall not be unreasonably withheld or delayed), publicize or use (a) the other party’s name (including a brief description of the relationship among the parties hereto), logo or hyperlink to such other parties’ web site, separately or together, in written and oral presentations, advertising, promotional and marketing materials, client lists, public relations materials or on its web site (together, the “ Publicity Materials”); (b) the names of officers of such other parties in the Publicity Materials; and (c) such other parties’ name, trademarks, servicemarks in any news or press release concerning such party; provided however, notwithstanding anything to the contrary herein, no such consent shall be

 

50


required (i) to the extent necessary to comply with the requests of any regulators, legal requirements or laws applicable to such party, pursuant to any listing agreement with any national securities exchange (so long as such party provides prior notice to the other party hereto to the extent reasonably practicable) and (ii) to comply with Section 11.12.

11.19    Multiple Borrowers.

(a)    Borrower’s Agent. Each of the Borrowers hereby irrevocably appoints Stealth Delaware as its agent, attorney-in-fact and legal representative for all purposes, including requesting disbursement of the Term Loan and receiving account statements and other notices and communications to Borrowers (or any of them) from the Agent or any Lender. The Agent may rely, and shall be fully protected in relying, on any request for the Term Loan, disbursement instruction, report, information or any other notice or communication made or given by Stealth Delaware, whether in its own name or on behalf of one or more of the other Borrowers, and the Agent shall not have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction, report, information, other notice or communication, nor shall the joint and several character of the Borrowers’ obligations hereunder be affected thereby.

(b)    Waivers. Each Borrower hereby waives: (i) any right to require the Agent to institute suit against, or to exhaust its rights and remedies against, any other Borrower or any other person, or to proceed against any property of any kind which secures all or any part of the Secured Obligations, or to exercise any right of offset or other right with respect to any reserves, credits or deposit accounts held by or maintained with the Agent or any Indebtedness of the Agent or any Lender to any other Borrower, or to exercise any other right or power, or pursue any other remedy the Agent or any Lender may have; (ii) any defense arising by reason of any disability or other defense of any other Borrower or any guarantor or any endorser, co-maker or other person, or by reason of the cessation from any cause whatsoever of any liability of any other Borrower or any guarantor or any endorser, co-maker or other person, with respect to all or any part of the Secured Obligations, or by reason of any act or omission of the Agent or others which directly or indirectly results in the discharge or release of any other Borrower or any guarantor or any other person or any Secured Obligations or any security therefor, whether by operation of law or otherwise; (iii) any defense arising by reason of any failure of the Agent to obtain, perfect, maintain or keep in force any Lien on, any property of any Borrower or any other person; (iv) any defense based upon or arising out of any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against any other Borrower or any guarantor or any endorser, co-maker or other person, including without limitation any discharge of, or bar against collecting, any of the Secured Obligations (including without limitation any interest thereon), in or as a result of any such proceeding. Until all of the Secured Obligations have been paid, performed, and discharged in full, nothing shall discharge or satisfy the liability of any Borrower hereunder except the full performance and payment of all of the Secured Obligations. If any claim is ever made upon the Agent for repayment or recovery of any amount or amounts received by the Agent in payment of or

 

51


on account of any of the Secured Obligations, because of any claim that any such payment constituted a preferential transfer or fraudulent conveyance, or for any other reason whatsoever, and the Agent repays all or part of said amount by reason of any judgment, decree or order of any court or administrative body having jurisdiction over the Agent or any of its property, or by reason of any settlement or compromise of any such claim effected by the Agent with any such claimant (including without limitation the any other Borrower), then and in any such event, each Borrower agrees that any such judgment, decree, order, settlement and compromise shall be binding upon such Borrower, notwithstanding any revocation or release of this Agreement or the cancellation of any note or other instrument evidencing any of the Secured Obligations, or any release of any of the Secured Obligations, and each Borrower shall be and remain liable to the Agent and the Lenders under this Agreement for the amount so repaid or recovered, to the same extent as if such amount had never originally been received by the Agent or any Lender, and the provisions of this sentence shall survive, and continue in effect, notwithstanding any revocation or release of this Agreement. Until the payment of the Secured Obligations and thereafter upon any recovery, disgorgement or set aside of any Secured Obligations, each Borrower hereby expressly and unconditionally waives all rights of subrogation, reimbursement and indemnity of every kind against any other Borrower, and all rights of recourse to any assets or property of any other Borrower, and all rights to any collateral or security held for the payment and performance of any Secured Obligations, including (but not limited to) any of the foregoing rights which Borrower may have under any present or future document or agreement with any other Borrower or other person, and including (but not limited to) any of the foregoing rights which any Borrower may have under any equitable doctrine of subrogation, implied contract, or unjust enrichment, or any other equitable or legal doctrine.

(c)     Consents. Each Borrower hereby consents and agrees that, without notice to or by the other Borrower and without affecting or impairing in any way the obligations or liability of such Borrower hereunder, the Agent may, from time to time before or after revocation of this Agreement, do any one or more of the following in its sole and absolute discretion: (i) accept partial payments of, compromise or settle, renew, extend the time for the payment, discharge, or performance of, refuse to enforce, and release all or any parties to, any or all of the Secured Obligations; (ii) grant any other indulgence to any Borrower or any other Person in respect of any or all of the Secured Obligations or any other matter; (iii) accept, release, waive, surrender, enforce, exchange, modify, impair, or extend the time for the performance, discharge, or payment of, any and all property of any kind securing any or all of the Secured Obligations or any guaranty of any or all of the Secured Obligations, or on which the Agent at any time may have a Lien, or refuse to enforce its rights or make any compromise or settlement or agreement therefor in respect of any or all of such property; (iv) substitute or add, or take any action or omit to take any action which results in the release of, any one or more other Borrowers or any endorsers or guarantors of all or any part of the Secured Obligations, including, without limitation one or more parties to this Agreement, regardless of any destruction or impairment of any right of contribution or other right of Borrower; (v) during the continuance of an Event of Default, apply any sums received from any other Borrower, any guarantor, endorser, or co-signer, or from the disposition of any Collateral

 

52


or security, to any Indebtedness whatsoever owing from such person or secured by such Collateral or security, in such manner and order as the Agent determines in its sole discretion, and regardless of whether such Indebtedness is part of the Secured Obligations, is secured, or is due and payable. Each Borrower consents and agrees that the Agent shall be under no obligation to marshal any assets in favor of Borrower, or against or in payment of any or all of the Secured Obligations. Each Borrower further consents and agrees that the Agent shall have no duties or responsibilities whatsoever with respect to the care of any property securing any or all of the Secured Obligations other than as required under this Agreement. Without limiting the generality of the foregoing, the Agent shall have no obligation to monitor, verify, audit, examine, or obtain or maintain any insurance with respect to, any property securing any or all of the Secured Obligations.

(d)    Independent Liability. Each Borrower hereby agrees that one or more successive or concurrent actions may be brought hereon against such Borrower, in the same action in which any other Borrower may be sued or in separate actions, as often as deemed advisable by Agent. Each Borrower is fully aware of the financial condition of each other Borrower and is executing and delivering this Agreement based solely upon its own independent investigation of all matters pertinent hereto, and such Borrower is not relying in any manner upon any representation or statement of the Agent or any Lender with respect thereto. Each Borrower represents and warrants that it is in a position to obtain, and each Borrower hereby assumes full responsibility for obtaining, any additional information concerning any other Borrower’s financial condition and any other matter pertinent hereto as such Borrower may desire, and such Borrower is not relying upon or expecting the Agent to furnish to it any information now or hereafter in the Agent’s possession concerning the same or any other matter.

(e)    Subordination. All Indebtedness of a Borrower now or hereafter arising held by another Borrower is subordinated to the Secured Obligations and after the occurrence and during the continuation of an Event of Default, the Borrower holding the Indebtedness shall take all actions reasonably requested by Agent to effect, to enforce and to give notice of such subordination.

(SIGNATURES TO FOLLOW)

 

53


IN WITNESS WHEREOF, Borrower, Agent and Lender have duly executed and delivered this Loan and Security Agreement as of the day and year first above written.

 

BORROWER:
STEALTH BIOTHERAPEUTICS INC.
Signature:  

/s/ Reenie McCarthy

 

Print Name:   Reenie McCarthy
Title:   President and Secretary

 

STEALTH BIOTHERAPEUTICS CORP
Signature:  

 

Print Name:   Louise Garbarino
Title:   Director

[Signature Page to Loan and Security Agreement (Hercules/Stealth)]


IN WITNESS WHEREOF, Borrower, Agent and Lender have duly executed and delivered this Loan and Security Agreement as of the day and year first above written.

 

BORROWER:
STEALTH BIOTHERAPEUTICS INC.
Signature:  

 

Print Name:   Reenie McCarthy
Title:   President and Secretary

 

STEALTH BIOTHERAPEUTICS CORP
Signature:  

/s/ Louise Garbarino

 

Print Name:   Louise Garbarino
Title:   Director

[Signature Page to Loan and Security Agreement (Hercules/Stealth)]


Accepted in Palo Alto, California:

 

AGENT:
HERCULES CAPITAL, INC
Signature:  

/s/ Jennifer Choe

 

Print Name:   Jennifer Choe
Title:   Assistant General Counsel

 

LENDER:
HERCULES CAPITAL, INC
Signature:  

/s/ Jennifer Choe

 

Print Name:   Jennifer Choe
Title:   Assistant General Counsel

[Signature Page to Loan and Security Agreement (Hercules/Stealth)]


Table of Exhibits and Schedules

 

Exhibit A:    Advance Request
   Attachment to Advance Request
Exhibit B:    Term Note
Exhibit C:    Name, Locations, and Other Information for Borrower
Exhibit D:    Borrower’s Patents, Trademarks, Copyrights and Licenses
Exhibit E:    Borrower’s Deposit Accounts and Investment Accounts
Exhibit F:    Compliance Certificate
Exhibit G:    Joinder Agreement
Exhibit H:    ACH Debit Authorization Agreement
Exhibit I-1:   

Form of U.S. Tax Compliance Certificate (For Foreign Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)

Exhibit I-2:   

Form of U.S. Tax Compliance Certificate (For Foreign Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)

Exhibit I-3:   

Form of U.S. Tax Compliance Certificate (For Foreign Participants That Are Partnerships For U.S. Federal Income Tax Purposes)

Exhibit I-4:   

Form of U.S. Tax Compliance Certificate (For Foreign Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)

Schedule 1    Subsidiaries
Schedule 1.1    Commitments
Schedule 1A    Existing Permitted Indebtedness
Schedule 1B    Existing Permitted Investments
Schedule 1C    Existing Permitted Liens
Schedule 5.3    Consents, Etc.
Schedule 5.8    Tax Matters
Schedule 5.9    Intellectual Property Claims
Schedule 5.10    Intellectual Property
Schedule 5.11    Borrower Products
Schedule 5.14    Capitalization


EXHIBIT A

ADVANCE REQUEST

 

To:    Agent:    Date:             , 20[      ]
  

 

Hercules Capital, Inc. (the “Agent”)

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

email: legal@herculestech.com; kkosofsky@htgc.com

Attn:

[Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands] [Stealth BioTherapeutics Inc., a Delaware corporation] (“Borrower”) hereby requests from Hercules Capital, Inc. (“Lender”) an Advance in the amount of              Dollars ($              ) on              ,          (the “Advance Date”) pursuant to the Loan and Security Agreement among Borrower, Agent and Lender (the “Agreement”). Capitalized words and other terms used but not otherwise defined herein are used with the same meanings as defined in the Agreement.

Please:

(a)    Issue a check payable to Borrower                         

or

(b)    Wire Funds to Borrower’s account                          [IF FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITY PURPOSES]

 

   Bank:  

 

  
   Address:  

 

  
    

 

  
   ABA Number:  

 

  
   Account Number:  

 

  
   Account Name:  

 

  
   Contact Person:  

 

  
   Phone Number     
   To Verify Wire Info:  

 

  
   Email address:  

 

  

Borrower represents that the conditions precedent to the Advance set forth in the Agreement are satisfied and shall be satisfied upon the making of such Advance, including but not limited to: (i) that no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing; (ii) that the representations and warranties by Borrower set forth in the Agreement and in the Warrant are and shall be true and correct in all material respects on and as of the Advance Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date; (iii) that Borrower is in compliance with all the terms and provisions set forth in


each Loan Document on its part to be observed or performed; and (iv) that as of the Advance Date, no default or Event of Default under the Loan Documents shall have occurred and be continuing. Borrower understands and acknowledges that Agent has the right to review the financial information supporting this representation and, based upon such review in its sole discretion, Lender may decline to fund the requested Advance.

Borrower hereby represents that Borrower’s corporate status and locations have not changed since the date of the Agreement or, if the Attachment to this Advance Request is completed, are as set forth in the Attachment to this Advance Request.

Borrower agrees to notify Agent promptly before the funding of the Loan if any of the matters which have been represented above shall not be true and correct on the Borrowing Date and if Agent has received no such notice before the Advance Date then the statements set forth above shall be deemed to have been made and shall be deemed to be true and correct as of the Advance Date.

Executed as of [            ], 20[    ].

 

BORROWER: [                                                     ]
SIGNATURE:                                                          
TITLE:                                                                    
PRINT NAME:                                                      


ATTACHMENT TO ADVANCE REQUEST

Dated:                     

Borrower hereby represents and warrants to Agent that Borrower’s current name and organizational status is as follows:

 

  Name:    [                                                           ]
  Type of organization:    Corporation
  State of organization:    [                                       ]
  Organization file number:   

Borrower hereby represents and warrants to Agent that the street addresses, cities, states and postal codes of its current locations are as follows:


EXHIBIT B

SECURED TERM PROMISSORY NOTE

THIS NOTE IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT (“ OID ”). PURSUANT TO TREASURY REGULATION SECTION 1.1275-3, FOR INFORMATION REGARDING THE ISSUE PRICE, AMOUNT OF OID, ISSUE DATE, AND YIELD TO MATURITY, PLEASE CONTACT STEALTH BIOTHERAPEUTICS INC., ATTENTION: HENRY HESS, 275 GROVE STREET, STE. 3-107, NEWTON, MA 02466, EMAIL: HENRY.HESS@STEALTHBT.COM, TELEPHONE: 617-340-3289.

 

$[    ], 000,000    Advance Date:             , 20[    ]
   Maturity Date:                 , 20[    ]

FOR VALUE RECEIVED, Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands, and Stealth BioTherapeutics Inc., a Delaware corporation (the “Borrower”) hereby promises to pay to Hercules Capital, Inc., a Maryland corporation or the registered holder of this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo Alto, CA 94301 or such other place of payment as the registered holder of this Secured Term Promissory Note (this “Promissory Note”) may specify from time to time in writing, in lawful money of the United States of America, the principal amount of [ ] Million Dollars ($[ ],000,000) or such other principal amount as Lender has advanced to Borrower, together with interest at a rate as set forth in Section 2.2(c) of the Loan Agreement based upon a year consisting of 360 days, with interest computed daily based on the actual number of days in each month.

This Promissory Note is the Note referred to in, and is executed and delivered in connection with, that certain Loan and Security Agreement dated June 30, 2017, by and among Borrower, Hercules Capital, Inc., a Maryland corporation (the “Agent”) and the several banks and other financial institutions or entities from time to time party thereto as lender (as the same may from time to time be amended, modified or supplemented in accordance with its terms, the “Loan Agreement”), and is entitled to the benefit and security of the Loan Agreement and the other Loan Documents (as defined in the Loan Agreement), to which reference is made for a statement of all of the terms and conditions thereof. All payments shall be made in accordance with the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. An Event of Default under the Loan Agreement shall constitute a default under this Promissory Note.

Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest under the UCC or any applicable law. Borrower agrees to make all payments under this Promissory Note without setoff, recoupment or deduction and regardless of any counterclaim or defense. This Promissory Note has been negotiated and delivered to Lender and is payable in the State of California. This Promissory Note shall be governed by and construed and enforced in accordance with, the laws of the State of California, excluding any conflicts of law rules or principles that would cause the application of the laws of any other jurisdiction.

BORROWER FOR ITSELF AND

ON BEHALF OF ITS SUBSIDIARIES:    [                                                  ]


By:
Title:


EXHIBIT C

NAME, LOCATIONS, AND OTHER INFORMATION FOR BORROWER

1.    Each Borrower represents and warrants to Agent that such Borrower’s current name and organizational status as of the Closing Date is as follows:

 

Name:   Stealth BioTherapeutics Corp
Type of organization:   Exempted company incorporated with limited liability
State of organization:   Cayman Islands
Organization file number:   165223
Name:   Stealth BioTherapeutics Inc.
Type of organization:   Corporation
State of organization:   Delaware
Organization file number:   4444582

2.    Each Borrower represents and warrants to Agent that for five (5) years prior to the Closing Date, Borrower did not do business under any other name or organization or form except the following:

 

  Stealth BioTherapeutics Corp   
  Name:    Stealth Peptides International Inc.
  Used during dates of:    4/3/06 to 8/3/15
  Type of Organization:    Exempted company incorporated with limited liability
  State of organization:    Cayman Islands
  Organization file Number:    165223
  Borrower’s fiscal year ends on December 31
  Borrower’s federal employer tax identification number is: N/A
  Stealth BioTherapeutics Inc.   
  Name:    Stealth Peptides Incorporated
  Used during dates of:    10/22/07 to 4/13/2015
  Type of Organization:    Corporation
  State of organization:    Delaware
  Organization file Number:    4444582
  Borrower’s fiscal year ends on December 31
  Borrower’s federal employer tax identification number is: 26-1512085

3.    Each Borrower represents and warrants to Agent that its principal offices are located at:

 

  Stealth BioTherapeutics Inc.    Stealth BioTherapeutics Corp
  275 Grove Street, Suite 3-107    2nd Floor, Le Prince de Galles, 3-5 Avenue
  Newton, MA 02466    des Citronniers, MC 98000, Monaco


EXHIBIT D

BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

Material Licenses

Exclusive License Agreement dated as of April 20, 2006, among Stealth Cayman (f/k/a Stealth Peptides International Inc.), Cornell Research Foundation, Inc. and Institut de Recherches Cliniques de Montreal, as amended on October 7, 2010.

Patents and Patent Applications

Attached separately.

Trademarks and Trademark Schedules

Attached separately .


EXHIBIT E

BORROWER’S DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS

 

Institution Name and Address

  

Account Number

  

Name of Account

Owner

  Account
Type

Standard Chartered Bank (HK) Ltd    

17f, Standard Chartered Tower

388 Kwun Tong Road

Kwun Tong, Kowloon

   xxxxxxx6289   

Stealth

BioTherapeutics Corp

  Depository

Citizens Bank

One Citizens Plaza

Providence, RI 02903 USA

   xxxxxx9633   

Stealth

BioTherapeutics Inc.

  Depository

Citizens Bank

One Citizens Plaza

Providence, RI 02903 USA

   xxxxxx1858   

Stealth

BioTherapeutics Inc.

  Depository


EXHIBIT F

COMPLIANCE CERTIFICATE

Hercules Capital, Inc. (as “Agent”)

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Reference is made to that certain Loan and Security Agreement dated June 30, 2017 and the Loan Documents (as defined therein) entered into in connection with such Loan and Security Agreement all as may be amended from time to time (hereinafter referred to collectively as the “Loan Agreement”) by and among the several banks and other financial institutions or entities from time to time party thereto (collectively, the “Lender”), Hercules Capital, Inc., as agent for the Lender (the “Agent”), Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Stealth Cayman”) and Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware” and, individually and collectively with Stealth Cayman and each of Stealth Cayman and Stealth Delaware’s respective Subsidiaries, the “Company”) as Borrower. All capitalized terms not defined herein shall have the same meaning as defined in the Loan Agreement.

The undersigned is an Officer of the Company, knowledgeable of all Company financial matters, and is authorized to provide certification of information regarding the Company; hereby certifies, in such capacity, that in accordance with the terms and conditions of the Loan Agreement, the Company is in compliance for the period ending                      of all covenants, conditions and terms therein and hereby reaffirms that all representations and warranties contained therein are true and correct in all material respects, other than as disclosed in this Compliance Certificate, on and as of the date of this Compliance Certificate with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, after giving effect in all cases to any standard(s) of materiality contained in the Loan Agreement as to such representations and warranties. Attached are the required documents supporting the above certification. The undersigned further certifies that these are prepared in accordance with GAAP (except for the absence of footnotes with respect to unaudited financial statement and subject to normal year-end adjustments) and are consistent from one period to the next except as explained below.

 

REPORTING REQUIREMENT    REQUIRED   

CHECK IF

ATTACHED

Interim Financial Statements    Monthly within 30 days   
Interim Financial Statements   

Quarterly within 45

days (for first 3 FQ of

each year)

  
Audited Financial Statements   

FYE within 180 days

(within 90 days after IPO)

  
Most recent Capitalization Table   

Quarterly within 45

days (for first 3 FQ of each year)

  


Accounts Receivable and Accounts  
Payable (7.1(e))   Monthly within 30 days
Projections (7.1(g))   FYE within 60 days

7.21 – Minimum Cash

Has either Performance Milestone 1 or Performance Milestone 2 been achieved?      Yes;      No

If Yes, in compliance.

If No:

(A) Unrestricted Cash: $                     

(B) amount of Borrower’s accounts payable under GAAP and not paid after the 90th day following the invoice date for such accounts payable: $                     

(C) item (A) minus item (B): $                     

Is item (C) greater than or equal to $6,000,000?

     Yes (in compliance);      No (not in compliance)

The undersigned hereby also confirms the below disclosed accounts represent all depository accounts and securities accounts presently open in the name of each Borrower or Borrower Subsidiary, as applicable.

 

            Depository
AC #
     Financial
Institution
     Account
Type
(Depository
/ Securities)
     Last
Month
Ending
Account
Balance
     Purpose
of
Account
 

BORROWER

Name/Address:

                 
     1                 
     2                 
     3                 
     4                 
     5                 
     6                 
     7                 


BORROWER

SUBSIDIARY

Name/Address

       
                            

 
    
                

 
    
                

 
     
     1                 
     2                 
     3                 
     4                 
     5                 
     6                 
     7                 

 

Very Truly Yours,
[                                                             ],
on behalf of itself and its Subsidiaries

By:

 

 

Name:  

 

Its:  

 


EXHIBIT G

FORM OF JOINDER AGREEMENT

This Joinder Agreement (the “Joinder Agreement”) is made and dated as of [            ], 20[    ], and is entered into by and between                              ., a                      corporation (“Subsidiary”), and HERCULES CAPITAL, INC., a Maryland corporation (as “Agent”).

RECITALS

A. Subsidiary’s Affiliates, [Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands and Stealth BioTherapeutics Inc., a Delaware corporation] (individually and collectively, “Company”) [has entered/desires to enter] into that certain Loan and Security Agreement dated June 30, 2017, with the several banks and other financial institutions or entities from time to time party thereto as lender (collectively, the “Lender”) and the Agent, as such agreement may be amended (the “Loan Agreement”), together with the other agreements executed and delivered in connection therewith;

B. Subsidiary acknowledges and agrees that it will benefit both directly and indirectly from Company’s execution of the Loan Agreement and the other agreements executed and delivered in connection therewith;

AGREEMENT

NOW THEREFORE, Subsidiary and Agent agree as follows:

 

1.

The recitals set forth above are incorporated into and made part of this Joinder Agreement. Capitalized terms not defined herein shall have the meaning provided in the Loan Agreement.

 

2.

By signing this Joinder Agreement, Subsidiary shall be bound by the terms and conditions of the Loan Agreement the same as if it were the Borrower (as defined in the Loan Agreement) under the Loan Agreement, mutatis mutandis, provided however, that (a) with respect to (i) Section 5.1 of the Loan Agreement, Subsidiary represents that it is an entity duly organized, legally existing and in good standing under the laws of [                     ], (b) neither Agent nor Lender shall have any duties, responsibilities or obligations to Subsidiary arising under or related to the Loan Agreement or the other Loan Documents, (c) that if Subsidiary is covered by Company’s insurance, Subsidiary shall not be required to maintain separate insurance or comply with the provisions of Sections 6.1 and 6.2 of the Loan Agreement, and (d) that as long as Company satisfies the requirements of Section 7.1 of the Loan Agreement, Subsidiary shall not have to provide Agent separate Financial Statements. To the extent that Agent or Lender has any duties, responsibilities or obligations arising under or related to the Loan Agreement or the other Loan Documents, those duties, responsibilities or obligations shall flow only to Company and not to Subsidiary or any other Person or entity. By way of example (and not an exclusive list): (i) Agent’s providing notice to Company in accordance with the Loan Agreement or as otherwise agreed among Company, Agent and Lender shall be deemed provided to Subsidiary; (ii) a Lender’s providing an Advance to Company shall be deemed an Advance to Subsidiary; and (iii) Subsidiary shall have no right to request an Advance or make any other demand on Lender.


3.

Subsidiary agrees not to certificate its equity securities without Agent’s prior written consent, which consent may be conditioned on the delivery of such equity securities to Agent in order to perfect Agent’s security interest in such equity securities.

 

4.

Subsidiary acknowledges that it benefits, both directly and indirectly, from the Loan Agreement, and hereby waives, for itself and on behalf on any and all successors in interest (including without limitation any assignee for the benefit of creditors, receiver, bankruptcy trustee or itself as debtor-in-possession under any bankruptcy proceeding) to the fullest extent provided by law, any and all claims, rights or defenses to the enforcement of this Joinder Agreement on the basis that (a) it failed to receive adequate consideration for the execution and delivery of this Joinder Agreement or (b) its obligations under this Joinder Agreement are avoidable as a fraudulent conveyance.

 

5.

As security for the prompt, complete and indefeasible payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Subsidiary grants to Agent a security interest in all of Subsidiary’s right, title, and interest in and to the Collateral.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


[SIGNATURE PAGE TO JOINDER AGREEMENT]

 

SUBSIDIARY:          
                                                                      .
  By:
  Name:
  Title:
  Address:
  Telephone:                             
  email:                                 
AGENT:  
HERCULES CAPITAL, INC.
  By:                                                                                
  Name:                                                                              
  Title:                                                                                   
  Address:
  400 Hamilton Ave., Suite 310
  Palo Alto, CA 94301
  email: legal@herculestech.com; kkosofsky@htgc.com
  Telephone: 650-289-3060


EXHIBIT H

ACH DEBIT AUTHORIZATION AGREEMENT

Hercules Capital, Inc.

400 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Re: Loan and Security Agreement dated as of June 30, 2017 (the “Agreement”) by and among Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands and Stealth BioTherapeutics Inc., a Delaware corporation (individually and collectively, “Borrower”) and Hercules Capital, Inc., as agent (“Company”) and the lenders party thereto (collectively, the “Lender”)

In connection with the above referenced Agreement, Stealth BioTherapeutics Inc. hereby authorizes the Company to initiate debit entries for (i) the periodic payments due under the Agreement and (ii) out-of-pocket legal fees and costs incurred by Agent or Lender pursuant to Section 11.11 of the Agreement to the Borrower’s account indicated below. The Borrower authorizes the depository institution named below to debit to such account.

[IF FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITY PURPOSES]

 

DEPOSITORY NAME    BRANCH
CITY    STATE AND ZIP CODE
TRANSIT/ABA NUMBER    ACCOUNT NUMBER

This authority will remain in full force and effect so long as any amounts are due under the Agreement.

 

(Borrower)(Please Print)

By:                                                                                                    

Date:                                                                                                 


EXHIBIT I-1

[FORM OF]

U.S. TAX COMPLIANCE CERTIFICATE

(For Foreign Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)

Reference is hereby made to the Loan and Security Agreement dated as of June 30, 2017 (as amended, supplemented or otherwise modified from time to time, the “ Agreement ”), by and among [Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Stealth Cayman”), Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware”)], and each of their Subsidiaries (hereinafter collectively referred to as the “Borrower”), the several banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “ Lender ”) and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and the Lender (in such capacity, the “ Agent ”).

Pursuant to the provisions of Section 2.9 of the Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code and (iv) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished the Agent and the Borrower with a certificate of its non-U.S. Person status on IRS Form W-8BEN-E. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Agent, and (2) the undersigned shall have at all times furnished the Borrower and the Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Agreement and used herein shall have the meanings given to them in the Agreement.

[NAME OF LENDER]

 

By:  

 

   Name:
   Title:

Date:                   , 20[    ]


EXHIBIT I-2

[FORM OF]

U.S. TAX COMPLIANCE CERTIFICATE

(For Foreign Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)

Reference is hereby made to the Loan and Security Agreement dated as of June 30, 2017 (as amended, supplemented or otherwise    modified from time    to time, the “ Agreement ”), by    and among [Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Stealth Cayman”), Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware”)], and each of their Subsidiaries (hereinafter collectively referred to as the “Borrower”), the several banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “ Lender ”) and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and the Lender (in such capacity, the “ Agent ”).

Pursuant to the provisions of Section 2.9 of the Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the participation in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, and (iv) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished its participating Lender with a certificate of its non-U.S. Person status on IRS Form W-8BEN-E. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender in writing, and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Agreement and used herein shall have the meanings given to them in the Agreement.

 

[NAME OF PARTICIPANT]
By:  

 

  Name:
  Title:

Date:                          , 20[    ]


EXHIBIT I-3

[FORM OF]

U.S. TAX COMPLIANCE CERTIFICATE

(For Foreign Participants That Are Partnerships For U.S. Federal Income Tax Purposes)

Reference is hereby made to the Loan and Security Agreement dated as of June 30, 2017 (as amended, supplemented or otherwise modified from time to time, the “ Agreement ”), by and among [Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Stealth Cayman”), Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware”)], and each of their Subsidiaries (hereinafter collectively referred to as the “Borrower”), the several banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “ Lender ”) and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and the Lender (in such capacity, the “ Agent ”).

Pursuant to the provisions of Section 2.9 of the Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the participation in respect of which it is providing this certificate, (ii) its direct or indirect partners/members are the sole beneficial owners of such participation, (iii) with respect to such participation, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its direct or indirect partners/members is a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code and (v) none of its direct or indirect partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished its participating Lender with IRS Form W-8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (i) an IRS Form W-8BEN-E or (ii) an IRS Form W-8IMY accompanied by an IRS Form W-8BEN-E from each of such partner’s/member’s beneficial owners that is claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Agreement and used herein shall have the meanings given to them in the Agreement.

[NAME OF PARTICIPANT]

 

By:    
  Name:
  Title:

Date:                   , 20[    ]


EXHIBIT I-4

[FORM OF]

U.S. TAX COMPLIANCE CERTIFICATE

(For Foreign Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)

Reference is hereby made to the Loan and Security Agreement dated as of June 30, 2017 (as amended, supplemented or otherwise    modified from time    to time, the “ Agreement ”), by    and among [Stealth BioTherapeutics Corp, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Stealth Cayman”), Stealth BioTherapeutics Inc., a Delaware corporation (“Stealth Delaware”)], and each of their Subsidiaries (hereinafter collectively referred to as the “Borrower”), the several banks and other financial institutions or entities from time to time parties to this Agreement (collectively, referred to as “ Lender ”) and Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc., a Maryland corporation, in its capacity as administrative agent and collateral agent for itself and the Lender (in such capacity, the “ Agent ”).

Pursuant to the provisions of Section 2.9 of the Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) its direct or indirect partners/members are the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such Loan(s)), (iii) with respect to the extension of credit pursuant to this Agreement or any other Loan Document, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its direct or indirect partners/members is a ten percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B) of the Code and (v) none of its direct or indirect partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished the Agent and the Borrower with IRS Form W- 8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (i) an IRS Form W-8BEN-E or (ii) an IRS Form W- 8IMY accompanied by an IRS Form W-8BEN-E from each of such partner’s/member’s beneficial owners that is claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Agent, and (2) the undersigned shall have at all times furnished the Borrower and the Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Agreement and used herein shall have the meanings given to them in the Agreement.

[NAME OF LENDER]

 

By:    
  Name:
  Title:

Date:                   , 20[    ]


FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ First Amendment ”), dated as of March 12, 2018 (the “ First Amendment Effective Date ”), is made among STEALTH BIOTHERAPEUTICS CORP, an exempted company incorporated with limited liability under the laws of the Cayman Islands with registered number 165223 (“ Stealth Cayman ”), STEALTH BIOTHERAPEUTICS INC., a Delaware corporation (“ Stealth Delaware ” and, together with Stealth Cayman, hereinafter individually and collectively referred to as “ Borrower ”), HERCULES CAPITAL, INC., a Maryland corporation (“ Hercules ”), in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, “ Agent ”).

A. Borrower has requested that Lender agree to certain waivers under, and amendments to, the Loan and Security Agreement dated as of June 30, 2017 by and among the Borrower, Hercules and Agent (the “Loan and Security Agreement”). Lender has agreed to such request, subject to the terms and conditions hereof.

B. Borrower has failed to comply with Sections 7.6, 7.9, 7.13 and 7.15 of the Loan and Security Agreement with respect to creation of Stealth BioTherapeutics (HK) Limited 德泰生物醫藥 ( 香港 ) 有限公司 , a company incorporated with limited liability under the laws of Hong Kong with registered number 2577497 (“ Stealth HK ”), and Section 7.12 of the Loan and Security Agreement with respect to the bank account of Stealth HK (the “ Specified Defaults ”). Borrower has requested that Agent and Lender agree to waive the Specified Defaults and their rights and remedies against Borrower with respect to the Specified Defaults. Although Agent and Lender are under no obligation to do so, they have agreed to such requests, subject to the terms and conditions hereof.

Accordingly, the parties hereto agree as follows:

SECTION 1    Definitions; Interpretation.

(a)     Terms Defined in Loan and Security Agreement . All capitalized terms used in this First Amendment (including in the recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Loan and Security Agreement.

(b)     Interpretation . The rules of interpretation set forth in Section 1 of the Loan and Security Agreement shall be applicable to this First Amendment and are incorporated herein by this reference.

SECTION 2    Amendments to the Loan and Security Agreement.

(a)     Amendments . The Loan and Security Agreement shall be amended as follows effective as of the First Amendment Effective Date:

(i)     New Definitions . The following definitions are added to Section 1.1 in their proper alphabetical order:

“First Amendment Effective Date” means March 12, 2018.

“Stealth HK” shall mean Stealth BioTherapeutics (HK) Limited 德泰生物醫藥 ( 香港 ) 有限公司 , a company incorporated with limited liability under the laws of the Hong Kong with registered number 2577497.

 

1


(ii)     Amended and Restated Definitions . The following definitions are hereby amended and restated as follows:

“Pledge Agreement” means that certain Pledge Agreement, dated as of the First Amendment Effective Date, by and among Borrower and Agent, as the same may from time to time be amended, restated, modified or otherwise supplemented.

(iii)     Amended Definition . The following definitions are hereby amended as follows:

“Permitted Transfers”. The definition of “Permitted Transfers” is hereby amended by replacing “and (vi) other transfers of assets having a fair market value of not more than $250,000 in the aggregate in any fiscal year” with “(vi) transfers of the assets of Stealth HK to Stealth Cayman or Stealth Delaware, and (vii) other transfers of assets having a fair market value of not more than $250,000 in the aggregate in any fiscal year” therein.

(iv)     Section 3.2 . Section 3.2 is hereby amended by deleting the period at the end of the first sentence thereof and replacing it with the following:

“or (iii) any Equity Interests in excess of 65% of the presently existing and hereafter arising issued and outstanding shares of capital stock owned by Borrower of Stealth HK which shares entitle the holder thereof to vote for directors or any other matter.”

(v)     Section 7.11 . Section 7.11 is hereby amended by adding “Stealth HK shall not amend the voting thresholds of its equity holders unless approved in advance by Agent and the Required Lenders.” immediately after “The Borrower shall not suffer a Change in Control.” therein.

(vi)     Section 7.12 . Section 7.12 is hereby amended and restated as follows.

“Deposit Accounts. Neither Borrower nor any Subsidiary (other than the MSC) shall maintain any Deposit Accounts, or accounts holding Investment Property, except with respect to which Agent has an Account Control Agreement. The provisions of the previous sentence shall not apply to (i) Stealth Cayman’s account number XXXX6289 held at Standard Chartered Bank (Hong Kong) Ltd,, provided that the amount deposited therein shall not exceed $250,000, and (ii) Stealth HK’s account number XXX-X-XXX104-8 held at Standard Chartered Bank (Hong Kong) Ltd., provided that the amount deposited therein shall not exceed $100,000 at any one time.”

(vii)     Section 7.18 . Section 7.18 is hereby amended and restated as follows:

“Joinder/Security in Connection with Company Reorganization. Borrower, including any successor in interest of Borrower after the Company Reorganization, shall take all steps reasonably requested by Agent so that immediately upon the consummation of such Company Reorganization, Agent shall have a perfected first priority security interest in all assets of the Borrower and its Subsidiaries as required under the Loan Documents.”

(viii)     Section 7.19 . Section 7.19 is hereby amended and restated as follows:

“Stealth HK. Borrower agrees that Stealth HK shall not: (i) as of any time of determination, hold any assets or be liable for any liabilities in excess of $100,000, in each case in the aggregate; (ii) receive any Cash from any Person in excess of $100,000 in


the aggregate in any fiscal year; or (iii) own or otherwise have the right to use any Intellectual Property or any exclusive licenses for the use of any (a) Intellectual Property of Stealth Cayman or Stealth Delaware or (b) Borrower Products of Stealth Cayman or Stealth Delaware.”

(ix)     Schedules and Exhibits . The schedule and exhibits of the Loan and Security Agreement specified in Annex A hereto shall be amended and restated in their entirety with the corresponding schedule or exhibit, as applicable, included in Annex A.

(b)     Approval of Investments in Stealth HK. Pursuant to clause (x) of the definition of “Permitted Investment,” the Required Lenders hereby approves Investments in Stealth HK not to exceed $100,000 in the aggregate in any fiscal year.

(c)     References Within Loan and Security Agreement . Each reference in the Loan and Security Agreement to “this Agreement” and the words “hereof,” “herein,” “hereunder,” or words of like import, shall mean and be a reference to the Loan and Security Agreement as amended by this First Amendment.

SECTION 3    Waiver of Specified Defaults.

(a)    Subject to the terms of this First Amendment, Agent and Lender hereby waive the Specified Defaults.

(b)    Agent’s and Lender’s agreement to waive the Specified Defaults (1) in no way shall be deemed an agreement by Agent or Lender to waive Borrower’s compliance with the above-described covenant(s) as of all other dates or with respect to all other Subsidiaries, (2) shall not limit or impair Agent’s or Lender’s right to demand strict performance of the covenant(s) as of all other dates or with respect to all other Subsidiaries and (3) shall not limit or impair Agent’s or Lender’s right to demand strict performance of all other covenants as of any date.

(c)    The waiver set forth in this Section  3 is effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (1) be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (2) otherwise prejudice any right or remedy which Agent or Lender may now have or may have in the future under or in connection with any Loan Document.

SECTION 4      Conditions of Effectiveness. The effectiveness of this First Amendment shall be subject to the satisfaction of each of the following conditions precedent:

(a)     Fees and Expenses . Borrower shall have paid (i) all invoiced costs and expenses then due in accordance with Section  6(e) , and (ii) all other fees, costs and expenses, if any, due and payable as of the First Amendment Effective Date under the Loan and Security Agreement.

(b)     This First Amendment . Agent shall have received this First Amendment, executed by Agent, Lender and Borrower (including Stealth HK).

(c)     Pledge Agreement . Agent shall have received the Pledge Agreement, executed by Agent and Borrower.


(d)     Representations and Warranties; No Default . On the First Amendment Effective Date, after giving effect to the waivers under and amendment of the Loan and Security Agreement contemplated hereby:

(i)    The representations and warranties contained in Section  5 of this First Amendment shall be true and correct on and as of the First Amendment Effective Date as though made on and as of such date; and

(ii)    There exist no Events of Default or events that with the passage of time would result in an Event of Default.

SECTION 5      Representations and Warranties . To induce the Agent and Lender to enter into this First Amendment, Borrower hereby confirms, as of the date hereof, (a) that the representations and warranties made by it in Section 5 of the Loan and Security Agreement and in the other Loan Documents are true and correct in all material respects; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; (b) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing; and (c) other than as updated on Annex B attached hereto, that the information included in the Perfection Certificate delivered to Agent on the Effective Date remains true and correct. For the purposes of this Section  5 , (i) each reference in Section 5 of the Loan and Security Agreement to “this Agreement,” and the words “hereof,” “herein,” “hereunder,” or words of like import in such Section, shall mean and be a reference to the Loan and Security Agreement as amended by this First Amendment, (ii) any representations and warranties which relate solely to an earlier date shall not be deemed confirmed and restated as of the date hereof (provided that such representations and warranties shall be true, correct and complete as of such earlier date) and (iii) the accuracy of the representations and warranties of the Borrower made by it in Section 5 of the Loan and Security Agreement shall be determined for all purposes hereunder after giving effect to all updates to Schedules or Exhibits reflected on Annex A attached hereto.

SECTION 6    Miscellaneous.

(a)     Loan Documents Otherwise Not Affected; Reaffirmation . Except as expressly amended pursuant hereto or referenced herein, the Loan and Security Agreement and the other Loan Documents shall remain unchanged and in full force and effect and are hereby ratified and confirmed in all respects. Lender’s and Agent’s execution and delivery of, or acceptance of, this First Amendment shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. Borrower hereby reaffirms the grant of security under Section 3 of the Loan and Security Agreement and hereby reaffirms that such grant of security in the Collateral secures all Secured Obligations under the Loan and Security Agreement, including without limitation any Term Loans funded on or after the First Amendment Effective Date, as of the date hereof.

(b)     Conditions . For purposes of determining compliance with the conditions specified in Section  34 , each Lender that has signed this First Amendment (which constitute all Lenders) shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

(c)     Release . In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates,


subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lender and all such other persons being hereinafter referred to collectively as the “ Releasees ” and individually as a “ Releasee ”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this First Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above. Borrower waives the provisions of California Civil Code Section 1542, which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

(d)     No Reliance . Borrower hereby acknowledges and confirms to Agent and Lender that Borrower is executing this First Amendment on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person.

(e)     Costs and Expenses . Borrower agrees to pay to Agent within ten (10) days of its receipt of an invoice (or on the First Amendment Effective Date to the extent invoiced on or prior to the First Amendment Effective Date), the out-of-pocket costs and expenses of Agent and Lender party hereto, and the fees and disbursements of counsel to Agent and Lender party hereto (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution and delivery of this First Amendment and any other documents to be delivered in connection herewith on the First Amendment Effective Date or after such date.

(f)     Binding Effect . This First Amendment binds and is for the benefit of the successors and permitted assigns of each party.

(g)     Governing Law . THIS FIRST AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THE LAWS OF THE STATE OF CALIFORNIA ), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE COLLATERAL.

(h)     Complete Agreement; Amendments . This First Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements


with respect to such subject matter. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this First Amendment and the Loan Documents merge into this First Amendment and the Loan Documents.

(i)     Severability of Provisions. Each provision of this First Amendment is severable from every other provision in determining the enforceability of any provision.

(j)     Counterparts . This First Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Amendment. Delivery of an executed counterpart of a signature page of this First Amendment by facsimile, portable document format (.pdf) or other electronic transmission will be as effective as delivery of a manually executed counterpart hereof.

(k)     Loan Documents . This First Amendment and the documents related thereto shall constitute Loan Documents.

[Balance of Page Intentionally Left Blank; Signature Pages Follow]


IN WITNESS WHEREOF , the parties hereto have duly executed this First Amendment, as of the date first above written.

 

BORROWER:
STEALTH BIOTHERAPEUTICS CORP,
as Borrower
By:  

/s/ Louise Garbarino

Name:  

Louise Garbarino

Title:  

Director

STEALTH BIOTHERAPEUTICS INC.,
as Borrower
By:  

/s/ Reenie McCarthy

Name:  

Reenie McCarthy

Title:  

President

[Signature Page to First Amendment to Loan and Security Agreement (Hercules/Stealth)]


AGENT AND LENDER:

HERCULES CAPITAL, INC,

as Agent and Lender

By:  

/s/ Jennifer Choe

Name:  

Jennifer Choe

Title:  

Assistant General Counsel

[Signature Page to First Amendment to Loan and Security Agreement (Hercules/Stealth)]


ANNEX A

UPDATES TO SCHEDULES AND EXHIBITS

(see attached)


EXHIBIT D

BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES


ANNEX B

PERFECTION CERTIFICATE


PERFECTION CERTIFICATE

TO:    Hercules Capital, Inc.

The undersigned, a Director of Stealth BioTherapeutics Corp, a Cayman entity and the sole shareholder of Stealth BioTherapeutics Inc. (individually and collectively, the “Company”), hereby represents and warrants as of the date hereof to you on behalf of the Company as follows:

NAMES OF THE COMPANY

The name of the Company as it appears in its current Articles or Certificate of Incorporation is: “Stealth BioTherapeutics Corp” and “Stealth BioTherapeutics Inc.” .

The federal employer identification number of the Company is: 26-1512085 (Stealth BioTherapeutics Inc.) .

The Company is formed under the laws of the Cayman Islands (Stealth BioTherapeutics Corp) and the State of Delaware (Stealth BioTherapeutics Inc.).

The organizational identification number issued to the Company under its jurisdiction of formation is: 165223 (Stealth BioTherapeutics Corp); 4444582 (Stealth BioTherapeutics Inc.) .

The Company transacts business in the following states (and/or countries) (list jurisdictions other than jurisdiction of formation): Stealth BioTherapeutics Inc.: Connecticut, Florida, Illinois, Maine, Massachusetts, Michigan, New Jersey, North Carolina, Pennsylvania, Rhode Island .

The Company is duly qualified to transact business as a foreign entity in the following states (and/or countries) (list jurisdictions other than jurisdiction of formation): Stealth BioTherapeutics Inc.: Connecticut, Florida, Illinois, Maine, Massachusetts, Michigan, New Jersey, North Carolina, Pennsylvania, Rhode Island .

The following is a list of all other names (including fictitious names, d/b/a’s, trade names or similar names) currently used by the Company or used within the past five years:

 

Name

  

Period of Use

 

Note whether prior legal name, fictitious name,
d/b/a, trade name, etc.

Stealth Peptides International Inc. (Stealth BioTherapeutics Corp)   

4/3/06 – 8/3/15

 

Prior legal name

Stealth Peptides Incorporated (Stealth BioTherapeutics Inc.)    10/22/07 – 4/12/15  

Prior legal name

Stealth BioTherapeutics Inc. (Stealth BioTherapeutics Inc.)    1/15/15 – 4/12/15  

d/b/a

 

1


The following are the legal names and jurisdictions of formation of all entities which have been merged into the Company during the past five years:

N/A

 

Legal Name of Merged Entity

  

Entity Jurisdiction of Formation

  

Year of Merger

     
     
     

The following are the legal names and addresses (including jurisdictions of formation) of all entities from whom the Company has acquired any personal property in a transaction not in the ordinary course of business during the past five years, together with the date of such acquisition and the type of personal property acquired (e.g., equipment, inventory, etc.):

N/A

 

Legal Name

  

Jurisdiction of Formation / Address

  

Date of Acquisition

  

Type of Property

        
        
        

EQUITY-RELATED MATTERS

Is the Company publicly-traded or privately held?

Public    ☐     Private    ☒

If public, provide the following information:

 

Date of Listing

 

Exchange (e.g., NASDAQ, NYSE, LSE, etc.)

 

Ticker/Trading symbol

 

Tax/Accounting Year

 

Is the Company current in its SEC and/or other reporting?

 

Last report filed

 

 

2


If private, attach a current capitalization table as a schedule.

Provided to Agent in Data Room (see Section 5).

PARENT/SUBSIDIARIES OF THE COMPANY

The legal name of each subsidiary and parent of the Company is as follows. (A “parent” is an entity directly owning more than 50% of the outstanding capital stock of the Company. A “subsidiary” is an entity, 50% or more of the outstanding capital stock of which is directly owned by the Company.)

 

Name

  

Subsidiary/Parent

  

Fed. Employer ID No.

Stealth BioTherapeutics Inc. (subsidiary of Stealth BioTherapeutics Corp)   

Sub ☒     Parent ☐

  

26-1512085

Stealth BioTherapeutics Corp (parent of Stealth BioTherapeutics Inc.)   

Sub ☐     Parent ☒

  

N/A

Stealth BioTherapeutics (HK) Limited (subsidiary of Stealth BioTherapeutics Corp)   

Sub ☐     Parent ☐

  

N/A

The following is a list of the respective jurisdictions and dates of formation of the parent and each subsidiary of the Company:

 

Name

   Jurisdiction   

Date of Formation

Stealth BioTherapeutics Corp    Cayman Islands    4/3/06
Stealth BioTherapeutics Inc.    Delaware    10/22/07
Stealth BioTherapeutics (HK) Limited    Hong Kong    9/11/17

 

3


The following is a list of all other names (including fictitious names, d/b/a’s, trade names or similar names) currently used by each subsidiary of the Company or used during the past five years:

 

Name

  

Subsidiary

Stealth Peptides Incorporated

  

Stealth BioTherapeutics Inc.

  
  

The following are the names of all entities which have been merged into a subsidiary of the Company during the five years:

N/A

 

Name

  

Subsidiary

  
  
  

The following are the names and addresses of all entities from whom each subsidiary of the Company has acquired any personal property in a transaction not in the ordinary course of business during the past five years, together with the date of such acquisition and the type of personal property acquired (e.g., equipment, inventory, etc.):

N/A

 

Name

  

Address

  

Date of Acquisition

  

Type of Property

  

Subsidiary

           
           
           

LOCATIONS OF COMPANY AND ITS SUBSIDIARIES

The Company and each of its subsidiaries maintain books or records at the following addresses:

 

Complete street and mailing address, including county

  

Name of Company/Subsidiary

2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC 98000, Monaco   

Stealth BioTherapeutics Corp

275 Grove Street, Suite 3-107, Newton, Middlesex County, Massachusetts 02466, USA   

Stealth BioTherapeutics Inc.

22/F Hang Lung Centre, 2-20 Paterson Street, Causeway Bay, Hong Kong   

Stealth BioTherapeutics (HK) Limited

 

4


The Company and its subsidiaries own, lease, or occupy real property located at the following addresses and maintain equipment, inventory, or other property at such address:

 

Complete street and mailing address, including county

  

Name of Company/Subsidiary

  

Equipment/Inventory/other Collateral
(including $ value)

2nd Floor, Le Prince de Galles, 3-5 Avenue des Citronniers, MC 98000, Monaco   

Stealth BioTherapeutics Corp

  

N/A

275 Grove Street, Suite 3-107, Newton, Middlesex County, Massachusetts 02466, USA   

Stealth BioTherapeutics Inc.

  

Comp equip. office furniture

$936K (gross) See B/S

1946 Washington Street, Unit 30, Newton, MA 02466, USA   

Stealth BioTherapeutics Inc.

  

N/A

22/F Hang Lung Centre, 2-20 Paterson Street, Causeway Bay, Hong Kong   

Stealth BioTherapeutics (HK) Limited

  

N/A

The following are the names and addresses of all warehousemen, bailees, or other third parties who have possession of any of the Company’s inventory, equipment, or other property or that of its subsidiaries:

 

Name and complete mailing address of third party

  

Description of assets held with third party
including estimated FMV

  

Name of Company/Subsidiary

Virginia Polytechnic Institute and State University

 

1051 Integrated Life Science Building 1981 Kraft Drive

 

Blacksburg, VA 24060

  

In-cell imaging machine, $251,000;

 

Oxygraph-2k Multisensor system, $102,000

  

Stealth BioTherapeutics Inc.

 

5


SPECIAL TYPES OF COLLATERAL

The Company and its subsidiaries own (or have any ownership interest in) the following kinds of assets.

 

Copyrights or copyright applications registered with the U.S. Copyright Office

  

Yes ☒     No ☐

Software registered with the U.S. Copyright Office

  

Yes ☐     No ☒

Software not registered with the U.S. Copyright Office

  

Yes ☐     No ☒

Patents and patent applications

Provided to Agent in Data Room (see Section 3).

  

Yes ☒     No ☐

Trademarks or trademark applications (including any service marks, collective marks and certification marks)

Provided to Agent in Data Room (see Section 3).

  

Yes ☒     No ☐

Licenses to use trademarks, patents and copyrights of others

Provided to Agent in Data Room (see Section 3).

  

Yes ☒     No ☐

Licenses, permits (including environmental), authorizations, or certifications issued by federal, state, or local governments issued to the Company and/or its subsidiaries or with respect to their assets, properties, or businesses

Provided to Agent in Data Room (see Section 2.2).

  

Yes ☒     No ☐

Stocks, bonds or other securities held by the Company or its subsidiaries in other entities (Company or sub is the stock owner)

  

Yes ☐     No ☒

Promissory notes, or other instruments or evidence of indebtedness issued in favor of the Company or any of its subsidiaries (Company or sub is the lender)

  

Yes ☐     No ☒

Leases of equipment, security agreements naming the Company or its subsidiaries as secured party or other chattel paper (Company or sub is the lessor/secured party)

  

Yes ☐     No ☒

Aircraft

  

Yes ☐     No ☒

Vessels, Boats or Ships

  

Yes ☐     No ☒

Railroad Rolling Stock

  

Yes ☐     No ☒

Motor Vehicles

  

Yes ☐     No ☒

If the answer is “yes” to any of the above questions, attach a Schedule 5(a) listing each asset owned by the Company and/or its subsidiaries (separately identified and scheduled for each entity) and identifying which party owns the asset, the relevant jurisdiction (such as IP registered in non-U.S. jurisdictions or the jurisdiction under which a motor vehicle is registered), each registration, application, or other identification number, and all other relevant information. In the cases of licenses, include the relevant parties and the specific property being licensed, and, if any licenses are material to the Company’s and/or any of its subsidiaries’ business, provide copies of such licenses.

Provided to Agent in Data Room (see sections noted above).

 

6


The following are all banks, brokerages, or financial institutions at which the Company and its subsidiaries maintain deposit or securities accounts:

 

Institution Name and Address

  

Account

Number

  

Average Balance

in Account

  

Name of

Account Owner

Silicon Valley Bank

3003 Tasman Drive,

Santa Clara, CA 95054 USA

  

xxxxxx1856

   $50K over last 3 months ending balance    Stealth BioTherapeutics Inc.

Silicon Valley Bank

3003 Tasman Drive,

Santa Clara, CA 95054 USA

  

xxxxxx3337

   $2.2M over last 3 months ending balance    Stealth BioTherapeutics Inc.

Silicon Valley Bank

3003 Tasman Drive,

Santa Clara, CA 95054 USA

  

xxxxxx7148

   $50K over last 3 months ending balance    Stealth BioTherapeutics Corp

Silicon Valley Bank

3003 Tasman Drive,

Santa Clara, CA 95054 USA

  

xxxxxx3385

   $3.8M over last 3 months ending balance    Stealth BioTherapeutics Corp

Standard Chartered Bank

(Hong Kong) Ltd.

Standard Chartered Bank Building

4-4A Des Voeux Road C., Hong Kong

  

xxxxxx1048

   $0    Stealth BioTherapeutics (HK) Limited

Does or is it contemplated that the Company will regularly receive letters of credit from customers or other third parties to secure payments of sums owed to the Company? The following is a list of letters of credit naming the Company as “beneficiary” thereunder:

N/A

 

LC Number

  

Name of LC Issuer

  

LC Applicant

     
     
     

 

7


DEBT/ENCUMBRANCES

The Company and its subsidiaries have the following outstanding debt for money borrowed (whether or not convertible) (please attach copies of all instruments evidencing the debt):

Name and Address of Lender

  

Original Principal Amount/
Principal Outstanding

  

Maturity Date

  

Secured/Unsecured (if secured,
complete 6(b))

Morningside Venture (I)

Investments Limited 2 nd Floor,

Le Prince de Galles, 3-5

Avenue des Citronniers, MC

98000, Monaco

  

52,357,333.33 USD/

 

52,357,333.33 USD

  

January 10, 2020

  

Unsecured

Pivotal Beta Limited

[ADDRESS]

  

15,000,000 USD /

15,000,000 USD

  

January 10, 2020

  

Unsecured

        

Do not list debt that is to be repaid prior to or concurrently with the Hercules Capital, Inc. loan.

The Company’s and its subsidiaries’ properties are subject to the following liens or encumbrances:

N/A

 

Name of Holder of Lien/Encumbrance

  

Description of Property Encumbered

  

Name of Company/Subsidiary

Hines Global Reit Riverside Center, LLC

   Landlord security deposit in the amount of $325,000   

Stealth BioTherapeutics Inc.

Woodland Station LLC

   Landlord security deposit in the amount of $517.50   

Stealth BioTherapeutics Inc.

Do not list liens that are to be terminated prior to or concurrently with the Hercules Capital, Inc. loan.

GOVERNMENT REGULATION

The Company and its subsidiaries are subject to regulation by the following federal, state or local government entity or any department, agency, or instrumentality thereof:

 

Name of Regulatory Entity

  

Description of Regulation

  

Company/Subsidiary

United States Food and Drug Administration

   Regulations and guidance’s with respect to investigational drug development for human use   

Company ☐ or Name of Sub

Stealth Bio Therapeutics Inc.

Ex-US drug regulatory authorities

   Local competent authority regulations and ICH with respect to investigational drug development for human use   

Company ☐ or Name of Sub

Stealth Bio Therapeutics Inc.

 

8


LITIGATION

The following is a complete list of pending and threatened litigation or claims involving amounts claimed against the Company in an indefinite amount or in excess of $50,000 in each case:                          .

N/A

The following are the only claims which the Company has against others (other than claims on accounts receivable), which the Company is asserting or intends to assert, and in which the potential recovery exceeds $50,000:                          .

N/A

TAXES

The following taxes are currently outstanding and unpaid:

 

Assessing Authority

  

Amount and Description

N/A

  

N/A

  
  

INSURANCE BROKER

The following broker handles the Company’s property and liability insurance:

 

Broker

  

Contact

  

Telephone

  

Fax

  

Email

Arthur J. Gallagher & Co

  

Amy M. Sinclair

  

P: 617.646.0266

  

617.646.0400

  

amy_sinclair@ajg.com

 

9


OFFICERS OF THE COMPANY AND ITS SUBSIDIARIES

The following are the names and titles of the officers of the Company and its subsidiaries.

 

Office/Title

  

Name of Officer

  

Name of Company/Subsidiary

President and Chief Executive Officer   

Reenie McCarthy

  

Stealth BioTherapeutics Inc.

Chief Scientific Officer   

Mark J. Bamberger, Ph.D.

  

Stealth BioTherapeutics Inc.

Chief Business Officer   

Brian D. Blakey, Pharm.D.

  

Stealth BioTherapeutics Inc.

Chief Clinical Development Officer   

James R. Carr, Pharm.D.

  

Stealth BioTherapeutics Inc.

Interim Chief Financial Officer   

Daniel E. Geffken

  

Stealth BioTherapeutics Inc.

Director   

Francis Wen-Hou Chen

  

Stealth BioTherapeutics Corp

Director   

George Ka Ki Chang

  

Stealth BioTherapeutics Corp

Director   

Louise Mary Garbarino

  

Stealth BioTherapeutics Corp

IRS FORM W9

The Company’s completed and executed IRS Form W9 is attached hereto as Exhibit A.

Provided to Agent in Data Room (see Section 6).

LEGAL COUNSEL

The following attorney(s) will represent the Company in connection with the loan documents:

 

Name of Attorney

  

Name of law firm / address

  

Telephone

  

Fax

  

Email

Jamie Class

   Wilmer Cutler Pickering Hale and Dorr LLP    (617) 526-6871    (617) 526-5000    jamie.class@wilmerhale.com

 

10


HEALTHCARE MATTERS

The following is a description of any facts and circumstances where the facilities or licensed employees and contractors of the Company or any of its subsidiaries, in their respective duties on behalf of the Company or such subsidiary, are not in compliance with any applicable healthcare laws or, to the knowledge of the Company or any subsidiary, any presently existing circumstances which would result or likely would result in material violations of such healthcare laws, including all federal, state or local laws, rules, regulations governing or regulating the provision of, or payment for, medical services, or the sale of medical supplies:                          .

N/A

The following is a description of any circumstances where the Company or any of its subsidiaries has not maintained in all material respects all records required to be maintained by the Joint Commission on Accreditation of Healthcare Organizations, the Food and Drug Administration (“FDA”), Drug Enforcement Agency and State Boards of Pharmacy, as required by applicable healthcare laws:                          .

N/A

FDA AND RELATED REGULATORY MATTERS

The following is a list of all products designed, manufactured, distributed and/or sold by or for the Company or any of its subsidiaries that are subject to regulatory review and approval by the FDA:

Clinical investigational product, elamipretide (MTP-131), and clinical investigational product SBT- 020. Stealth BioTherapeutics does not have any approved products.

The following is a complete description of any FDA protocols applicable to products designed, produced, sold or distributed by the Company or its subsidiaries:

Provided to Agent in Data Room (see Sections 2.3.1 and 2.7.3).

The following is a description of any pending or threatened federal (DOJ, FDA, FTC, or other entity) or state or foreign government civil or criminal legal actions including, but not limited to, consent decrees, injunctions, product seizures, civil penalties, untitled letters, Warning Letters, and import detentions within the past five years, and attached hereto are copies of all related documentation and a summary of any investigative inquiries received from any government entity within the past five years related to products or regulatory compliance, including current status of inquiry: None .

The following is a description of all information, analysis, status, and plans to evaluate any pending safety issue (including product-specific or relevant class issues): None .

The following is a description of any of the following that has occurred during the past five years: (i) all sites inspected by FDA, including dates, location, and outcome of inspection; (ii) all FDA Establishment Inspection Reports (“ EIRs ”) and all related correspondence and documentation, including Company’s written responses and documentation of corrective actions; (iii) all FDA Form 483s and all related correspondence and documentation, including Company’s written responses and documentation of corrective actions; and (iv) all site inspections by state or local regulatory authorities related to drug or medical device products: None .

 

11


The following is a description of (and attached hereto are copies of) all federal, state, local and foreign governmental, quasi-governmental or regulatory permits, licenses, consents, approvals, clearances, authorizations, registrations, filings and entitlements (including import/export licenses/certificates) regarding organization, regulated products and current and future projects or services that are material to the Company or any of its subsidiaries (please indicate on the list the expiration date, if any, of the items and any requirements for new applications or notifications):

US (elamipretide)

IND 105,952 - Division of Cardiovascular and Renal Products

IND 114,243 - Division of Transplant and Ophthalmology Products IND 123,553 - Division of Neurology Products

IND 137,429 – Division of Neurology Products

EU

Elamipretide: EudraCT-No: 2016-000126-19 SPIHF-204: A Phase 2 Randomized, Double-Blind, Placebo-Controlled Study to Evaluate the Cardiac and Renal Effects of Short Term Treatment with Elamipretide in Patients Hospitalized with Congestion due to Heart Failure.

Elamipretide: EudraCT-No: 2014-005724-10 - SPIHF-201: A Phase 2 Randomized, Double-Blinded, Placebo-Controlled Study to Evaluate the Effects of Multiple Subcutaneous Injections of Elamipretide on Left Ventricular Function in Subjects with Stable Heart Failure with Reduced Ejection Fraction

Elamipretide: EudraCT-No: 2015-005615-32 SPIHF-203: A Phase 2 Randomized, Double-Blinded, Placebo-Controlled Study to Evaluate the Effects of 4 Weeks Treatment with Subcutaneous Elamipretide on Left Ventricular Function in Subjects with Stable Heart Failure with Preserved Ejection Fraction

Elamipretide: EudraCT-No: 2017-002447-15 SPIMM-301: A Phase 3 Randomized, Double-Blind, Parallel-Group, Placebo-Controlled Trial to Evaluate the Efficacy and Safety of Daily Subcutaneous Injections of Elamipretide in Subjects with Primary Mitochondrial Myopathy Followed by an Open-Label Treatment Extension

SBT-020: EudraCT-No: 2016-003730-25 SBT20-102: A Two Part Study to Assess the Safety, Pharmacokinetics and Pharmacodynamics of SBT-020 in Patients with Early Stage Huntington’s Disease

 

12


The following is a description of (and attached hereto are copies of) any documentation regarding the potential failure of Company or any of its subsidiaries to manufacture in accordance with FDA’s cGMP requirements (or the foreign counterpart of any of these requirements), including internal and third-party audit reports and related documentation: None .

The following is a description of all current clinical investigations sponsored by Company or its subsidiaries, including a list of all study protocols, study sites, and clinical investigators involved at each site and any documentation or notices received from a governmental authority (including the FDA) stating that such clinical trials are not being conducted in material accordance with applicable FDA requirements:

Provided to Agent in Data Room (See “Summary of Clinical Trials” documents in Sections 2.1 and 2.7.1)

The following is a description of (and attached hereto are copies of) any documentation regarding any recalls, corrections, removals, field actions, field notifications, market withdrawals, Dear Doctor Letters, and safety alerts related to the products of Company or its subsidiaries within the past five years: None.

 

13


The Company acknowledges that your acceptance of this Perfection Certificate and any continuation pages does not imply any commitment on your part to enter into a loan transaction with the Company, and that any such commitment may only be made by an express written loan commitment, signed by one of your authorized officers.

Date:                     

 

STEALTH BIOTHERAPEUTICS CORP
Signature:  

/s/ Louise Garbarino

Name: Louise Garbarino
Title: Director
STEALTH BIOTHERAPEUTICS INC.
Signature:  

/s/ Reenie McCarthy

Name: Reenie McCarthy
Title: President and Secretary

Signature Page to Perfection Certificate

 

14


Continuation Page - Additional Information

 

15


Exhibit A

IRS Form W9

Provided to Agent in Data Room (see Section 9).


SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Second Amendment ”), dated as of July 26, 2018 (the “ Second Amendment Effective Date ”), is made among STEALTH BIOTHERAPEUTICS CORP, an exempted company incorporated with limited liability under the laws of the Cayman Islands with registered number 165223 (“ Stealth Cayman ”), STEALTH BIOTHERAPEUTICS INC., a Delaware corporation (“ Stealth Delaware ” and, together with Stealth Cayman, hereinafter individually and collectively referred to as “ Borrower ”), HERCULES CAPITAL, INC., a Maryland corporation (“ Hercules ”), in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, “ Agent ”).

WHEREAS, the Lender has advanced U.S.$20 million to the Borrower under the Tranche 1 Advance, Tranche 2 Advance and Tranche 3 Advance under the Loan and Security Agreement dated as of June 30, 2017, as amended by that certain First Amendment to Loan and Security Agreement dated as of March 12, 2018, by and among the Borrower, Hercules and Agent (the “ Loan and Security Agreement ”); and

WHEREAS, the Borrower, Agent and Lender have agreed to certain amendments to the Loan and Security Agreement;

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency thereof being hereby acknowledged, the parties hereto agree as follows:

SECTION 1    Definitions; Interpretation.

(a)     Terms Defined in Loan and Security Agreement . All capitalized terms used in this Second Amendment (including in the recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Loan and Security Agreement.

(b)     Interpretation . The rules of interpretation set forth in Section 1 of the Loan and Security Agreement shall be applicable to this Second Amendment and are incorporated herein by this reference.

SECTION 2    Amendments to the Loan and Security Agreement.

(a)     Amendments . The Loan and Security Agreement shall be amended as follows effective as of the Second Amendment Effective Date:

(i)     New Definitions . The following definitions are added to Section 1.1 in their proper alphabetical order:

“HKSE” means The Stock Exchange of Hong Kong Limited.

“Hong Kong IPO” means the initial public offering and listing of Stealth Cayman’s ordinary shares (or the ordinary shares or other securities of any direct or indirect parent entity of Stealth Cayman) on the Main Board of the HKSE.

“Performance Milestone 6” means satisfaction of each of the following: (a) no Event of Default has occurred and is continuing, and (b) prior to July 31, 2018, Stealth Cayman has filed a Form A1 in connection with a potential Hong Kong IPO, and HKSE has acknowledged receipt of the listing application. It is acknowledged and agreed that Performance Milestone 6 has occurred.


“Performance Milestone 7” means satisfaction of each of the following: (a) no Event of Default has occurred and is continuing, (b) achievement of Performance Milestone 6, and (c) as of August 31, 2018, Stealth Cayman is continuing to proceed towards the completion of the Hong Kong IPO as evidenced by progress towards or completion of a hearing of the listing committee of the HKSE, as determined by Agent in its reasonable discretion.

“Performance Milestone 8” means satisfaction of each of the following : (a) no Event of Default has occurred and is continuing, (b) achievement of Performance Milestone 7, (c) Stealth Cayman has completed a Hong Kong IPO resulting in at least U.S.$100,000,000 of gross proceeds, and (c) the net proceeds of such Hong Kong IPO are deposited and held in a Deposit Account subject to an Account Control Agreement in favor of Agent.

“Second Amendment Effective Date” means July 26, 2018.

“Stealth WFOE” shall mean Stealth BioTherapeutics (Shanghai) Limited, a limited liability company established in the People’s Republic of China.

(ii)     Amended and Restated Definitions . The following definitions are hereby amended and restated as follows:

“Amortization Date” means August 1, 2018; provided however , because Performance Milestone 6 has occurred, it means September 1, 2018; provided further , if Performance Milestone 7 occurs, then October 1, 2018; provided further , if Performance Milestone 8 occurs, then April 1, 2019. Notwithstanding the foregoing, if prior to October 1, 2018 Performance Milestone 8 has not yet occurred but Borrower is continuing to progress towards the completion of a Hong Kong IPO, then upon Borrower’s written request to Lender on or before October 1, 2018, Lender may elect in its sole discretion to further extend the Amortization Date to November 1, 2018.

(iii)    Amended Definitions. The following definitions are hereby amended as follows:

The definition of “Change in Control” is hereby amended by adding the following words immediately before the period: “; and provided further, that the Hong Kong IPO shall not be deemed a Change in Control”.

“The definition of “Permitted Investment” is hereby amended by replacing the word “and” in clause (xvi) thereof with a comma and adding the following words immediately before the period: “and (xvi) any newly formed Subsidiaries formed after the Closing Date if formed in compliance with Section 7.13 hereof”.

(iv)     Section 2.2(a) . Section 2.2(a) is hereby amended by deleting the penultimate sentence and replacing it with the following:

“Subject to the terms and conditions of this Agreement, and conditioned on approval by Lender’s investment committee in its sole and unfettered discretion, beginning on the date Borrower achieves Performance Milestone 8 and continuing through September 30, 2019,


Borrower may request and Lender shall at its sole discretion make additional Term Loan Advances in an aggregate principal amount up to U.S.$20,000,000 in minimum increments of U.S.$5,000,000 (each a “ Tranche 4 Advance ”).

(v)     Section 2.6 . Section 2.6 is hereby amended and restated as follows.

“End of Term Charge. On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge in an amount equal to (a) U.S.$1,200,000 plus (b) five percent (5%) of the aggregate principal amount of all Tranche 4 Advances made (the “ End of Term Charge ”). Notwithstanding the required payment date of any charges or fees due under this Section 2.6, such charge or fee shall be deemed earned by Lender as follows: U.S.$750,000 earned as of the Closing Date, U.S.$250,000 earned as of March 15, 2018, U.S.$200,000 earned as of the Second Amendment Effective Date, and 5% of the aggregate principal amount of all Tranche 4 Advances made as of the Advance Date of each such Advance.

(vi)     Section 7.12 . Section 7.12 is hereby amended and restated as follows.

“Deposit Accounts. Neither Borrower nor any Subsidiary (other than the MSC) shall maintain any Deposit Accounts, or accounts holding Investment Property, except with respect to which Agent has an Account Control Agreement. The provisions of the previous sentence shall not apply to (i) Stealth Cayman’s account number XXXX6289 held at Standard Chartered Bank (Hong Kong) Ltd., provided that the amount deposited therein shall not exceed U.S.$250,000, (ii) Stealth HK’s account number XXX-X-XXX104-8 held at Standard Chartered Bank (Hong Kong) Ltd., provided that the amount deposited therein shall not exceed U.S.$100,000 at any one time, and (iii) Deposit Accounts of Stealth WFOE, provided that the amount deposited therein shall not exceed U.S.$100,000 at any one time.”

(vii)     Section 7.19 . Section 7.19 is hereby amended and restated as follows:

“(a)    Stealth HK. Borrower agrees that Stealth HK shall not: (i) as of any time of determination, hold any assets or be liable for any liabilities in excess of U.S.$100,000, in each case in the aggregate; (ii) receive any Cash from any Person in excess of U.S.$100,000 in the aggregate in any fiscal year; or (iii) own or otherwise have the right to use any Intellectual Property or any exclusive licenses for the use of any (a) Intellectual Property of Borrower or its Subsidiaries or (b) Borrower Products of Borrower or its Subsidiaries.

(b)    Stealth WFOE. Borrower agrees that Stealth WFOE shall not: (i) as of any time of determination, hold any assets or be liable for any liabilities in excess of U.S.$100,000, in each case in the aggregate; (ii) receive any Cash from any Person in excess of U.S.$100,000 in the aggregate in any fiscal year; or (iii) own or otherwise have the right to use any Intellectual Property or any exclusive licenses for the use of any (a) Intellectual Property of Borrower or its Subsidiaries or (b) Borrower Products of Borrower or its Subsidiaries.”


(viii)    Section 8.1. The third paragraph of Section 8.1 is hereby amended and restated as follows:

“The first paragraph of this Section 8.1 shall terminate upon the occurrence of the Hong Kong IPO. Subject to the foregoing sentence, this Section 8.1, and all rights and obligations hereunder, shall survive the repayment of indebtedness under, and otherwise shall survive the expiration or other termination of, the Loan Agreement and shall terminate on the 10th anniversary of this Agreement (ie. June 30, 2027).”

(ix)    Section 9.3. Section 9.3 is hereby amended and restated as follows:

“Material Adverse Effect. A circumstance has occurred that has had a Material Adverse Effect; provided that solely for purposes of this Section 9.3, the failure to achieve Performance Milestone 1, Performance Milestone 2, Performance Milestone 3, Performance Milestone 4, Performance Milestone 5, Performance Milestone 6, Performance Milestone 7 or Performance Milestone 8, in each case in and of itself, shall not constitute a Material Adverse Effect; or”

(x)     Schedules and Exhibits . The following schedule and exhibits of the Loan and Security Agreement shall be updated and delivered to Agent, in form and substance reasonably satisfactory to Agent, by July 31, 2018: Exhibit E, Schedule 1, Schedule 1A and Schedule 5.14.

(b)     Approval of Investments in Stealth WFOE. Pursuant to clause (x) of the definition of “Permitted Investment,” the Required Lenders hereby approves Investments in Stealth WFOE not to exceed U.S.$100,000 in the aggregate in any fiscal year.

(c)     References Within Loan and Security Agreement . Each reference in the Loan and Security Agreement to “this Agreement” and the words “hereof,” “herein,” “hereunder,” or words of like import, shall mean and be a reference to the Loan and Security Agreement as amended by this Second Amendment.

SECTION 3      Conditions of Effectiveness. The effectiveness of this Second Amendment shall be subject to the satisfaction of each of the following conditions precedent:

(a)    All fees and expenses required to be paid under the Loan Agreement shall have been paid.

(b)    Agent shall have received this Second Amendment, executed by Agent, Lender and Borrower.

(c)     Representations and Warranties; No Default . On the Second Amendment Effective Date, after giving effect to the waivers under and amendment of the Loan and Security Agreement contemplated hereby:

(i)    The representations and warranties contained in 4 of this Second Amendment shall be true and correct on and as of the Second Amendment Effective Date as though made on and as of such date; and

(ii)    There exist no Events of Default or events that with the passage of time would result in an Event of Default.

SECTION 4      Representations and Warranties . To induce the Agent and Lender to enter into this Second Amendment, Borrower hereby confirms, as of the date hereof, (a) that the representations and warranties made by it in Section 5 of the Loan and Security Agreement and in the other Loan Documents


are true and correct in all material respects; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; (b) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing. For the purposes of this Section  4 , (i) each reference in Section 5 of the Loan and Security Agreement to “this Agreement,” and the words “hereof,” “herein,” “hereunder,” or words of like import in such Section, shall mean and be a reference to the Loan and Security Agreement as amended by this Second Amendment, and (ii) any representations and warranties which relate solely to an earlier date shall not be deemed confirmed and restated as of the date hereof (provided that such representations and warranties shall be true, correct and complete as of such earlier date)..

SECTION 5    Miscellaneous.

(a)     Loan Documents Otherwise Not Affected; Reaffirmation . Except as expressly amended pursuant hereto or referenced herein, the Loan and Security Agreement and the other Loan Documents shall remain unchanged and in full force and effect and are hereby ratified and confirmed in all respects. Lender’s and Agent’s execution and delivery of, or acceptance of, this Second Amendment shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. Borrower hereby reaffirms the grant of security under Section 3 of the Loan and Security Agreement and hereby reaffirms that such grant of security in the Collateral secures all Secured Obligations under the Loan and Security Agreement, including without limitation any Term Loans funded on or after the Second Amendment Effective Date, as of the date hereof.

(b)     Conditions . For purposes of determining compliance with the conditions specified in Section  34 , each Lender that has signed this Second Amendment (which constitute all Lenders) shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

(c)     Release . In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lender and all such other persons being hereinafter referred to collectively as the “ Releasees ” and individually as a “ Releasee ”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Second Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above. Borrower waives the provisions of California Civil Code Section 1542, which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.


(d)     No Reliance . Borrower hereby acknowledges and confirms to Agent and Lender that Borrower is executing this Second Amendment on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person.

(e)     Costs and Expenses . Borrower agrees to pay to Agent within ten (10) days of its receipt of an invoice (or on the Second Amendment Effective Date to the extent invoiced on or prior to the Second Amendment Effective Date), the out-of-pocket costs and expenses of Agent and Lender party hereto, and the fees and disbursements of counsel to Agent and Lender party hereto (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution and delivery of this Second Amendment and any other documents to be delivered in connection herewith on the Second Amendment Effective Date or after such date.

(f)     Binding Effect . This Second Amendment binds and is for the benefit of the successors and permitted assigns of each party.

(g)     Governing Law . THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THE LAWS OF THE STATE OF CALIFORNIA ), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE COLLATERAL.

(h)     Complete Agreement; Amendments . This Second Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements with respect to such subject matter. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Second Amendment and the Loan Documents merge into this Second Amendment and the Loan Documents.

(i)     Severability of Provisions. Each provision of this Second Amendment is severable from every other provision in determining the enforceability of any provision.

(j)     Counterparts . This Second Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Amendment. Delivery of an executed counterpart of a signature page of this Second Amendment by facsimile, portable document format (.pdf) or other electronic transmission will be as effective as delivery of a manually executed counterpart hereof.

(k)     Loan Documents . This Second Amendment and the documents related thereto shall constitute Loan Documents.

[Balance of Page Intentionally Left Blank; Signature Pages Follow]


IN WITNESS WHEREOF , the parties hereto have duly executed this Second Amendment, as of the date first above written.

 

BORROWER:

STEALTH BIOTHERAPEUTICS CORP,

as Borrower

By:  

/s/ Reenie McCarthy

Name:  

Reenie McCarthy

Title:  

Executive Director

STEALTH BIOTHERAPEUTICS INC.,

as Borrower

By:  

/s/ Henry Hess

Name:  

Henry H. Hess

Title:  

Corporate Counsel

[Signature Page to Second Amendment to Loan and Security Agreement (Hercules/Stealth)]


AGENT

 

HERCULES CAPITAL, INC,

as Agent

By:  

/s/ Jennifer Choe

Name:  

Jennifer Choe

Title:  

Assistant General Counsel

LENDER:

 

HERCULES FUNDING II, LLC,

as Lender

By:  

/s/ Jennifer Choe

Name:  

Jennifer Choe

Title:  

Assistant General Counsel

[Signature Page to Second Amendment to Loan and Security Agreement (Hercules/Stealth)]


THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Third Amendment ”), dated as of October 10, 2018 (the “ Third Amendment Date ”), and effective as of October 1, 2018 (the “ Third Amendment Effective Date ”), is made among STEALTH BIOTHERAPEUTICS CORP, an exempted company incorporated with limited liability under the laws of the Cayman Islands with registered number 165223 (“ Stealth Cayman ”), STEALTH BIOTHERAPEUTICS INC., a Delaware corporation (“ Stealth Delaware ” and, together with Stealth Cayman, hereinafter individually and collectively referred to as “ Borrower ”), HERCULES CAPITAL, INC., a Maryland corporation (“ Hercules ”), in its capacity as administrative agent and collateral agent for itself and Lender (in such capacity, “ Agent ”).

WHEREAS, the Lender has advanced U.S.$20 million to the Borrower under the Tranche 1 Advance, Tranche 2 Advance and Tranche 3 Advance under the Loan and Security Agreement dated as of June 30, 2017, as amended by that certain First Amendment to Loan and Security Agreement dated as of March 12, 2018, by and among the Borrower, Hercules and Agent, and as amended by that certain Second Amendment to Loan and Security Agreement dated as of July 26, 2018, by and among the Borrower, Hercules and Agent (and as further amended from time to time, the “ Loan and Security Agreement ”); and

WHEREAS, the Borrower, Agent and Lender have agreed to certain amendments to the Loan and Security Agreement;

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency thereof being hereby acknowledged, the parties hereto agree as follows:

SECTION 1    Definitions; Interpretation.

(a)     Terms Defined in Loan and Security Agreement . All capitalized terms used in this Third Amendment (including in the recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Loan and Security Agreement.

(b)     Interpretation . The rules of interpretation set forth in Section 1 of the Loan and Security Agreement shall be applicable to this Third Amendment and are incorporated herein by this reference.

SECTION 2    Amendments to the Loan and Security Agreement.

(a)     Amendments . The Loan and Security Agreement shall be amended as follows effective as of the Third Amendment Effective Date:

(i)     New Definition . The following definition is added to Section 1.1 in its proper alphabetical order:

“Third Amendment Date” means October 10, 2018.

(ii)     Amended and Restated Definition . The following definition is hereby amended and restated as follows:

“Amortization Date” means December 1, 2018; provided however , if Performance Milestone 8 occurs, then April 1, 2019.

 

1


(iii)     Amended Definition . The following definition is hereby amended as follows:

The definition of “Performance Milestone 7” is hereby amended by adding the following sentence to the end of such definition: “It is acknowledged and agreed that Performance Milestone 7 has occurred.”

(iv)     Section 2.6 . Section 2.6 is hereby amended and restated as follows.

“End of Term Charge. On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations (other than any inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) in full, or (iii) the date that the Secured Obligations become due and payable, Borrower shall pay Lender a charge in an amount equal to (a) U.S.$1,250,000 plus (b) five percent (5%) of the aggregate principal amount of all Tranche 4 Advances made (the “ End of Term Charge”) . Notwithstanding the required payment date of any charges or fees due under this Section 2.6, such charge or fee shall be deemed earned by Lender as follows: U.S.$750,000 earned as of the Closing Date, U.S.$250,000 earned as of March 15, 2018, U.S.$200,000 earned as of the Second Amendment Effective Date, U.S.$50,000 earned as of the Third Amendment Date, and 5% of the aggregate principal amount of all Tranche 4 Advances made as of the Advance Date of each such Advance.

(b) Waiver and Consent. The Lender and Agent waive any default or Event of Default arising from the failure of the Borrower to deliver updates to Exhibit E and Schedules 1, 1A and 5.14 on or prior to July 31, 2018, as required pursuant to the Second Amendment to Loan and Security Agreement. The Borrower agrees to deliver to Agent updates to such exhibit and schedules, in form and substance reasonably satisfactory to Agent, by October 31, 2018.

(c) References Within Loan and Security Agreement . Each reference in the Loan and Security Agreement to “this Agreement” and the words “hereof,” “herein,” “hereunder,” or words of like import, shall mean and be a reference to the Loan and Security Agreement as amended by this Third Amendment.

SECTION 3     Conditions of Effectiveness . The effectiveness of this Third Amendment shall be subject to the satisfaction of each of the following conditions precedent:

(a) Fees and Expenses . All fees and expenses required to be paid under the Loan Agreement shall have been paid.

(b) This Third Amendment. Agent shall have received this Third Amendment, executed by Agent, Lender and Borrower.

(c) Financing Event. Borrower shall have received at least Fifteen Million Dollars ($15,000,000) in unrestricted (including not subject to any clawback, redemption, escrow or similar contractual restriction) gross cash proceeds from one or more Subordinated Indebtedness financings of Borrower after October 1, 2018 and on or prior to the Third Amendment Date, which proceeds shall have been received in an account subject to an Account Control Agreement.


(d) Representations and Warranties; No Default . On the Third Amendment Date, after giving effect to the waivers under and amendment of the Loan and Security Agreement contemplated hereby:

(i) The representations and warranties contained in Section 4 of this Third Amendment shall be true and correct on and as of the Third Amendment Date as though made on and as of such date; and

(ii) There exist no Events of Default or events that with the passage of time would result in an Event of Default.

SECTION 4    Representations and Warranties . To induce the Agent and Lender to enter into this Third Amendment, Borrower hereby confirms, as of the date hereof, (a) that the representations and warranties made by it in Section 5 of the Loan and Security Agreement and in the other Loan Documents are true and correct in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; (b) no event that has had or could reasonably be expected to have a Material Adverse Effect has occurred and is continuing. For the purposes of this Section 4, (i) each reference in Section 5 of the Loan and Security Agreement to “this Agreement,” and the words “hereof,” “herein,” “hereunder,” or words of like import in such Section, shall mean and be a reference to the Loan and Security Agreement as amended by this Third Amendment, and (ii) any representations and warranties which relate solely to an earlier date shall not be deemed confirmed and restated as of the date hereof (provided that such representations and warranties shall be true, correct and complete as of such earlier date)

SECTION 5    Miscellaneous.

(a) Loan Documents Otherwise Not Affected; Reaffirmation . Except as expressly amended pursuant hereto or referenced herein, the Loan and Security Agreement and the other Loan Documents shall remain unchanged and in full force and effect and are hereby ratified and confirmed in all respects. Lender’s and Agent’s execution and delivery of, or acceptance of, this Third Amendment shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. Borrower hereby reaffirms the grant of security under Section 3 of the Loan and Security Agreement and hereby reaffirms that such grant of security in the Collateral secures all Secured Obligations under the Loan and Security Agreement, including without limitation any Term Loans funded on or after the Third Amendment Date, as of the date hereof.

(b) Conditions . For purposes of determining compliance with the conditions specified in Section 34, each Lender that has signed this Third Amendment (which constitute all Lenders) shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

(c) Release . In consideration of the agreements of Agent and each Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby fully, absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, Lender and all such other persons being hereinafter referred to collectively as the “ Releasees ” and individually as a “ Releasee ”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of


any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Third Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with the Loan and Security Agreement, or any of the other Loan Documents or transactions thereunder or related thereto. Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above. Borrower waives the provisions of California Civil Code Section 1542, which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

(d) No Reliance . Borrower hereby acknowledges and confirms to Agent and Lender that Borrower is executing this Third Amendment on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person.

(e) Costs and Expenses . Borrower agrees to pay to Agent within ten (10) days of its receipt of an invoice (or on the Third Amendment Date to the extent invoiced on or prior to the Third Amendment Date), the out-of-pocket costs and expenses of Agent and Lender party hereto, and the fees and disbursements of counsel to Agent and Lender party hereto (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution and delivery of this Third Amendment and any other documents to be delivered in connection herewith on the Third Amendment Date or after such date.

(f) Binding Effect . This Third Amendment binds and is for the benefit of the successors and permitted assigns of each party.

(g) Governing Law. THIS THIRD AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THE LAWS OF THE STATE OF CALIFORNIA), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE COLLATERAL.

(h) Complete Agreement; Amendments . This Third Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements with respect to such subject matter. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Third Amendment and the Loan Documents merge into this Third Amendment and the Loan Documents.

(i) Severability of Provisions . Each provision of this Third Amendment is severable from every other provision in determining the enforceability of any provision.


(j) Counterparts . This Third Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Amendment. Delivery of an executed counterpart of a signature page of this Third Amendment by facsimile, portable document format (.pdf) or other electronic transmission will be as effective as delivery of a manually executed counterpart hereof.

(k) Loan Documents . This Third Amendment and the documents related thereto shall constitute Loan Documents.

[Balance of Page Intentionally Left Blank; Signature Pages Follow]


IN WITNESS WHEREOF, the parties hereto have duly executed this Third Amendment, as of the date first above written.

 

BORROWER:

STEALTH BIOTHERAPEUTICS CORP,

as Borrower

By:  

/s/ Louise Garbarino

Name:  

Louise Garbarino

Title:  

Authorized Signatory

 

STEALTH BIOTHERAPEUTICS INC.,

as Borrower

By:  

/s/ Reenie McCarthy

Name:  

Reenie McCarthy

Title:  

President and CEO

[Signature Page to Third Amendment to Loan and Security Agreement (Hercules/Stealth)]


AGENT AND LENDER:

HERCULES CAPITAL, INC,

as Agent and Lender

By:  

/s/ Jennifer Choe

Name:  

Jennifer Choe

Title:  

Assistant General Counsel

[Signature Page to Third Amendment to Loan and Security Agreement (Hercules/Stealth)]

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

 

Name of Subsidiary    Jurisdiction of Incorporation or Organization     

Stealth BioTherapeutics, Inc.

   Delaware   

Stealth BioTherapeutics (HK) Limited

   Hong Kong   

Stealth BioTherapeutics (Shanghai) Limited

   People’s Republic of China   

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form F-1 of our report dated October 25, 2018 (December 28, 2018 as to the effects of the reverse stock split described in Note 18) relating to the consolidated financial statements of Stealth BioTherapeutics Corp and its subsidiaries (the “Company”) (which report expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph referring to the Company’s ability to continue as a going concern) appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading “Experts” in such Prospectus.

/s/ Deloitte  & Touche LLP

Boston, Massachusetts

December 28, 2018