Registration No. 333-         

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Hancock Jaffe Laboratories, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   3841   33-0936180
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

70 Doppler

Irvine, California 92618

(949) 261-2900

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

 

Benedict Broennimann, M.D.

Co-Chief Executive Officer

Hancock Jaffe Laboratories, Inc.

70 Doppler

Irvine, California 92618

(949) 261-2900

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

 

Copies to:

 

Michael A. Hedge

K&L Gates LLP

1 Park Plaza

Twelfth Floor

Irvine, California 92614

(949) 253-0900

 

Peter DiChiara

Carmel, Milazzo & DiChiara LLP

261 Madison Avenue, 9th Floor

New York, New York

(212) 658-0458

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered   Proposed
Maximum
Aggregate Offering Price(1)
    Amount of
Registration Fee(2)
 
Common Stock, $0.00001 par value per share   $ 15,000,000     $ 1,738.50  

 

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Registration fee will be paid when registration statement is first publicly filed under the Securities Act.

 

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 that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

 

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                   , 2017

 

PRELIMINARY PROSPECTUS

 

 

                             Shares

Common Stock

 

This is the initial public offering of our common stock. Prior to this offering there has been no public market for our common stock. We are offering              shares of common stock. We currently expect the initial public offering price to be between $          and $              per share.

 

We intend to apply to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “ .” Upon the closing of this offering, we expect to be a “controlled company” within the meaning of the listing requirements of Nasdaq, or the Nasdaq Marketplace Rules.

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 8 of this prospectus.

 

    Per Share     Total  
Public offering price   $                $          
Underwriting discounts and commissions (1)   $     $  
Proceeds to us, before expenses   $     $  

 

 

(1) We have also agreed to reimburse the underwriters for certain of their expenses. See “Underwriting” beginning on page 103 of this prospectus for more information about these arrangements.

 

We have granted to the underwriters an option to purchase up to              additional shares of common stock at the public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                , and the total proceeds to us, before expenses, will be $                .

 

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

 

Delivery of the shares of common stock is expected to be made on or about                    , 2017.

 

Network 1 Financial Securities, Inc.

 

The date of this prospectus is                       , 2017

 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
RISK FACTORS 8
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA 44
USE OF PROCEEDS 45
DIVIDEND POLICY 46
CAPITALIZATION 47
DILUTION 48
BUSINESS 59
MANAGEMENT 79
EXECUTIVE AND DIRECTOR COMPENSATION 86
PRINCIPAL STOCKHOLDERS 93
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 94
DESCRIPTION OF CAPITAL STOCK 95
SHARES ELIGIBLE FOR FUTURE SALE 101
UNDERWRITING 103
LEGAL MATTERS 106
EXPERTS 106
WHERE YOU CAN FIND MORE INFORMATION 106
INDEX TO FINANCIAL STATEMENTS F-1

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under the circumstances and in the jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus or any applicable free writing 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 and any applicable free writing prospectus must inform themselves, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

Through and including                   , 2017 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We use our registered trademarks and trade names, such as VenoValve™, CoreoGraft™, ProCol® Vascular Bioprosthesis, in this prospectus. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus, and does not contain all of the information that you should consider before investing in our common stock. This summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read this entire prospectus carefully, including the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto contained in this prospectus, before making an investment decision. Unless the context requires otherwise, references in this prospectus to “we,” “us,” “our,” “our company,” or similar terminology refer to Hancock Jaffe Laboratories, Inc.

 

Overview

 

We are a development stage medical device company developing biologic based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three products: the Bioprosthetic Heart Valve, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Our Products

 

We are in the process of developing the following bioprosthetic implantable devices for cardiovascular disease:

 

  The Bioprosthetic Heart Valve : the Bioprosthetic Heart Valve, or BHV, is a bioprosthetic, pig heart valve designed to function like a native heart valve, and designed to provide a patient greater functional performance than currently available devices. Early clinical testing has demonstrated improved function over existing surgically implanted devices and, due to these study results, we believe BHV may be suitable for the pediatric population, as it accommodates for the growth concomitant with the patient. Most of the data and studies have been performed to support our submission to the FDA for either a first-in-human study or for an investigational device exemption, or IDE, which we plan to submit in 2018. Once approved for an IDE, we plan to proceed with a clinical trial through the FDA standard ISO 5840, which is the international standard for bioprosthetic heart valve testing.
     
  The CoreoGraft : the CoreoGraft is an “off the shelf” bioprosthetic, cow derived heart, coronary artery bypass graft, or CABG, with a 3 millimeter, or mm, diameter for use as a coronary vascular conduit in coronary artery bypass procedures. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and to facilitate a more complete revascularization of the injured heart muscle. The CoreoGraft is intended to allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures. We believe we will need to proceed with both animal and human studies in order to obtain FDA approval. Once these studies have been completed we plan to proceed with a human trial in the United States to evaluate this graft in patients in need of cardiac revascularization without any autologous tissue. We would be evolving a one year study to evaluate patient survival and the graft being open by coronary angiography. We intend to start these studies in the United States in 2018.
 
 

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The Venous Valve : the VenoValve is a bioprosthetic, pig venous valve for patients with lower limb chronic venous insufficiency, or CVI, which occurs because of damage to the valves of the veins in the legs after patients develop blood clots in the deep venous system. An estimated 2.5 million people experience lower limb CVI in the United States and we believe the VenoValve, which is surgically implanted, will result in improvement in venous valve function in the legs of these patients. The VenoValve would replace dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. The VenoValve will allow for surgical insertion into the femoral vein or popliteal vein, thereby re-establishing competence and antegrade venous flow back to the heart and improvement in symptoms. Preclinical prototype testing, including in vivo animal studies by us, and in vitro hemodynamic studies have demonstrated that the VenoValve mimics the function of a normal functioning venous valve. Ascending and descending venography of the VenoValve in sheep demonstrated competency of the valve as well as being open in appropriate flow patterns. Results of eight pre-clinical tests were submitted to the FDA in the third quarter of 2017 in order to commence first-in-human trials in the United States. Once a first-in-human trial is underway, we will seek to obtain reimbursement approval for this product candidate.

 

In addition, we previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a Class III product for hemodialysis vascular access in patients with ESRD. It is a biological graft derived from a cow’s mesenteric vein. The ProCol Vascular Bioprosthesis received a premarket approval, or PMA, for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft implant.

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for its dialysis access line of products for an upfront payment and a three-year royalty of up to $5 million. We continue to provide manufacturing transition services to LMAT from our facility in Irvine, California and are obligated to do so under an agreement with LMAT until 2019. Our ongoing revenue stream is derived from the sub-contract manufacturing services and royalties earned on LMAT sales pursuant to the agreement with LMAT.

 

Our Industry and Market

 

Our three product candidates currently under development are designed to address three different industries. The BHV is designed to address diseases relating to the aortic and mitral valves. The CoreGraft is designed to address coronary artery bypass surgery, and the VenoValve is designed to address lower limb CVI.

 

Aortic and Mitral Valve Diseases

 

Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. They have been shown to be effective, safe and durable. Heart valve replacement can be done with either a mechanical or bioprosthetic (tissue) prosthesis. Patients with mechanical heart valves are at increased risk for embolic stroke and thrombosis of the valve itself, and, therefore, require long-term anticoagulation. Even with anticoagulation, the risk of stroke or valve thrombosis is ~0.9% per year with mechanical mitral valves, ~0.5% per year for mechanical aortic valves, and ~1.2% per year in those with two mechanical valves.

 

We believe that pediatric patients requiring the smallest valve sizes, typically 19-21 mm in diameter, are not adequately treated by current market devices. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple interventions to provide a larger valve replacement. Historically, children and adolescents receive mechanical valves, which show lower performance. The patient outgrows the valve size several times between ages two and twenty, requiring several surgeries before adulthood, also referred to as patient prosthetic mismatch.

 

Congenital heart defects are serious and common conditions that have significant impact on morbidity, mortality, and healthcare costs in children and adults. The most commonly reported incidence of congenital heart defects in the United States is between 4 and 10 per 1,000, clustering around 8 per 1,000 live births. These patients above all would benefit from a bioprosthetic heart valve that is safer, more cost effective, and more likely to reduce reoperations.

 

 

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Coronary Artery Bypass Graft Surgery

 

The current standard procedure for coronary bypass graft surgery, or CABG, employs the use of the patient’s saphenous vein internal mammary artery and/or radial artery, as conduits to re-establish blood flow. While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. CABG remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. By the end of the last decade, more than 160,000 CABG procedures requiring almost one hundred thousand harvested autologous grafts were performed annually in the United States. In 2015, 150,000 CABG procedures were performed, which accounts for 425,000 bypass grafts.

 

We believe that the recent trend toward off pump coronary graft surgery (surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation, which decreases the surgery time by one hour) and minimally invasive CABG procedures has had considerable bearing on both perioperative and procedural safety and efficacy and has had a significant impact on the future of the procedure and attendant utility of prosthetic bypass grafts. Bypass graft harvest remains the most invasive and complication prone aspect of the minimally invasive bypass procedure. Present standard-of-care complications are described in recent published reports in major medical journals . The percentage of complications can be as high as 43%.

 

Saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the three mechanisms that lead to venous graft failure. Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure.

 

Lower limb CVI

 

Lower limb CVI is a disease affecting 2.5 million people in the United States, which includes over 600,000 people having ulcers or wounds on their legs, which is generally considered the most severe type of CVI. People with CVI are plagued with marked disability, either from leg swelling, development of non healing leg ulcers and often the inability to ambulate. Approximately 1 million people in the United States each year develop blood clots in their legs and many of these patients will go on to develop symptoms of CVI.

 

Once the venous valves are damaged from episodes of blood clots in the legs, the poor functioning of the valves prevents blood from returning to the heart from the legs and the cascade of symptoms of CVI begins. Presently, no medical or nonsurgical treatment is available other than compression “garments” or constant leg elevation. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected saphenous vein is an option. For the deep system, valve transplants have been used but with very poor results. Additionally, the creation of valves using fibrous tissue is only performed in few centers world wide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI. Currently, however, there is no device or medicine available that would restore venous flow in the deep venous system.

 

Hemodialysis Market

 

Hemodialysis is the main treatment for patients with ESRD. During a hemodialysis treatment, a machine pumps and cleans a patient’s blood by way of a flexible, plastic tube. In order to perform hemodialysis, an access must be created. This is a surgical direct connection between the patient’s own artery and vein or if the vein is not of adequate size, then a connection between the artery and vein is created using a prosthetic device or conduit. The most commonly used hemodialysis access grafts consist of various conduit designs fabricated from expanded polytetrafluoroethylene, or ePTFE. Despite historically mediocre performance, ePTFE grafts continue to have a significant part in the hemodialysis market.

 

 

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Our Strategy

 

Our business strategy is focused primarily on research, development and manufacturing of our biomedical device product candidates for use in cardiovascular surgical procedures. We have targeted the relatively large device markets where our biologic technological advances and achievements provide an opportunity to address patient needs that are not currently being satisfied.

 

Our Competitive Strengths

 

We believe we will offer the cardiovascular device market a compelling value proposition with the launch of our three device candidates, if approved, for the following reasons:

 

We have extensive experience of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic tissue devices. Our patents pertaining to unique design advantages and processing methods of biologic valvular tissue as a “bioprosthetic” device provide intellectual advantage over potential competitors.

 

We operate a 14,507 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of Class III medical devices and is equipped for research and development, prototype fabrication, current good manufacturing practices, or cGMP, manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.

 

We have attracted senior executives who are experienced in research and development and who have the expertise to obtain FDA approval for products like ours that satisfy patient needs. We also have the advantage of seasoned marketing and business development experience within senior management and members of our board of directors who will provide guidance as we move towards market launch.

 

Intellectual Property

 

We possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long and trusted relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that enhances device functions and guarantees sterility. Our patents pertaining to the unique design advantages and processing methods of valvular tissue as a bioprosthetic device provides further intellectual advantage over potential competitors. The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010 and expiring on July 9, 2027. Two patents have been filed for the VenoValve with the U.S. Patent and Trademark Office.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These provisions include, but are not limited to:

 

being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

reduced disclosure about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and

 

 

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exemptions from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are not choosing to “opt out” of this provision. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

 

Summary Risks Related to Our Business

 

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our common stock. These risks are discussed more fully in “Risk Factors” beginning on page 8 of this prospectus. These risks include, but are not limited to, the following:

 

We have incurred significant losses since our inception, expect to incur significant losses in the future and may never achieve or sustain profitability.

 

We currently depend entirely on the successful and timely regulatory approval and commercialization of our three product candidates, which may not receive regulatory approval or, if any of our product candidates do receive regulatory approval, we may not be able to successfully commercialize them.

 

If we are unable to successfully raise additional capital, our future clinical trials and product development could be limited and our long term viability may be threatened.

 

As a result of our current lack of financial liquidity, our independent registered accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.

 

We will need to increase the size of our organization, and we may experience difficulties in managing this growth.

 

Our business and product candidates are subject to extensive governmental regulation and oversight, and our failure to comply with applicable regulatory requirements could harm our business.

 

The FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.

 

We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of our product candidates, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.

 

If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which could harm our business, financial condition and results of operations.

 

Our collaborations with outside scientists and consultants may be subject to restriction and change.

 

Our principal stockholders and management own a significant percentage of our capital stock and will be able to exert a controlling influence over our business affairs and matters submitted to stockholders for approval.

 

We will be a “controlled company” within the meaning of the Nasdaq on these exemptions in the future, and if we utilize the exemptions afforded to us under the Nasdaq Marketplace Rules, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Corporate Information

 

We were incorporated in Delaware in December 22, 1999. Our principal executive offices are located at 70 Doppler, Irvine, California, 92618, and our telephone number is (949) 261-2900. Our corporate website address is www.hancockjaffe.com. The information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

 

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The Offering

 

Common stock offered by us                  shares
   
Option to purchase additional shares We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional              shares of common stock.
   
Common stock to be outstanding after this offering                          shares
   
Use of proceeds We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund our research and development activities and the regulatory review process for our product candidates, and the remainder for working capital and other general corporate purposes. See “Use of Proceeds” on page 45.
   
Risk Factors See “Risk Factors” on page 8 for a discussion of certain of factors to consider carefully before deciding to purchase any shares of our common stock.
   
Proposed Nasdaq Capital Market symbol “                                         ”

 

The number of shares of our common stock to be outstanding after this offering is based on 12,246,963 shares of common stock outstanding as of June 30, 2017, and excludes:

 

533,805 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2017, at a weighted average exercise price of $5.81 per share;

 

166,668 shares of common stock issuable upon the conversion of senior convertible notes outstanding as of June 30, 2017;
     
  103,803 shares of common stock issuable upon the exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith;

 

2,592,000 shares of common stock issuable upon the exercise of outstanding stock options under our 2016 Omnibus Incentive Plan, or the 2016 plan, as of June 30, 2017; and

 

708,000 shares of our common stock reserved for future issuance under the 2016 plan.

 

Unless otherwise indicated, all information contained in this prospectus assumes:

 

no exercise by the underwriters of their option to purchase up to               additional shares of our common stock;

 

no exercise of the outstanding stock options described above;

 

no exercise of the outstanding warrants described above;

 

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,132,825 shares of our common stock, the conversion of which will occur immediately prior to the closing of this offering; and

 

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering.

 

 

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Summary Financial Data

 

The following tables set forth a summary of our historical financial data as of, and for the periods ended on, the dates indicated. The statements of operations data for the years ended December 31, 2016 and 2015 and balance sheet data as of December 31, 2016 and December 31, 2015 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the six months periods ended June 30, 2017 and 2016 and the balance sheet data as of June 30, 2017 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements were prepared on the same basis as the audited financial statements. Our management believes that the unaudited financial statements reflect all adjustments necessary for the fair presentation of the financial condition and results of operations for such periods.

 

The following summary financial information should be read in connection with, and is qualified by reference to, our financial statements related notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period.

 

On July 22, 2016, our board of directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. All shares and per share amounts have been adjusted to reflect the 2.114-for-l forward split of our issued and outstanding shares, retroactively.

 

    For The Six Months Ended
June 30,
    For the Years Ended
December 31,
 
    2017     2016     2016     2015  
    (unaudited)              
Selected Statements of Operations Data:                                
Revenues   $ 219,108     $ 185,581     $ 785,912     $ -  
Cost of goods sold     188,734       201,365       810,294       -  
Gross Income (Loss)     30,374       (15,784 )     (24,382 )     -  
                                 
Selling, general and administrative expenses     2,135,167       2,447,538       4,634,801       1,289,851  
Research and development expenses     257,579       -       -       -  
Loss from Operations     (2,362,372 )     (2,463,322 )     (4,659,183 )     (1,289,851 )
                                 
Other Expense:     50,190       508,302       929,075       88,347  
                                 
Loss from Continuing Operations     (2,412,562 )     (2,971,624 )     (5,588,258 )     (1,378,198 )
Discontinued Operations:                                
Loss from discontinued operations, net of tax     -       (298,286 )     (298,286 )     (225,815 )
Gain on sale of discontinued operations, net of tax     -       2,499,054       2,499,054       -  
Income (Loss) from Discontinued Operations, net of tax     -       2,200,768       2,200,768       (225,815 )
                                 
Net Loss     (2,412,562 )     (770,856 )     (3,387,490 )     (1,604,013 )
Deemed dividend to preferred stockholders     (214,911 )     (149,663 )     (342,859 )     (4,352 )
Net Loss Attributable to Common Stockholders   $ (2,627,473 )   $ (920,519 )   $ (3,730,349 )   $ (1,608,365 )

 

        December 31,  
    June 30, 2017     2016     2015  
    (unaudited)              
Selected Balance Sheet Data:                        
Cash   $ 15,916     $ 56,514     $ 1,585,205  
Working capital deficit   $ (3,150,762 )   $ (1,673,367 )   $ (2,870,602 )
Total assets   $ 1,731,766     $ 1,782,867     $ 2,874,791  
Total liabilities   $ 3,522,527     $ 2,066,588     $ 4,655,211  
Accumulated deficit   $ (30,140,912 )   $ (27,728,350 )   $ (24,340,860 )
Total stockholders’ deficiency   $ (6,357,169 )   $ (4,219,359 )   $ (3,576,904 )

 

  7  
 

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.

 

Risks Related to Our Business and Strategy

 

We have incurred significant losses since our inception, expect to incur significant losses in the future and may never achieve or sustain profitability.

 

We have historically incurred substantial net losses, including net losses of $2,412,562 for the six months ended June 30, 2017, $3,387,490 for the year ended December 31, 2016 and $1,604,013 for the year ended December 31, 2015. As a result of our historical losses, we had an accumulated deficit of $30,140,912 as of June 30, 2017. Our losses have resulted primarily from costs related to our research programs and the development of our product candidates, as well as general and administrative expenses relating to our operations. Currently, we are not generating significant revenue from operations, and we expect to incur losses for the foreseeable future as we seek to obtain regulatory approval for our product candidates. Additionally, we expect that our general and administrative expenses will increase due to the additional operational and reporting costs associated with being a public company as well as the projected expansion of our operations. We do not expect to generate significant revenue until any of our product candidates are approved, if ever. We may never generate significant revenue or become profitable. Even if we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve and subsequently sustain profitability could harm our business, financial condition, results of operations and cash flows.

 

We currently depend entirely on the successful and timely regulatory approval and commercialization of our three product candidates, which may not receive regulatory approval or, if any of our product candidates do receive regulatory approval, we may not be able to successfully commercialize them.

 

We currently have three product candidates, the Bioprosthetic Heart Valve, the CoreoGraft, and the VenoValve, and our business presently depends entirely on our ability to obtain regulatory approval for and to successfully commercialize each of our product candidates in a timely manner. Our product candidates are based on technologies that have not been used previously in the manner we propose and must compete with more established treatments currently accepted as the standards of care. Market acceptance of our products will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use. We may not be able to successfully develop and commercialize our product candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.

 

We are subject to rigorous and extensive regulation by the FDA in the United States and by comparable agencies in other jurisdictions, including the European Medicines Agency, or EMA, in the European Union, or EU. Our product candidates are currently in research or development and we have not received FDA approval for our product candidates. Our product candidates may not be marketed in the United States until they have been approved by the FDA and may not be marketed in other jurisdictions until they have received approval from the appropriate foreign regulatory agencies. Each product candidate requires significant research, development and preclinical testing and extensive clinical investigation before submission of any regulatory application for marketing approval.

 

Obtaining regulatory approval requires substantial time, effort and financial resources, and we may not be able to obtain approval of any of our products on a timely basis, or at all. The number, size, design and focus of preclinical and clinical trials that will be required for approval by the FDA, the EMA or any other foreign regulatory agency varies depending on the compound, the disease or condition that the products is designed to address and the regulations applicable to any particular products. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory approval. The FDA, the EMA and other foreign regulatory agencies can delay, limit or deny approval of a product for many reasons, including, but not limited to:

 

  8  
 

 

a product may not be shown to be safe or effective;

 

the clinical and other benefits of a product may not outweigh its safety risks;

 

clinical trial results may be negative or inconclusive, or adverse medical events may occur during a clinical trial;

 

the results of clinical trials may not meet the level of statistical significance required by regulatory agencies for approval;

 

regulatory agencies may interpret data from pre-clinical and clinical trials in different ways than we do;

 

regulatory agencies may not approve the manufacturing process or determine that the manufacturing is not in accordance with cGMPs;

 

a product may fail to comply with regulatory requirements;

 

regulatory agencies might change their approval policies or adopt new regulations.

 

If our product candidates are not approved at all or quickly enough to provide net revenues to defray our operating expenses, our business, financial condition, operating results and prospects could be harmed.

 

If we are unable to successfully raise additional capital, our future clinical trials and product development could be limited and our long term viability may be threatened.

 

We have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received from sales of our capital stock, the issuance of convertible notes, and the sale of our ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to Le Maitre Vascular, Inc., or LMAT, in March 2016. We will seek to obtain additional funds in the future through equity or debt financings, or strategic alliances with third parties, either alone or in combination with equity financings. These financings could result in substantial dilution to the holders of our common stock, or require contractual or other restrictions on our operations or on alternatives that may be available to us. If we raise additional funds by issuing debt securities, these debt securities could impose significant restrictions on our operations. Any such required financing may not be available in amounts or on terms acceptable to us, and the failure to procure such required financing could have a material adverse effect on our business, financial condition and results of operations, or threaten our ability to continue as a going concern.

 

Our present and future capital requirements will be significant and will depend on many factors, including:

 

the progress and results of our development efforts for our product candidates;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

 

the effect of competing technological and market developments;

 

market acceptance of our product candidates;

 

our rate of progress in establishing coverage and reimbursement arrangements with domestic and international commercial third-party payors and government payors;

 

our ability to achieve revenue growth and improve gross margins;

 

the extent to which we acquire or in-license other products and technologies; and

 

legal, accounting, insurance and other professional and business-related costs.

 

  9  
 

 

We may not be able to acquire additional funds on acceptable terms, or at all. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets or delay, reduce the scope of or eliminate some or all of our development programs.

 

If we do not have, or are not able to obtain, sufficient funds, we may be required to delay development or commercialization of our products or license to third parties the rights to commercialize our products or technologies that we would otherwise seek to commercialize ourselves. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

 

As a result of our current lack of financial liquidity, our independent registered accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.

 

As a result of our current lack of financial liquidity, the report of our independent registered accounting firm that accompanies our audited financial statements for the years ended December 31, 2016 and 2015, which are included as part of this prospectus, contains going concern qualifications, and our independent registered public accounting firm expressed substantial doubt regarding our ability to continue as a going concern, meaning that we may be unable to continue in operation for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. Our lack of sufficient liquidity could make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain and our public stock price generally.

 

In order to continue as a going concern, we will need to, among other things, achieve positive cash flow from operations and, if necessary, seek additional capital resources to satisfy our cash needs. Our plans to achieve positive cash flow include engaging in offerings of equity and debt securities and negotiating up-front and milestone payments on our product candidates and royalties from sales of our products that secure regulatory approval and any milestone payments associated with such approved products. Our failure to obtain additional capital would have an adverse effect on our financial position, results of operations, cash flows, and business prospects, and ultimately on our ability to continue as a going concern.

 

We will need to increase the size of our organization, and we may experience difficulties in managing this growth.

 

As of August 21, 2017, we had nine full-time employees and three independent contractors. We will need to continue to expand our managerial, operational, finance and other resources to manage our operations, commence clinical trials, commercialize our product candidates, if approved, and continue our development activities. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

manage any of our future clinical trials effectively;

 

identify, recruit, retain, incentivize and integrate additional employees;

 

manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and

 

continue to improve our operational, financial and management controls, reporting systems and procedures.

 

  10  
 

 

Due to our limited financial resources and our limited experience in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our development and strategic objectives, or disrupt our operations.

 

We presently rely on our supply agreement with LMAT for substantially all of our revenue, and if the supply agreement were terminated it could have a material adverse effect on our revenue and results of operations.

 

In March, 2016, we entered into the supply agreement with LMAT to be the exclusive contract manufacturer of the ProCol Vascular Bioprosthesis for Hemodialysis Vascular Access concomitant with ESRD. We have generated almost all of our total revenue since March 2016 pursuant to the supply agreement. If the supply agreement were terminated, or if either party became unable to perform their obligations under the supply agreement, we would no longer be able to generate revenue until one of our product candidates is approved, if ever.

 

We may never be able to generate sufficient revenue from the commercialization of our product candidates to achieve and maintain profitability.

 

Our ability to operate profitably in the future will depend upon, among other items, our ability to (i) fully develop our new products, (ii) scale up our business and operational structure, (iii) obtain regulatory approval of our product candidates from the FDA, (iv) market and sell our products, (v) successfully gain market acceptance of our products, and (vi) obtain sufficient and on-time supply of components from our third party suppliers. If we fail to successfully commercialize any of our product candidates, we may never receive a return on our investments in product development, sales and marketing, regulatory compliance, manufacturing and quality assurance, which may cause us to fail to generate revenue and gain economies of scale from such investments.

 

In addition, potential customers may decide not to purchase our products and, even if we succeed in increasing adoption of our products by physicians, hospitals and other healthcare providers, creating and maintaining relationships with customers and developing and commercializing new features or indications for our products, we may not be able to generate sufficient revenue to achieve or maintain profitability.

 

We utilize a third-party, single-source supplier for some components and materials used in the ProCol Vascular Bioprosthesis and the loss of this supplier could have an adverse impact on our business.

 

We rely on a third-party, single source supplier to supply the cow tissue used in the ProCol Vascular Bioprosthesis to fulfill our sub-manufacturing requirement. We intend to use this same supplier to supply pig and cow tissue for our three product candidates. Our ability to supply the ProCol Vascular Bioprosthesis to LMAT and our future product candidates, if approved, commercially depends, in part, on our ability to obtain this pig and cow tissue in accordance with our specifications and with regulatory requirements and in sufficient quantities to meet demand. Our ability to obtain pig and cow tissue may be affected by matters outside our control, including that this supplier may cancel our arrangements on short notice, we may be relatively less important as a customer to this supplier and this supplier may have disruptions to its operations.

 

If we are required to establish additional or replacement suppliers for the pig and cow tissue, it may not be accomplished quickly and our operations could be disrupted. Even if we are able to find replacement suppliers, the replacement suppliers would need to be qualified and may require additional regulatory authority approval, which could result in further delay. In the event of a supply disruption, our product inventories may be insufficient to supply our customers. If our third-party, single-source supplier fails to deliver the required commercial quantities of pig tissue on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of the ProCol Vascular Bioprosthesis and any of our product candidates, if approved, the supply of ProCol Vascular Bioprosthesis to customers and the development of any future products would be delayed, limited or prevented, which could have an adverse impact on our business.

 

  11  
 

 

We depend upon third-party suppliers for certain components of our product candidates, making us vulnerable to supply problems and price fluctuations, which could harm our business.

 

We rely on a number of third-party suppliers to provide certain components of our product candidates. We do not have long-term supply agreements with most of our suppliers, and, in many cases, we purchase finished goods on a purchase order basis. Our suppliers may encounter problems during manufacturing for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these third-party suppliers also subjects us to other risks that could harm our business, including:

 

interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;

 

delays in product shipments resulting from defects, reliability issues or changes in components from suppliers;

 

price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;

 

errors in manufacturing components, which could negatively impact the effectiveness or safety of our product candidates or cause delays in shipment of our product candidates;

 

discontinued production of components, which could significantly delay our production and sales and impair operating margins;

 

inability to obtain adequate supplies in a timely manner or on commercially reasonable terms;

 

difficulty locating and qualifying alternative suppliers, especially with respect to our sole-source supplies;

 

delays in production and sales caused by switching components, which may require product redesign and/or new regulatory submissions;

 

delays due to evaluation and testing of devices from alternative suppliers and corresponding regulatory qualifications;

 

non-timely delivery of components due to our suppliers manufacturing products for a range of customers;

 

the failure of our suppliers to comply with strictly enforced regulatory requirements, which could result in disruption of supply or increased expenses; and

 

inability of suppliers to fulfill orders and meet requirements due to financial hardships.

 

In addition, there are a limited number of suppliers and third-party manufacturers that operate under the FDA’s Quality System Regulation, or QSR, requirements, maintain certifications from the International Organization for Standardization that are recognized as harmonized standards in the European Economic Area, or EEA, and that have the necessary expertise and capacity to manufacture components for our product candidates. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth may strain the ability of our current suppliers to deliver products, materials and components to us. If we are unable to arrange for third-party manufacturing of components for our product candidates, or to do so on commercially reasonable terms, we may not be able to complete development of, market and sell our current or new devices. Further, any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our product candidates would limit our ability to manufacture our product candidates. Failure to meet these commitments could result in legal action by our customers, loss of customers or harm to our ability to attract new customers, any of which could have a material adverse effect on our business, financial condition, results of operations and growth.

 

  12  
 

 

We must demonstrate to surgeons and hospitals the merits of our products to facilitate adoption of our products.

 

Surgeons continue to play a significant role in determining the devices used in the operating room and in assisting in obtaining approval by the relevant value analysis committee, or VAC. Educating surgeons on the benefits of our product candidates will require a significant commitment by our marketing team and sales organization. Surgeons and hospitals may be slow to change their practices because of familiarity with existing devices and/or treatments, perceived risks arising from the use of new devices, lack of experience using new devices, lack of clinical data supporting the benefits of such devices or the cost of new devices. There may never be widespread adoption of our product candidates by surgeons and hospitals. If we are unable to educate surgeons and hospitals about the advantages of our product candidates incorporating our technology, as compared to surgical methods which do not incorporate such technology, we may face challenges in obtaining approval by the relevant VAC, and we will not achieve significantly greater market acceptance of our product candidates, gain momentum in our sales activities, significantly grow our market share or grow our revenue and our business and financial condition will be adversely affected.

 

We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our sales and operating results may be negatively affected.

 

The medical device industry is intensely competitive and subject to rapid and significant technological change, as well as the introduction of new products or other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop future products that reach the market in a timely manner, are well adopted by customers and receive adequate coverage and reimbursement from third-party payors.

 

We have numerous competitors, many of whom have substantially greater name recognition, commercial infrastructure and financial, technical and personnel resources than us. Our competitors develop and patent competing products or processes earlier than we can or obtain regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar products or processes. Additionally, our competitors may, in the future, develop medical devices that render our products obsolete or uneconomical.

 

Many of our current and potential competitors are publicly traded, or are divisions of publicly-traded, major medical device or technology companies that enjoy several competitive advantages. We face a challenge overcoming the long-standing preferences of some specialists for using the products of our larger, more established competitors. Specialists who have completed many successful procedures using the products made by these competitors may be reluctant to try new products from a source with which they are less familiar. If these specialists do not try and subsequently adopt our products and services, we may be unable to generate sufficient revenue or growth. In addition, many of our competitors enjoy other advantages such as:

 

greater financial resources for marketing and aggressive discounting;

 

large and established sales, marketing and distribution networks with greater reach in both domestic and international markets;

 

significantly greater brand recognition;

 

established business and financial relationships with specialists, referring physicians, hospitals and medical schools;

 

greater existing market share in our product market;

 

greater resources devoted to research and development of competing products and greater capacity to allocate additional resources;

 

greater experience in obtaining and maintaining regulatory clearances and approvals for new products and product enhancements;

 

products supported by long-term clinical data;

 

more expansive patent portfolios and other intellectual property rights; and

 

broader product portfolios affording them greater ability to cross-sell their products or to incentivize hospitals or surgeons to use their products.

 

  13  
 

 

As a result of this increased competition, we believe there will be increased pricing pressure in the future. The entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in our markets generally. Additionally, because we expect that potential hospital and other healthcare provider customers will bill various third-party payors to cover all or a portion of the costs and fees associated with the procedures in which our valves and other products will be used, including the cost of the purchase of our products, changes in the amount such payors are willing to reimburse our customers for procedures using our products could create pricing pressure for us. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to invest in and grow our business.

 

Our competitors may not seek to obtain agreements, exclusive or otherwise, with the same partners or licensees that we intend to approach in order to develop and market our product candidates. In addition, our competitors may be able to meet these requirements and develop products which are comparable or superior to our products or which would render our technology or products obsolete or non-competitive.

 

Our long-term growth depends on our ability to develop and commercialize additional products.

 

The medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our product candidate offerings and introduce new devices. Developing new medical devices is expensive and time-consuming. Even if we are successful in developing additional devices, the success of any new device offering or enhancements to existing devices will depend on several factors, including our ability to:

 

properly identify and anticipate surgeon and patient needs;

 

develop and introduce new devices or device enhancements in a timely manner;

 

develop an effective and dedicated sales and marketing team;

 

avoid infringing upon the intellectual property rights of third-parties;

 

demonstrate, if required, the safety and efficacy of new devices with data from preclinical studies and clinical trials;

 

obtain the necessary regulatory clearances or approvals for new devices or device enhancements;

 

be fully FDA-compliant with marketing of new devices or modified devices;

 

provide adequate training to potential users of our product candidates; and

 

receive adequate coverage and reimbursement for procedures performed with our product candidates.

 

If we are unsuccessful in developing and commercializing additional devices in other areas, our ability to increase our revenue may be impaired.

 

New technologies, techniques or products could emerge that might offer better combinations of price and performance than the products and services that we plan to offer. Existing markets for surgical devices are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and physician, hospital and healthcare provider practices. It is also important that we successfully introduce new, enhanced and competitive products to meet our prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage our introduction of new products. If potential customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also continue to offer older obsolete products as we transition to new products, and we may not have sufficient experience managing product transitions. If we do not successfully innovate and introduce new technology into our anticipated product lines or successfully manage the transitions of our technology to new product offerings, our revenue, results of operations and business could be adversely impacted.

 

  14  
 

 

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, industry standards, distribution reach or customer requirements. We anticipate that we will face strong competition in the future as current or future competitors develop new or improved products and as new companies enter the market with novel technologies.

 

If we are unable to convince hospital facilities to approve the use of our product candidates, we may be unable to generate a substantial volume of sales of our products.

 

In the United States, in order for surgeons to use our product candidates, the hospital facilities where these surgeons treat patients will typically require us to receive approval from the facility’s VAC. VACs typically review the comparative effectiveness and cost of medical devices used in the facility. The makeup and evaluation processes for VACs vary considerably, and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant VAC. For example, even if we have an agreement with a hospital system for purchase of our products, in most cases, we must obtain VAC approval by each hospital within the system to sell at that particular hospital. Additionally, hospitals typically require separate VAC approval for each specialty in which our product is used, which may result in multiple VAC approval processes within the same hospital even if such product has already been approved for use by a different specialty group. We often need VAC approval for each different product to be used by the surgeons in that specialty. In addition, hospital facilities and group purchasing organizations, or GPOs, which manage purchasing for multiple facilities, may also require us to enter into a purchasing agreement and satisfy numerous elements of their administrative procurement process, which can also be a lengthy, costly and time consuming effort. If we do not receive access to hospital facilities in a timely manner, or at all, via these VAC and purchasing contract processes, or otherwise, or if we are unable to secure contracts on commercially reasonable terms in a timely manner, or at all, our operating costs will increase, our sales may decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these costly and time-consuming processes and still may not obtain VAC approval or a purchase contract from such hospitals or GPOs.

 

Our manufacturing resources are limited and if we are unable to produce an adequate supply of our proposed products for use in our current and planned clinical trials or for commercialization, our regulatory, development and commercialization efforts may be delayed.

 

Our manufacturing resources for our product candidates are limited. We currently manufacture our proposed products candidates for our research and development purposes at our manufacturing facility in Irvine, California. If our existing manufacturing facility experiences a disruption, we would have no other means of manufacturing our proposed product candidates until we are able to restore the manufacturing capability at our current facility or develop alternative manufacturing facilities. Additionally, any damage to or destruction of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability to produce our proposed product candidates and prepare our product candidates for clinical trials.

 

Additionally, in order to produce our proposed product candidate in the quantities that will be required for commercialization, we will have to increase or “scale up” our production process over the current level of production. We may encounter difficulties in scaling up our production, including issues involving yields, controlling and anticipating costs, quality control and assurance, supply and shortages of qualified personnel. If our scaled-up production process is not efficient or results in a product that does not meet quality or other standards, we may be unable to meet market demand and our revenues, business and financial prospects would be adversely affected. Further, third parties with whom we may develop relationships may not have the ability to produce the quantities of the materials we may require for clinical trials or commercial sales or may be unable to do so at prices that allow us to price our products competitively.

 

  15  
 

 

If our facilities are damaged or become inoperable, we will be unable to continue to research, develop and manufacture our product candidates and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.

 

Our facility and equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire, vandalism and power outages, which may render it difficult to operate our business for some period of time. While we have taken precautions to safeguard our facilities, any inability to operate our business during such periods could lead to the loss of customers or harm to our reputation. We also possess insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.

 

Our future international operations could subject us to regulatory and legal risks and certain operating risks, which could adversely impact our business, results of operations and financial condition.

 

The sale and shipment of our product candidates, if approved, across international borders and the purchase of components from international sources subject us to U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and could expose us to penalties for non-compliance. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue to identify opportunities in international markets. Our future international business operations are subject to a variety of risks, including:

 

fluctuations in foreign currency exchange rates;

 

difficulties in staffing and managing foreign and geographically dispersed operations;

 

third-party reimbursement policies that may require some of the patients who undergo procedures using our products or who use our services to directly absorb costs or that may necessitate the reduction of the selling prices of our products;

 

an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action

 

economic, political or social instability in certain countries and regions;

 

the imposition of additional U.S. and foreign governmental controls or regulations;

 

changes in duties and tariffs, license obligations and other non-tariff barriers to trade;

 

the imposition of costly and lengthy new export licensing requirements;

 

the imposition of restrictions on the activities of foreign agents, representatives and distributors;

 

the occurrence of an FDA inspection that results in adverse findings at our facilities, or the facilities of our vendors or suppliers, and any resulting import detention that prevents products made in such facilities from entering the United States;

 

scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;

 

availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us;

 

imposition of differing labor laws and standards;

 

  16  
 

 

the ability of a foreign government to exclude us from, or limit our ability to compete in, the markets under its jurisdiction through collective tender processes or otherwise;

 

longer payment cycles for products sold to customers outside the United States;

 

difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; and

 

the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity.

 

We expect each international market we enter will pose particular regulatory and other hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.

 

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

 

We expect to expand our business operations to meet anticipated growth in demand for our proposed products. This future growth could strain our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. Our ability to effectively manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.

 

As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increases in scale, expansion of personnel, purchase of equipment or process enhancements may not be successfully implemented.

 

We must also successfully increase production output to meet expected customer demand. In the future, we may experience difficulties with production yields, quality control, component supply and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenues.

 

We currently have no sales and marketing infrastructure and if we are unable to successfully secure a sales and marketing partner or establish a sales and marketing infrastructure, we may be unable to commercialize our product candidates, if approved, and may never generate sufficient revenue to achieve or sustain profitability.

 

In order to commercialize products that are approved by regulatory agencies, we must either collaborate with third parties that have such commercial infrastructure, engage third party distributors, or develop our own sales and marketing infrastructure. At present, we have no sales or marketing personnel. We may not be able to enter into collaborations on acceptable terms or at all, which would leave us unable to progress our business plan. We will face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to maintain or reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of our product candidates, reduce or delay development programs, delay potential commercialization of our product candidates or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.

 

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Moreover, even if we are able to maintain and/or enter into such collaborations, such collaborations may pose a number of risks, including the following:

 

collaborators may not perform their obligations as expected;

 

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 our product candidates, might lead to additional responsibilities for us with respect to such devices, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

collaborators could independently develop or be associated with products that compete directly or indirectly with our product candidates;

 

collaborators could have significant discretion in determining the efforts and resources that they will apply to our arrangements with them, and thus we may have limited or no control over the sales, marketing and distribution activities;

 

should any of our product candidates achieve regulatory approval, a collaborator with marketing and distribution rights to our product candidates may not commit sufficient resources to the marketing and distribution of such products;

 

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;

 

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

 

collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to either find alternative collaborators (which we may be unable to do) or raise additional capital to pursue further development or commercialization of our product candidates on our own.

 

Our business would be materially or perhaps significantly harmed if any of the foregoing or similar risks comes to pass with respect to our key collaborations.

 

If we elect to establish a sales and marketing infrastructure, we may not realize a positive return on this investment. We will have to compete with established and well-funded medical device companies to recruit, hire, train and retain sales and marketing personnel. Once hired, the training process is lengthy because it requires significant education of new sales representatives to achieve the level of clinical competency with our products expected by specialists. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. If we are unable to attract, motivate, develop and retain a sufficient number of qualified sales personnel, or if our sales representatives do not achieve the productivity levels in the time period we expect them to reach, our revenue will not grow at the rate we expect and our business, results of operations and financial condition will suffer. Also, to the extent we hire sales personnel from our competitors, we may be required to wait until applicable non-competition provisions have expired before deploying such personnel in restricted territories or incur costs to relocate personnel outside of such territories. In addition, we have been in the past, and may be in the future, subject to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Any of these risks may adversely affect our ability to increase sales of our products. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.

 

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

 

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Manufacturing and marketing of our commercial devices and clinical testing of our product candidates under development, may expose us to product liability and other tort claims. Furthermore, surgeons may misuse our product candidates or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our product candidates are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Regardless of the merit or eventual outcome, product liability claims may result in:

 

significant litigation costs;

 

distraction of management’s attention from our primary business operations;

 

decreased demand for our products and any products that we may develop;

 

damage to our reputation;

 

withdrawal of clinical trial participants;

 

substantial monetary awards to trial participants, patients or other claimants;

 

loss of revenue; and

 

the inability to commercialize any products that we may develop.

 

Although we intend to maintain liability insurance, the coverage limits of our insurance policies may not be adequate, and one or more successful claims brought against us may have a material adverse effect on our business and results of operations. If we are unable to obtain insurance in the future at an acceptable cost or on acceptable terms with adequate coverage, we will be exposed to significant liabilities.

 

We bear the risk of warranty claims on our product candidates.

 

We provide limited product warranties against manufacturing defects of the ProCol Vascular Bioprosthesis, including component parts manufactured by third parties. Our product warranty requires us to repair defects arising from product design and production processes, and if necessary, replace defective components. Thus far, we have not accrued a significant liability contingency for potential warranty claims.

 

If we experience warranty claims in excess of our expectations, or if our repair and replacement costs associated with warranty claims increase significantly, we will incur liabilities for potential warranty claims that may be greater than we expect. An increase in the frequency of warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our business, results of operations and financial condition.

 

The loss of our executive officers or our inability to attract and retain qualified personnel may adversely affect our business, financial conditions and results of operations.

 

Our business and operations depend to a significant degree on the skills, efforts and continued services of our executive officers who have critical industry experience and relationships. Although we have entered into employment agreements with our executive officers, they may terminate their employment with us at any time. Accordingly, these executive officers may not remain associated with us. The efforts of these persons will be critical to us as we continue to develop our products and business. We do not carry key person life insurance on any of our management, which would leave our company uncompensated for the loss of any of our executive officer.

 

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Further, competition for highly-skilled and qualified personnel is intense. As such, our future viability and ability to achieve sales and profit will also depend on our ability to attract, train, retain and motivate highly qualified personnel in the diverse areas required for continuing our operations. If we were to lose the services one or more of our current executive officers or if we are unable to attract, hire and retain qualified personnel, we may experience difficulties in competing effectively, developing and commercializing our products and implementing our business strategies, which could have a material adverse effect on our business, operations and financial condition.

 

Our employees, consultants, independent sales agencies, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

 

We are exposed to the risk that our employees, consultants, collaborators, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees, sales agencies, distributors and other third parties, 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 comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

 

We may not be able to successfully complete any future acquisitions and any acquisitions, joint ventures or other investments may result in dilution of our stockholders’ ownership, increase our debt or cause us to incur significant expense.

 

We may seek to grow our business through the acquisition of additional products, technologies, services or businesses that we believe have significant commercial potential. Growth through acquisitions will depend upon the continued availability of suitable acquisition candidates at favorable prices and on commercially acceptable terms and conditions. Even if these opportunities are present, we may be unable to successfully identify suitable acquisition candidates. In addition, we may not be able to successfully integrate any acquired companies or achieve the commercial potential or synergies projected for any acquisition. Future acquisitions may also divert management’s attention from other business activities. Further, any such acquisitions may result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations.

 

Additionally, we may pursue strategic alliances and joint ventures that leverage our technology and industry experience. We may be unable to find suitable partners or, in the event we identify such a partner, we may be unable to realize the anticipated benefits of any such alliance or joint venture. To finance any such acquisitions, alliances or joint ventures, we may choose to issue shares of capital stock as consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, however, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.

 

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If we experience significant disruptions in our information technology systems, our business may be adversely affected.

 

We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. We do not have redundant systems at this time. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades, which would impact our business operations, or experience difficulties in operating our business during the upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.

 

We are increasingly dependent on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a materially adverse effect on our business. For example, third parties may attempt to hack into systems and may obtain our proprietary information.

 

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.

 

As of December 31, 2016, we had available federal and state net operating loss carryforwards, or NOLs, of approximately $5.7 million, which begin to expire in the year ending December 31, 2026. As of December 31, 2016, we also had federal research and development tax credit carryforwards of approximately $0.2 million. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally defined as a cumulative change in equity ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period) may be subject to limitations on its ability to utilize its NOLs and certain credit carryforwards to offset future taxable income and taxes. We are currently analyzing the tax impacts of any potential ownership changes on our federal NOLs and credit carryforwards. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in ownership changes. Our NOLs and credit carryforwards may also be limited under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future tax benefits of such assets.

 

Risks Related to Regulatory Approval and Other Governmental Regulations

 

Our business and product candidates are subject to extensive governmental regulation and oversight, and our failure to comply with applicable regulatory requirements could harm our business.

 

Our product candidates and operations are subject to extensive regulation in the United States by the FDA and by regulatory agencies in other countries where we anticipate conducting business activities. The FDA regulates the development, testing, manufacturing, labeling, storage, record-keeping, promotion, marketing sales, distribution and post-market support and reporting of medical devices in the United States. The regulations to which we are subject are complex and may become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.

 

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In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board, or IRB, approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an Investigational Device Exemption, or IDE, application. Our system product is considered a significant risk device requiring IDE approval prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices we intend to market in the United States in the future. If we obtain such approvals, we may not be able to conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition and results of operations. It is uncertain whether clinical trials will meet desired endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA will accept the validity of foreign clinical study data, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant financial costs and reduced revenue.

 

Our product candidates may also be subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to comply with applicable requirements could cause our business, results of operations and financial condition to suffer.

 

In the EEA, our products will need to comply with the Essential Requirements set forth in Annex I to the EU Active Implantable Medical Devices Directive. Compliance with these requirements is a prerequisite to be able to affix the CE mark to a product, without which a product cannot be marketed or sold in the EEA. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE Mark to our product candidates, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by a competent authority of an EEA country to conduct conformity assessments. Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the Technical File and the quality system for the manufacture, design and final inspection of our products. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical products after having prepared and signed a related EC Declaration of Conformity.

 

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As a general rule, demonstration of conformity of medical products and their manufacturers with the Essential Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific literature. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the competent authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can be expensive and time-consuming.

 

The FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.

 

In the United States, our product candidates are expected to be regulated as medical devices. Before our medical device product candidates can be marketed in the United States, we must submit and the FDA must approve a PMA. For the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. In addition, modifications to products that are approved through a PMA application generally need FDA approval. The time required to obtain approval, clearance or license by the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including the substantial discretion of the FDA.

 

Our product candidates could fail to receive regulatory approval, clearance or license for many reasons, including the following:

 

the FDA may disagree with the design or implementation of our clinical trials or study endpoints;

 

we may be unable to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for their proposed indications or that our product candidates provide significant clinical benefits;

 

the results of our clinical trials may not meet the level of statistical significance required by the FDA for approval, clearance or license or may not support approval of a label that could command a price sufficient for us to be profitable;

 

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

 

the opportunity for bias in the clinical trials as a result of the open-label design may not be adequately handled and may cause our trial to fail;

 

our product candidates may be subject to an FDA advisory committee review, which may be requested at the sole discretion of the FDA, and which may result in unexpected delays or hurdles to approval;

 

the FDA may determine that the manufacturing processes at our facilities or facilities of third-party manufacturers with which we contract for clinical and commercial supplies are inadequate; and

 

the approval, clearance or license policies or regulations of the FDA may significantly change in a manner rendering our clinical data insufficient for approval.

 

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Even if we were to obtain approval, clearance or license, the FDA may grant approval, clearance or license contingent on the performance of costly post-marketing clinical trials, or may approve our product candidates with a label that does not include the labeling claims necessary or desirable for successful commercialization of our product candidates. Any of the above could materially harm our product candidates’ commercial prospects.

 

Even if our product candidates are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our product candidates, our product candidates could be subject to restrictions or withdrawal from the market.

 

The manufacturing processes, post-approval clinical data and promotional activities of any product for which we obtain marketing approval will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of our proposed products is granted in the United States, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown and unanticipated problems with our proposed products, including but not limited to unanticipated severity or frequency of adverse events, delays or problems with the manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

 

Legislative or regulatory reforms in the United States or Europe may make it more difficult and costly for us to obtain regulatory clearances or approvals for our product candidates or to produce, market or distribute our product candidates after clearance or approval is obtained.

 

From time to time, legislation is drafted and introduced in U.S. Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbursement thereof. In addition, the FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our product candidates. For example, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute our product candidates or future products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

 

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additional testing prior to obtaining clearance or approval;

 

changes to manufacturing methods;

 

recall, replacement or discontinuance of our systems or future products; or

 

additional record keeping.

 

Any of these changes could require substantial time and cost and could harm our business and our financial results.

 

In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the EU Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the Medical Devices Regulation). Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.

 

In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group, or MDCG (a new, yet to be created, body chaired by the European Commission, and representatives of EEA Member States), for an opinion. These new procedures may result in a longer or more burdensome assessment of our new products.

 

Our product candidates may in the future be subject to recalls or market withdrawals that could harm our business, results of operations and financial condition.

 

Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance or other reasons. Additionally, the FDA and similar foreign governmental authorities have the authority to require the recall of commercialized devices in the event of material deficiencies or defects in the design, manufacture or labeling in the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, conduct a device notification to inform surgeons of changes to instructions for use or of a deficiency, or of a suspected deficiency, found in a device. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include certain notifications and corrections as well as removals, of any of our product candidates, could divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers and reduce our ability to achieve expected revenues.

 

Further, under the FDA’s Medical Device Reporting regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or regulatory authority actions, such as inspection, mandatory recall or other enforcement action. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results.

 

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Moreover, depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our product candidates, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, withdrawals or clearances or approvals or civil or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including our ability to market our products in the future.

 

We are required to report certain malfunctions, deaths and serious injuries associated with our product candidates, which can result in voluntary corrective actions or agency enforcement actions.

 

Under FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to submit information to FDA when they become aware of information that reasonably suggests a device may have caused or contributed to a death or serious injury or has malfunctioned, and, upon recurrence, the malfunction would likely cause or contribute to death or serious injury. If our product candidates are approved for commercial marketing and sale, we determine that an MDR report is not required to be submitted for an event, and FDA disagrees with that determination, it could take enforcement action against us for failing to report the event. All manufacturers marketing medical devices in the EEA are legally bound to report incidents involving devices they produce or sell to the regulatory agency, or competent authority, in whose jurisdiction the incident occurred. Under the EU Medical Devices Directive (Directive 93/42/EEC), an incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health.

 

Malfunction or misuse of our product candidates could result in future voluntary corrective actions, such as recalls, including corrections (e.g., customer notifications), or agency action, such as inspection or enforcement actions. If malfunctions or misuse do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions or misuse, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products or the instructions for use for those products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, may distract management from operating our business, and may harm our business, results of operations and financial condition.

 

The potential misuse or off-label promotion of our future products may harm our reputation in the marketplace, result in injuries that lead to product liability litigation or result in costly investigations and sanctions by regulatory bodies.

 

If our products are cleared by the FDA and CE Marked in the EEA for specific indications, we may only promote or market our products for their specifically cleared or approved indications. We will train our marketing and sales force against promoting our future products for uses outside of the cleared or approved indications for use, known as “off-label uses.”

 

If the FDA determines that our promotional materials or training constitute promotion of unsupported claims or an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business, results of operations and financial condition.

 

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Further, the contemplated advertising and promotion of our products will be subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. EEA Member State legislation may also restrict or impose limitations on our ability to advertise our products directly to the general public. In addition, voluntary EU and national Codes of Conduct provide guidelines on the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals harming our business, results of operations and financial condition.

 

We are subject to federal, state and foreign healthcare laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.

 

Our operations are, and will continue to be, directly and indirectly affected by various federal, state or foreign healthcare laws, including, but not limited to, those described below. These laws include:

 

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-kickback Statute may result in substantial civil or criminal penalties, including criminal fines of up to $25,000, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law of up to $50,000 for each violation, plus three times the remuneration involved, civil penalties under the federal False Claims Act of up to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs;

 

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, the government may impose penalties of not less than $5,500 and not more than $11,000, plus three times the amount of the damages that the government sustains due to the submission of a false claim and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;

 

the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;

 

HIPAA, as amended by the HITECH Act, and their respective implementing regulations, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $50,000 per violation, not to exceed $1.5 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can bring a civil action to enjoin a HIPAA violation or to obtain statutory damages up to $25,000 per violation on behalf of residents of his or her state. HIPAA also imposes criminal penalties for fraud against any healthcare benefit program and for obtaining money or property from a healthcare benefit program through false pretenses and provides for broad prosecutorial subpoena authority and authorizes certain property forfeiture upon conviction of a federal healthcare offense. Significantly, the HIPAA provisions apply not only to federal programs, but also to private health benefit programs. HIPAA also broadened the authority of the U.S. Office of Inspector General of the U.S. Department of Health and Human Services to exclude participants from federal healthcare programs;

 

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the federal physician sunshine requirements under the PPACA, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, which is defined broadly to include other healthcare providers and teaching hospitals and ownership and investment interests held by physicians and their immediate family members. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year. Failure to submit the required information may result in civil monetary penalties up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”) for all payments, transfers of value or ownership or investment interests not reported in an annual submission, and may result in liability under other federal laws or regulations; and

 

analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third- party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Any failure by us to ensure that our employees and agents comply with applicable state and foreign laws and regulations could result in substantial penalties or restrictions on our ability to conduct business in those jurisdictions, and our results of operations and financial condition could be materially and adversely affected.

 

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with surgeons and other healthcare providers, some of whom recommend, purchase and/or prescribe our product candidates, and our distributors, could be subject to challenge under one or more of such laws.

 

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion from governmental health care programs and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

 

Legislative or regulatory healthcare reform measures may have a material adverse effect on business, results of operations and financial condition.

 

FDA regulations and guidance are often revised or reinterpreted by FDA and such actions may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times for our product candidates. Delays in receipt of, or failure to receive, regulatory approvals for our product candidates would have a material adverse effect on our business, results of operations and financial condition.

 

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In March 2010, the PPACA was signed into law, which includes a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, that began on January 1, 2013. Although a moratorium was placed on the medical device excise tax in 2016 and 2017 and its reinstatement thereafter is uncertain, if it is reinstated, it may adversely affect our results of operations and cash flows. Other elements of the PPACA, including comparative effectiveness research, an independent payment advisory board and payment system reforms, including shared savings pilots and other provisions, may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business, results of operations and financial condition.

 

In addition, other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 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. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, or the ATRA, was signed into law which further reduced Medicare payments to certain providers, including hospitals.

 

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

 

We could be negatively impacted by violations of global anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, or FCPA.

 

Certain anti-bribery laws, including the FCPA or the UK Bribery Act of 2010, prohibit covered entities from offering, promising, authorizing or giving anything of value, directly or indirectly, to foreign officials or other commercial parties with the intent to influence the recipient’s act or decision, to induce action or inaction in violation of lawful duty or for the purpose of improperly obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates. As we expect to generate substantial revenue from countries outside the United States, we are subject to the risk that we, our employees, or any third parties such as sales agents and distributors acting our behalf in foreign countries may take action determined to be in violation of applicable anti-corruption laws, including the FCPA. Any violations of these laws, or even allegations of such violations, can lead to an investigation, which could disrupt our operations, involve significant management distraction, lead to significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition or operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other costly remedial measures.

 

Although we intend to implement a program designed to ensure our employees and distributors comply with the FCPA and other anti-bribery laws, this program may not prevent all potential violations of the FCPA and other anti-corruption laws. Similarly, our books and records and internal control policies and procedures do not guarantee that we will, in all instances, comply with the accounting provisions of the FCPA.

 

Our relationships with physician consultants, owners and investors could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions.

 

Federal and state laws and regulations impose restrictions on our relationships with physicians who are consultants, owners and investors. We have entered into, and intend to enter into, consulting agreements, license agreements and other agreements with physicians in which we provided cash as compensation. We have other written and oral arrangements with physicians, including for research and development grants and for other purposes as well.

 

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We could be adversely affected if regulatory agencies were to interpret our financial relationships with these physicians, who may be in a position to influence the ordering of and use of our products for which governmental reimbursement may be available, as being in violation of applicable laws. If our relationships with physicians are found to be in violation of the laws and regulations that apply to us, we may be required to restructure the arrangements and could be subject to administrative, civil and criminal penalties, including exclusion from participation in government healthcare programs, imprisonment, and the curtailment or restructuring of our operations, any of which could negatively impact our ability to operate our business and our results of operations.

 

Many of our customers and potential customers are required to comply with the federal Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act and implementing regulation affecting the transmission, security and privacy of health information, and failure to comply could result in significant penalties.

 

Numerous federal and state laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, govern the collection, dissemination, security, use and confidentiality of health information that identifies specific patients. HIPAA and the HITECH Act require our surgeon and hospital customers and potential customers to comply with certain standards for the use and disclosure of health information within their companies and with third parties. The Privacy Standards and Security Standards under HIPAA establish a set of standards for the protection of individually identifiable health information by health plans, health care clearinghouses and certain health care providers, referred to as Covered Entities, and the business associates with whom Covered Entities enter into service relationships pursuant to which individually identifiable health information may be exchanged. Notably, whereas HIPAA previously directly regulated only these Covered Entities, the HITECH Act makes certain of HIPAA’s privacy and security standards also directly applicable to Covered Entities’ business associates. As a result, both Covered Entities and business associates are now subject to significant civil and criminal penalties for failure to comply with Privacy Standards and Security Standards.

 

HIPAA requires Covered Entities (like many of our customers and potential customers) and business associates to develop and maintain policies and procedures with respect to protected health information that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides for civil monetary penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against Covered Entities and business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

 

Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations. If we do not comply with existing or new applicable federal or state laws and regulations related to patient health information, we could be subject to criminal or civil sanctions and any resulting liability could adversely affect our financial condition.

 

In addition, countries around the world have passed or are considering legislation that would impose data breach notification requirements and/or require that companies adopt specific data security requirements. If we experience a data breach that triggers one or more of these laws, we may be subject to breach notification obligations, civil liability and litigation, all of which could also generate negative publicity and have a negative impact on our business.

 

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Our business involves the use of hazardous materials and we and our current or future third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

 

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.

 

New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, required the SEC to establish new disclosure and reporting requirements for those companies that use certain minerals and metals mined in the Democratic Republic of Congo and adjoining countries, known as conflict minerals, in their products whether or not these products or the components containing such conflict minerals are manufactured by third parties. The new rule may affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to verify the origins for these minerals used in our products sufficiently through the due diligence procedures that we implement, which may prevent us from certifying our products as conflict-free, harming our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

 

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers such as us from certain markets, which could have an adverse effect on our business, results of operations or financial condition.

 

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers, including us, from important market segments as GPOs, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for hospitals. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, results of operations or financial condition. However, for example, if the VenoValve studies are successful, and since no other option is available, we believe our path to reimbursement is very high.

 

If coverage and reimbursement from third-party payors for procedures using our product candidates significantly decline, surgeons, hospitals and other healthcare providers may be reluctant to use our product candidates and our sales may decline.

 

In the United States, healthcare providers who may purchase our product candidates, if approved, will generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, to pay for all or a portion of the cost of our product candidates in the procedures in which they are employed. Because there is often no separate reimbursement for instruments and supplies used in surgical procedures, the additional cost associated with the use of our product candidates can impact the profit margin of the hospital or surgery center where the surgery is performed. Some of our target customers may be unwilling to adopt our product candidates in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for the procedures using our product candidates may make it difficult for existing customers to continue using, or adopt, our products and could create additional pricing pressure for us. We may be unable to sell our product candidates, if approved, on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement.

 

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To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes. Surgeons, hospitals and other healthcare providers may not purchase our product candidates if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our product candidates.

 

In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. Because the cost of our product candidates generally will be recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. With respect to physician payments, in the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. In April 2015, however, the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, was signed into law, which repealed and replaced the statutory formula for Medicare payment adjustments to physicians. MACRA provides a permanent end to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Medicare Physician Fee Schedule. MACRA extended existing payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System, beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities and meaningful use of electronic health records. MACRA also requires Centers for Medicare & Medicaid Services, or CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations, that emphasize quality and value over the traditional volume-based fee-for-service model. It is unclear what impact, if any, MACRA will have on our business and operating results, but any resulting decrease in payment may result in reduced demand for our products.

 

Moreover, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer surgical procedures or by requiring the use of the least expensive devices available. Additionally, as a result of reform of the U.S. healthcare system, changes in reimbursement policies or healthcare cost containment initiatives may limit or restrict coverage and reimbursement for our product candidates and cause our revenue to decline.

 

Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for laparoscopic procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our product candidates, if approved, may decline.

 

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We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of our product candidates, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.

 

Our manufacturing processes and facility are required to comply with the FDA’s QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our product candidates. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies. We are required to register our manufacturing facility with the FDA and list all devices that are manufactured. We also operate an International Organization for Standards, or ISO, 13485 certified facility and annual audits are required to maintain that certification. The suppliers of our components are also required to comply with the QSR and are subject to inspections. We have limited ability to ensure that any such third-party manufacturers will take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:

 

administrative or judicially-imposed sanctions;

 

injunctions or the imposition of civil penalties;

 

recall or seizure of our products;

 

total or partial suspension of production or distribution;

 

the FDA’s refusal to grant future clearance or pre-market approval for our products;

 

withdrawal or suspension of marketing clearances or approvals;

 

clinical holds;

 

warning letters;

 

refusal to permit the import or export of our products; and

 

criminal prosecution of us or our employees.

 

Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving any of our products would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.

 

Risks Related to Our Intellectual Property

 

If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which could harm our business, financial condition and results of operations.

 

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

 

We have filed and are actively pursuing patent applications for our product candidates and manufacturing processes. As of February 2, 2017, the critical design components and function relationships for our bioprosthetic heart valve are protected by U.S. patent 7,815,677 issued on October 19, 2010, and we owned 2 issued U.S. patents, zero issued foreign patents, 2 pending U.S. patent applications and zero pending foreign patent applications. Assuming all required fees are paid, individual patents or applications owned by us will expire between July 20, 2027 and November 20, 2029.

 

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Our patents may not have, or our pending patent applications that mature into issued patents may not include, claims with a scope sufficient to protect our products, any additional features we develop for our current products or any new products. Other parties may have developed technologies that may be related or competitive to our products, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our implant systems.

 

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If any of these developments were to occur, they each could have a negative impact on our business and competitive position.

 

Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

 

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products are invalidated or found unenforceable, our financial position and results of operations could be negatively impacted. In addition, if a court found that valid, enforceable patents held by third parties covered one or more of our products, our financial position and results of operations could be harmed.

 

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

 

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

 

The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payments such as maintenance and annuity fee payments and other provisions during the patent procurement process as well as over the life span of an issued patent. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

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Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

 

We employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employees.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

 

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. Our business, products and methods could infringe the patents or other intellectual property rights of third parties.

 

The medical device industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many medical device companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties, either in the U.S. or abroad. We may also become a party to patent infringement claims and litigation or interference proceedings declared by the USPTO to determine the priority of inventions. Third parties may also challenge the validity of any of our issued patents and we may initiate proceedings to enforce our patent rights and prevent others from infringing on our intellectual property rights. Any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, diversion of our management’s attention and resources, or entrance into royalty or license agreements that are not advantageous to us. In any of these circumstances, we may need to spend significant amounts of money, time and effort defending our position. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the intellectual property rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of intellectual property in court or redesign our products.

 

Our collaborations with outside scientists and consultants may be subject to restriction and change.

 

We work with biologists and other scientists at academic and other institutions, and consultants who assist us in our research, development, and regulatory efforts, including the members of our medical advisory board. These scientists and consultants have provided, and we expect that they will continue to provide, valuable advice on our programs. These scientists and consultants are not our employees, may have other commitments that would limit their future availability to us and typically will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated.

 

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We have entered into or intend to enter into non-competition agreements with certain of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. However, under current law, we may be unable to enforce these agreements against certain of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former employees gained while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

 

Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.

 

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or 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 and also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which only became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

 

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

 

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

 

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

 

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

 

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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

 

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks or names. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential customers in our markets of interest. In addition, third parties may register trademarks similar and identical to our trademarks in foreign jurisdictions, and may in the future file for registration of such trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products in those countries. In any case, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business, results of operations and financial condition may be adversely affected.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

The market price of our common stock may be highly volatile, and you could lose all or part of your investment.

 

Prior to this offering, there was no public market for shares of our common stock. The offering price for the shares of our common stock sold in this offering will be determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. As a result, the trading price of our common stock is likely to be volatile, which may prevent you from being able to sell your shares at or above the public offering price. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:

 

whether we achieve our anticipated corporate objectives;

 

actual or anticipated fluctuations in our financial condition and operating results;

 

changes in financial or operational estimates or projections;

 

the development status of our product candidates and when our products receive regulatory approval;

 

our execution of our sales and marketing, manufacturing and other aspects of our business plan;

 

performance of third parties on whom we rely to manufacture our products, product components and product candidates, including their ability to comply with regulatory requirements;

 

the results of our preclinical studies and clinical trials;

 

results of operations that vary from those of our competitors and the expectations of securities analysts and investors;

 

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

our announcement of significant contracts, acquisitions or capital commitments;

 

announcements by our competitors of competing products or other initiatives;

 

announcements by third parties of significant claims or proceedings against us;

 

regulatory and reimbursement developments in the United States and abroad;

 

future sales of our common stock;

 

product liability claims;

 

healthcare reform measures in the United States;

 

additions or departures of key personnel; and

 

general economic or political conditions in the United States or elsewhere.

 

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In addition, the stock market in general, and the stock of medical device companies like ours, in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the issuer. Such road market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

 

We may be subject to securities litigation, which is expensive and could divert our management’s attention.

 

The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

We have broad discretion in the use of the net proceeds from this offering and may invest or spend the proceeds in ways with which you disagree or that may not yield a return.

 

While we set forth our anticipated use for the net proceeds from this offering in the section titled “Use of Proceeds”, our management will have broad discretion on how to use and spend any proceeds that we receive from this offering and may use the proceeds in ways that differ from the anticipated uses set forth in this prospectus. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds with only limited information concerning management’s specific intentions. It is possible that we may decide in the future not to use the proceeds of this offering in the manner described in this offering. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of our common stock may not desire or that may not yield a significant return or any return at all. Investors will receive no notice or vote regarding any such change and may not agree with our decision on how to use such proceeds. If we fail to utilize the proceeds we receive from this offering effectively, our business and financial condition could be harmed and we may need to seek additional financing sooner than expected. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity.

 

Prior to this offering, there has not been a public market for our common stock. Although we intend to apply to have our common stock listed on the Nasdaq, an active trading market for our common stock may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the trading market. You may not be able to sell your shares of our common stock at or above the price you paid in the offering. As a result, you could lose all or part of your investment. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.

 

Our principal stockholders and management own a significant percentage of our capital stock and will be able to exert a controlling influence over our business affairs and matters submitted to stockholders for approval.

 

After this offering, it is anticipated that our officers and directors, together with holders of 5% or more of our outstanding common stock before this offering and their respective affiliates, will beneficially own or control                   shares of our common stock, which in the aggregate will represent approximately                 % of the outstanding shares of our common stock, or                    % if the underwriters’ option to purchase additional shares is exercised in full. As a result, if some of these persons or entities act together, they will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, the approval of any business combination and any other significant corporate transaction. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares. Some of these persons or entities who make up our principal stockholders may have interests different from yours.

 

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Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our common stock.

 

If, after listing, we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but our common stock may not be listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the Nasdaq Marketplace Rules.

 

If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain a listing on Nasdaq and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.

 

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on 13,400,183 shares outstanding as of August 21, 2017 (after conversion of 1,005,700 shares of issued and outstanding Series A preferred stock and 127,125 shares of issued and outstanding Series B preferred stock), upon the completion of this offering, we will have outstanding                 shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares,             shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business. We also intend to register all shares of common stock 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, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

 

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After the lock-up agreements pertaining to this offering expire and based on shares outstanding after this offering, an additional              shares will be eligible for sale in the public market. In addition, upon issuance, the 2,832,000 shares subject to outstanding options under our stock option plans and the shares reserved for future issuance under our equity compensation plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately              shares of our common stock, including 1,132,825 shares issuable upon conversion of our preferred stock in connection with this offering, will have the right to require us to register these shares under the Securities Act of 1933, as amended, or the Securities Act. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business. We also intend to register all shares of common stock 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, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

 

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

 

The public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding stock options, you will incur further dilution. Based on an assumed initial public offering price of $              per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $              per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately              % of the aggregate price paid by all purchasers of our stock but will own only approximately              % of our common stock outstanding after this offering.

 

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. We may remain an “emerging growth company” until as late as December 31, 2022 (the fiscal year-end following the fifth anniversary of the completion of our initial public offering), though we may cease to be an “emerging growth company” earlier under certain circumstances, including (1) if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an “emerging growth company” as of the following December 31, or (2) if our gross revenue exceeds $1.07 billion in any fiscal year. “Emerging growth companies” may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors could find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 102 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.

 

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

 

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To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls when we become subject to this requirement could negatively impact the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.

 

Our management team has limited experience managing a public company.

 

Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition and operating results.

 

Because we have elected to use the extended transition period for complying with new or revised accounting standards for an EGC our financial statements may not be comparable to companies that comply with public company effective dates.

 

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates, and thus investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock.

 

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

 

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the price for our common stock could be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

 

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Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.

 

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the consummation of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include, but are not limited to:

 

a classified board of directors so that not all directors are elected at one time;

 

a prohibition on stockholder action through written consent;

 

no cumulative voting in the election of directors;

 

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director;

 

a requirement that special meetings of stockholders be called only by the board of directors, the chairman of the board of directors, the chief executive officer or, in the absence of a chief executive officer, the president;

 

an advance notice requirement for stockholder proposals and nominations;

 

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

 

a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our amended and restated certificate of incorporation.

 

In addition, the Delaware General Corporate Law, or DGCL, prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, the DGCL may discourage, delay or prevent a change in control of our company.

 

Furthermore, our amended and restated certificate of incorporation will specify that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of the DGCL by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers.

 

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Provisions in our charter documents and other provisions of the DGCL could limit the price that investors are willing to pay in the future for shares of our common stock.

 

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

 

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or amended and restated bylaws, (4) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws or (5) any action asserting a claim governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future and, as such, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, and any future loan arrangements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We will be a “controlled company” within the meaning of the Nasdaq on these exemptions in the future, and if we utilize the exemptions afforded to us under the Nasdaq Marketplace Rules, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Upon completion of this offering, Biodyne Holding, S.A., or Biodyne, will continue to control a majority of the voting power of our company on account of its ownership of our common stock. As a result, we will be a “controlled company” within the meaning of the Nasdaq Marketplace Rules. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements:

 

that a majority of the board of directors consists of independent directors;

 

that we have a nominating and corporate governance committee that is composed entirely of independent directors; and

 

that we have a compensation committee that is comprised entirely of independent directors.

 

We do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or any of our board committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq Marketplace Rules. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and the Nasdaq Marketplace Rules within the applicable time frame.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA

 

Special Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

 

failure to obtain FDA approval to commercially sell our products in a timely manner or at all;

 

whether surgeons and patients in our target markets accept our proposed products;

 

the expected growth of our business and our operations, and the capital resources needed to progress our business plan;

 

failure to scale up of the manufacturing process of our proposed products in a timely manner, or at all;

 

failure to manufacture our proposed products at a competitive price;

 

our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure;

 

reliance on third party suppliers for certain components of our proposed products;

 

reliance on third parties to commercialize and distribute our proposed products in the United States and internationally;

 

changes in external competitive market factors;

 

uncertainties in generating sustained revenue or achieving profitability;

 

unanticipated working capital or other cash requirements;

 

changes in FDA regulations, including testing procedures, of medical devices and related promotional and marketing activities;

 

our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing;

 

our ability to obtain and maintain intellectual property protection for our proposed products; and

 

changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the medical device industry.

 

You should read this prospectus, including the section titled “Risk Factors,” and the documents that we reference elsewhere in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

 

These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus regardless of the time of delivery of this prospectus or any sale of our common stock. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein.

 

Industry and Market Data

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market opportunity and market size, is based on information from various sources, including independent industry publications. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in, the markets for our products. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications that is included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

 

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

 

Each $1.00 increase or decrease in the assumed initial public offering price of $               per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $              million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million in the number of shares we are offering at the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $             million, assuming the assumed initial public offering price remains the same.

 

We intend to use the net proceeds from this offering as follows:

 

approximately $              million to fund our research and development activities;

 

approximately $            million to fund the regulatory review process for each of our product candidates; and

 

the remainder for working capital and other general corporate purposes, including the additional costs associated with being a public company.

 

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, the status of and results from clinical trials, our sales, marketing and manufacturing efforts, any collaborations that we may enter into with third parties for our products 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 believe opportunities may exist from time to time to expand our current business through the acquisition or in-license of complementary product candidates. While we have no current agreements or commitments for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

  45  
 

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. In addition, the terms of our senior debt financing prohibit us from paying dividends on our equity securities so long as at least 33% of the principal amount of our senior notes remains outstanding. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects, the requirements of current or then-existing debt instruments and other factors our board of directors may deem relevant.

 

  46  
 

 

CAPITALIZATION

 

The following table sets forth our cash, cash equivalents and capitalization as of June 30, 2017:

 

on an actual basis;

 

on a pro forma basis to reflect (1) the automatic conversion of all outstanding shares of our preferred stock into 1,132,825 shares of our common stock, which will occur immediately prior to the closing of this offering, (2) 240,405 shares of common stock issuable upon the conversion of senior convertible notes outstanding as of June 30, 2017, and (3) the filing of our amended and restated certificate of incorporation upon the closing of this offering; and

 

on a pro forma as adjusted basis to give further effect to our issuance and sale of                  shares of common stock in this offering at an assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our common stock and other terms of this offering determined at pricing. You should read the following table in conjunction with “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and other financial information contained in this prospectus, including the financial statements and related notes appearing elsewhere in this prospectus.

 

    As of June 30, 2017  
    Actual     Pro Forma     Pro Forma As Adjusted (1)  
          (unaudited)        
Cash and cash equivalents   $ 15,916       $       $    
                         
Total debt   $ 2,327,087       $       $    
                         
Series A preferred stock, par value $0.00001 per share; 1,300,000 shares authorized, 1,005,700 shares issued and outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted   $   3,935,638                    
Series B convertible preferred stock, par value $0.00001 per share; 2,000,000 shares authorized, 127,125 shares issued and outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted   $   630,770                    
                         
Stockholders’ (deficit) equity:                        
Common stock, par value $0.00001 per share; 30,000,000 shares authorized, 12,246,963 shares issued and outstanding, actual;          shares authorized, shares issued and outstanding, pro forma;            shares authorized, shares issued and outstanding, pro forma as adjusted     122                    
Additional paid-in capital     23,783,621                    
Accumulated deficit     (30,140,912 )                
                         
Total stockholders’ (deficit) equity   $ ( 6,357,169 )                
                         
Total capitalization   $ 552,242     $       $    

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $               per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $              million, assuming the number of shares offered by us, as stated on the cover page of this prospectus, remains unchanged and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $            million, assuming the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The number of shares of our common stock to be outstanding after this offering is based on 12,246,963 shares of common stock outstanding as of June 30, 2017, and excludes:

 

533,805 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2017, at a weighted average exercise price of $5.81 per share;
     
  103,803 shares of common stock issuable upon the exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therwith;

 

166,668 shares of common stock issuable upon the conversion of senior convertible notes outstanding as of June 30, 2017;

 

2,592,000 shares of common stock issuable upon the exercise of outstanding stock options under our 2016 plan, as of June 30, 2017; and

 

708,000 shares of our common stock reserved for future issuance under the 2016 plan .

 

  47  
 

 

DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share of common stock is determined by dividing our total tangible assets less total liabilities by the number of outstanding shares of our common stock.

 

Our historical net tangible book value (deficit) as of June 30, 2017 was approximately           , or             per share of common stock. Our pro forma net tangible book value (deficit) as of June 30, 2017 was          or           per share of common stock, after giving effect to the conversion of all our outstanding shares of preferred stock into 1,132,825 shares of common stock upon the completion of this offering.

 

Pro forma as adjusted net tangible book value (deficit) is our pro forma net tangible book value, after giving further effect to (i) the sale of            shares of our common stock in this offering at an assumed initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of the net proceeds from this offering as described in the section of this prospectus entitled “Use of Proceeds.” This amount represents an immediate increase in pro forma net tangible book value (deficit) of $             per share to our existing stockholders, and an immediate dilution of $           per share to new investors participating in this offering.

 

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share           $    
Historical net tangible book value (deficit) per share as of June 30, 2017   $   )        
                 
Increase in pro forma net tangible book value (deficit) attributable to conversion of our Series A preferred stock                
Pro forma net tangible book value (deficit) per share as of June 30, 2017, before giving effect to this offering                
                 
Increase in pro forma net tangible book value (deficit) per share attributable to new investors participating in this offering                
                 
Pro forma as adjusted net tangible book value (deficit) per share after this offering                
                 
Dilution in pro forma net tangible book value (deficit) per share to new investors participating in this offering           $    

 

A $1.00 increase or decrease in the assumed initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $            per share and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $               per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

Similarly, a 1.0 million share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease, as appropriate, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $           and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $            , assuming the assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  48  
 

 

The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.

 

If the underwriters exercise in full their option to purchase               additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase to $             per share, representing an immediate increase in pro forma net tangible book value to existing stockholders of $                 per share and an immediate dilution of $              per share to new investors participating in this offering.

 

The following table sets forth, as of June 30, 2017, on the pro forma as adjusted basis described above, the differences between our existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the weighted average price paid per share paid to us, based on an assumed initial public offering price of                      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Shares Purchased     Total Consideration    

Weighted

Average Price

 
    Number     Percent     Amount     Percent     per Share  
Existing stockholders     12,246,963       %   $ 21,345,218       %   $    
                                         
New investors                                        
                                         
Total             100 %   $         %        

 

If the underwriters exercise in full their option to purchase additional shares of our common stock in this offering, the number of shares held by existing stockholders will be reduced to             % of the total number of shares of common stock that will be outstanding upon completion of this offering, and the number of shares of common stock held by new investors participating in this offering will be further increased to               % of the total number of shares of common stock that will be outstanding upon completion of the offering.

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as appropriate, the total consideration paid by new investors by $             million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as appropriate, the total consideration paid by new investors by $                 million, assuming that the assumed initial price to the public remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We may choose to raise additional capital through the sale of equity or equity-linked securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any options are issued under our equity incentive plan or we issue additional shares of common stock or equity-linked securities in the future, there will be further dilution to investors purchasing in this offering.

 

The number of shares of our common stock to be outstanding after this offering is based on 12,246,963 shares of common stock outstanding as of June 30, 2017, and excludes:

 

533,805 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2017, at a weighted average exercise price of $5.81 per share;
     
  103,803 share of common stock issuable upon the exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith;

 

166,668 shares of common stock issuable upon the conversion of senior convertible notes outstanding as of June 30, 2017;

 

2,592,000 shares of common stock issuable upon the exercise of outstanding stock options under our 2016 plan, as of June 30, 2017; and

 

708,000 shares of our common stock reserved for future issuance under the 2016 plan .

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry and Market Data” in this prospectus.

 

Overview

 

We are a development stage medical device company developing biologic based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three products: the Bioprosthetic Heart Valve, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Recent Developments

 

Amendments to Certificate of Incorporation

 

On March 1, 2017, we adopted a second amended and restated Certificate of Incorporation, which increased the number of our authorized preferred shares to 6,000,000 and designated 1,300,000 shares of our authorized preferred stock as Series A preferred stock. On June 6, 2017, we adopted a third amended and restated Certificate of Incorporation, which designated 2,000,000 shares of our authorized preferred stock as Convertible Series B Preferred Stock, or Series B preferred stock.

 

Series B Preferred Stock and Placement Agent Warrants

 

Through September 1, 2017, we issued 127,125 shares of Series B preferred stock, at a purchase price of $6 per share to accredited investors. The gross proceeds from the Series B preferred stock were $762,750 and we incurred offering expenses of $129,850, including $77,075 for placement agent fees. In connection with the sales of the Series B preferred stock, the placement agent also received a warrant for the purchase of an aggregate of 3,233 shares of our Series B preferred stock at an exercise price equal to the lesser of $6.00 per share or the price of the securities issued in a future round of financing.

 

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Senior Convertible Notes and Warrants

 

Through August 30, 2017, we issued $1,835,500 in senior convertible notes due January 11, 2018 with an interest rate of 15%, and 152,965 warrants to purchase common stock at an exercise price of the lesser of $7.20 or 120% of the conversion price, which is equal to the lesser of (i) $6.00 or (ii) the per share price in our initial public offering, multiplied by 70%. We incurred offering expenses for placement agent and escrow fees of $92,130. The placement agent also received a warrant for the purchase of 18,475 shares of our common stock at an exercise price equal to the lesser of $7.20 per share or 120% of the conversion price.

 

Results of Operations

 

The following table represents selected items in our statements of operations for the six months ended June 30, 2017 and 2016 and for the years ended December 31, 2016 and 2015, and, respectively:

 

    For The Six Months Ended
June 30,
    For the Year s Ended
December 31,
 
    2017     2016     2016     2015  
    (unaudited)              
Revenues:                                
Product sales   $ 152,400     $ 149,600     $ 694,118     $ -  
Royalty income     66,708       35,981       91,794       -  
Total Revenue     219,108       185,581       785,912       -  
Cost of goods sold     188,734       201,365       810,294       -  
Gross Income (Loss)     30,374       (15,784 )     (24,382 )     -  
                                 
Selling, general and administrative expenses     2,135,167       2,447,538       4,634,801       1,289,851  
Research and development expenses     257,579       -       -       -  
Loss from Operations     (2,362,372 )     (2,463,322 )     (4,659,183 )     (1,289,851 )
                                 
Other Expense (Income):                                
Allowance on investment in unconsolidated affiliate     -       482,700       487,900       -  
Interest expense, net     24,934       36,084       57,890       88,524  
Amortization of debt discount     23,634       -       -       -  
Change in fair value of derivative liabilities     1,622       (10,482 )     383,285       (177 )
Total Other Expense     50,190       508,302       929,075       88,347  
                                 
Loss from Continuing Operations     (2,412,562 )     (2,971,624 )     (5,588,258 )     (1,378,198 )
Discontinued Operations:                                
Loss from discontinued operations, net of tax     -       (298,286 )     (298,286 )     (225,815 )
Gain on sale of discontinued operations, net of tax     -       2,499,054       2,499,054       -  
Income (Loss) from Discontinued Operations, net of tax     -       2,200,768       2,200,768       (225,815 )
                                 
Net Loss     (2,412,562 )     (770,856 )     (3,387,490 )     (1,604,013 )
Deemed dividend to preferred stockholders     (214,911 )     (149,663 )     (342,859 )     (4,352 )
Net Loss Attributable to Common Stockholders   $ (2,627,473 )   $ (920,519 )   $ (3,730,349 )   $ (1,608,365 )

 

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Comparison of the Six Months Ended June 30, 2017 and 2016

 

Our net loss for the six months ended June 30, 2017, increased by $1,641,706, or 213%, to $2,412,562 as compared to $770,856 for the six months ended June 30, 2016, primarily due to the gain on sale of discontinued operations recognized during the six months ended June 30, 2016.

 

Revenue

 

For the six months ended June 30, 2017 we generated $152,400 of revenues for product sales and $66,708 of royalty income pursuant to the March 2016 asset purchase agreement with LMAT. For the six months ended June 30, 2016 we generated $149,600 of revenues for product sales and $35,981 of royalty income pursuant to the March 2016 asset purchase agreement with LMAT. Our product sales result from our contract manufacturing supply arrangement with LMAT entered into in connection with the sale of our ProCol product to LMAT. As a result, until any of our product candidates is approved, our revenue will be dependent upon LMAT’s sales efforts for the ProCol product.

 

Gross Loss

 

For the six months ended June 30, 2017 and 2016, cost of goods sold was $188,734 and $201,265, respectively, representing a decrease of $12,631 or 6%, which was due to the lower revenue for the quarter ended June 30, 2017. Cost of goods sold consist primarily of direct labor costs and supplies and material cost used in the manufacturing process of the ProCol products sold to LMAT. The gross loss on product sales is primarily the result of (i) lower than expected product sales, and (ii) high fixed costs, since we have a fixed volume contract with the supplier of our raw materials. For periods in which LMAT’s demand for sub-contract manufacture of the vascular bioprosthesis is relatively low, we can expect to incur losses on the sale of product. We intend to renegotiate the contract with the supplier, such that during periods of low demand, the supplier will provide materials that can be used for research and development purposes; however, there can be no assurance that we will be successful in these negotiations.

 

Selling, General and Administrative Expenses

 

For the six months ended June 30, 2017, selling, general and administrative expenses decreased by $312,371, or 13%, from $2,447,538 to $2,135,167, as compared to the six months ended June 30, 2016. The decrease is primarily due to a decrease in stock-based compensation expense of $1,143,000, related to expense recognized during May 2016 in connection with an employee warrant, and a decrease of approximately $497,000 in professional fees incurred during the six months ended June 30, 2016 in connection with the sale of Series A preferred stock, partially offset by an increase of approximately $473,000 in administrative salaries expense resulting from hiring our Chief Medical Officer, Business Development Manager, and Chief Medical Officer during 2016, and an approximately $243,000 increase in selling, general and administrative expenses resulting from less fixed overhead charged to inventory during the six months ended June 30, 2017, and an approximately $168,000 increase in write-offs of tissue expense.

 

Research and Development Expenses

 

We incurred $257,579 of research and development expenses during the six months ended June 30, 2017 related primarily to labor costs, benefits and supplies and materials associated with research and development activities incurred by us in developing techniques to manufacture the bioprosthetic venous valve and the pediatric bioprosthetic heart valves. We did not conduct any research and development activities in the six months ended June 30, 2016.

 

Allowance on Advances to Related Party

 

On June 30, 2016, we reviewed the recoverability of our advances to Hancock Jaffe Laboratories Aesthetics, Inc., or HJLA, and concluded that collectability was not reasonably assured. HJLA is a development stage company with two employees that holds a patent for a dermal filler, and to date its efforts have been focused on raising funds to be used for approval and commercialization of the product, for which we own the exclusive rights to develop and manufacture. As a result, we recorded an allowance of $482,700 for the six months ended June 30, 2016 related to our advances to HJLA.

 

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Interest Expense

 

For the six months ended June 30, 2017, interest expense decreased by $11,150, or 31%, as compared to the six months ended June 30, 2016 resulting from a decrease in the average balance of loans payable outstanding during the period, due principally to the exchange of a $1,200,000 note payable for equity on August 31, 2016.

 

Amortization of Debt Discount

 

During the six months ended June 30, 2017, we recognized $23,624 amortization of debt discount related to the embedded conversion option of our convertible notes, as well as warrants granted with convertible notes issued on June 15, 2017.

 

Change in Fair Value of Derivative Liability

 

For the six months ended June 30, 2017 and 2016, we recorded a gain (loss) from the change in the fair value of the derivative liabilities of ($1,622) and $10,482, respectively. Our derivative liabilities are related to warrants issued in connection with our Series A preferred stock and Series B preferred stock, warrants issued in connection with our convertible notes, as well as the embedded conversion option of our convertible notes.

 

Loss from Continuing Operations

 

Loss from continuing operations was $2,412,562 for the six months ended June 30, 2017, compared to $2,971,624 for the six months ended June 30, 2016, representing a decrease of $559,062 or 19%. The decrease was primarily attributable to the decrease in selling, general and administrative expenses of $312,371 and a decrease in allowance on investment in unconsolidated affiliate recognized of $482,700, partially offset by increases in cost of goods sold of $12,631 and a $257,579 increase in research and development expense, as described above.

 

Income from Discontinued Operations, Net of Tax

 

During the six months ended June 30, 2016, we recognized income from discontinued operations of $2,200,768, consisting of a $2,499,054 gain on the sale of discontinued operations, offset by a $298,286 loss from discontinued operations.

 

Comparison of the years ended December 31, 2016 and 2015

 

Overview

 

We reported net losses of $3,387,490 and $1,604,013 for the years ended December 31, 2016 and 2015, respectively, representing an increase in net loss of $1,783,477 or 111%, resulting primarily from increases in operating expenses, as discussed below.

 

Revenues

 

Revenues earned during the year ended December 31, 2016 were generated through product sales of $694,118 and royalty income of $91,794. We did not have any product sales for the year ended December 31, 2015.

 

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Gross Loss

 

For the year ended December 31, 2016, cost of sales of $810,294 consisted primarily of labor costs and the costs of materials used for the sub-contract manufacture of the vascular bioprosthesis. We did not have any product sales in the year ended December 31, 2015 and therefore there were no costs of goods sold. The gross loss on product sales is primarily the result of (i) lower than expected product sales, and (ii) high fixed costs, since we have a fixed volume contract with the supplier of our raw materials. For periods in which LMAT’s demand for sub-contract manufacture of the vascular bioprosthesis is relatively low, we can expect to incur losses on the sale of product. We intend to renegotiate the contract with the supplier such that during periods of low demand, the supplier will provide materials that can be used for research and development purposes; however, there can be no assurance that we will be successful in these negotiations.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by $3,344,950, or 259%, from $1,289,851 the year ended December 31, 2015 to $4,634,801 for the year ended December 31, 2016. The increase is primarily due to increased professional fees of approximately $1,089,000 incurred in connection with preparing for our initial public offering and the issuance of Series A preferred stock during 2016, an increase in compensation expenses of approximately $579,000 resulting from hiring our Chief Financial Officer, Business Development Manager and Chief Medical officer during 2016, approximately $1,510,000 increase in stock based compensation resulting from the value of an employee warrant granted ($1,143,863) as well as the amortization of stock options granted ($366,226) during the period and approximately $175,000 increase in write-offs of tissue expense.

 

Allowance on Advances to Related Party

 

During the year ended December 31, 2016, we reviewed the recoverability of our advances to HJLA and concluded that collectability was not reasonably assured. HJLA is a development stage company with two employees that holds a patent for a dermal filler, and to date its efforts have been focused on raising funds to be used for approval and commercialization of the product, for we which own the exclusive rights to develop and manufacture. As a result, we recorded an allowance of $482,700 for the year ended December 31, 2016 related to our advances to HJLA.

 

Interest Expense

 

We recognized interest expense of $57,890 and $88,524 during the years ended December 31, 2016 and 2015, respectively, representing a decrease of $30,634 or 35%. The decrease in interest expense is primarily due to decreased notes payable balances.

 

Change in Fair Value of Derivative Liability

 

For the years ended December 31, 2016 and 2015, we recorded a (loss) gain of $(383,285) and $177, respectively, from the change in the fair value of the derivative liabilities related to preferred stock warrants.

 

Loss from Continuing Operations

 

Our loss from continuing operations for the year ended December 31, 2016, increased by $4,210,606, or 305%, to $5,588,258 as compared to $1,378,198 for the year ended December 31, 2015. The increase was primarily attributable to (i) a decrease in gross profit of $24,382, (ii) an increase in selling, general and administrative expenses of $3,344,950, (iii) an increase loss of $383,462 from the change in the fair value of the derivative liabilities, and (iv) the allowance recorded on our advances to HJLA of $487,900, partially offset by a $30,634 decrease in interest expense, as discussed above.

 

Income (Loss) From Discontinued Operations

 

During the years ended December 31, 2016 and 2015, we earned revenues $385,219 and $1,004,825, respectively, and recognized cost of sales of $251,485 and $1,230,640, respectively, related to the sale of vascular bioprosthesis pursuant to a distribution agreement that was terminated in 2016. Accordingly, these results are recorded in loss from discontinued operations.

 

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Liquidity and Capital Resources

 

We measure our liquidity in a variety of ways, including the following:

 

    June 30,     December 31,  
    2017     2016     2016     2015  
    (unaudited)              
Cash   $ 15,916     $ 656,746     $ 56,514     $ 1,585,205  
Working capital deficiency   $ (3,150,762 )   $ 223,206     $ (1,673,367 )   $ (2,870,602 )

 

We have incurred losses since inception and negative cash flows from operating activities for the years ended December 31, 2015 and 2016 and six months ended June 30, 2017. As of June 30, 2017, we had an accumulated deficit of $30.1 million. Since inception, we have funded our operations primarily through private placements of equity and convertible debt securities as well as from sales of our products. As of June 30, 2017, we had cash and cash equivalents of $15,916. After June 30, 2017, we raised $835,500 (before $327,130 of offering costs) through the issuance of additional senior convertible notes.

 

Currently, we generate revenue from our manufacturing of the ProCol product sold to LMAT in 2016. Under this arrangement, we have an agreement to manufacture ProCol as requested by LMAT for up to 3 years after the sale of ProCol to LMAT. In addition, as part of the consideration of the sale ProCol to LMAT, we are entitled to a royalty payment for the sale of ProCol by LMAT.

 

We will require significant amounts of additional capital to continue to fund our operations and commence and complete our research and development activities. We currently have limited resources to continue to fund our operations and if we are not able to obtain additional cash resources, we will not be able to continue operations. We will continue seeking additional financing sources to meet our working capital requirements, make continued investment in research and development and make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may even have to cease our operations. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock, including shares of common stock sold in this offering.

 

For the Six Months Ended June 30, 2017 and 2016

 

During the six months ended June 30, 2017, we financed our activities from proceeds derived from (i) the issuance of convertible notes for net proceeds of $892,430, issuance of a note payable (net of repayments) of $223,148 and sales of our Series B preferred stock net proceeds of $632,900. During the six months ended June 30, 2016, we financed our activities from the sales of Series A preferred stock for net proceeds of $1,970,665.

 

For the six months ended June 30, 2017 and 2016, we used cash of $1,721,709 and $1,897,325, respectively, in operations. Our cash use for the six months ended June 30, 2017 was primarily attributable to our net loss of $2,412,562, adjusted for net non-cash expenses in the aggregate amount of $372,920, partially offset by $317,933 of net cash used by changes in the levels of operating assets and liabilities. Our cash use for the six months ended June 30, 2016 was primarily attributable to our net loss of $770,856, adjusted for net non-cash expenses in the aggregate amount of $813,238 partially offset by $313,231 of net cash provided by changes in the levels of operating assets and liabilities.

 

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During the six months ended June 30, 2017, cash used in investing activities was $27,365, of which $166,250 was received from the sale of assets to LMAT, $160,000 was paid in exchange for a note receivable to a related party and $31,350 was paid as an advance to a related party, and $2,265 was paid for the purchase of property and equipment. Net cash used in investing activities was $852,900 during the six months ended June 30, 2016, of which, $370,200 was used for purchase of an intangible asset and $482,700 was attributable to an investment in a related party.

 

Net cash provided by financing activities for the six months ended June 30, 2017 was $1,708,476, of which $632,900 was provided in connection with proceeds from the issuance of Series B preferred stock and warrants, net of issuance costs of $129,850, $311,000 was received upon the issuance of a note payable to a related party (partially offset by the repayments of $87,852), $892,430 was provided from the issuance of convertible notes (net of cash offering costs of $107,570), partially offset by the payment of deferred offering cost associated with the initial public offering of $40,002. Cash provided by financing activities for the six months ended June 30, 2016 was $1,821,766, of which $1,970,665 was provided in connection with proceeds from the issuance of Series A preferred stock and warrants, net of issuance costs of $527,835, partially offset by the repayments of notes payable of $111,000, repayments of notes payable – related party of $75,624 and payment of deferred offering cost associated with the initial public offering of $62,275.

 

For the Year Ended December 31, 2016 and 2015

 

During the year ended December 31, 2016 and 2015, we financed our activities primarily from net proceeds derived from sales of our Series A preferred stock of $2,233,131 and $1,870,750 and proceeds from the issuance of notes payable of $188,000 and $1,310,512, respectively.

 

For the year ended December 31, 2016 and 2015, we used cash of $3,084,657 and $2,019,463, respectively, in operations. Cash used during the year ended December 31, 2016 was primarily attributable to our net loss of $3,387,490, adjusted for net non-cash expenses in the aggregate amount of $33,524, partially offset by $269,309 of net cash used by changes in the levels of operating assets and liabilities. Our cash used during the year ended December 31, 2015 was primarily attributable to our net loss of $1,604,013, adjusted for net non-cash expenses in the aggregate amount of $125,246, partially offset by $540,696 of net cash used by changes in the levels of operating assets and liabilities.

 

During the year ended December 31, 2016, cash used in investing activities was $705,226, of which $370,200 was paid for the purchase of an intangible asset, $497,900 was paid in connection with an investment in an unconsolidated affiliate, $3,416 was for the purchase of property and equipment, and $166,250 received from the sale of assets. Net cash used in investing activities for the year ended December 31, 2015, cash used in investing activities was $77,620, of which $75,000 was paid in anticipation of the agreement to acquire an exclusive right to provide development and manufacturing services to HJLA and $2,620 for the purchase of property and equipment.

 

During the year ended December 31, 2016, cash used in financing activities was $2,261,232, of which $2,233,131 was provided in connection with proceeds from the issuance of Series A preferred stock and warrants (net of issuance costs of $615,369), $188,000 was provided by proceeds from the issuance of notes payable, $100,000 was provided by advances from distributors, partially offset by the repayments of notes payable of $186,624. Net cash provided by financing activities for the year ended December 31, 2015 was $3,624,262, of which $1,870,750 was provided in connection with proceeds from the issuance of Series A preferred stock and warrants (net of issuance costs of $309,250), $1,310,512 was provided by proceeds from the issuance of notes payable, and $1,080,000 represented advances from a distributor, partially offset by the repayments of notes payable of $612,000 and payments of deferred offering costs associated with the initial public offering of $25,000.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” or ASU 2014-0. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our financial statements or disclosures. In addition, the FASB issued ASU 2016-08 in March 2016, to help provide interpretive clarifications on the new guidance in ASC Topic 606. We are currently evaluating the accounting, transition, and disclosure requirements of the standard to determine the impact, if any, on our financial statements.

 

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In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, or ASU 2014-15. ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. We do not anticipate that the adoption of ASU 2014-15 will have a significant impact on our financial statement disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of ASU 2015-03 has not had a material impact on our financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” or ASU 2015-11. ASU 2015-11 amends the existing guidance to require that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the effects of ASU 2015–11 on our financial statements.

 

Critical Accounting Policies and Estimates

 

Investments

 

Equity investments in which we exercise significant influence but do not control, and are not the primary beneficiary, are accounted for using the equity method, whereby investment accounts are increased (decreased) for our proportionate share of income (losses), but investment accounts are not reduced below zero.

 

Long-Lived Assets

 

We account for our long-lived assets in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”), which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

 

  ● significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows;

  ● significant negative industry or economic trends;

  ● knowledge of transactions involving the sale of similar property at amounts below our carrying value; or

  ● our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

 

Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.

 

When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and the residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Based on our evaluation, we did not record a charge for impairment for the year ended December 31, 2016 or for the six months ended June 30, 2017.

 

Management believes that our intangible assets (patented heart valve bioprothesis technology and a right to develop and manufacture derma filler on behalf of HJLA) have significant long-term profit potential. Although there can be no assurance that our efforts will be successful, we and HJLA intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, we may be unable to realize the potential of our efforts and the intangible assets may be subject to significant impairment.

 

Preferred Stock

 

We have applied the accounting standards generally accepted in the United States of America, or GAAP, for distinguishing liabilities from equity, when determining the classification and measurement of our convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity. Our Series A preferred stock feature certain redemption rights that are considered to be outside our control. Accordingly, our Series A preferred stock is presented as temporary equity on our balance sheets.

 

As of the issuance date, the carrying amount of our Series A preferred stock was less than the redemption value. If we were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

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Derivative Liabilities

 

During December 2015, we issued warrants for a fixed number of Series A preferred stock at an adjustable price. We determined that these warrants are derivative instruments pursuant to FASB ASC 815 “Derivatives and Hedging.”

 

The accounting treatment of derivative financial instruments requires that we record the warrants as a liability at fair value and mark-to-market the instruments at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. We reassess the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

Revenue Recognition

 

We recognize revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale or rendering of services is recorded as deferred revenue on the accompanying balance sheets.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.”

 

JOBS Act

 

Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period.

 

For as long as we remain an “emerging growth company” under the recently enacted JOBS Act, we will, among other things:

 

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;

 

be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation; and

 

be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.

 

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” including the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.

 

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BUSINESS

 

Overview

 

We are a development stage medical device company developing biologic based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three products: the Bioprosthetic Heart Valve, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Our Products

 

We are in the process of developing the following bioprosthetic implantable devices for cardiovascular disease:

 

The Bioprosthetic Heart Valve : the Bioprosthetic Heart Valve, or BHV, is a bioprosthetic, pig heart valve designed to function like a native heart valve, and designed to provide a patient greater functional performance than currently available devices. Early clinical testing has demonstrated improved function over existing surgically implanted devices and, due to these study results, we believe BHV may be suitable for the pediatric population, as it accommodates for the growth concomitant with the patient. Most of the data and studies have been performed to support our submission to the FDA for either a first-in-human study or for an investigational device exemption, or IDE, which we plan to submit in 2018. Once approved for an IDE, we plan to proceed with a clinical trial through the FDA standard ISO 5840, which is the international standard for bioprosthetic heart valve testing.

 

The CoreoGraft : the CoreoGraft is an “off the shelf” bioprosthetic, cow derived heart, coronary artery bypass graft, or CABG, with a 3 millimeter, or mm, diameter for use as a coronary vascular conduit in coronary artery bypass procedures. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and to facilitate a more complete revascularization of the injured heart muscle. The CoreoGraft is intended to allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures. We believe we will need to proceed with both animal and human studies in order to obtain FDA approval. Once these studies have been completed we plan to proceed with a human trial in the United States to evaluate this graft in patients in need of cardiac revascularization without any autologous tissue. We would be evolving a one year study to evaluate patient survival and the graft being open by coronary angiography. We intend to start these studies in the United States in 2018.

 

The Venous Valve : the VenoValve is a bioprosthetic, pig venous valve for patients with lower limb chronic venous insufficiency, or CVI, which occurs because of damage to the valves of the veins in the legs after patients develop blood clots in the deep venous system. An estimated 2.5 million people experience CVI in the United States and we believe the VenoValve, which is surgically implanted, will result in improvement in venous valve function in the legs of these patients. The VenoValve would replace dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. The VenoValve will allow for surgical insertion into the femoral vein or popliteal vein, thereby re-establishing competence and antegrade venous flow back to the heart and improvement in symptoms. Preclinical prototype testing, including in vivo animal studies by us, and in vitro hemodynamic studies have demonstrated that the VenoValve mimics the function of a normal functioning venous valve. Ascending and descending venography of the VenoValve in sheep demonstrated competency of the valve as well as being open in appropriate flow patterns. Results of eight pre-clinical tests were submitted to the FDA in the third quarter of 2017 in order to commence first-in-human trials in the United States. Once a first-in-human trial is underway, we will seek to obtain reimbursement approval for this product candidate.

 

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In addition, we previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a Class III product for hemodialysis vascular access in patients with ESRD. It is a biological graft derived from a cow’s mesenteric vein. The ProCol Vascular Bioprosthesis received a premarket approval, or PMA, for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft implant.

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for its dialysis access line of products for an upfront payment and a three-year royalty of up to $5 million. We continue to provide manufacturing transition services to LMAT from our facility in Irvine, California and are obligated to do so under an agreement with LMAT until 2019. Our ongoing revenue stream is derived from the sub-contract manufacturing services and royalties earned on LMAT sales pursuant to the agreement with LMAT.

 

Bioprosthetic Heart Valve

 

The BHV is a bio-prosthetic heart valve designed to mimic and function like a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability of BHV have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients and we are aiming to have the BHV become the standard of care for pediatric heart valve replacement.

 

Following an eight-year research and development effort, we completed the designing, prototyping and testing in accordance with the requisite International Organization for Standardization, or ISO, 5840 Part 1 (Cardiovascular Implants, Cardiac Valve Prostheses General Requirements) and Part 2 (Surgically Implanted Heart Valve Substitutes) of what we believe is an innovative heart valve bio-prosthesis for pediatric cardiac heart valve replacement. We believe that we have completed the necessary ISO 5840 pre-clinical data requirements and plan a submission to the FDA to begin first-in-human clinical trials in the United States in 2017. To that end, we have obtained a patent for the BHV. We intend to produce 19 mm, 21 mm and 23 mm diameter bio-prosthetic heart valves to address the specific needs of the pediatric and adult patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease.

 

The BHV has been designed to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease. Based upon our patented technology, the BHV is designed to eliminate the need for external support structures technically referred to as a “stent” to maintain valve geometry and function. This is accomplished through a use of titanium wires embedded within the wall of the bioprosthetic valve. This increases the size of the bioprosthesis that can be placed in the pediatric patient’s small annulus, the site of the inflow of the patient’s original valve. Thus, the BHV allows for effective functional results equal to a valve size two to three sizes larger than would be possible when implanting with an external stent. In addition, the internalized titanium supports are robust enough so as not to require additional suturing as is the case for weakly supported or stentless valves. This allows for the utilization of a single suture line for attachment of the valve to the recipient’s annulus and for an uninterrupted flow plane, which greatly increases the volume of blood with each heart beat. Conversely, conventional valve design requires that the valve tissue be sewn or mounted inside the external stent diminishing the effective diameter and resulting in poor performance, stress on the leaflets and ultimately to a decreased longevity. When a conventional bioprosthetic heart valve is placed in a small annulus, not only will the valve react adversely to increasing cardiac output but it will require a valve three sizes larger than the annulus to achieve a similar hemodynamic or functional result to the native valve; a feat not advisable or in any event accomplishable even with conventional root enlargement procedures. A patient prosthesis mismatch (the prosthesis is too small with regards to the patient’s size and weight) results in poor quality of life and in impairment of physical development and social integration.

 

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Similar flow advantages have been verified for our 23 mm BHV, the most common size implanted for mitral disease. We believe our 23 mm BHV provides an orifice area that mimics flow conditions of a younger active child. This is approximately 85% greater blood flow than presently available bioprosthetic heart valves with expected decreased recovery time from procedure of up to 75%.

 

Additionally, for a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. The protrusion of our 23 mm BHV is up to 2 mm less when compared to other bioprosthetic valves. Our flatter more planar geometry comes closer to mimicking the native anatomy allowing for physiological, more efficient left ventricular and aortic outflow tract flow patterns.

 

The CoreoGraft

 

The CoreoGraft is a device for use as an alternate or supplemental coronary vascular conduit in coronary bypass surgery. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and facilitate a more complete revascularization of the injured heart muscle. The device will allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures and patients suffering from chronic venous insufficiency. This device is fashioned from 3 mm diameter bovine mesenteric veins. The “feel” and suturing quality of the graft are mimetic of mammary arteries and requires no special suture considerations beyond those commonly used for autologous grafts. The CoreoGraft length is appropriate for all bypass requirements allowing exact trimming to the individually required length.

 

The CoreoGraft is functionally similar to a natural artery and has been demonstrated in preliminary studies to sustain effective “coronary” hemodynamics and cardiac function. Outcomes of the 24 procedures performed exemplify the utility as an alternate or supplemental coronary vascular conduit in off-pump CABG. This preliminary clinical study was limited to patients without sufficient available autologous grafts or patients who could not be weaned from bypass perfusion because of incomplete cardiac revascularization. Twenty-six grafts were implanted in 24 patients requiring a complete myocardial revascularization subsequent to hospital admission for coronary artery bypass grafting. In all cases, the CoreoGraft was used when it was determined that adequate or suitable autologous conduits were not available as a consequence of prior use, vascular pathology or contraindication associated with a comorbid condition.

 

We believe there are no presently approved “off the shelf” vascular grafts for coronary artery bypass procedures. We believe that the availability of a readily available “off the shelf” device like the Coreograft will encourage multiple graft placement without the surgeon forgoing additional procedures that are not cost-effective. We anticipate that the FDA trial for this product candidate will begin in 2018. We expect the trial’s endpoints will be patient survival as well as graft survival at one year. We will also be assessing complications post operatively and comparing them to concurrent CABG patients.

 

The VenoValve

 

We have developed the VenoValve for use in treatment of lower limb CVI. The VenoValve is intended to be a replacement of dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. Restoration of valvular function in the deep system is the primary treatment for treatment of CVI. The VenoValve comprises a biologic leaflet mounted in a supporting frame that will allow for surgical insertion of VenoValve into the femoral vein or popliteal vein, thereby re-establishing competence and anterograde venous flow back to the heart.

 

Preclinical prototype testing, including in vivo animal studies and in vitro hemodynamic studies have demonstrated that the VenoValve is similar in function to a normal functioning venous valve. Ascending and descending venography of the VenoValve in sheep, demonstrated competency of the valve as well as patency in appropriate flow patterns.

 

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In August 2017, we made a presubmission to the FDA to initiate feedback regarding an Investigational Device Exemption, or IDE, to initiate an Early Feasibility study in the United States. As we believe there are no currently available medical or non-surgical treatments for lower limb CVI, we believe the VenoValve will provide for a paradigm shift in the treatment of both primary and secondary causes of chronic venous insufficiency disease.

 

ProCol Vascular Bioprosthesis

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for dialysis access line of products for $2,805,297 plus a three-year royalty up to a maximum of $5 million. We agreed to provide manufacturing transition services to LMAT from its facility for up to three years.

 

The ProCol Vascular Bioprosthesis is a Class III vascular bioprosthesis for hemodialysis vascular access concomitant with ESRD. The ProCol Vascular Bioprosthesis is a natural biological graft derived from a cow’s mesenteric vein. The tissue processing technology and sterilization process ensures a product that is flexible, easy to suture and one which exhibits physiologic pulsatile flow characteristics similar to a native fistula. The ProCol Vascular Bioprosthesis may be implanted in a straight or loop configuration, according to the specific surgical need and has demonstrated clinical efficacy in the upper arm, forearm, and thigh.

 

The ProCol Vascular Bioprosthesis has received FDA Premarket Approval, or PMA, for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft or consequent to failure of a prosthetic graft in terms of intent to treat.

 

The outcomes of the FDA trials and subsequent studies demonstrate that the cumulative patency for the ProCol Vascular Bioprosthesis implanted as a first access or after multiple failed prosthetic grafts is fundamentally that usually reported for arteriovenous fistulas as the first access or employed consequent to failed ePTFE grafts. As compared with the present standard of care ePTFE graft, the ProCol Vascular Bioprosthesis has shown 3.7 times lower relative risk of infection, 1.4 times lower relative risk of interventions, and 1.7 times lower relative risk of thrombosis. We believe this is exemplified by the quantitative and qualitative similarities of the cumulative patency of the ProCol Vascular Bioprosthesis to that reported for native arteriovenous fistulae in the Dialysis Outcome and Practice Patterns Study. We believe the results of these and other studies consistently demonstrate that as a vascular access bridge graft the ProCol Vascular Bioprosthesis provides dramatically better cumulative patency compared to ePTFE grafts and exhibits a lower complication rate. Most importantly is the continued patient satisfaction associated with the paucity of complications and uninterrupted dialysis therapy.

 

The ProCol Vascular Bioprosthesis is stored in sterile saline, so preparation in the operating room is easily accomplished via a simple, quick rinsing process. The ProCol Vascular Bioprosthesis is also highly biocompatible and elicits no antibody reactions in patients. Handling and suturing characteristics of the ProCol Vascular Bioprosthesis are similar to a patient’s native tissue making it easy to work with during the implant procedure. The natural tissue of the ProCol Vascular Bioprosthesis is easily punctured in the hemodialysis setting affording the ease of access associated with a native fistula and the highly elastic and compliant nature of the ProCol Vascular Bioprosthesis enables it to handle high flow rates. Hemostasis is also readily achieved with minimal pressure following the removal of the hemodialysis needles. The ProCol Vascular Bioprosthesis graft may be accessed for hemodialysis as soon as two weeks following implant, based upon the physician’s decision and patient tolerance.

 

Our Industry and Market

 

Our three product candidates currently under development are designed to address three different industries. The BHV is designed to address diseases relating to the aortic and mitral valves. The CoreoGraft is designed to address coronary artery bypass surgery, and the VenoValve is designed to address lower limb CVI.

 

Aortic and Mitral Valve Diseases

 

Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. There is a long history of durability and value of these devices. Aortic valve or mitral valve stenosis occurs when the heart’s valves narrow, preventing the valve from opening fully. This obstructs blood flow from the heart and to the rest of the body. When the valves are obstructed, the heart needs to work harder to pump blood to the body, eventually limiting the amount of blood it can pump and may weaken the heart muscle. Valve stenosis, if left untreated, can lead to serious heart problems.

 

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Mitral valve stenosis and prolapse, leakage or regurgitation related to inadequate or faulty closing, concerns a defective mitral valve, which is located between the left chambers of the heart. This valve works to keep blood flowing properly and allows blood to pass from the left atrium to the left ventricle but prevents it from flowing backward. When the mitral valve does not work properly, a person can experience symptoms such as fatigue and shortness of breath because the defective valve is allowing blood to flow backwards into the left atrium. Consequently, the heart will not pump enough blood out of the left ventricular chamber to supply the body with oxygen-filled blood. In certain cases, mitral valve disease, may, if left untreated, lead to heart failure or irregular heartbeats (arrhythmias), which may be life threatening.

 

Historically, heart valve manufacturers have fabricated replacement heart valve types (mechanical, biological, pericardial, pig-origin) and sizes to accommodate a spectrum of patient age, body mass or special pathologic conditions. Typically, this consists of aortic valve sizes with outside diameters ranging from 19 millimeters, or mm, to 27 mm in 2 mm increments and mitral valves sizes in 2 mm increments from 27 mm to 31 mm. Hospitals and surgeons generally used one biologic and/or one mechanical valve from a single manufacturer and until about the end of the last century hospitals tended to inventory a complete size range of valves typically from a single manufacturer. As the practice of heart valve replacement surgery developed, it became apparent that the recipient population demanded a more prospective view in terms of the various implant modalities, geometrical configuration and a patient’s comorbidities. Depending on age (patients under age 20 receive a mechanical valve due to their calcium metabolism) surgeons use either mechanical, pericardial or porcine biological valves. Porcine valves have shown better longevity than pericardial valves.

 

Distinctive features of one particular valve may facilitate implantation or meet the particular demands of a patient’s unique pathology. This stimulated the development of various valve configurations, but in the end did not significantly improve hemodynamic performance or advance quality of life concerns. There is no disagreement and considerable evidence that for most cardiac valve related disorders presently available devices will improve graft recipients presenting conditions.

 

However, we believe that is one patient cohort for whom the present devices fall short: very young children and adolescents requiring the smallest valve sizes, typically 19-21 mm in diameter. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple interventions to provide a larger valve replacement. Additionally, biological valves in younger patients will deteriorate as a consequence of what is known as dystrophic mineralization, a phenomenon most likely associated with skeletal growth. Children and adolescent receive historically mechanical valves, which show lower performance. The patient outgrows the valve size several times between ages 2 and 20, requiring three to five surgeries before adulthood (also referred to as patient prosthetic mismatch).

 

Pediatric patients suffering from mitral valve prolapse, stenosis or rheumatic fever typically face complex issues such as alterations of the morphology and geometrical shape of the left heart chambers, which may compromise the chords that tether the mitral valve and the surrounding annular tissues that maintain the leaflet in a proper position (juxtaposition) leading to leakage or regurgitation. The common course for mitral valve disease in children is repair rather than replacement of the valve due to the potential complexity of pediatric mitral valve disease. However, when the mitral valve is not amenable to repair either as a consequence of surgeon skill and/or experience or the complexity of the pathology, a valve replacement procedure is necessary. Mitral valve stenosis and prolapse, leakage or regurgitation also results in significant changes in the morphology of the wall of the left ventricle, typically manifested as considerable thinning, and/or ventricle enlargement or thickening. For a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. This leads to a restricted passage of the blood through the aortic valve (aortic insufficiency). A too large aortic valve replacement may restrict the function of the mitral valve. It is therefore very important to match the respective valve with the size of the patient’s heart.

 

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We believe that the effective orifice size of most, if not all, of the present commercially available small diameter bioprosthetic heart valves suited for pediatric aortic and mitral valve replacement are inadequate to provide the necessary hemodynamic result for up to 80% of the potential valve recipients suffering from congenital or acquired valvular disease. We believe that this shortcoming is a result of the reduced effective diameter of currently available bioprosthetic heart valves that uses conventional supporting structures and/or the resistance of the valve leaflets during the forward flow opening phase of the cardiac cycle. Most commonly, for developing children, the increasing body mass or body surface area as a child grows is frequently incongruent with the valve size that the patient’s heart can accommodate. Consequently, these recipients almost universally develop a condition designated as “patient prosthetic mismatch.” For valve replacement in both younger and older pediatric patients, patient prosthetic mismatch has been shown to be associated with longer recovery periods and diminished improvements in symptoms. This is reflected in decreased exercise capacity, decreased recovery of the thickened left ventricle, as a result of the ventricular adaptation to the flow resistance of the narrowed aortic valve outflow tract, and an increased number of adverse postoperative cardiac events. Older pediatric patients are especially susceptible to patient prosthetic mismatch with a marked persistence of symptoms. This is most likely related to the younger patient’s higher cardiac output requirements in association with a longer exposure to the consequences of patient prosthetic mismatch.

 

The American Heart Association reports that in each year, approximately 10 of every 1,000 children (approximately 1.3 million children) worldwide including 8 of every 1,000 in the U.S. are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 mm sized prostheses. The 2015 Global Data Report reported the global heart valve market to be approximately $2 billion based on an ASP for standard valve prostheses of $5,000 to $9,000.

 

Coronary Artery Bypass Graft Surgery

 

The present standard procedure for coronary bypass graft surgery, or CABG, employs the use of the patient’s saphenous vein and/or internal mammary artery as conduits to re-establish blood flow. While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. Balloon angioplasty also has not produced conclusive and consistent results and, in a large number of instances, may only provide short term relief necessitating subsequent and consequently more difficult surgical intervention. CABG surgery remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. By the end of the last decade, more than 500,000 CABG procedures requiring almost one million harvested autologous grafts were performed annually in the United States. In 2016, 157,000 CABG procedures were performed, accounting for 470,000 bypass grafts (three bypasses per procedure).

 

We believe that the recent trend toward off pump coronary graft surgery—the surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation—has had considerable bearing on both perioperative and procedural safety and efficacy and has had a significant impact on the future of the procedure and attendant utility of prosthetic bypass grafts. Bypass graft harvest remains the most invasive and complication prone aspect of minimally invasive bypass procedures as well as on-pump CABG. Present standard-of-care complications are described in recent published reports in major medical journals . The percentage of complications can be as high as 43%. Fortunately, less than 50% of these wounds require operative intervention, but the ones that do can be major.

 

Also recent articles substantiate that saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the 3 mechanisms that lead to venous graft failure. Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure.

 

The increased incidence of chronic venous diseases of the lower limbs also reduce the possibility of harvesting good quality veins as well as the increased incidence of redo CABG bypasses. With an aging population the incidence of good quality veins for bypass is reduced and the need for an “off the shelf” conduit becomes imperative. An “off the shelf” bypass conduit (tube) would do away with the attendant complications and chronic postoperative discomfort frequently reported for autologous graft harvest and consistently afford sufficient material for more complete cardiac revascularization. The American Heart Association stated in 2015 that complete revascularization was key to ensure long term survival and quality of life in patients with coronary disease. An efficacious prosthetic bypass graft in concert with off pump and/or minimally invasive surgery would comprise an almost wholly “noninvasive procedure.” We believe the availability and appeal of such a modality would have considerable impact on the therapeutic balance between bypass revascularization and interventional cardiology regimens like stents and balloon catheterization, which only provide temporary relief.

 

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Coronary artery bypass surgery departs from the usual one-procedure, one-device paradigm. When revascularization requires more than an internal mammary graft, a conservative average of 2.5 additional grafts is required. The economics and surgeon reimbursement amounts for bypass procedures presently discourage multiple graft procedures as the time to harvest additional grafts is not economically justified in terms of the reimbursement amounts. Reimbursement codes for a single bypass graft versus five grafts on the same patient only differ by a few hundred dollars but the multiple grafts require up to three times the amount of time and operating costs of a single procedure. We believe that this discourages taking the time and incurring the operating room costs in harvesting additional bypass grafts resulting in suboptimal cardiac revascularization. Moreover patients requiring multiple bypasses for a complete revascularization often show comorbidities like chronic venous insufficiency of the lower limbs as well as redo patients.

 

If only 20% of the annually performed procedures required multiple graft revascularization and were high risk patients, the requisite number for the United States alone would be in excess of 100,000 grafts. On the basis that, consequent to an approved device, utilization was only 50% of the prospective market potential, market value for the United States alone would be approximately $300 million to $350 million for unit pricing of approximately $6,000 to $7,000. The European and Pacific Asia markets combined would have an estimated similar value for a worldwide market of approximately $1 billion to $2 billion. Pricing evaluation for this product includes reduced operating room expense and time for vein harvest, including reduction in operating room personnel as well as reduction in the overall morbidity from the leg wounds created during vein harvest in the post operative period. Pricing evaluation also includes the fact this is the first off the shelf device for CABG as there is no competitive product. Most importantly, we believe there is an immediate need for this device in the medical field. Studies to obtain FDA approval would be required in patients without any autologous tissue for bypass. We would be evaluating patients after one year for survival and graft functioning.

 

Lower Limb CVI

 

Lower limb CVI is a disease presently affecting tens of millions of patients worldwide with approximately 1.5 million new cases annually. In the United States, based upon data from the Vascular Disease Foundation, approximately 20-25 million Americans suffer from varicose veins and 5% (15 million) of the population are expected to develop deep vein thrombosis, or DVT, and approximately 65% (10 million) of the DVT population are expected to develop CVI. Data from the Vascular Disease Foundation reveals that in the United States, the present population of individuals suffering lower limb CVI is approximately 2.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in approximately 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. The highest incidence of CVI is in the age group of patients between 57-80 years of age. With an aging global population, the incidence of CVI is rising. In Western Europe, the incident rate of CVI is estimated at one million hospitalizations per year, the prevalent CVI population is estimated at 17.5 million, and the mean prevalence of CVI of the legs in the general population in Western Europe is 30%. Patients with CVI are plagued with marked disability, either from leg swelling or development of non healing leg ulcers.

 

The hallmark of the disease is the failure of damaged venous valves to allow for lower limb venous blood to return to the heart. It is a mechanical reflux problem. Presently, no medical or nonsurgical treatment is available other than compression “garments” for early stage disease or leg elevation for more severe cases, which are, at best, only palliative. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected vein is an option. However, for the deep system, valve transplants have been used but with very poor results or creation of valves using fibrous tissue which is only performed in few centers world wide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI.

 

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Hemodialysis Market

 

Hemodialysis is the main treatment for patients with ESRD. During a hemodialysis treatment, a machine pumps and cleans a patient’s blood by way of a flexible, plastic tube. In order to perform hemodialysis, an access point must be created. This is a connection between the patient’s artery and vein so that dialysis can be performed. If the vein is not of adequate size, then a connection between the artery and vein is created using a prosthetic or man-made device or conduit. The most commonly used hemodialysis access grafts consist of various conduit designs fabricated from expanded polytetrafluoroethylene, or ePTFE. Despite, what we believe to be historically mediocre performance, ePTFE grafts continue to have a significant part in the hemodialysis market.

 

Several studies have shown that the ProCol Vascular Bioprosthesis has better patency (stays open) rate than ePTFE grafts. Also in case of infection of an ePTFE graft, a ProCol Vascular Bioprosthesis graft may be used at the same place without getting infected. Studies have shown that the overall patency and infection rate of ProCol Vascular Bioprosthesis is superior to ePTFE in the leg position.

 

In 2009, investment analysts estimated that the U.S. market for hemodialysis vascular access grafts amounted to around $77 million and projected this market to grow by 5% per annum through the middle of this decade. Hemodialysis access is rapidly becoming one of the largest market segments for vascular grafts and with the average selling price, or ASP, per unit rapidly approaching over $1,000. The market is expected to be about $110 million by 2015. Although vascular access is one of the most vital components of the treatment paradigm for ESRD, the yearly total access graft cost represents less than one half of one percent of the total annual ESRD treatment expenditures.

 

Competition

 

We operate in the highly competitive medical device industry. While we believe our product candidates may face minimum direct competition, there are other products, treatments or devices that may indirectly compete with our product candidates. We compete with various companies that operate in the medical device industry. Among these companies are St. Jude Medical, Inc., Johnson and Johnson and Medtronic Inc. Many of our competitors have substantially greater technological, financial, research and development, manufacturing, personnel and marketing resources than we do. We believe that we have competitive strengths that will position us favorably in our markets. However, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may acquire or in-license devices and could directly compete with us. Additionally, certain of our competitors may be able to develop competing or superior technologies and processes and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and devices may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. As more companies develop new intellectual property in our markets, the possibility of a competitor acquiring patents or other rights that may limit demand for our product candidates.

 

We believe that each of our product candidates either under development or currently manufactured face limited direct competition for the following reasons:

 

BHV

 

Although the BHV market is mature with multiple established competing products, we believe that our approach (natural physiology with a proprietary tissue processing technology, design and geometry) will greatly facilitate market entry and acceptance. Our competitors in this market include St. Jude Medical, Inc., Johnson and Johnson and Medtronic Inc., all of which have previously acquired heart valves developed by some of our present and previous management.

 

The CoreoGraft

 

To our knowledge, no company presently develops adjunct devices to be applied to a patient’s harvested grafts. Others have made attempts to “tissue engineer” small diameter grafts. We believe there will not be an approved competitive device for possibly a decade as a consequence of the complexities of present FDA regulations for tissue engineered devices and the historically poor outcomes of grafts fabricated from synthetics. As a result, we do not face significant competition to our CoreoGraft.

 

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The VenoValve

 

The VenoValve may provide for a new paradigm for the treatment of the disease for which it is intended. While the etiology of deep vein chronic insufficiency may vary, the condition is wholly attributable to significant reflux in the deep system caused by dysfunctional venous valves. For some time, it has been recognized that the only durable treatment must include either reconstruction or replacement of the affected valve. There are no FDA approved effective drugs, practical effective surgical or nonsurgical treatments, or a single treatment strategy for CVI. As a result, we believe there will be no direct competition for the VenoValve for the foreseeable future.

 

Our Strategy

 

Our business strategy is focused primarily on research, development and manufacturing of biomedical device technologies for use in surgical procedures. We are also focused on the relatively large device markets where our technological advances and achievements provide an opportunity to offer our product candidates in an environment conducive and advantageous to their utilization and clinical benefit. Developing pathways to obtain FDA approval in the most expedient fashion is our main strategy for our product candidates. Our present strategy for the VenoValve is to obtain approval from the FDA for a first-in-human study that will quickly evolve into a study coordinated to demonstrate improvement in the quality of life for patients with CVI. We believe that the VenoValve will provide significant improvement in the quality of life measures for patients living with the disability of CVI.

 

Our Competitive Strengths

 

We believe we will offer the cardiovascular device market a compelling value proposition with the launch of our three product candidates, if approved, for the following reasons:

 

We have experience of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic tissue devices. Our patents pertaining to unique design advantages and processing methods of biologic valvular tissue as a “bioprosthetic” device provide intellectual advantage over potential competitors.

 

We operate a 14,507 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of Class III medical devices and is equipped for research and development, prototype fabrication, current good manufacturing practices, or cGMP, manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.

 

We have attracted senior executives who are experienced in research and development and who have the expertise to obtain FDA approval for products like ours that satisfy patient needs. We also have the advantage of seasoned marketing and business development experience within senior management and members of our board of directors who will provide guidance as we move towards market launch.

 

Marketing and Sales

 

We intend to develop an internal marketing and sales group to manage a combination of direct sales representatives and an independent distribution network.

 

BHV

 

Cardiac surgeons and hospitals generally develop a preference for one particular company’s device, whether based on an impression of superior performance or on developed relationships with the providers, or costs. We believe that by focusing on the pediatric segment we are not subject to this issue as the prospective user can focus on the best ethical approach to the patient’s needs without “abandoning” prior affiliations. We believe that with the present “commodity” nature of the heart valve industry, the benefits of the BHV will position the device as a standard of care without a competitive “peer.”

 

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In addition, according to the American Heart Association, each year worldwide approximately 10 of every 1,000 children (approximately 1.3 million children) including 8 of every 1,000 in the United States are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 millimeter sized prostheses. The 2015 Global Data Report reported the global heart valve market to be approximately $2 billion, based on an ASP for standard valve prostheses of $5,000 to $9,000. Based on these statistics, we believe that at the proposed ASP of $17,500.00 per unit for all sizes, the estimated market of the BHV is approximately $300 million in the United States and $500 million to $600 million in Western Europe and Pacific Asia. On an equivalent cost basis, we believe the market value of our BHV would represent approximately 25% of the total market on a unit basis.

 

CoreoGraft CABG

 

The CABG market is a more complex market to estimate on a procedural basis. This is largely due to the evolving attitude toward more complete vascularization of the infarcted heart and the varying number of placed grafts accompanying the cardiopulmonary bypass and off pump or beating heart procedures. In lieu of a multifaceted trend analysis, it is reasonable to approach the potential market on a conservative basis by assigning an average of 2.5 grafts per procedure, which for the United States, would be an equivalent of approximately 375,000 units annually representing a market value of approximately $3.25 billion. As is the case for devices utilized as part of well-established surgical procedures, the “rest-of-world” market has been consistently equivalent to that of the U.S. market.

 

When the total costs of coronary artery bypass procedures are estimated in terms of alternate treatments and especially for those patients for whom surgery is strongly indicated it appears that a cost for a device that substitutes for graft harvest, alleviates the inevitable cost of treatment subsequent to incomplete revascularization and limits the adjunct use of high ASP’s for stents would allow for reimbursement equivalent to less than 20% of the total procedure and hospital costs. In consideration of the above, the anticipated price to the hospital would be approximately $6,000.00 per unit.

 

The VenoValve

 

In the United States, based upon data from the Vascular Disease Foundation, approximately 5% (15 million) of the U.S. population is expected to develop DVT and approximately 65% (10 million) of the U.S. DVT population is expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the United States, the present prevalent population of individuals suffering varying degrees of CVI is approximately 2.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. For Western Europe, the incident rate of CVI disease is estimated at one million hospitalizations per year, the prevalent CVI disease population is estimated at 17.5 million, and the mean prevalence of CVI disease of the legs in the general population in Western Europe is 30%.

 

There is no comparable device for purposes of price comparisons or reimbursement codes. Therefore, after consulting with industry analysts and examining the actual selling price sensitivity in terms of clinical benefit, and analyzing trends in reimbursement for similarly existing devices, we have developed a potential clinical value for the VenoValve. We have estimated a reimbursement of approximately $6,500 - $11,000 per valve.

 

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A measure to estimate the cost effectiveness of an intervention is quality-of life-years, or QOLY. Presently for CVI, the cost per patient to maintain the status quo of CVI or no substantial improvement in QOLY is approximately $50,000.00 annually. We believe the VenoValve will improve the QOLY over a 5-year period by at least 2.5 QOLYs and would reduce the annual cost to maintain the improved longevity and life style by 60%. For device recipients, with a return to normal activity without pain, the QOLY improvement would be 4, equivalent to reducing annual costs by 75%. Over a 5-year period the health care cost savings associated with use of the venous valve would be $150,000 to $200,000. In consideration of the above the anticipated price to the buyer, we expect these factors to be associated with the cost of the device.

 

Intellectual Property

 

We possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that extends device longevity, provides device functions and guarantees sterility. Our patents pertaining to the design advantages and processing methods of valvular tissue as a bioprosthetic device provides further intellectual advantage over potential competitors. In addition, there are various specific intellectual property items related to each of our product candidates as described below. The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010, and expiring on July 9, 2027. Patents are pending for the design of the frame for this device. We maintain proprietary methods for processing tissue for this valve. Two patents have been filed for the VenoValve with the U.S. Patent and Trademark Office.

 

Regulatory Pathway

 

BHV

 

We have developed a prototype specification for each of the BHV sizes, device history records and other required documentation including risk analyses to support the prototype specification. We have complete biocompatibility testing and tests specified in ISO 5840 Standards, including animal and tissue fatigue and hydrodynamic. Subsequent to the completion of all required studies and investigational protocol, we will submit an application to the FDA to begin U.S. human studies.

 

In October 2002, under the Medical Device User Fee and Modernization Act of 2002, or MDUFMA, the FDA developed guidelines, which were enacted into law in 2007, to stimulate and facilitate the development of devices for pediatric medicine. Among other things, the MDUFMA amended provisions of the Federal, Food, Drug, and Cosmetic Act, or FFDCA, to promote the development of safe and effective pediatric devices and promote protection of such patient population during the course of clinical trials involving such products. The 21st Century Cures Act, implemented in September 2016, adds significantly to our ability to perform trials in the least burdensome regulatory path. We believe that the adoption of these guidelines will greatly facilitate the regulatory tasks and FDA PMA for the BHV clinical trial protocol.

 

The CoreoGraft

 

There are no regulatory guidelines for the development and preclinical testing of conduits for CABG and we have taken the initiative in developing a proposal for preclinical testing and the clinical investigation protocol. Most of the production procedures and validation processes are similar if not identical to the FDA PMA of ProCol. The remaining preclinical work will include a short term implantation in an approved animal model. The study will require approximately 6 months to complete and is intended to be combined with presently completed documentation including the “first-in-human” studies reviewed in the device information studies as part of the FDA IDE application.

 

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The VenoValve

 

A pivotal trial will be conducted under an approved IDE following a Human Feasibility study. Due to the low hazard analysis and high need for such a device, we anticipate that the FDA may shorten the time to receive a PMA for commercialization from thirty-six months to approximately eighteen months for this Class III device due to medical needs in the community.

 

Government Regulation

 

Our product candidates and our operations are subject to extensive regulation by the FDA, and other federal and state authorities in the United States, as well as comparable authorities in foreign jurisdictions. Our products are subject to regulation as medical devices in the United States under the FDCA, as implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.

 

FDA Premarket Clearance and Approval Requirements

 

Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, or approval of a PMA application. Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, postmarket surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre-amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed.

 

510(k) Marketing Clearance Pathway

 

We do not intend to utilize the 510(k) clearance route. However, if we do, to obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate device already on the market. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to six months, but may take longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.

 

If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device. After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.

 

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The FDA is currently considering proposals to reform its 510(k) marketing clearance process, and such proposals could include increased requirements for clinical data and a longer review period. Specifically, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the 510(k) clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval.

 

PMA Approval Pathway

 

Class III devices require PMA approval before they can be marketed although some pre-amendment Class III devices for which FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by extensive data, including data from preclinical studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR.

 

The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported PMA approval or requirements to conduct additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.

 

Certain changes to an approved device, such as changes in manufacturing facilities, methods or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our products are currently approved under a PMA. However, we may in the future develop devices which will require the approval of a PMA.

 

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De novo Classification Process

 

Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. We may utilize the de novo classification process to obtain marketing authorization for our product candidates under development.

 

Clinical Trials

 

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s IDE regulations, which govern investigational device labeling, prohibit promotion of the investigational device and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.

 

In addition, the study must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB, for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent and labeling and record-keeping requirements. Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.

 

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During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

 

Post-market Regulation

 

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

 

establishment registration and device listing with the FDA;

 

QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

 

labeling regulations and FDA prohibitions against the promotion of investigational products, or “off-label” uses of cleared or approved products;

 

requirements related to promotional activities;

 

clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices;

 

medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;

 

correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;

 

the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and

 

post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.

 

Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our products, which would have a material adverse effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

 

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The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

 

warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;

 

recalls, withdrawals or administrative detention or seizure of our products;

 

operating restrictions or partial suspension or total shutdown of production;

 

refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;

 

withdrawing 510(k) clearances or PMA approvals that have already been granted;

 

refusal to grant export approvals for our products; or

 

criminal prosecution.

 

Regulation of Medical Devices in the EEA

 

There is currently no premarket government review of medical devices in the European Economic Area, or EEA (which is comprised of the 28 Member States of the European Union, or EU, plus Norway, Liechtenstein and Iceland). However, all medical devices placed on the market in the EEA must meet the relevant essential requirements laid down in the Medical Devices Directive. The most fundamental essential requirement is that a medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performances intended by the manufacturer and be designed, manufactured and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. These include standards governing common requirements, such as sterilization and safety of medical electrical equipment, and product standards for certain types of medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter. Compliance with a standard developed to implement an essential requirement also creates a rebuttable presumption that the device satisfies that essential requirement.

 

To demonstrate compliance with the essential requirements laid down in Annex I to the Medical Devices Directive, medical device manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Conformity assessment procedures require an assessment of available clinical evidence, literature data for the product and post-market experience in respect of similar products already marketed. Except for low-risk medical devices, where the manufacturer can self-declare the conformity of its products with the essential requirements, a conformity assessment procedure requires the intervention of a Notified Body. Notified bodies are often private entities and are authorized or licensed to perform such assessments by government authorities. The notified body would typically audit and examine a products’ technical dossiers and the manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE mark to the device, which allows the device to be placed on the market throughout the EEA. Once the product has been placed on the market in the EEA, the manufacturer must comply with requirements for reporting incidents and field safety corrective actions associated with the medical device.

 

In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the Medical Devices Regulation). Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.

 

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In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices, such as active implantable devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the MDCG, (a new, yet to be created, body chaired by the European Commission, and representatives of Member States) for an opinion. These new procedures may result in the re-assessment of our existing medical devices, or a longer or more burdensome assessment of our new products.

 

If finally adopted, the Medical Devices Regulation is expected to enter into force sometime in 2016 and become applicable three years thereafter. In its current form it would, among other things, also impose additional reporting requirements on manufacturers of high risk medical devices, impose an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance and provide for more strict clinical evidence requirements.

 

Federal, State and Foreign Fraud and Abuse, Data Privacy and Security and Physician Payment Transparency Laws

 

In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These laws include, without limitation, foreign, federal and state anti-kickback and false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers.

 

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (described below).

 

Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, the U.S. Department of Health and Human Services issued regulations in July 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback law. Additional safe harbor provisions providing similar protections have been published intermittently since 1991.

 

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Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Our arrangements with physicians, hospitals and other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in the various safe harbors. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (described below). Violations of the Anti-Kickback Statute can result in imprisonment, exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties, including criminal fines of up to $5,000 and imprisonment of up to five years. Violations are subject to civil monetary penalties up to $50,000 for each violation, plus up to three times remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act of up to $11,000 for each claim submitted, plus up to three times the amounts paid for such claims. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement authorities. The majority of states also have anti-kickback laws which establish similar prohibitions and in some cases may apply more broadly to items or services covered by any third-party payor, including commercial insurers and self-pay patients.

 

The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The civil False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish liability under the civil False Claims Act. The government may further prosecute conduct constituting a false claim under the criminal False Claims Act. The criminal False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious or fraudulent and, unlike the civil False Claims Act, requires proof of intent to submit a false claim. In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the False Claims Act in the name of the government and share in the proceeds of the lawsuit. Penalties for False Claim Act violations include fines ranging from $5,500 to $11,000 for each false claim, plus up to three times the amount of damages sustained by the federal government and, most critically, may provide the basis for exclusion from the federally funded healthcare program.

 

The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

 

Additionally, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. The Physician Payment Sunshine Act was recently signed into law, which imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.” Manufacturers must submit reports by the 90th day of each calendar year. Certain states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.

 

Many U.S. states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. We may also be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. In addition, many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations may vary greatly from country to country. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.

 

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We are also subject to various federal, state and foreign laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as HIPAA in the United States. HIPAA created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

 

Under HIPAA, the Department of Health and Human Services, or HHS, has issued regulations to protect the privacy and security of protected health information used or disclosed by covered entities including health care providers and their business associates. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. HIPAA violations carry civil and criminal penalties, including civil monetary penalties up $50,000 per violation, not to exceed $1.5 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages up to $25,000 per violation on behalf of residents of his or her state.

 

We intend to develop and implement processes designed to comply with these regulations. The requirements under these regulations may change periodically and could have an effect on our business operations if compliance becomes substantially more costly than under current requirements. Additionally, a breach of unsecured protected health information, such as by employee error or an attack by an outsider, could have an adverse effect on our business in terms of potential penalties and corrective action required. In addition to federal privacy regulations, there are a number of state laws governing confidentiality and security of health information that are applicable to our business. New laws governing privacy may be adopted in the future as well. State privacy laws can also be more stringent and more broadly applicable than HIPAA. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.

 

In the EU, we are subject to laws relating to our collection, control, processing and other use of personal data (i.e. data relating to an identifiable living individual). We may process personal data in relation to our operations. We may process data of both our employees and our customers, including health and medical information. The data privacy regime in the EU includes the EU Data Protection Directive (95/46/EC) regarding the processing of personal data and the free movement of such data, the E-Privacy Directive 2002/58/EC and national laws implementing each of them. As each, EU Member State has transposed the requirements laid down by this Privacy and Data Protection Directive into its own national data privacy regime and therefore the laws differ significantly by jurisdiction. We need to ensure compliance with the rules in each jurisdiction where we are established or are otherwise subject to local privacy laws.

 

The requirements include that personal data may only be collected for specified, explicit and legitimate purposes based on a legal grounds set out in the local laws, and may only be processed in a manner consistent with those purposes. Personal data must also be adequate, relevant, not excessive in relation to the purposes for which it is collected, be secure, not be transferred outside of the EEA unless certain steps are taken to ensure an adequate level of protection and must not be kept for longer than necessary for the purposes of collection. To the extent that we process, control or otherwise use sensitive data relating to living individuals (for example, patients’ health or medical information), more stringent rules apply, limiting the circumstances and the manner in which we are legally permitted to process that data and transfer that data outside of the EEA. In particular, in order to process such data, explicit consent to the processing (including any transfer) is usually required from the data subject (being the person to whom the personal data relates).

 

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We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable law. We depend on a number of third parties in relation to our provision of our services, a number of which process personal data on our behalf. With each such provider we enter into contractual arrangements to ensure that they only process personal data according to our instructions, and that they have sufficient technical and organizational security measures in place. Where we transfer personal data outside the EEA, we do so in compliance with the relevant data export requirements. We take our data protection obligations seriously, as any improper disclosure, particularly with regard to our customers’ sensitive personal data, could negatively impact our business and/or our reputation.

 

Local laws are amended from time to time, and guidance is issued frequently by regulators. Any changes in law and new guidance may impact, and require changes to, our current operations. Additionally, on January 25, 2012, the European Commission published its draft EU Data Protection Regulation. On March 12, 2014, the European Parliament formally passed a revised proposal of the Regulation, and the Council of the European Union published its general approach on June 15, 2015. Trilogue discussion between the European Commission, European Parliament and Council of the European Union are currently ongoing and are expected to be finalized by the end of 2015, taking into account the two year implementation period, the earliest the terms would be in force would be the end of 2017. The current form of the Regulation proposes significant changes to the EU data protection regime. Unlike the Privacy and Data Protection Directive, the Regulation has direct effect in each EU Member State, without the need for further enactment. When implemented, the Regulation will likely strengthen individuals’ rights and impose stricter requirements on companies processing personal data. There are similar privacy laws in a number of other countries in which we operate and in the future new privacy laws may be enacted countries that do not have privacy laws today. Significant changes in the current draft of the Regulation include: (1) the need for consent to processing to always be explicit; (2) extended information duties; (3) tougher sanctions (as currently drafted, the applicable data protection authority may be able to impose a fine of up to EUR 100 million or five percent of annual worldwide turnover, whichever is greater); and (4) increased rights of the data subject and a requirement to notify the data protection authority of data breaches. As the Regulation has not yet made its full progression through the legislative process, it is not currently possible to assess its full impact on our business. As the Regulation has not yet made its full progression through the legislative process, it is not currently possible to assess its full impact on our business.

 

These existing and proposed laws, regulations and guidance can be costly to comply with and can delay or impede the development of new products and/or entry into new markets, increase our operating costs, require significant management time and attention, increase our risk of non-compliance and subject us to claims and other remedies, including fines, demands that we modify or cease our existing practices and/or negative publicity and reputational harm

 

Employees

 

As of August 21, 2017, we had 9 full-time and 3 subcontracted employees. None of our employees are represented by a collective bargaining agreement, and we have never experienced any work stoppage. We believe we have good relations with our employees.

 

Properties and Facilities

 

We lease a 14,507 square foot manufacturing facility in Irvine, California, which is certified under the ISO 13485 medical device manufacturing standard for medical devices and operates under the FDA’s QSR. The base term for this lease of our facility expired on July 14, 2017 and we continue to lease this facility on a month-to-month basis. We intend to renew this lease in the third quarter of 2017. Our facility is designed expressly for the manufacture of biologic vascular grafts and is equipped for research and development, prototype fabrication, cGMP manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.

 

Legal Proceedings

 

From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.

 

Changes in and Disagreements with Accountants

 

None.

 

Corporation Information

 

We were incorporated in the State of Delaware in December 1999. Our principal executive office is located at 70 Doppler, Irvine, California 92618 and our telephone number is (949) 261-2900. Our website is www.hancockjaffe.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table provides information regarding our executive officers and directors as of August 21, 2017:

 

Name   Age   Position(s)
Executive Officers and Directors        
Benedict Broennimann, M.D.   60   Co-Chief Executive Officer
Steven Cantor   60   Co-Chief Executive Officer and Director
William R. Abbott   61   Senior Vice President and Chief Financial Officer, Secretary and Treasurer
Marc H. Glickman, M.D.   68   Senior Vice President and Chief Medical Officer
Susan Montoya   66   Senior Vice President of Operations, Regulatory Affairs and Quality Assurance
Non-Employee Directors        
Yury Zhivilo   58   Chairman of the Board of Directors
Robert Anderson   77   Director
Robert Doyle   75   Director
Steven Girgenti   72   Director

 

Executive Officers and Directors

 

Benedict Broennimann, M.D. has served as our Chief Executive Officer since September 2016, and our Co-Chief Executive Officer since August 2017. From 2006 to 2008, Dr. Broennimann served as our Chairman and Chief Executive Officer, and from 2009 to 2015 he was engaged by us as a consultant to facilitate our efforts to gain various regulatory approvals in Europe. Dr. Broennimann is a seasoned cardiovascular device executive with over 20 years experience delivering strong market, financial, and operational results for medical device companies in Europe, the United States, and Asia. From 2012 to 2016, he served as Chief Executive Officer and Chief Medical Officer of OstomyCure AS, where he was responsible for achieving CE marking of a Class IIb medical implant and leading strategic alliances and negotiations. From 2004 to 2008, he was also Chief Executive Officer of Leman Cardiovascular, where he spearheaded fundraising and cardiovascular device developments. Dr. Broennimann served as Principal at Heidrick & Struggles from 2000 to 2002 and Highland Partners from 2003 to 2004. He also served as a Senior Partner at Rosewall Ventures, Ltd. from 2008 to 2011. Dr. Broennimann attended the University of Bern in Switzerland, where he received his Doctor of Medicine, and was Chief Resident in the Department of General Surgery and Transplantation at the Centre Hospitalier Universitaire Vaudois in Lausanne, Switzerland. Dr. Broennimann is also board certified in general surgery and pharmaceutical medicine.

 

Steven Cantor has served as our Co-Chief Executive Officer and a member of our board of directors since August 2017. Mr. Cantor served as our Business Development Manager from September 2013 to December 2016, and our Chief Business Development Officer from December 2016 to August 2017. Prior to joining our company, Mr. Cantor was the founder, Chairman, and Chief Executive Officer of Vasomedical, Inc., a company focused on enhanced external counterpulsation for the treatment of cardiovascular disease. In March of 2014, Mr. Cantor co-founded BioAffinity Technologies, Inc., a cancer diagnostic and treatment company and served as a director until May 2014. From October 2011 to October 2012, Mr. Cantor served as Business Development Manager at Neurox Pharmaceuticals LLC, a development stage pharmaceutical company. In February 2010, the Alabama Securities Commission issued an administrative order permanently barring Mr. Cantor from registration and from engaging in any securities activities into, within or from the State of Alabama. We believe Mr. Cantor is qualified to serve as a member of our board of directors because of his extensive experience in all phases of the commercialization of devices in the medical technology field.

 

William R. Abbott has served as our Chief Financial Officer since March 2016. In July 2016 he was appointed as our Senior Vice President, Treasurer and Secretary. Mr. Abbott has more than thirty years of experience in multi-industry international companies. From December 2014 to March 2016, Mr. Abbott served as Vice President of Finance and Corporate Controller and later as Interim Chief Financial Officer of Apollo Medical Holdings, Inc. From 2011 to 2014, he was an independent consultant providing accounting and advisory services. From 2006 to 2011, Mr. Abbott served as Senior Vice President, Chief Financial Officer, Secretary and Treasurer for Cardiogenesis Corporation. From 1997 to 2005, Mr. Abbott served in financial management positions at Newport Corporation, including as Vice President of Finance and Treasurer from 2001 to 2005 and Vice President and Corporate Controller from 1997 to 2001. Prior to that, Mr. Abbott served as Vice President and Corporate Controller of Amcor Sunclipse North America, Director of Financial Planning at Coca-Cola Enterprises, Inc. and Controller of McKesson Water Products Company. Mr. Abbott also spent six years in management positions at PepsiCo, Inc. after beginning his career with PricewaterhouseCoopers, LLP. Mr. Abbott has a Bachelor of Science degree in accounting from Fairfield University and a Masters in Business Administration degree from Pepperdine University.

 

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Marc H. Glickman, M.D. has served as our Senior Vice President and Chief Medical Officer since May 2016 and served as member of our board of directors from July 2016 to August 2017. In 1981, Dr. Glickman started a vascular practice in Norfolk, Virginia. He established the first Vein Center in Virginia and also created a dialysis access center. He was employed by Sentara Health Care as director of Vascular Services until he retired in 2014. Dr. Glickman is a board certified vascular surgeon. He has written over 55 articles in peer review journals, 8 book chapters and has delivered over 400 lectures worldwide. In addition to participating in over 100 clinical trials, frequently as principal investigator, he has been instrumental in obtaining approval of numerous medical devices by the FDA. Dr. Glickman received his Doctor of Medicine from Case Western Reserve, in Cleveland, Ohio and completed his residency at the University of Washington, Seattle. He board certified in Vascular Surgery and was past president of the Vascular Society of the Americas. He has served on the advisory boards of Possis Medical, Cohesion Technologies, Thoratec, GraftCath, Inc., TVA medical, Austin, Texas.

 

Susan Montoya has served as our Vice President Operations, Quality Assurance/Regulatory Affairs since 1999. In this role, she is responsible for manufacturing operations, quality procedures and regulatory affairs. Ms. Montoya has overseen clinical trials and regulatory submissions. Ms. Montoya has over 30 years of leadership experience in medical device industry, and has been with our company since inception in 1999. Ms. Montoya was employed by Xenotech Laboratories from 1980 to 1986, where she developed one of the first Quality System and Good Manufacturing Practices for Cardiovascular and Orthopedic bioprosthetic devices and at a precursor company of Hancock Jaffe Laboratories beginning in 1988. She has also held various management positions at several medical device companies, including Medtronic Inc., and St. Jude Medical. Ms. Montoya holds both a Bachelor and a Masters degree in Biology from the California State University, Fullerton.

 

Non-Employee Directors

 

Yury Zhivilo has served as Chairman of our board of directors since September 2007. In 2004, he co-founded Leman Cardiovascular SA, a private company that develops, manufactures and markets bioprosthetic products used in cardiovascular surgery, as well as nephrology indications. Since 2010, he has been serving as President of Leman Cardiovascular S.A, Chief Executive Officer and President of Dante-Lido Financial Limited, and as Managing Director of Biodyne, all of which are based in Morge, Switzerland. Biodyne’s principal line of business is to invest in medical device technology companies. Mr. Zhivilo is also currently serving as a director of Dante-Lido Financial Limited and Biodyne. From 2004 to present, Mr. Zhiyilo served as Chairman of the board of director of Leman Cardiovascular S.A. Prior to that, he served as Chairman and Chief Executive Officer of Base Metal Trading Limited from 1992 to 2004. Mr. Zhivilo received a Senior Specialist degree in economics in 1985 from Moscow State Institute of International Affairs. We believe Mr. Zhivilo is qualified to serve as a member of our board of directors because of his extensive experience in the medical device industry as both an operating executive and as a board member.

 

Robert Anderson has served as a member of our board of directors since August 2016. From 1983 to 1988, Mr. Anderson served as Group Product Director at Parke-Davis, where he was responsible for the cardiovascular products and pipeline. From 1988 to 1990, Mr. Anderson served as Vice-President of Marketing for the Key Pharmaceuticals division of Schering-Plough Corporation, and was responsible for the marketing of Schering-Plough Corporation’s cardiovascular portfolio. Following his tenure at Schering-Plough Corporation, Mr. Anderson was brought on board at Centocor Biotech, Inc. (now known as Janssen Biotech, Inc.) to build the business infrastructure, including developing marketing plans, budgets and the U.S. pre-launch product strategies. On a global basis his responsibilities included the cardiovascular imaging business. In 1992, Mr. Anderson joined Physicians World Communications Group (which was later acquired by Thomson Corp.) as Vice President, was later appointed to the Executive Committee and made a Partner and was appointed Chief Operating Officer in 1997. Mr. Anderson received a Bachelor of Arts degree in Political Science from Rutgers University. We believe Mr. Anderson is qualified to serve as a member of our board of directors because of his experience providing infrastructure development, financial analysis, marketing leadership and successfully launching products in the cardiovascular, biotech and pharmaceutical industries.

 

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Robert Doyle has served as a member of our board of directors since August 2016. From 1994 to 2000, Mr. Doyle headed Marketing Operations for Parke-Davis where he had overall responsibility for launch meetings. Mr. Doyle continued his operations responsibilities during the Pfizer acquisition in 2000, helping to manage a $400 million annual advertising and promotion budget. From 2001 to 2005, Mr. Doyle served at Novartis Pharmaceuticals, US as Vice-President of Marketing Operations and also chaired the Committees on Pharmaceutical Research & Manufacturers of America Code guidelines and Office of Inspector General – HHS guidelines, and was a permanent member of the senior management group overseeing the Core Team (Medical, Legal, Regulatory Compliance). From 1978 to 1984, Mr. Doyle served at E.R. Squibb & Sons as Hospital Advertising Manager, then Cardiovascular Product Manager. From 1984 to 1990 Mr. Doyle was a product manager, Director of New Products and then Director of Product Licensing at Warner-Lambert. From 1990 to 1992 he was Worldwide Director of Marketing for Imaging Products at Centocor. Mr. Doyle also served on the board of directors of the Healthcare Marketing & Communications Council and in 1999 he was presented with the President’s Award. He is also a past member of the Editorial Advisory Board, of Pharmaceutical Executive magazine and received their Publisher’s Award in 1999. Mr. Doyle also served as a member of the Hilton Advisory Board from 1997 to 2004. Mr. Doyle holds a Bachelor of Business Administration degree from Upsala College and a Master in Business Administration from Fairleigh Dickinson University. We believe Mr. Doyle is qualified to serve as a member of our board of directors because of his experience leading and successfully managing budgets and highly regulated and complex pharmaceutical businesses.

 

Steven Girgenti has served as a member of our board of directors since September 2017. In 2005, Mr. Girgenti founded DermWorx Inc., a specialty pharmaceutical company, which he sold to a European dermatology company in 2013. Mr. Girgenti was also the founder, Chief Executive Officer and Worldwide Chairman of Healthworld Corporation until 2008, a leading global healthcare marketing services network. Mr. Girgenti was recognized as “Entrepreneur of the Year” by Nasdaq in 1999 and in 2010 he was inducted into the Medical Advertising Hall of Fame. Mr. Girgenti serves as a director of Vycor Medical and BioAffinity Technologies, Inc. He is the Vice Chairman of the Board of Governors for the Mount Sinai Hospital Prostate Disease and Research Center in New York City and is a Director of the Jack Martin Fund, an affiliated Mount Sinai Hospital charity dedicated to pediatric oncology. He graduated from Columbia University and has worked in the pharmaceutical industry since 1968 for companies such as Bristol-Myers Squibb, Carter Wallace and DuPont, as well as advertising agencies that specialize in healthcare. During his career, Steve has held positions in marketing research, product management, new product planning and commercial development. We believe that Mr. Girgenti’s extensive knowledge of the medical industry qualifies him to serve on our board of directors.

 

Family Relationships

 

There are no family relationships between or among any of the current directors, executive officers or persons nominated or charged to become directors or executive officers. There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.

 

Board Composition

 

Our business and affairs are organized under the direction of our board of directors, which currently consists of five members. Our directors hold office until the earlier of their death, resignation, removal or disqualification, or until their successors have been elected and qualified. Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of our board of directors should be separate. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis. Upon completion of this offering, our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors.

 

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We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

 

Director Independence

 

The Nasdaq Marketplace Rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act.

 

Under Rule 5605(a)(2) of the Nasdaq Marketplace Rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.

 

Our board of directors has reviewed the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of Messrs. Anderson, Doyle, and Girgenti, is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq Marketplace Rules. Our board of directors also determined that                , who will comprise our audit committee following this offering,                     , who will comprise our compensation committee following this offering, and                 , who will be members of our nominating and corporate governance committee following this offering, satisfy the independence standards for such committees established by the SEC and the Nasdaq Marketplace Rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.

 

Controlled Company

 

Upon completion of this offering, Biodyne will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” under the Nasdaq Marketplace Rules. As a controlled company, exemptions under the standards will free us from the obligation to comply with certain corporate governance requirements, including the requirements:

 

that a majority of the board of directors consists of independent directors;

 

that we have a nominating and corporate governance committee that is composed entirely of independent directors; and

 

that we have a compensation committee that is comprised entirely of independent directors.

 

We do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or on our audit, nominating and corporate governance, and compensation committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and the Nasdaq Marketplace Rules within the applicable time frame.

 

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Board Committees

 

Our board of directors has established three standing committees—audit, compensation and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors. Prior to the completion of this offering, copies of each committee’s charter will be posted on the Investor Relations section of our website, which is located at www.hancockjaffe.com. Each committee has the composition and responsibilities described below. Our board of directors may from time to time establish other committees.

 

Audit Committee

 

Our audit committee consists of                , who is the chair of the committee, and            . Our board of directors has determined that each of the members of our audit committee satisfies the Nasdaq Marketplace Rules and SEC independence requirements. The functions of this committee include, among other things:

 

evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors;

 

reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;

 

reviewing our annual and quarterly financial statements and reports, including the disclosures contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management;

 

reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy and effectiveness of our financial controls;

 

reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented; and

 

reviewing and evaluating on an annual basis the performance of the audit committee, including compliance of the audit committee with its charter.

 

Our board of directors has determined that                     qualifies as an “audit committee financial expert” within the meaning of applicable SEC regulations and meets the financial sophistication requirements of the Nasdaq Marketplace Rules. In making this determination, our board has considered               extensive financial experience and business background. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

 

Compensation Committee

 

Our compensation committee consists of                , who is the chair of the committee, and               . Our board of directors has determined that each of the members of our compensation committee is an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and satisfies the Nasdaq Marketplace Rules independence requirements. The functions of this committee include, among other things:

 

reviewing, modifying and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) our overall compensation strategy and policies;

 

reviewing and approving the compensation, the performance goals and objectives relevant to the compensation, and other terms of employment of our executive officers;

 

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reviewing and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) the equity incentive plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs;

 

reviewing and approving the terms of any employment agreements, severance arrangements, change in control protections and any other compensatory arrangements for our executive officers;

 

reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” in our periodic reports or proxy statements to be filed with the SEC; and

 

preparing the report that the SEC requires in our annual proxy statement.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee consists of                    , who is the chair of the committee, and                   . Our board of directors has determined that each of the members of this committee satisfies the Nasdaq Marketplace Rules independence requirements. The functions of this committee include, among other things:

 

identifying, reviewing and evaluating candidates to serve on our board of directors consistent with criteria approved by our board of directors;

 

evaluating director performance on the board and applicable committees of the board and determining whether continued service on our board is appropriate;

 

evaluating, nominating and recommending individuals for membership on our board of directors; and

 

evaluating nominations by stockholders of candidates for election to our board of directors.

 

Medical Advisory Board

 

Our executive team is supported by our Medical Advisory Board, the members of which include medical doctors experienced in the field of vascular medicine. The members of our scientific advisory board provide scientific, portfolio and project strategy advice to our company, including the evaluation of licensing arrangements and research and development strategies. We have agreed to compensate the members of our Medical Advisory Board with payment of a monthly fee of $4,500. The members of our Medical Advisory Board are set forth below.

 

Steve Elias, M.D., FACS, FACPH , is Director at the Center for Vein Disease at Englewood Hospital and Medical Center. Dr. Elias has extensive expertise in vascular medicine, conducting important research and writing extensively about the treatment of vein disease, and serving as the principal investigator on several major clinical trials. His work has been recognized at national medical and scientific meetings and published in top peer reviewed journals, and he is frequently invited to lecture to both national and international audiences about minimally invasive vein care and surgical procedures. Dr. Elias has been named as one of the 25 most influential professionals in vein care worldwide by VEIN Magazine and has been recognized as Top Doctor in the New York Metropolitan Area for the past nine years by Castle Connolly. He is a member of several medical societies, including The Society for Clinical Vascular Surgery, American College of Surgeons, and the International Society of Cardiovascular Surgery.

 

Antonios Gasparis, M.D. , is Professor of Surgery, Director of the Center for Vein Care, Director of the Wound Center, Medical Director of the Non-Invasive Vascular Laboratory, and Director of Phlebology Fellowship at Stony Brook University Medical Center. His areas of clinical interest and expertise include minimally invasive endovascular surgery for the management of aortic aneurysms; surgery for stroke prevention, aortic aneurysms, lower extremity vascular reconstruction, and dialysis access; pelvic congestion syndrome and pelvic venous insufficiency; minimally invasive percutaneous closure for varicose veins; and treatment of spider veins. Dr. Gasparis is an internationally renowned expert on venous disease and is currently a director of the 2016 New York Venous Symposium, one of the premier international conferences on issues and treatment related to venous disease. Previously, he was Committee Chair of the 2014 American Venous Forum. Dr. Gasaparis is a Fellow of the American College of Surgeons and has authored more than 35 peer-reviewed publications. He was selected for inclusion in Guide to America’s Top Surgeons by the Consumers’ Research Council of America.

 

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Wade Dimitri, M.D. , is a highly regarded cardiac surgeon in Europe and pioneer in off-pump coronary artery bypass grafting, a Council Member of the Fellowship of Postgraduate Medicine and a member of the Royal Society of Medicine. He is a reviewer for The European Journal of Cardiovascular and Thoracic Surgery. Since retiring from active clinical work, he has increased his involvement with overseas training, teaching cardiac surgeons as well as operating. At Warwick Medical School he is a member of the Panel of Examiners. He is a member of several Cardiac Surgical Societies including The Society for Cardiothoracic Surgery in Great Britain and Ireland, The Society of Thoracic Surgeons (USA), Scottish Cardiac Society, The Egyptian Society Of Cardiovascular and Thoracic Surgery and an Honorary fellow of The Indian Society Of Cardiovascular and Thoracic Surgeon. Dr Dimitri performed several dozens of surgeries with the CoreoGraft CABG graft in Europe with excellent results. He will be instrumental in helping the company bring this product to the market in Europe.

 

Mark Meissner, M.D. , is a Professor of Surgery specializing in vascular surgery at the University of Washington School of Medicine. He has particular clinical and research interests in chronic venous disease, deep venous thrombosis, post thrombotic syndrome, venous ulceration and vascular trauma. He is the past president of the American Venous Forum, a member of the board of directors of the American College of Phlebology and a director of the Intersocietal Accreditation Commission’s Vein Center division. Dr. Meissner has published and lectured extensively on venous disease, participated in the generation of evidence-based guidelines and served as faculty at numerous medical conferences around the world. The American Board of Venous and Lymphatic Medicine and the Phlebology Leadership Institute awarded the first Venous and Lymphatic Medicine Lifetime Achievement Award to Dr. Meissner for his many important contributions to the field in the areas of research and education, and for his visionary leadership and offerings to the specialty.

 

Code of Business Conduct and Ethics

 

Prior to the consummation of this offering, our board of directors will adopt a written code of business conduct and ethics 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. We intend to post on our website a current copy of the code and all disclosures that are required by law or Nasdaq Marketplace Rules concerning any amendments to, or waivers from, any provision of the code.

 

Board Leadership Structure

 

Our board of directors is free to select the Chairman of the board of directors and the Chief Executive Officer in a manner that it considers to be in the best interests of our company at the time of selection. Currently, Benedict Broennimann, M.D. and Steven Cantor serve as our Co-Chief Executive Officers, and Yury Zhivilo serves as Chairman of the board of directors. We currently believe that this leadership structure is in our best interests and strikes an appropriate balance between our Chief Executive Officer’s responsibility for the day-to-day management of our company and the Chairman of the board of directors’ responsibility to provide oversight, including setting the board of directors’ meeting agendas and presiding at executive sessions of the independent directors. Mr. Zhivilo provides a strong link between management and our board of directors, which we believe promotes clear communication and enhances strategic planning and implementation of corporate strategies. Additionally, in addition to having a non-executive Chairman of the board of directors, three of our five members of our board of directors have been deemed to be “independent” by the board of directors, which we believe provides sufficient independent oversight of our management. Because we have a non-executive Chairman of the board of directors, our board of directors has not designated a lead independent director.

 

Our board of directors, as a whole and also at the committee level, plays an active role overseeing the overall management of our risks. Our Audit Committee reviews risks related to financial and operational items with our management and our independent registered public accounting firm. Our board of directors is in regular contact with our Co-Chief Executive Officers and Chief Financial Officer, who report directly to the board of directors and who supervise day-to-day risk management.

 

Role of Board in Risk Oversight Process

 

We face a number of risks, including those described under the caption “Risk Factors” contained elsewhere in this prospectus. Our board of directors believes that risk management is an important part of establishing, updating and executing on our business strategy. Our board of directors has oversight responsibility relating to risks that could affect the corporate strategy, business objectives, compliance, operations, and the financial condition and performance of our company. Our board of directors focuses its oversight on the most significant risks facing us and on our processes to identify, prioritize, assess, manage and mitigate those risks. Our board of directors receives regular reports from members of our senior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While our board of directors has an oversight role, management is principally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on us.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

 

The following table sets forth total compensation paid to our named executive officers for the years ended December 31, 2016 and 2015. Individuals we refer to as our “named executive officers” include our Chief Executive Officer and our two other most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2016 .

 

Name and Principal Position   Year    

Salary

($)

   

Bonus

($)

    Option Awards ($)    

Non-

Equity

Incentive

Plan

Compensation

($)

   

Nonqualified

Deferred

Compensation

Earnings

($)

    All Other Compensation ($)    

Total

($)

 
Benedict Broennimann, M.D.     2016       - (1)     -       155,290 (2)     -       -       -       155,290  
Co-Chief Executive Officer     2015       -       -       -       -       -       -       -  
Marc H. Glickman, M.D.     2016       196,154       -       195,570 (2)     -       -       24,241 (3)     416,145  
Chief Medical Officer and Senior Vice President     2015       -       -       -       -       -       -       -  
Susan Montoya     2016       301,187       -       867,610 (2)     -       -       43,000 (4)     1,211,797  
Vice President Operations,     2015       245,077       -       -       -       -       39,828 (5)     284,905  
Quality Assurance/Regulatory Affairs, Director                                                                

 

(1) Dr. Broennimann did not receive any cash compensation in 2016 because he agreed to defer his cash compensation until such time as we and Dr. Broennimann agree. As a result, we owe Dr. Broennimann $260,000 as of June 30, 2017.

 

(2) Represents grant date fair value of non-qualified stock option granted on October 1, 2016, using the Black-Scholes option pricing model. The options vested 20% at the grant date and the remaining 80% vest ratably on a monthly basis for 24 months.

 

(3) Includes company paid healthcare of $16,344 and 401(k) match of $8,077.

 

(4) Includes company paid healthcare of $29,750 and 401(k) match of $13,250.

 

(5) Includes company paid healthcare of $27,574 and 401(k) match of $12,254.

 

Employment Agreements

 

We have entered into various employment agreements with certain of our executive officers. Set forth below is a summary of many of the material provisions of such agreements, which summaries do not purport to contain all of the material terms and conditions of each such agreement. For purposes of the following employment agreements:

 

“Cause” generally means the executive’s (i) willful misconduct or gross negligence in the performance of his or her duties to us; (ii) willful failure to perform his or her duties to us or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or disability); (iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude: (iv) repeated failure to cooperate in any audit or investigation of our business or financial practices; (v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of our property; or (vi) material breach of his or her employment agreement or any other material agreement with us or a material violation of our code of conduct or other written policy.

 

“Good reason” generally means, subject to certain notice requirements and cure rights, without the executive’s consent, (i) material diminution in his or her base salary or annual bonus opportunity; (ii) material diminution in his or her authority or duties (although a change in title will not constitute “good reason”), other than temporarily while physically or mentally incapacitated, as required by applicable law; (iii) relocation of his or her primary work location by more than 25 miles from its then current location; or (iv) a material breach by us of a material term of the employment agreement.

 

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“Change of control” generally means (i) the acquisition, other than from us, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than us or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act) or employee benefit plan of ours, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors; (ii) a reorganization, merger, consolidation or recapitalization of us, other than a transaction in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following such transaction is held by the persons who, immediately prior to the transaction, were the holders of our voting securities; or (iii ) a complete liquidation or dissolution of us, or a sale of all or substantially all of our assets.

 

Benedict Broennimann, M.D.

 

On August 30, 2016, we entered into an employment agreement with Benedict Broennimann, M.D., our Chief Executive Officer. Pursuant to the terms of his employment agreement, Dr. Broennimann’s initial base salary is $360,000, subject to annual review and adjustment at the discretion of our board of directors. In connection with his employment, Dr. Broennimann received an initial equity grant of an option to purchase up to 293,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. Dr. Broennimann is an at-will employee and has a full-time commitment. Further, Dr. Broennimann’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

Steven Cantor

 

On July 1, 2016, we entered into an employment agreement with Mr. Cantor, who prior to December 1, 2016, was our business development manager and commencing on December 2, 2016 became our Chief Business Development Officer. The employment agreement was amended on December 2, 2016, and again on June 12, 2017. Pursuant to the terms of his amended employment agreement, Mr. Cantor’s base salary is $300,000 and is subject to annual review and adjustment at the discretion of our board of directors, and in no event shall Mr. Cantor’s annual salary be reduced from the preceding year. Mr. Cantor will be entitled to receive a bonus of $250,000 upon the earlier of (i) a commercial sale of one of our product candidates, or (ii) the entry into a definitive agreement for the distribution or license of one of our products. We, in our sole discretion, may advance all or any portion of such bonus as certain milestones are advanced. We also agreed to pay Mr. Cantor’s relocation expenses and up to $5,000 per month for living and vehicle expenses. We also agreed to a lump sum payment to Mr. Cantor in the amount of twelve months’ gross salary, which is subject to claw back if Mr. Cantor’s relocation is for less than twelve months. In connection with his employment, Mr. Cantor received 598,800 shares of our common stock, which we issued to replace shares of our common stock previously earned under Mr. Cantor’s prior employment agreement and we ratified the issuance to Mr. Cantor of a warrant to purchase 833,333 shares of our common stock at an exercise price of $6.00 per share. As of June 30, 2017, Mr. Cantor returned to us 500,000 of such warrants and transferred the balance of 333,333 warrants to others. Mr. Cantor’s amended employment agreement, which terminates on December 31, 2018, will be automatically extended for additional three (3) year terms unless either party gives written notice to the other to terminate such amended employment agreement or unless sooner terminated under its terms.

 

Mr. Cantor is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Mr. Cantor’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

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Pursuant to the terms of his employment agreement, Mr. Cantor is entitled to severance in the event of certain terminations of employment. In the event Mr. Cantor’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Prior to the completion of this offering, we intend to enter into an amendment to Mr. Cantor’s employment agreement as our Co-Chief Executive Officer.

 

William R. Abbott

 

On July 22, 2016, we entered into an employment agreement with William R. Abbott, our interim President, Senior Vice President, Chief Financial Officer, Treasurer and Secretary. On June 1, 2017, we entered into an amendment to the employment agreement with Mr. Abbott. Pursuant to the terms of his employment agreement, as amended, Mr. Abbott’s base salary is $300,000, subject to annual review and adjustment at the discretion of our board of directors, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with his employment, Mr. Abbott received an initial equity grant of an option to purchase up to 293,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Mr. Abbott’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Mr. Abbott’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.

 

Mr. Abbott is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Mr. Abbott’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

Pursuant to the terms of his employment agreement, Mr. Abbott is entitled to severance in the event of certain terminations of employment. In the event Mr. Abbott’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Susan Montoya

 

On July 22, 2016, we entered into an employment agreement with Susan Montoya, our Senior Vice President of Operations and Quality Assurance/Regulatory Affairs. Pursuant to the terms of her employment agreement, Ms. Montoya’s base salary is $295,000, subject to annual review and adjustment at the discretion of our board of directors, and she will be eligible for an annual year-end discretionary bonus of up to 50% of her base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with her employment, Ms. Montoya received an initial equity grant of an option to purchase up to 1,637,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Ms. Montoya’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Ms. Montoya’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.

 

Ms. Montoya is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on her behalf. Ms. Montoya’s employment agreement prohibits her from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

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Pursuant to the terms of her employment agreement, Ms. Montoya is entitled to severance in the event of certain terminations of employment. In the event Ms. Montoya’s employment is terminated by us without cause and other than by reason of disability or she resigns for good reason, subject to her timely executing a release of claims in our favor and in addition to certain other accrued benefits, she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Marc H. Glickman, M.D.

 

On July 22, 2016, we entered into an employment agreement with Marc H. Glickman, M.D., our Senior Vice President and Chief Medical Officer. Pursuant to the terms of his employment agreement, Dr. Glickman’s base salary is $300,000, subject to annual review and adjustment at the discretion of our board of directors, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with his employment, Dr. Glickman received an initial equity grant of an option to purchase up to 369,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Dr. Glickman’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Dr. Glickman’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.

 

Dr. Glickman is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Dr. Glickman’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

Pursuant to the terms of his employment agreement, Dr. Glickman is entitled to severance in the event of certain terminations of employment. In the event Dr. Glickman’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Potential Payments Upon Termination or Change-in-Control

 

Pursuant to the terms of the employment agreements discussed above, we will pay severance in the event of certain terminations of employment. In the event employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his or her timely executing a release of claims in our favor and in addition to certain other accrued benefits, he or she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Employee Benefit Plans

 

2016 Omnibus Incentive Plan

 

On October 1, 2016, our board of directors adopted the Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan, or 2016 plan, and on October 1, 2016, our stockholders voted to approve of the 2016 plan. The principal features of the 2016 plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2016 plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

 

Share Reserve

 

We have reserved 3,300,000 shares of our common stock for issuance under the 2016 plan, all of which may be granted as incentive stock options under Code Section 422. The shares of common stock issuable under the 2016 plan will consist of authorized and unissued shares, treasury shares or shares purchased on the open market or otherwise.

 

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If any award is canceled, terminates, expires or lapses for any reason prior to the issuance of shares or if shares are issued under the 2016 plan and thereafter are forfeited to us, the shares subject to such awards and the forfeited shares will not count against the aggregate number of shares of common stock available for grant under the 2016 plan. In addition, the following items will not count against the aggregate number of shares of common stock available for grant under the 2016 plan: (1) the payment in cash of dividends or dividend equivalents under any outstanding award, (2) any award that is settled in cash rather than by issuance of shares of common stock, (3) shares surrendered or tendered in payment of the option price or purchase price of an award or any taxes required to be withheld in respect of an award or (4) awards granted in assumption of or in substitution for awards previously granted by an acquired company.

 

Administration

 

The 2016 plan may be administered by our board of directors or our compensation committee. Our compensation committee, in its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted and the terms and conditions of such awards.

 

Eligibility

 

Awards may be granted under the 2016 plan to officers, employees, directors, consultants and advisors of us and our affiliates. Incentive stock options may be granted only to employees of us or our subsidiaries.

 

Awards

 

The 2016 plan permits the granting of any or all of the following types of awards:

 

Stock Options . Stock options entitle the holder to purchase a specified number of shares of common stock at a specified price (the exercise price), subject to the terms and conditions of the stock option grant. Our compensation committee may grant either incentive stock options, which must comply with Code Section 422, or nonqualified stock options. Our compensation committee sets exercise prices and terms and conditions, except that stock options must be granted with an exercise price not less than 100% of the fair market value of our common stock on the date of grant (excluding stock options granted in connection with assuming or substituting stock options in acquisition transactions). Unless our compensation committee determines otherwise, fair market value means, as of a given date, the closing price of our common stock. At the time of grant, our compensation committee determines the terms and conditions of stock options, including the quantity, exercise price, vesting periods, term (which cannot exceed 10 years) and other conditions on exercise.
     
Stock Appreciation Rights . Our compensation committee may grant SARs, as a right in tandem with the number of shares underlying stock options granted under the 2016 plan or as a freestanding award. Upon exercise, SARs entitle the holder to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the share’s fair market value on the date of exercise over the grant price of the SAR. The grant price of a tandem SAR is equal to the exercise price of the related stock option and the grant price for a freestanding SAR is determined by our compensation committee in accordance with the procedures described above for stock options. Exercise of a SAR issued in tandem with a stock option will reduce the number of shares underlying the related stock option to the extent of the SAR exercised. The term of a freestanding SAR cannot exceed 10 years, and the term of a tandem SAR cannot exceed the term of the related stock option.
     
Restricted Stock, Restricted Stock Units and Other Stock-Based Awards . Our compensation committee may grant awards of restricted stock, which are shares of common stock subject to specified restrictions, and restricted stock units, or RSUs, which represent the right to receive shares of our common stock in the future. These awards may be made subject to repurchase, forfeiture or vesting restrictions at our compensation committee’s discretion. The restrictions may be based on continuous service with us or the attainment of specified performance goals, as determined by our compensation committee. Stock units may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Our compensation committee may also grant other types of equity or equity-based awards subject to the terms and conditions of the 2016 plan and any other terms and conditions determined by our compensation committee.

 

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Performance Awards . Our compensation committee may grant performance awards, which entitle participants to receive a payment from us, the amount of which is based on the attainment of performance goals established by our compensation committee over a specified award period. Performance awards may be denominated in shares of common stock or in cash, and may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Cash-based performance awards include annual incentive awards.

 

Awards to Non-employee Directors

 

No more than $250,000 may be granted in equity-based awards during any one year to a non-employee member of our board of directors, based on the grant date fair value for accounting purposes in the case of stock options or SARs and based on the fair market value of our common stock underlying the award on the grant date for other equity-based awards. This limit does not apply to shares received by a non-employee director at his or her election in lieu of all or a portion of the director’s retainer for board service.

 

No Repricing

 

Without stockholder approval, our compensation committee is not authorized to (1) lower the exercise or grant price of a stock option or SAR after it is granted, except in connection with certain adjustments to our corporate or capital structure permitted by the 2016 plan, such as stock splits, (2) take any other action that is treated as a repricing under generally accepted accounting principles or (3) cancel a stock option or SAR at a time when its exercise or grant price exceeds the fair market value of the underlying stock, in exchange for cash, another stock option or SAR, restricted stock, RSUs or other equity award, unless the cancellation and exchange occur in connection with a change in capitalization or other similar change.

 

Clawback

 

All cash and equity awards granted under the 2016 plan will be subject to all applicable laws regarding the recovery of erroneously awarded compensation, any implementing rules and regulations under such laws, any policies we adopted to implement such requirements, and any other compensation recovery policies as we may adopt from time to time.

 

Change in Control

 

Under the 2016 plan, in the event of a change in control (as defined in the 2016 plan), outstanding awards will be treated in accordance with the applicable transaction agreement. If no treatment is provided for in the transaction agreement, each award holder will be entitled to receive the same consideration that stockholders receive in the change in control for each share of stock subject to the award holder’s awards, upon the exercise, payment or transfer of the awards, but the awards will remain subject to the same terms, conditions and performance criteria applicable to the awards before the change in control, unless otherwise determined by our compensation committee. In connection with a change in control, outstanding stock options and SARs can be cancelled in exchange for the excess of the per share consideration paid to stockholders in the transaction, minus the option or SARs exercise price.

 

Subject to the terms and conditions of the applicable award agreements, awards granted to non-employee directors will fully vest on an accelerated basis, and any performance goals will be deemed to be satisfied at target. For awards granted to all other service providers, vesting of awards will depend on whether the awards are assumed, converted or replaced by the resulting entity.

 

For awards that are not assumed, converted or replaced, the awards will vest upon the change in control. For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the change in control.

 

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For awards that are assumed, converted or replaced by the resulting entity, no automatic vesting will occur upon the change in control. Instead, the awards, as adjusted in connection with the transaction, will continue to vest in accordance with their terms and conditions. In addition, the awards will vest if the award recipient has a separation from service within two years after a change in control by us other than for “cause” or by the award recipient for “good reason” (each as defined in the applicable award agreement). For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the separation from service.

 

Amendment and Termination of the 2016 plan

 

Unless earlier terminated by our board of directors, the 2016 plan will terminate, and no further awards may be granted, 10 years after the date on which it was approved by our stockholders. Our board of directors may amend, suspend or terminate the 2016 plan at any time, except that, if required by applicable law, regulation or stock exchange rule, stockholder approval will be required for any amendment. The amendment, suspension or termination of the 2016 plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights under an outstanding award.

 

Limitation of Liability and Indemnification Matters

 

Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, will limit the liability of our directors for monetary damages for breach of their fiduciary duties, except for liability that cannot be eliminated under the Delaware General Corporation Law. Consequently, our directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:

 

· any breach of their duty of loyalty to us or our stockholders;
     
· acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
     
· unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or
     
· any transaction from which the director derived an improper personal benefit.

 

Our amended and restated bylaws will also provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether our amended and restated bylaws would permit indemnification. We have obtained directors’ and officers’ liability insurance.

 

We intend to enter into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our amended and restated bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by this person in any action or proceeding arising out of this person’s services as a director or executive officer or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

 

The above description of the indemnification provisions of our amended and restated bylaws and our indemnification agreements is not complete and is qualified in its entirety by reference to these documents, each of which is incorporated by reference as an exhibit to the registration statement to which this prospectus forms a part.

 

The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, 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. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth certain information concerning the ownership of our common stock as of August 31, 2017, with respect to: (i) each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common stock; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our current directors and executive officers as a group.

 

Applicable percentage ownership is based on 13,400,183 shares of common stock outstanding as of August 9, 2017 and reflects the issuance of 1,032,825 shares of common stock issuable upon the conversion of all shares of our outstanding preferred stock. The percentage of beneficial ownership after this offering assumes the sale and issuance of shares of common stock in this offering and no exercise by the underwriters of their option to purchase additional shares of common stock.

 

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to such securities. In addition, pursuant to such rules, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of August 21, 2017. We did not deem such shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the beneficial owners named in the table below have sole voting and investment power with respect to all shares of our common stock that they beneficially own, subject to applicable community property laws.

 

   

Beneficial Ownership

Prior to Offering

   

Beneficial Ownership

After the Offering

 
Name and Address of Beneficial Owner (1)   Number of Shares     Percentage    

Number

of Shares

    Percentage  
5% Stockholders                                
Biodyne Holding, S.A. (2)     9,543,328       77.8 %                
Steven Cantor     1,500,800       12.2 %                
Named Executive Officers and Directors                                
Yury Zhivolo (2)     9,543,328       77.8 %                
Susan Montoya (3)     982,204       7.4 %                
Marc Glickman, M.D. (3)     221,400       1.8 %                
Benedict Broennimann, M.D. (3)     175,804       1.4 %                
Steven Cantor     1,500,800       12.2 %                
Robert Anderson (3)     80,000       0.6 %                
Robert Doyle (3)     80,000       0.6 %                
Steven Girgenti (3)     80,000       0.6 %                
All directors and named executive officers as a group (8 persons)     12,663,536       91.2 %                

 

* Represents beneficial ownership of less than 1%.

 

(1) Unless otherwise noted, the business address for each holder is 70 Doppler, Irvine, California 92618.
   
(2) Mr. Zhivilo is the controlling shareholder, President and director of Biodyne Holding, S.A., or Biodyne, and may be deemed to be the beneficial owner of the shares of common stock owned by Biodyne. He has voting and investment power over the shares held by Biodyne. The principal business address of Biodyne is 13 Rue de la Gare, 1100 Morges, Switzerland.
   
(3) Represents shares of common stock issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this prospectus.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

The following is a description of transactions since January 1, 2014 to which we were a party in which (i) the amount involved exceeded or will exceed the lesser of $120,000 of one percent (1%) of our average total assets at year end for the last two completed fiscal years and (ii) any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, any of the foregoing persons, who had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other similar arrangements, which are described under “Executive and Director Compensation.”

 

Biodyne

 

On June 30, 2015, we entered into a loan agreement with Biodyne. The loan agreement has a maximum borrowing capacity of $2,200,000, available in advances in several installments over a period of 8 months. All advances bore interest at a rate of 3% per annum. On April 1, 2016, the related note was amended such that it was convertible at the option of Biodyne into shares of our common stock at a conversion price of $5.00 per share. The interest was due and payable on an annual basis, the first payment of which was due November 1, 2016. The highest principal balance owed under the loan agreement was approximately $1,200,000 as of August 31, 2016. On August 31, 2016, the entire principal advanced and $36,789 of related interest were converted into for 247,358 shares of our common stock. Biodyne owns 9,543,328 shares of our common stock, representing an ownership interest of approximately 77.8%. In addition, Yury Zhivilo, the chairman of our board of directors, is the majority shareholder of Biodyne.

 

Indemnification of Officers and Directors

 

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective in connection with the completion of this offering, will provide that we will indemnify each of our directors and officers to the fullest extent permitted by Delaware law. Further, we intend to enter into indemnification agreements with each of our directors and officers, and we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. For further information, see “Executive and Director Compensation—Limitations of Liability and Indemnification Matters.”

 

Policies and Procedures for Related Party Transactions

 

All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.

 

To the best of our knowledge, during the past two fiscal years, other than as set forth above, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds $120,000, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest (other than compensation to our officers and directors in the ordinary course of business).

 

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DESCRIPTION OF CAPITAL STOCK

 

The following is a summary of the rights of our common stock and preferred stock, certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws as they will be in effect upon completion of this offering and applicable law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed as exhibits to the registration statement and are incorporated by reference to our registration statement, of which this prospectus forms a part.

 

Authorized Capital Stock

 

Immediately prior to the completion of this offering and upon the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of              shares of common stock, par value $0.00001 per share, and                     shares of undesignated preferred stock, par value $0.00001 per share.

 

Common Stock

 

As of September 1, 2017, and after giving effect to the automatic conversion of all of our outstanding preferred stock into common stock in connection with this offering, there were 13,400,183 shares of common stock issued and outstanding, 608,576 shares of common stock issuable upon exercise of outstanding warrants (including the subsequent conversion of preferred stock warrants), and 2,832,000 shares of common stock issuable upon exercise of outstanding stock options.

 

Under the terms of our amended and restated certificate of incorporation, holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, including the election of directors, and do not have cumulative voting rights. The holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and in such amounts as our board of directors from time to time may determine. Our common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of our company, the assets legally available for distribution to stockholders are distributable ratably among the holders of our common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

 

Preferred Stock

 

As of September 1, 2017, there were 1,005,700 outstanding shares of Series A preferred stock, which will be converted into 1,005,700 shares of common stock immediately prior to the closing of this offering, and 127,125 outstanding shares of Series B preferred stock, which will be converted into 127,125 shares of common stock immediately prior to the closing of this offering. Upon the closing of this offering, we will have no shares of our preferred stock outstanding, but our board of directors will be authorized, without further action by the stockholders, to create and issue one or more series of preferred stock and to fix the rights, preferences and privileges thereof. Among other rights, our board of directors may determine, without further vote or action by our stockholders:

 

the number of shares constituting the series and the distinctive designation of the series;
     
the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series;
     
whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights;
     
whether the series will have conversion privileges and, if so, the terms and conditions of conversion;

 

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whether or not the shares of the series will be redeemable or exchangeable, and, if so, the dates, terms and conditions of redemption or exchange, as the case may be;
     
whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and
     
the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series.

 

Although we presently have no plans to issue any shares of preferred stock upon completion of the offering, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, could, among other things, decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

 

Options

 

As of September 1, 2017, we had outstanding options to purchase an aggregate 2,832,000 shares of our common stock, with a weighted-average exercise price of $5.09 per share.

 

Warrants

 

Legend Securities, Inc., or Legend, acted as our placement agent for the offering of 1,300,000 shares of Series A preferred stock on October 26, 2015 and in connection therewith, we issued Legend warrants to purchase an aggregate of 100,570 shares of Series A preferred stock with an exercise price of $5.00 per share. The shares of Series A preferred stock issuable upon exercise of such warrants have the same rights as shares sold to investors in the Series A preferred stock financing.

 

On May 5, 2016, pursuant to his employment agreement, we issued a warrant to Steven Cantor, our Co-Chief Executive Officer and director, to purchase 833,333 shares of our common stock at an initial exercise price of $6.00 per share. As of June 30, 2017, Mr. Cantor forfeited 500,000 of such warrants and transferred the balance of 333,333 warrants to others. The warrant is immediately vested and exercisable until May 5, 2023.

 

Newbridge Securities Corp., or Newbridge, acted as our placement agent for the offering of 127,125 shares of Series B preferred stock from February 14, 2017 and in connection therewith, we issued Newbridge warrants to purchase an aggregate of 3,233 shares of Series B preferred stock with an exercise price of $6.00 per share. The shares of Series B preferred stock issuable upon exercise of such warrants have the same rights as shares sold to investors in the Series B preferred stock financing.

 

From June 6, 2017 to August 30, 2017, in connection with our senior convertible debt financing, we issued warrants to purchase an aggregate amount of 152,965 shares of our common stock to debt holders. We also issued warrants to purchase an aggregate amount of 18,475 shares of our common stock to Alexander Capital, LP, our placement agent and financial advisor in connection with the senior convertible debt financing.

 

Senior Convertible Notes

 

Through August 31, 2017, in connection with our senior convertible debt financing, we issued senior convertible notes for an aggregate principal amount of $1,485,500, or the notes. The notes are due and payable on January 11, 2018 and bear interest at a rate of 15% to be paid quarterly. The notes are convertible at the option of the holder upon completion of this offering into shares of our common stock, at a conversion price based on a discount to our trading price.

 

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Registration Rights

 

Form S-3 Demand Registration Rights

 

Pursuant to the Investors’ Rights Agreement, dated as of October 26, 2015, or the Series A Investors’ Rights Agreement, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the registrable (i) shares of our common stock issued or issuable upon conversion of our Series A preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), have the right to demand that we file a shelf registration statement for such holders on Form S-3. Under specified circumstances, we also have the right to defer filing of a requested registration statement for a period of not more than 120 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.

 

Pursuant to the Investors’ Rights Agreement, dated as of January 9, 2016, or the Series B Investors’ Rights Agreement, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the registrable (i) shares of our common stock issued or issuable upon conversion of our Series B preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), have the right to demand that we file a shelf registration statement for such holders on Form S-3. Under specified circumstances, we also have the right to defer filing of a requested registration statement for a period of not more than 120 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.

 

Piggyback Registration Rights

 

Pursuant to the Series A Investors’ Rights Agreement, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit or similar plans, or corporate reorganizations or other transactions under Rule 145 under the Securities Act, the holders of registrable (i) shares of our common stock issued or issuable upon conversion of our Series A preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), are entitled to notice of the registration and have the right to include their registrable securities in such registration. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, including the right to exclude all such stockholder shares from this offering.

 

Pursuant to the Series B Investors’ Rights Agreement, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit or similar plans, or corporate reorganizations or other transactions under Rule 145 under the Securities Act, the holders of registrable (i) shares of our common stock issued or issuable upon conversion of our Series B preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), are entitled to notice of the registration and have the right to include their registrable securities in such registration. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, including the right to exclude all such stockholder shares from this offering.

 

Expenses of Registration

 

Pursuant to the Series A and Series B Investors’ Rights Agreements, we are required to pay certain expenses in an amount not to exceed $25,000, relating to any Form S-3 or piggyback registration by the holders of registerable securities thereunder, subject to certain limitations.

 

Expiration of Registration Rights

 

The registration rights described under the Series A Investors’ Rights Agreement will expire for each holder immediately prior to the consummation of this offering, or upon a sale transaction, whichever occurs first.

 

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The registration rights described under the Series B Investors’ Rights Agreement will expire for each holder at such time (i) the closing of a deemed liquidation event, (ii) Rule 144 or another similar exemption under the Securities Act is available for the sale of such investors’ shares without limitation during a three-month period without registration and (iii) the fourth anniversary of the Series B Investors’ Rights Agreement.

 

Delaware Anti-Takeover Law and Provisions of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

 

Some provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise; or the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions which provide for payment of a premium over the market price for our shares.

 

These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

 

Delaware Anti-Takeover Law

 

We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

 

prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
     
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or
     
at or subsequent to the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder.

 

Section 203 defines a “business combination” to include:

 

any merger or consolidation involving the corporation and the interested stockholder;
     
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder;
     
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
     
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
     
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 

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In general, Section 203 defines an “interested stockholder” as any person that is:

 

the owner of 15% or more of the outstanding voting stock of the corporation;
     
an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or
     
the affiliates and associates of the above.

 

Under specific circumstances, Section 203 makes it more difficult for an “interested stockholder” to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation’s certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.

 

Our amended and restated certificate of incorporation and amended and restated bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our board of directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.

 

Undesignated Preferred Stock

 

The ability of our board of directors, without action by the stockholders, to issue up to             shares of undesignated preferred stock with voting or other rights or preferences as designated by our board of directors could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.

 

Stockholder Meetings

 

Our amended and restated bylaws provide that a special meeting of stockholders may be called only by our chairman of the board, chief executive officer or president, or by a resolution adopted by a majority of our board of directors.

 

Requirements for Advance Notification of Stockholder Nominations and Proposals

 

Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals to be brought before a stockholder meeting and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.

 

Elimination of Stockholder Action by Written Consent

 

Our amended and restated certificate of incorporation and amended and restated bylaws eliminate the right of stockholders to act by written consent without a meeting, after Biodyne no longer owns a majority of our outstanding capital stock.

 

Removal of Directors

 

Our amended and restated certificate of incorporation provides that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of the total voting power of all of our outstanding voting stock then entitled to vote in the election of directors.

 

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Stockholders Not Entitled to Cumulative Voting

 

Our amended and restated certificate of incorporation does not permit stockholders to cumulate their votes in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock may be entitled to elect.

 

Choice of Forum

 

Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative form, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; (3) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; (4) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws; or (5) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation also provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to this choice of forum provision. It is possible that a court of law could rule that the choice of forum provision contained in our amended and restated certificate of incorporation is inapplicable or unenforceable if it is challenged in a proceeding or otherwise. This choice of forum provision has important consequences to our stockholders.

 

Amendment Provisions

 

The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred stock, would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.

 

The provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

 

Elimination of Monetary Liability for Officers and Directors

 

Our amended and restated certificate of incorporation incorporates certain provisions permitted under the Delaware General Corporation Law relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty. Our amended and restated certificate of incorporation also contains provisions to indemnify the directors, officers, employees or other agents to the fullest extent permitted by the Delaware General Corporation Law. We believe that these provisions will assist us in attracting and retaining qualified individual to serve as directors.

 

Exchange Listing

 

We intend to apply to list our common shares on the Nasdaq Capital Market under the trading symbol “ .”

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Vstock Transfer, LLC. The transfer agent and registrar’s address is 18 Lafayette Pl, Woodmere, New York 11598.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, no public market existed for our common stock. Future sales of substantial amounts of our common stock in the public market following this offering, or the possibility of such sales occurring, could adversely affect prevailing market prices and could impair our ability to raise capital through the offering of equity securities.

 

Based on the number of shares of common stock outstanding as of June 30, 2017, upon the completion of this offering, we will have a total of             shares of common stock outstanding, assuming an initial public offering price of $              per share and assuming no exercise by the underwriters of their option to purchase additional shares of common stock and no exercise of outstanding options or warrants to purchase shares of common stock. All of the shares sold in this offering will be freely tradable unless held by our “affiliates”, as defined in Rule 144 under the Securities Act.

 

As a result of contractual restrictions described below and the provisions of Rules 144 and 701 promulgated under the Securities Act, the shares of common stock sold in this offering will be available for sale in the public market as follows:

 

all the shares of common stock sold in this offering will be eligible for immediate sale upon the closing of this offering; and
     
                  common shares will be eligible for sale in the public market upon expiration of lock-up agreements 180 days after the date of this prospectus, subject, in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701.

 

Rule 144

 

In general, persons (or persons whose shares are required to be aggregated) who have beneficially owned shares of our common stock for at least six months, and any affiliate of ours who owns shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144 under the Securities Act.

 

Non-Affiliates

 

Any person (or persons whose shares are required to be aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell those shares, subject only to the availability of current public information about us and provided that we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. If such person has held our shares for at least one year, such person can resell such shares under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company and current public information requirements.

 

Affiliates

 

Any person (or persons whose shares are required to be aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be subject to the restrictions described above. Additionally, such person would be subject to additional restrictions, pursuant to which such person would be required to comply with the manner of sale and notice provisions of Rule 144 and would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

1% of the number of shares of common stock then outstanding, which will equal approximately                 immediately after this offering, based on the number of shares outstanding as of June 30, 2017 and assuming no exercise by the underwriters of their option to purchase additional shares of common stock and no outstanding options or warrants; or

 

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the average weekly trading volume of our shares of common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Additionally, persons who are our affiliates at the time of, or any time during the three months preceding, a sale may sell unrestricted securities under the requirements of Rule 144 described above, without regard to the six-month holding period of Rule 144, which does not apply to sales of unrestricted securities.

 

Rule 701

 

Under Rule 701 under the Securities Act, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, by:

 

persons other than affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject only to the manner-of-sale provisions of Rule 144; and
     
our affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject to the manner-of-sale and volume limitations, current public information and filing requirements of Rule 144, in each case, without compliance with the six-month holding period requirement of Rule 144.

 

Notwithstanding the foregoing, all our Rule 701 shares are subject to lock-up agreements as described below and in the section titled “Underwriting” and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

 

Lock-Up Agreements

 

We and certain of our executive officers, directors and other certain holders of our capital stock and securities convertible into or exchangeable for our capital stock have agreed that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of the underwriters, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise dispose of or hedge any of our shares of common stock, any options or warrants to purchase our shares of common stock, or any securities convertible into, or exchangeable for or that represent the right to receive our shares of common stock. The underwriters may, in their discretion, release any of the securities subject to these lock-up agreements at any time. Upon the expiration of the lock-up period, all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.

 

Form S-8 Registration Statement

 

We intend to file registration statements on Form S-8 under the Securities Act after the closing of this offering to register the shares of our common stock that are issuable pursuant to our 2016 plan. The registration statements are expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statements will be available for sale in the open market following their effective dates, subject to Rule 144 volume limitations and the lock-up arrangement described above, if applicable.

 

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UNDERWRITING

 

Network 1 Financial Securities, Inc., or Network 1, is acting as representative of each of the underwriters named below and we have entered into an underwriting agreement on the date of this prospectus with Network 1 Financial Securities, Inc. Subject to the terms and conditions of the underwriting agreement, the underwriters named below have severally agreed to purchase from us the following respective number of shares of our common stock:

 

Underwriter  

Number

of

Shares

 
Network 1 Financial Securities, Inc.        
Total        

 

The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

 

We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

 

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel including the validity of the shares, and subject to other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The offering of the shares by the underwriters is also subject to the underwriters’ right to reject any order in whole or in part.

 

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers.

 

The following table summarizes the compensation we will pay:

 

    Per Share     Total  
   

Without

Over-

allotment

   

Full

Exercise

   

Without

Over-

allotment

   

Full

Exercise

 
Underwriting discounts and commissions                                                                                

 

We estimate that our out of pocket expenses for this offering (not including any underwriting discounts and commissions) will be approximately $            million. The representative has informed us that it does not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered. The underwriters will not confirm sales to any accounts over which they exercise discretionary authority without first receiving a written consent from those accounts.

 

We will bear all of our fees, disbursements and expenses in connection with this offering. In addition, we will reimburse Network 1 for its reasonable expenses in connection with this offering, including fees for its legal counsel, up to an amount of $75,000.

 

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The underwriting agreement, however, provides that in the event the offering is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that offering expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).

 

We have granted to the underwriters the right of first negotiation to co-manage any public underwriting or private placement of debt or equity securities (excluding (i) shares issued under any compensation or stock option plan approved by the stockholders of our company, (ii) shares issued in payment of the consideration for an acquisition or as part of strategic partnerships and transactions and (iii) conventional banking arrangements and commercial debt financing) of our company or any subsidiary or successor of our company, with the underwriters receiving the right to underwrite or place a number of the securities to be sold therein having an aggregate purchase price therein equal to a minimum of the aggregate purchase price of the shares offered by us in this offering (excluding any shares that we may sell to the underwriters to cover overallotments), until twelve months after completion of this offering.

 

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock, or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the representative for a period of days after the date of this prospectus, except (a) issuances pursuant to the conversion or exchange of convertible or exchangeable securities (including cashless or “net” exercises, other than broker-assisted cashless exercises) or the exercise of warrants or options, in each case outstanding on the date of this prospectus and described in this prospectus, (b) grants of employee stock options pursuant to the terms of a plan described in this prospectus, (c) issuances pursuant to the exercise of such options, or (d) satisfaction of certain existing contractual obligations.

 

We and all our executive officers, directors and other certain holders of our capital stock and securities convertible into or exchangeable for our capital stock have agreed that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of the underwriters, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise dispose of or hedge any of our shares of common stock, any options or warrants to purchase our shares of common stock, or any securities convertible into, or exchangeable for or that represent the right to receive our shares of common stock. The underwriters may, in their discretion, release any of the securities subject to these lock-up agreements at any time. Upon the expiration of the lock-up period, all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between us and the representatives. In determining the initial public offering price of our common stock, the representatives will consider:

 

the prospects for the industry in which we compete;
     
our financial information;
     
the ability of our management and our business potential and earning prospects;
     
the prevailing securities markets at the time of this offering; and
     
the recent market prices of, and the demand for, publicly traded shares of generally comparable companies.

 

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We will apply to list the shares of common stock on the Nasdaq Capital Market under the symbol “              ”.

 

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and to contribute to payments that the underwriters may be required to make for these liabilities.

 

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

 

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
     
Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.
     
Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
     
Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.

 

A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representative may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.

 

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LEGAL MATTERS

 

Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by K&L Gates LLP, Irvine, California. Certain other legal matters will be passed upon for the underwriters by Carmel, Milazzo & DiChiara LLP, New York, New York.

 


EXPERTS

 

The financial statements of Hancock Jaffe Laboratories, Inc. as of December 31, 2016 and 2015 and for each of the years then ended have been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements are included in this prospectus and registration statement in reliance upon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of Marcum LLP, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect and copy the registration statement and its exhibits and schedules at the Public Reference Room the SEC maintains at 100 F Street, N.E., Washington, D.C. 20549. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect the registration statement and its exhibits and schedules and other information without charge at the website maintained by the SEC. The address of this site is www.sec.gov.

 

We also file periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We also maintain a website at www.hancockjaffe.com, by which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information that is contained on, or that may be accessed through, our website is not a part of this prospectus. We have included our website in this prospectus solely as an inactive textual reference.

 

  106  
 

 

HANCOCK JAFFE LABORATORIES, INC.

INDEX TO FINANCIAL STATEMENTS

 

Condensed Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 F-2
   
Unaudited Condensed Statements of Operations for the Six Months Ended June 30, 2017 and 2016 F-3
   
Unaudited Condensd Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Six Months Ended June 30, 2017 F-4
   
Unaudited Condensed Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 F-5
   
Notes to Unaudited Condensed Financial Statements F-7

 

F- 1
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED BALANCE SHEETS

 

    June 30, 2017     December 31, 2016  
    (unaudited)        
Assets                
Current Assets:                
Cash   $ 15,916     $ 56,514  
Accounts receivable, net     38,800       23,500  
Receivables from sale of assets     -       166,250  
Inventory     -       90,908  
Advances to related party, net     41,350       10,000  
Note receivable - related party     160,000       -  
Prepaid expenses and other current assets     115,699       46,049  
Total Current Assets     371,765       393,221  
Property and equipment, net     19,817       28,810  
Intangible asset, net     1,171,064       1,232,718  
Deferred offering costs     138,277       98,275  
Security deposits and other assets     30,843       29,843  
Total Assets   $ 1,731,766     $ 1,782,867  
                 
Liabilities, Temporary Equity and Stockholders' Deficiency                
Current Liabilities:                
Accounts payable   $ 791,330     $ 541,957  
Accrued expenses     396,748       324,856  
Accrued expenses - related party     7,362       15,652  

Convertible notes payable, net of debt discount of $780,936 at June 30, 2017

    182,625       -  
Notes payable - related party     356,920       444,772  
Convertible note payable - related party     499,000       188,000  
Derivative liabilities     1,288,542       551,351  
Total Liabilities     3,522,527     2,066,588  
                 

Redeemable Convertible Series A Preferred Stock, par value $0.00001, 1,300,000 shares authorized, 1,005,700 shares issued and outstanding; liquidation preference of $10,599,2099 and $10,399,859 at June 30, 2017 and December 31, 2016, respectively.

    3,935,638       3,935,638  

Redeemable Convertible Series B Preferred stock, par value $0.00001, 2,000,000 shares authorized, 127,125 and 0 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively; liquidation preference of $1,541,061 and $0 at June 30, 2017 and December 31, 2016, respectively.

    630,770       -  
                 
Commitments and Contingencies     -       -  
                 
Stockholders' Deficiency:                

Preferred stock, par value $0.00001, 6,000,000 shares are authorized; 2,700,000 shares available for designation

    -       -  

Common stock, par value $0.00001, 30,000,000 shares authorized, 12,246,963 shares issued and outstanding

    122       122  
Additional paid-in capital     23,783,621       23,508,869  
Accumulated deficit     (30,140,912 )     (27,728,350 )
Total Stockholders' Deficiency     (6,357,169 )     (4,219,359 )
Total Liabilities, Temporary Equity and Stockholders' Deficiency   $ 1,731,766     $ 1,782,867  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 2
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

   

For The Six Months Ended

June 30,

 
    2017     2016  
Revenues:                
Product sales   $ 152,400     $ 149,600  
Royalty income     66,708       35,981  
      219,108       185,581  
Cost of goods sold     188,734       201,365  
Gross Profit (Loss)     30,374       (15,784 )
                 
Selling, general and administrative expenses     2,135,167       2,447,538  
Research and development expenses     257,579       -  
Loss from Operations     (2,362,372 )     (2,463,322 )
                 
Other Expense (Income):                
Allowance on advances to related party     -       482,700  
Interest expense, net     24,934       36,084  
Amortization of debt discount     23,634       -  
Change in fair value of derivative liabilities     1,622       (10,482 )
Total Other Expense     50,190       508,302  
                 
Loss from Continuing Operations     (2,412,562 )     (2,971,624 )
Discontinued Operations:                
Loss from discontinued operations, net of tax     -       (298,286 )
Gain on sale of discontinued operations, net of tax     -       2,499,054  
Income from Discontinued Operations, net of tax     -       2,200,768  
                 
Net Loss     (2,412,562 )     (770,856 )
Deemed dividend to preferred stockholders     (214,911 )     (149,663 )
Net Loss Attributable to Common Stockholders   $ (2,627,473 )   $ (920,519 )
                 
Net Loss Per Basic and Diluted Common Share:                
Loss from continuing operations   $ (0.22 )   $ (0.26 )
Income from discontinued operations     -       0.18  
Net Loss Per Basic and Diluted Common Share:   $ (0.22 )   $ (0.08 )
                 
Weighted Average Number of Common Shares Outstanding:                
Basic and Diluted     12,124,164       12,000,000  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 3
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIENCY

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(unaudited)

 

    Series A Redeemable     Series B Redeemable                          
    Convertible     Convertible           Additional           Total  
    Preferred Stock     Preferred Stock     Common Stock     Paid-in     Accumulated     Stockholders'  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Deficiency  
                                                       
Balance at December 31, 2016     1,005,700     $ 3,935,638       -     $ -       12,246,963     $ 122     $ 23,508,869     $ (27,728,350 )   $ (4,219,359 )
Stock-based compensation                                                   $ 274,752             $ 274,752  

Series B redeemable convertible preferred stock issued

    -       -       127,125       630,770       -       -       -       -       -  
Net loss     -       -       -       -       -       -       -       (2,412,562 )     (2,412,562 )
Balance at June 30, 2017     1,005,700     $ 3,935,638       127,125     $ 630,770       12,246,963     $ 122     $ 23,783,621     $ (30,140,912 )   $ (6,357,169 )

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 4
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

( unaudited)

 

   

For The Six Months Ended

June 30,

 
    2017     2016  
Cash Flows from Operating Activities                
Net Loss   $ (2,412,562 )   $ (770,856 )
Adjustments to reconcile net loss to cash used in operating activities                
Stock-based compensation     274,752       1,143,883  
Amortization of debt discount     23,634       -  
Depreciation and amortization     72,912       69,715  
Gain on sale of discontinued operations     -       (2,499,054 )
Allowance on advances to related party     -       482,700  
Change in fair market value of derivatives     1,622       (10,482 )
Changes in operating assets and liabilities:                
Accounts receivable, net     (15,300 )     150,259  
Inventory     90,908       (350,470 )
Prepaid expenses and other current assets     (69,650 )     (61,929 )
Security deposit and other assets     (1,000 )     -  
Accounts payable     249,373       (341,450 )
Accrued expenses     63,602       243,558  
Deferred revenues     -       46,801  
Total adjustments     690,853       (1,126,469 )
Net Cash Used in Operating Activities     (1,721,709 )     (1,897,325 )
                 
Cash Flows from Investing Activities                
Installment payments from sale of assets     166,250       -  
Purchase of note receivable from related party     (160,000 )     -  
Advances to related party     (31,350 )     (482,700 )
Purchase of property and equipment     (2,265 )     -  
Purchase of intangible assets     -       (370,200 )
Net Cash Used in Investing Activities     (27,365 )     (852,900 )
                 
Cash Flows from Financing Activities                
Proceeds from issuance of note payable to related party     311,000       -  
Proceeds from issuance of convertible notes, net of cash offering costs of $107,570     892,430          
Payments of deferred offering costs associated with initial public offering     (40,002 )     (62,275 )
Proceeds from issuance of redeemable Series B preferred stock and warrant, net of cash offering costs of $129,850     632,900       -  
Proceeds from issuance of redeemable Series A preferred stock and warrant, net of cash offering costs of $527,835     -       1,970,665  
Repayments of notes payable     -       (111,000 )
Repayments of notes payable - related party     (87,852 )     (75,624 )
Advances from distributor     -       100,000  
Net Cash Provided by Financing Activities     1,708,476       1,821,766  
                 
Net Decrease in Cash     (40,598 )     (928,459 )
Cash - Beginning of Period     56,514       1,585,205  
Cash - End of Period   $ 15,916     $ 656,746  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 5
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS, continued

( unaudited)

 

    For The Six Months Ended June 30,  
    2017     2016  
Supplemental Disclosures of Cash Flow Information:                
Cash Paid During the Periods For:                
Interest   $ 27,148     $ 37,667  
                 
Non-Cash Financing Activities                
Issuance of placement agent warrants in connection with preferred stock offering included in derivative liabilities   $ 2,130     $ 82,406  
Issuance of warrants in connection with convertible debt included in derivative liabilities   $ 307,060     $ -  
Conversion feature on convertible debt included in derivative liabilities   $ 426,379     $ -  
Forgiveness of debt in connection with the sale of discontinued operations   $ -     $ 2,805,297  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 6
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 1 – Business Organization, Nature of Operations and Basis of Operations

 

Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe” or the “Company”) develops and sells biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.

 

The Company develops and manufactures implantable cardiovascular bioprosthetic devices for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, and has manufactured and developed the following medical devices that have, or are in the process of, getting Class III U.S. Food and Drug Administration (“FDA”) approval:

 

  ProCol® Vascular Bioprosthesis;
     
  Bioprosthetic Heart Valve;
     
  Coronary Artery Bypass Graft,, “off the shelf” device, Coreograft™; and
     
  Bioprosthetic Venous Valve, the VenoValve™.

 

The Company also realizes sub-contract manufacturing and royalty revenue from sales of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has been approved by the FDA.

 

On September 1, 2015, our Board of Directors approved a 2.1144 for 1.00 forward stock split of the Company’s common stock, which became effective on July 22, 2016. Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the 2.1144 for 1.00 stock split. See Note 10 – Temporary Equity and Stockholders’ Deficiency for additional details regarding the Company’s authorized capital.

 

On March 1, 2017, the Company adopted a second amended and restated Certificate of Incorporation, which increased the number of authorized preferred shares to 6,000,000 and designated 1,300,000 shares of the Company’s authorized preferred stock as Series A Preferred Stock. On June 6, 2017, the Company adopted a third amended and restated Certificate of Incorporation, which designated 2,000,000 shares of the Company’s authorized and unissued preferred stock as Series B Preferred Stock.

 

Note 2 – Going Concern and Management’s Liquidity Plan

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company incurred a net loss of $2,412,562 and $770,856 during the six months ended June 30, 2017 and 2016, respectively, and has an accumulated deficit of $30,140,912 at June 30, 2017. Cash used in operating activities was $1,721,709 and $1,897,325 for the six months ended June 30, 2017 and 2016 respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the condensed financial statements.

 

F- 7
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 2 – Going Concern and Management’s Liquidity Plan, continued

 

During the six months ended June 30, 2017, the Company received net cash proceeds of $632,900 from the sale of Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) and warrants (see Note 10 – Temporary Equity and Stockholders’ Deficiency), received net cash proceeds of $892,430 from the issuance of convertible notes payable (see Note 7 – Convertible Notes Payable), and $311,000 cash proceeds related to the convertible note payable to a related party. As of June 30, 2017, Hancock Jaffe had a cash balance of $15,916 and working capital deficiency of $3,150,762.

 

The Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms.

 

Note 3 – Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for completed financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed financial statements of the Company as of June 30, 2017, and for the six months ended June 30, 2017 and 2016. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed financial statements be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2016. The balance sheet as of December 31, 2016 has been derived from the Company’s audited financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance related to the Company’s deferred tax assets, and the valuation of warrants and derivative liabilities.

 

F- 8
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 3 – Significant Accounting Policies, continued

 

Deferred Offering Costs

 

Deferred offering costs, which primarily consist of direct, incremental professional fees relating to debt and equity offerings are capitalized within noncurrent assets. The deferred offering costs will be offset against the proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. As of June 30, 2017 and December 31, 2016, the Company has capitalized deferred offering costs consisting primarily of legal costs related to a potential initial public offering totaling $138,277 and $98,275, respectively, in the accompanying condensed balance sheets.

 

Investments

 

Equity investments over which the Company exercises significant influence but does not control are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.

 

The Company holds a 28.5% ownership investment, consisting of founders’ shares acquired at nominal cost, in Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA”) of which the Company’s Former President and Vice President of Operations were/are officers. To date, HJLA has recorded cumulative losses. Since the Company’s investment is recorded at $0, the Company has not recorded its proportionate share of HJLA’s losses. If HJLA reports net income in future years, the Company will apply the equity only after its share of HJLA’s net income equals its share of net losses previously incurred.

 

Fair Value of Financial Instruments

 

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

FASB ASC 820 defines fair value 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. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

F- 9
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 3 – Significant Accounting Policies, continued

 

Fair Value of Financial Instruments, continued

 

  Level 1 - Quoted prices available in active markets for identical assets or liabilities trading in active markets.

 

  Level 2 - Observable inputs other than quoted prices included in Level 1, such as quotable prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

  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. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

 

Financial instruments, including accounts receivable, accounts payable and short-term advances are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company’s other financial instruments include note receivable and notes payable, the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations with similar terms and maturities, as well as derivative liabilities – preferred stock warrants, derivative liabilities – convertible debt warrants and derivative liabilities – convertible debt conversion feature that are accounted for at fair value on a recurring basis. The fair value of the derivative liabilities as of June 30, 2017 and December 31, 2016, by level within the fair value hierarchy appears below:

 

Description:   Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative liabilities - Preferred Stock Series A Warrants                        
June 30, 2017   $ -     $ -     $ 551,735  
December 31, 2016   $ -     $ -     $ 551,351  
Derivative liabilities - Preferred Stock  Series B Warrants                        
June 30, 2017   $ -     $ -     $ 1,886  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Warrants                        
June 30, 2017   $ -     $ -     $ 308,431  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Conversion Feature                        
June 30, 2017   $ -     $ -     $ 426,490  
December 31, 2016   $ -     $ -     $ -  

 

F- 10
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 3 – Significant Accounting Policies, continued

 

Fair Value of Financial Instruments, continued

 

The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis:

 

    Derivative  
    Liabilities  
Balance - December 31, 2016   $ 551,351  
Issuance of derivative liabilities - preferred stock Series B warrants     2,130  
Issuance of derivative liabilities - convertible debt warrants     307,060  
Issuance of derivative liabilities - convertible debt conversion feature     426,379  
Change in fair value of derivative liabilities     1,622  
Balance - June  30, 2017   $ 1,288,542  

 

Preferred Stock

 

The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A and Series B Preferred Stock (together, the “Preferred Stock”). Preferred stock subject to mandatory redemption is classified as a liability instruments and is measured at fair value. Conditionally redeemable preferred stock (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, preferred stock is classified as permanent equity. As of the issuance date, the carrying amount of the Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions such that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

F- 11
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 3 – Significant Accounting Policies, continued

 

Derivative Liabilities

 

Derivative financial instruments are recorded as a liability at fair value and are marked-to-market as of each subsequent balance sheet date. The change in fair value at each balance sheet date is recorded as a change in the fair value of derivative liabilities on the statement of operations for each reporting period. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification of the financial instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is marked to market and reclassified as of the date of the event that caused the reclassification.

 

Net Loss per Share

 

The Company computes basic and diluted loss per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share are the same since the inclusion of common shares issuable pursuant to the exercise of warrants, the conversion of convertible debt and the conversion of Preferred Stock in the calculation of diluted net loss per common shares would have been anti-dilutive.

 

The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:

 

    For the Six Months Ended  
    June 30,  
    2017     2016  
Loss from continuing operations   $ (2,412,652 )   $ (2,488,924 )
Less: Deemed dividend to Series A preferred stockholders     (214,911 )     (149,663 )
Net loss from continuing operations attributable to common stockholders   $ (2,353,266 )   $ (2,638,587 )

 

The following table summarizes the number of potentially dilutive common share equivalents excluded from the calculation of diluted net loss per common share for the six months ended June 30, 2017 and 2016:

 

    For the Six Months Ended  
    June 30,  
    2017     2016  
Shares of common stock issuable upon conversion of preferred stock     1,132,825       779,800  
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith     103,803       77,980  
Shares of common stock issuable upon conversion of senior secured convertible debt     166,668          
Shares of common stock issuable upon exercise of warrants     533,805       -  
Shares of common stock issuable upon exercise of options     2,592,000       -  
Potentially dilutive common share equivalents excluded from diluted net loss per share     4,529,101       857,780  

 

F- 12
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 3 – Significant Accounting Policies, continued

 

Major Customers

 

During the six months ended June 30, 2017 and 2016, 100% of the Company’s revenues from continuing operations were from the sub-contract manufacture of product to for LeMaitre Vascular, Inc. (“LeMaitre”) and royalties earned from the sale of product by LeMaitre, with whom the Company entered a Post-Acquisition Supply Agreement effective March 18, 2016. During the six months ended June 30, 2016, 100% of the Company’s revenues presented within discontinued operations were from the sale of its products to the Company’s sole distributor (the “Distributor’), with whom the Company entered an Exclusive Supply and Distribution Agreement effective March 26, 2014.

 

Major Supplier

 

During the six months ended June 30, 2017 and 2016, 100% of the raw material used for the manufacture of vascular bioprostheses was purchased from a single vendor. (See Note 9 – Commitment and Contingencies).

 

Reclassifications

 

Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

Subsequent Events

 

The Company evaluated events that have occurred after the balance sheet date through the date the financial statements were issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 11.

 

F- 13
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 4- Advances to Related Party, net

 

During 2015, the Company paid a deposit of $75,000 to HJLA, in anticipation of entering into an agreement to acquire the exclusive rights to provide development and manufacturing services to HJLA. HJLA is a development stage company with two employees that holds a patent for dermal filler, and to date its efforts have been focused on raising funds to be used for approval and commercialization of the product, for which we own the exclusive rights to develop and manufacture . On April 1, 2016, the Company paid an additional $370,200 upon the execution of this agreement and recorded an intangible asset in the amount of $445,200.

 

During the six months ended June 2016, the Company also paid an additional $482,700 to HJA, which was recorded as advances to related party. As of June 30, 2016, the Company reviewed the recoverability of the advances and recorded an allowance of $482,700 for the six months ended June 30, 2016, because collectability was not reasonably assured.

 

During the six months ended June 30, 2017, the Company provided additional advances, net of repayments, totaling $31,350 to HJLA.

 

Note 5 - Note Receivable - Related Party

 

On June 15, 2017, the Company entered into a promissory note agreement (the “Note Receivable”) with HJLA, pursuant to which the Company loaned $160,000 to HJLA. The Note Receivable bears interest at 15% per annum, and all unpaid principal and interest are payable in full on September 15, 2017.

 

Note 6 – Accrued Expenses and Accrued Expenses - Related Party

 

Accrued expenses consist of the following:

 

    June 30, 2017     December 31, 2016  
Accrued compensation costs   $ 378,488     $ 294,110  
Accrued professional fees     8,813       15,864  
Deferred rent     -       11,951  
Accrued Interest     6,164       -  
Other accrued expenses     3,283       2,931  
Accrued Expenses   $ 396,748     $ 324,856  

 

Accrued expenses, related parties consisted of accrued interest on notes payable to a major common stockholder and to the Related Party totaling, in the aggregate, $7,362 and $ 15,652 at June 30, 2017 and the year then ended December 31, 2016, respectively.

 

F- 14
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 7 – Convertible Notes Payable and Convertible Note Payable - Related Party

 

Convertible Notes

 

On June 15, 2017, the Company received proceeds aggregating $1,000,000 pursuant to five convertible promissory notes and 83,335 warrants (the “Convertible Notes”) with the principal of each ranging from $100,000 to $500,000. The Convertible Notes bear interest at 15% per annum and are due on January 11, 2018. The notes are convertible at a price equal to the lesser of (i) $6.00 per share, or (ii) 70% of the highest price per common share sold in an initial public offering (the “Conversion Price”). The warrants have a term of five years, and are exercisable for the number of common shares equal to 50% of the total shares issuable upon the conversion of the Convertible Note, at a price equal to the lesser of (i) $7.20 per share or (ii) 120% of the Conversion price. The conversion option and the warrants had a grant date value of $426,379 and $307,060, respectively, and the aggregate $733,439 was recorded as a debt discount and a derivative liability. The conversion option and the warrants were valued using a Monte Carlo model, with the following assumptions used:

 

Volatility     42 %
Risk free interest rate     1.76% - 1.89 %

 

The debt discount is amortized over the term of the note using the effective interest method. The fair value of the derivative liability is marked to market at each reporting date.

 

Convertible Note - Related Party

 

On June 30, 2015, the Company entered into a loan agreement with the majority (78%) common stock shareholder, (“the 2015 Note”). The 2015 note has a maximum borrowing capacity of $2,200,000 and bears interest at 3% per annum. On April 1, 2016, the 2015 Note was amended such that the Note became convertible at the option of the lender at a conversion price of $5.00 per share. During the six months ended June 30, 2017 and 2016, the Company borrowed $499,000 and $0, respectively, under the 2015 Note. The 2015 Note’s principal and accrued interest are due on January 31, 2018.

 

Note 8 – Note Payable - Related Party

 

The Company has a note payable to a related party, of which the Company’s Former President and Vice President of Operations were / are officers, and of which the officers, and of which a member of the Company’s Board of Directors is a shareholder. The Related Party Note bears interest at 6% per annum. The balance due on the Related Party note was $356,920 and $444,772 at June 30, 2017 and December 31, 2016, respectively.

 

F- 15
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 9 – Commitments and Contingencies

 

Legal Matters

 

From time to time, the Company may be involved in litigation relating to claims arising in the ordinary course of business. There are currently no material claims or actions pending or threatened against the Company.

 

Property Lease Obligation

 

On May 1, 2016, the Company’s entered into a one-year lease of an apartment located in Irvine, California for the chairman of the Company’s board of directors. The lease required a $3,720 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $1,860. Rent expense for this property was $11,219 and $2,842 for the six months ended June 30, 2017 and 2016, respectively. The lease expired on April 30, 2017, the Company is currently renting the apartment on a month-to-month basis.

 

Amendment to Employment Agreement

 

On June 12, 2017, the Company entered into an amendment of its employment agreement with the Business Development Manager (the “BDM Agreement”) whereby the Company agreed to provide relocation services and reimburse relocation expenses for the BDM. Furthermore, pursuant to the amended BDM agreement, the Company agreed to pay the BDM for costs incurred by the BDM as a result of relocation such as a furnished primary residence in the designated area outlined in the agreement and a vehicle for the sole use of the BDM. The total amount of these outgoing payments is not to exceed $5,000 dollars per month. Lastly, the amended agreement states that upon employee relocation, the BDM shall receive a lump sum payment in an amount that is the total of the gross salary that was due to the BDM under the BDM Agreement. During August 2017, the Company paid $4,469 for the reimbursement of relocation expenses, pursuant to BDM Agreement.

 

F- 16
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 10 – Temporary Equity and Stockholders’ Deficiency

 

Preferred Stock

 

The Company is authorized to issue a total of 6,000,000 shares of preferred stock of which 1,300,000 and 2,000,000 preferred shares have been designated as the Company’s Series A Preferred Stock and Series B Preferred Stock, respectively, and 2,700,000 preferred shares remain undesignated. The Company’s preferred shares feature certain redemption rights that are considered by the Company to be outside of the Company’s control. Accordingly, the Series A Preferred Stock and Series B Preferred Stock is presented as temporary equity on the Company’s balance sheets.

 

Redeemable Convertible Series B Preferred Stock (“Series B Preferred Stock”)

 

On March 1, 2017 and June 6, 2017, the Company filed Certificates of Designation with the Secretary of State of the state of Delaware, designating 200,000 shares and then 2,000,000 shares, respectively, of the Company’s preferred stock as Series B Redeemable Convertible Preferred Stock at a par value of $0.00001 per share. The Series B Redeemable Convertible Preferred Stock have a stated value of $6 per share with an initial conversion price of $6 per common share (subject to adjustment as provided in the Series B Certificate of Designation).

 

The holders of the Company’s Series B Preferred Stock have voting rights equal to common stockholders on an as-converted basis, and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior to common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series B Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series B Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series B Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined. As of June 30, 2017, the holders of Series B Preferred Stock are entitled to receive a liquidation preference payment of $12.00 per share plus accrued and unpaid dividends totaling, in the aggregate, $1,541,061. The liquidation preference of The Series B Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

 

Each share of Series B Preferred Stock is convertible at the option of the holder at any time into one share of the Company’s common stock, subject to certain typical anti-dilution provisions, such as stock dividend or stock splits. Each share of Series B Preferred Stock is mandatorily converted into the Company’s common stock at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock. If the Company issues additional shares of common stock prior to (ii) the Company’s receipt of certain FDA approvals, or (ii) the closing of the initial public offering is less than $100,000,000, then the Series B will be convertible into the number of shares of common stock equal to the percentage ownership of the holders of Series B Preferred Stock on the date that the additional shares of common stock were issued. Because the conversion option associated with the Series B Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability.

 

At any time after the third anniversary of the original issuance of the Series B Preferred Stock, the Series A Preferred Stock may be redeemed as a result of the written request of the holder of the Series B Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series B Preferred Stock is classified as temporary equity.

 

F- 17
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 10 – Temporary Equity and Stockholders’ Deficiency, continued

 

Redeemable Convertible Series B Preferred Stock (“Series B Preferred Stock”)

 

As of the issuance date, the carrying amount of the Series B Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

During the six months ended June 30, 2017, the Company issued 127,125 shares of Series B Preferred Stock at a purchase price of $6 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the additional shares were $762,750 and the Company incurred cash offering costs of $129,850 (including $77,075 of placement agent fees) and non-cash offering costs, consisting of 3,233 warrants for the purchase of Series B Preferred Stock, valued at $2,130 (see Warrants, below) resulting in an original carrying value of the additional Series B Preferred Stock of $630,770.

 

Cumulative undeclared dividends in arrears on Series A and Series B Preferred Stock are $542,209 and $15,561, respectively, as of June 30, 2017.

 

Warrants

 

During the six months ended June 30, 2017, the Series B Preferred Stock placement agent received a cash fee in the aggregate of $77,075 and five-year warrants to purchase an additional 3,233 shares of the Company’s Series B Preferred Stock at an exercise price equal to the lesser of $6.00 per share or the price of securities issued in a future round of financing. The warrants had an aggregate fair value of $2,130 on the date of grant, which was charged against the proceeds received from the sale of the shares. Due to the variable exercise price, the warrants were determined to be a derivative liability and the value of the warrants is recorded as such on the accompanying condensed balance sheet.

 

The value of the derivative liability related to Series A and Series B placement agent warrants was determined by using the Monte Carlo simulation method. This valuation is revised on a quarterly basis until the warrants are reclassified to equity, exercised or expired, with the changes in fair value recorded in other income (expense) on the condensed statements of operations. The assumptions used in applying the Monte Carlo simulation method to value the derivative liabilities during the six months ended June 30, 2017 were as follows:

 

Risk free interest rate     1.50% - 1.93 %
Expected term (years)     2.7 - 4.7  
Expected volatility     42.1 %

 

F- 18
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 10 – Temporary Equity and Stockholders’ Deficiency, continued

 

Warrants, continued

 

On June 30, 2017, a warrant for the purchase of 500,000 shares of common stock, which had been granted to the Business Development Manager, was forfeited by the Business Development Manager, and canceled by the Company.

 

A summary of warrants activity during the six months ended June 30, 2017 is presented below:

 

    Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value  
Outstanding, December 31, 2016     933,903     $ 5.89                  
Issued     99,902       6.00                  
Exercised     -       -                  
Forfeited     (500,000 )     -                  
Outstanding, June 30, 2017     533,805     $ 5.81       5.4     $ -  
                                 
Exercisable, June 30, 2017     533,805     $ 5.81       5.4     $ -  

 

A summary of outstanding and exercisable warrants of June 30, 2017 is presented below:

 

Warrants Outstanding     Warrants Exercisable  
Exercise Price     Exercisable Into   Outstanding Number of Warrants     Weighted Average Remaining Life In Years     Exercisable Number of Warrants  
$ 6.00     Common Stock     430,002       5.8       430,002  
$ 5.00     Series A Preferred Stock     100,570       3.7       100,570  
$ 6.00     Series B Preferred Stock     3,233       4.7       3,233  
        Total     533,805               533,805  

 

F- 19
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

Note 11 - Subsequent Events

 

From July 12, through August 30, 2017 the Company received net cash proceeds of $508,370 from the sale of a Senior Secured Convertible Notes (the “Convertible Notes”) in the amount of $835,500 and five year warrants for the purchase of 69,630 shares of the Company’s common stock. The Convertibles Note are convertible into common stock at the lesser of $6.00 per share, or at price equal to 70% of the highest price per common share sold in the Company’s initial public offering. In connection with the sale of the Convertible Notes, the Company also issued five-year warrants to the placement agent for the purchase of 5,141 shares of common stock.

 

On August 31, 2017, the Company granted options for the purchase of 80,000 shares of the Company’s common stock to each of three members of the board of directors. The options vested immediately, have a ten-year contractual life, and are exercisable at $6.00 per share.

 

On August 31, 2017, the board of directors appointed the Business Development Manager to the position of co-chief executive officer of the Company. The appointment solely represents a change of position and title for the Business Development Manager; all other terms of the BDM Agreement remain unchanged.

 

F- 20
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

FINANCIAL STATEMENTS

 

For the Years Ended December 31, 2016 and 2015

 

F- 21
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

INDEX TO FINANCIAL STATEMENT

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Balance Sheets as of December 31, 2016 and 2015 F-3
   
Statements of Operations for the Years Ended December 31, 2016 and 2015 F-4
   
Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Years Ended December 31, 2016 and 2015 F-5
   
Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 F-6
   
Notes to Financial Statements F-8

 

F- 1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Hancock Jaffe Laboratories, Inc.,

 

We have audited the accompanying balance sheets of Hancock Jaffe Laboratories, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related statements of operations, changes in temporary equity and stockholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hancock Jaffe Laboratories, Inc., as of December 31, 2016 and 2015, 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.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has incurred recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Marcum LLP  
   
Marcum LLP  
New York, New York  
September 6, 2017  

 

F- 2
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

BALANCE SHEETS

 

    As of  
    December 31,  
    2016     2015  
Assets                
Current Assets:                
Cash   $ 56,514     $ 1,585,205  
Accounts receivable, net     23,500       -  
Receivables from sale of assets     166,250       -  
Inventory     90,908       -  
Advances to related party, net     10,000       -  
Prepaid expenses and other current assets     46,049       15,431  
Current assets of discontinued operations     -       183,973  
Total Current Assets     393,221       1,784,609  
Property and equipment, net     28,810       64,658  
Intangible assets, net     1,232,718       899,411  
Deferred offering costs     98,275       25,000  
Related party deposit     -       75,000  
Security deposits and other assets     29,843       26,113  
Total Assets   $ 1,782,867     $ 2,874,791  
                 
Liabilities, Temporary Equity and Stockholders'  Deficiency                
Current Liabilities:                
Accounts payable   $ 541,957     $ 618,279  
Accrued expenses     324,856       128,935  
Accrued expenses - related party     15,652       9,749  
Note payable     -       111,000  
Notes payable - related party     632,772       1,719,908  
Derivative liabilities     551,351       74,089  
Current liabilities of discontinued operations     -       1,993,251  
Total Liabilities     2,066,588       4,655,211  
Redeemable Convertible Series A Preferred Stock, par value $0.00001, 1,300,000 shares authorized, 1,005,700 and 436,000 shares issued and outstanding as of December 31, 2016 and 2015, respectively; liquidation preference of $10,399,859 and $4,364,350 at December 31, 2016 and 2015, respectively.     3,935,638       1,796,484  
Redeemable Convertible Series B Preferred Stock, par value $0.00001, 2,000,000 shares authorized, no shares issued or outstanding     -       -  
                 
Commitments and Contingencies     -       -  
                 
Stockholders' Deficiency:                
Preferred stock, par value $0.00001, 6,000,000 shares are authorized; 2,700,000 shares available for designation     -       -  
Common stock, par value $0.00001, 30,000,000 shares authorized, 12,246,963 and 12,000,000 shares issued and outstanding as of December 31, 2016 and 2015, respectively     122       120  
Additional paid-in capital     23,508,869       20,763,836  
Accumulated deficit     (27,728,350 )     (24,340,860 )
Total Stockholders' Deficiency     (4,219,359 )     (3,576,904 )
Total Liabilities, Temporary Equity and Stockholders' Deficiency   $ 1,782,867     $ 2,874,791  

 

See Notes to these Financial Statements

 

F- 3
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

STATEMENTS OF OPERATIONS

  

   

For The Years Ended

December 31,

 
    2016     2015  
             
Revenues:                
Product sales   $ 694,118     $ -  
Royalty income     91,794       -  
      785,912       -  
Cost of goods sold     810,294       -  
Gross Loss     (24,382 )     -  
                 
Selling, general and administrative expenses     4,634,801       1,289,851  
Loss from Operations     (4,659,183 )     (1,289,851 )
                 
Other Expense (Income):                
Allowance on advances to related party   487,900       -  
Interest expense, net     57,890       88,524  
Change in fair value of derivative liabilities     383,285       (177 )
Total Other Expense     929,075       88,347  
                 
Loss from Continuing Operations     (5,588,258 )     (1,378,198 )
Discontinued Operations:                
Loss from discontinued operations, net of tax     (298,286 )     (225,815 )
Gain on sale of discontinued operations, net of tax     2,499,054       -  
Income (Loss) from Discontinued Operations, net of tax     2,200,768       (225,815 )
                 
Net Loss     (3,387,490 )     (1,604,013 )
Deemed dividend to Series A preferred stockholders     (342,859 )     (4,352 )
Net Loss Attributable to Common Stockholders   $ (3,730,349 )   $ (1,608,365 )
                 
Net Loss Per Basic and Diluted Common Share:                
Loss from continuing operations   $ (0.49 )   $ (0.11 )
Income (loss) from discontinued operations     0.18       (0.02 )
Net Loss Per Basic and Diluted Common Share:   $ (0.31 )   $ (0.13 )
                 
Weighted Average Number of Common Shares Outstanding:                
Basic and Diluted     12,082,321       12,000,000  

 

See Notes to these Financial Statements

 

F- 4
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

 

    S eries A Redeemable                          
    Convertible           Additional           Total  
    Preferred Stock     Common Stock     Paid-in     Accumulated     Stockholders'  
    Shares     Amount     Shares     Amount     Capital     Deficit     Deficiency  
                                           
Balance at December 31, 2014     -     $ -       12,000,000     $ 120     $ 20,725,282     $ (22,736,847 )   $ (2,011,445 )
Series A redeemable convertible preferred stock issued     436,000       1,796,484       -       -       -       -       -  
Capital contribution     -       -       -       -       38,554       -       38,554  
Net loss     -       -       -       -       -       (1,604,013 )     (1,604,013 )
Balance at December 31, 2015     436,000       1,796,484       12,000,000       120       20,763,836       (24,340,860 )     (3,576,904 )
Series A redeemable convertible preferred stock issued     569,700       2,139,154       -       -       -       -       -  
Exchange of note payable and accrued interest into common stock     -       -       246,963       2       1,234,814       -       1,234,816  
Stock-based compensation                                     1,510,219       -       1,510,219  
Net loss     -       -       -       -       -       (3,387,490 )     (3,387,490 )
Balance at December 31, 2016     1,005,700     $ 3,935,638       12,246,963     $ 122     $ 23,508,869     $ (27,728,350 )   $ (4,219,359 )

 

See Notes to these Financial Statements

 

F- 5
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

STATEMENTS OF CASH FLOWS

 

    For The Years Ended  
    December 31,  
    2016     2015  
Cash Flows from Operating Activities:                
Net Loss   $ (3,387,490 )   $ (1,604,013 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Stock-based compensation     1,510,219       -  
Depreciation and amortization     151,174       125,423  
Gain on sale of discontinued operations     (2,499,054 )     -  
Allowance on advances to related party     487,900       -  
Change in fair market value of derivatives     383,285       (177 )
Changes in operating assets and liabilities:                
Accounts receivable, net     309,000       25,240  
Inventory     (213,178 )     171,904  
Prepaid expenses and other current assets     (30,618 )     30,016  
Security deposits and other assets     (3,730 )        
Accounts payable     (76,322 )     (83,539 )
Accrued expenses     237,356       (253,615 )
Deferred revenues     46,801       (430,702 )
Total Adjustments     302,833       (415,450 )
Net cash used in operating activities     (3,084,657 )     (2,019,463 )
                 
Cash flows from Investing Activities:                
Purchase of intangible assets     (370,200 )     -  
Installment payments from sale of assets     166,250       -  
Related party deposit     -       (75,000 )
Advances to related party     (497,900 )     -  
Purchase of property and equipment     (3,416 )     (2,620 )
Net cash used in investing activities     (705,266 )     (77,620 )
                 
Cash Flows from Financing Activities:                
Payment of deferred offering costs associated with initial public offering     (73,275 )     (25,000 )
Proceeds from issuance of redeemable Series A preferred stock and warrant     2,848,500       2,180,000  
Preferred stock offering costs     (615,369 )     (309,250 )
Proceeds from issuance of notes payable     188,000       1,310,512  
Advances from distributor     100,000       1,080,000  
Repayments of notes payable     (111,000 )     (364,385 )
Repayments of notes payable - related party     (75,624 )     (247,615 )
Net cash provided by financing activities     2,261,232       3,624,262  
                 
Net (Decrease)/Increase in Cash     (1,528,691 )     1,527,179  
Cash - Beginning of Year     1,585,205       58,026  
Cash - End of Year   $ 56,514     $ 1,585,205  

 

See Notes to these Financial Statements

 

F- 6
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

STATEMENTS OF CASH FLOWS, continued

 

    For The Years Ended  
    December 31,  
    2016     2015  
Supplemental Disclosures of Cash Flow Information:                
Cash Paid During the Years For:                
Interest   $ 37,667     $ 109,696  
                 
Supplemental disclosures of non-cash investing and financing activities                
Accrued expenses contributed to capital   $ -     $ 38,554  
Issuance of placement agent warrants in connection with preferred stock offering included in derivative liabilities   $ 93,977     $ 74,266  
Forgiveness of debt in connection with the sale of discontinued operations   $ 2,805,297     $ -  
Exchange of note payable and accrued interest into common stock   $ 1,234,816     $ -  

 

See Notes to these Financial Statements

 

F- 7
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

  

Note 1 – Business Organization, Nature of Operations and Basis of Operations

 

Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe” or the “Company”) develops and sells biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.

 

The Company develops and manufactures implantable cardiovascular bioprosthetic devices for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, and has manufactured and developed the following medical devices that have, or are in the process of, getting Class III U.S. Food and Drug Administration (“FDA”) approval:

 

  ProCol® Vascular Bioprosthesis;
     
  Bioprosthetic Heart Valve;
     
  Coronary Artery Bypass Graft,, “off the shelf” device, Coreograft™; and
     
  Bioprosthetic Venous Valve, the VenoValve™.

 

The Company also realizes sub-contract manufacturing and royalty revenue from sales of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has been approved by the FDA.

 

On September 1, 2015, the Company’s Board of Directors approved a 2.1144 for 1.00 forward stock split of the Company’s common stock, which became effective on July 22, 2016. Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the 2.1144 for 1.00 stock split. See Note 13 – Temporary Equity and Stockholders’ Deficiency for additional details regarding the Company’s authorized capital.

 

Note 2 – Going Concern and Management’s Liquidity Plan

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company incurred a net loss of $3,387,490, and $1,604,013 during the years ended December 31, 2016 and 2015, respectively, and has an accumulated deficit of $27,728,350 at December 31, 2016. Cash used in operating activities was $3,084,657 for the year ended December 31, 2016. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the financial statements.

 

F- 8
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 2 – Going Concern and Management’s Liquidity Plan, continued

 

During the year ended December 31, 2016, the Company received net cash proceeds of $2,233,131 from the sale of Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) and warrants (see Note 13 – Temporary Equity and Stockholders’ Deficiency). As of December 31, 2016, Hancock Jaffe had a cash balance of $56,514 and working capital deficiency of $1,673,367.

 

Subsequent to December 31, 2016, the Company received net cash proceeds of $655,250 from additional sales of Series B Preferred Stock and net cash proceeds of $1,835,500 from the sale of Senior Secured Convertible notes and warrants (See Note 15 – Subsequent Events- Series B Preferred Stock and Senior Secured Convertible Debt with Warrants).

 

The Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms.

 

Note 3 – Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance related to the Company’s deferred tax assets, and the valuation of warrants and derivative liabilities.

 

Cash

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2016 and 2015, the Company had no cash equivalents.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Upon completion, finished goods are shipped directly to a distributor. There is no right of return after the products are delivered and accepted. Inventory balances at December 31, 2016 consist primarily of finished goods. Inventory balances at December 31, 2015 were sold pursuant to an Asset Purchase Agreement (see Note 4 – Discontinued Operations), and are presented as current assets of discontinued operations on the accompanying balance sheet. There is no inventory reserve at December 31, 2016 or 2015.

 

F- 9
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Deferred Offering Costs

 

Deferred offering costs, which primarily consist of direct, incremental professional fees relating to debt and equity offerings are capitalized within non-current assets. The deferred offering costs will be offset against the proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. For the years ended December 31, 2016 and 2015, the Company has capitalized deferred offering costs, consisting primarily of legal costs, related to a potential initial public offering totaling $98,275 and $25,000, respectively, in the accompanying balance sheets.

 

Investments

 

Equity investments over which the Company exercises significant influence, but does not control, are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.

 

The Company holds a 28.5% ownership investment, consisting of founders’ shares acquired on June 10, 2010 at nominal cost, in Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA”) of which the Company’s Former President and Vice President of Operations were/are officers. To date, HJLA has recorded cumulative losses. Since the Company’s investment is recorded at $0, the Company has not recorded its proportionate share of HJLA’s losses. If HJLA reports net income in future years, the Company will apply the equity only after its share of HJLA’s net income equals its share of net losses previously incurred.

 

Property and Equipment, Net

 

Property and equipment are stated at cost, net of accumulated depreciation using the straight-line method at rates sufficient to charge the cost of depreciable assets to operations over their estimated useful lives, which range from 5 to 7 years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred, and expenditures, which extend the economic life are capitalized. When assets are retired, or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized.

 

F- 10
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Intangible Assets, Net

 

The Company’s recorded intangible assets consist of a purchased patent related to heart valve bioprosthesis technology and an exclusive worldwide right to provide development and manufacturing services to HJLA. The patent is stated at cost, and is amortized on a straight-line basis over its estimated useful life of approximately 14 years. The right is stated at cost, and is amortized on a straight-line basis over its estimated useful life of approximately 10 years (see Note 7 – Intangible Assets).

 

Impairment of Long-lived Assets

 

The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The Company has not identified any impairment losses.

 

Fair Value of Financial Instruments

 

The Company measures the fair value of financial assets and liabilities based on the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

FASB ASC 820 defines fair value 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. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

  Level 1 Quoted prices available in active markets for identical assets or liabilities trading in active markets.
     
  Level 2 Observable inputs other than quoted prices included in Level 1, such as quotable prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
     
  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.      This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

  

F- 11
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Fair Value of Financial Instruments, continued

 

Financial instruments, including accounts receivable, accounts payable and short-term advances are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company’s other financial instruments include notes payable, the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations with similar terms and maturities, as well as derivative liabilities – preferred stock warrants, that are accounted for at fair value on a recurring basis. The fair value of derivative liabilities – preferred stock warrants as of December 31, 2016 and 2015, by level within the fair value hierarchy appears below:

  

Description:   Quoted Prices in Active Markets
for Identical
Assets or
Liabilities
(Level 1)
    Significant Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative liabilities - preferred stock warrants                        
December 31, 2016   $ -     $ -     $ 551,351  
December 31, 2015   $ -     $ -     $ 74,089  

 

The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis:

 

    Derivative  
    Liabilities- Preferred  
    Stock Warrants  
Balance - December 31, 2015   $ 74,089  
Issuance of derivative liabilities - preferred stock warrants     93,977  
Change in fair value of derivative liabilities - preferred stock warrants     383,285  
Balance - December 31, 2016   $ 551,351  

 

F- 12
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Preferred Stock

 

The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A Preferred Stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity.

 

Derivative Liabilities

 

During the years ended December 31, 2016 and 2015, the Company issued warrants for a fixed number of Series A Preferred Stock at an adjustable price. The Company determined that these warrants are derivative instruments pursuant to FASB ASC 815 “Derivatives and Hedging.”

 

The accounting treatment of derivative financial instruments requires that the Company record the warrants as a liability at fair value and mark-to-market the instruments to their fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company’s common stock is not listed on any exchange and, accordingly, the Company hired an independent valuation specialist to assist the Company in arriving at an estimated fair value of the derivative liabilities as of the date of issuance and as of December 31, 2016. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale of product or rendering of services during the year ended December 31, 2015 was recorded as deferred revenue.

 

F- 13
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Net Loss per Share

 

The Company computes basic and diluted loss per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share are the same since the inclusion of common shares issuable pursuant to the exercise of warrants, options and the conversion of Series A Preferred Stock in the calculation of diluted net loss per common shares would have been anti-dilutive.

 

The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:

 

    For the Year Ended  
    December 31,  
    2016     2015  
Loss from continuing operations   $ (5,588,258 )   $ (1,378,198 )
Less: Deemed dividend to Series A preferred stockholders     (342,859 )     (4,352 )
Net loss from continuing operations attributable to common stockholders   $ (5,857,855 )   $ (1,382,550 )

 

The following table summarizes the number of potentially dilutive common share equivalents excluded from the calculation of diluted net loss per common share for the years ended December 31, 2016 and 2015.

 

    December 31,  
    2016     2015  
Shares of common stock issuable upon conversion of preferred stock     1,005,700       436,000  
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith     100,570       43,600  
Shares of common stock issuable upon exercise of warrants     833,333       -  
Shares of common stock issuable upon exercise of options     2,592,000       -  
Potentially dilutive common share equivalents excluded from diluted net loss per share     4,531,603       479,600  

  

Major Customers

 

During the year ended December 31, 2016, 100% of the Company’s revenues from continuing operations were from sales of product to LeMaitre Vascular, Inc. (“LeMaitre”) with whom the Company entered a Post-Acquisition Supply Agreement effective March 18, 2016. During the year ended December 31, 2015, 100% of the Company’s revenues were from sale of its products to the Company’s sole distributor (the “Distributor’), with whom the Company entered an Exclusive Supply and Distribution Agreement effective March 26, 2014 (See Note 4 – Discontinued Operations.).

 

F- 14
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Major Supplier

 

During the year ended December 31, 2016 and 2015, 100% of the raw material used for the manufacture of vascular bioprostheses was purchased from a single vendor. Purchases made during the year ended December 31, 2015 have been included in discontinued operations (see Note 4 – Discontinued Operations.)

 

Credit Risk

 

The Company maintains its cash balances in financial institutions located in the United States. At times, the Company’s cash balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740 - Income Taxes. Under FASB ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

FASB ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s financial condition, results of operations or cash flows.

 

F- 15
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, ”Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard to determine the impact, if any, on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, ”Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its financial statements.

 

In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 simplifies the accounting for equity method investments by eliminating the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016 with early adoption permitted. The adoption of ASU 2016-07, is not expected to have a material impact on the Company’s financial statements.

 

F- 16
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Recent Accounting Pronouncements , continued

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing”, in May 9, 2016, the FASB issued ASU No. 2016-12, ”Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”) and in December 2016, the FASB issued ASU No. 2016-20, “Revenue From Customers – Technical Corrections and Improvements (Topic 606)”. These updates provide clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective.

 

These new standards provide a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. This guidance will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The Company will evaluate the effects, if any, that adoption of this guidance will have on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, ”Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate that the adoption of ASU 2016-09 will have material impact on its financial statements.

 

In August 2016, the FASB issued ASU 2016-15, ”Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its cash flows and related disclosures.

 

F- 17
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 3 – Significant Accounting Policies, continued

 

Recent Accounting Pronouncements , continued

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features. Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the ASU, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share (“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company has not yet selected a transition method and is currently evaluating the impact of the adoption of these ASUs on its financial position and results of operations.

 

Reclassifications

 

Certain prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

Subsequent Events

 

The Company evaluated events that have occurred after the balance sheet date through the date the financial statements were issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 15 - Subsequent Events.

 

F- 18
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4 – Discontinued Operations

 

Asset Sale

 

On March 18, 2016, Hancock Jaffe, LeMaitre Vascular, Inc. (“LeMaitre”) and CryoLife, Inc. (“CryoLife”) entered into a tripartite agreement whereby: (i) pursuant to the Exclusive Supply and Distribution Agreement, as amended, (the “Current Supply Agreement”), CryoLife transferred to LeMaitre its exclusive, freely assignable right and option to acquire certain assets of Hancock Jaffe in exchange for $2,035,000; (ii) CryoLife released Hancock Jaffe from all remaining indebtedness and released its security interest in the acquired assets pursuant to the security agreement dated March 26, 2014 between Hancock Jaffe and CryoLife (the “Security Agreement”); and (iii) the Current Supply Agreement and the Security Agreement were terminated without recourse.

 

On March 18, 2016, Hancock Jaffe entered into an asset purchase agreement with LeMaitre (the “Asset Purchase Agreement”) whereby Hancock Jaffe sold all of its assets (including intellectual property) related to the manufacture, sale and distribution of vascular bioprostheses to LeMaitre for consideration of $665,000 in cash and the forgiveness of certain liabilities, totaling, in the aggregate, $2,140,297 (the “Asset Sale”). Of the total cash proceeds, $332,500 was paid on March 18, 2016, $166,250 was paid on September 19, 2016 and $166,250 was paid on March 23, 2017. In addition, Hancock Jaffe is entitled to a royalty equal to 10% of LeMaitre’s net sales, as defined, of vascular bioprostheses during the three-year period ending March 18, 2019. The royalty is to be paid quarterly in arrears and cannot exceed $2 million in any 12-month period or $5 million in the aggregate during the three-year period. During the year ended December 31, 2016, the Company recorded a gain of $2,499,054 (net of tax of $0) related to the Asset Sale, as follows:

 

Cash proceeds from sale (consisting of cash received and receivables)   $ 665,000  
Liabilities forgiven:        
Short term advances     1,180,000  
Accrued interest     21,997  
Accrued penalty payable     938,300  
Total consideration from sale     2,805,297  
         
Less - net book value of assets sold to buyer:        
Inventory     (306,243 )
Gain on sale of discontinued operations   $ 2,499,054  

 

F- 19
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 4 – Discontinued Operations, continued

 

Results of Discontinued Operations

 

Summarized operating results of discontinued operations are presented in the following table:

 

    For The Years Ended  
    December 31,  
    2016     2015  
Revenues   $ 385,219     $ 1,004,825  
Gross profit (loss)   $ 133,734     $ (225,815 )
General and administrative expenses   $ (432,020 )   $ -  
Gain on sale of discontinued operations, net of tax   $ 2,499,054     $ -  
Loss from discontinued operations   $ 2,200,768     $ (225,815 )

 

Summarized assets and liabilities of discontinued operations are presented in the following table:

 

    December 31,  
    2016     2015  
Inventory   $ -     $ 183,973  
Total current assets of discontinued operations   $ -     $ 183,973  
                 
Short term advances   $ -     $ 1,080,000  
Accrued expenses     -       21,752  
Deferred revenues     -       891,499  
Total current liabilities of discontinued operations   $ -     $ 1,993,251  

  

During the year ended December 31, 2016 and 2015, the Company received an aggregate of $100,000 and $1,080,000, respectively, in interest-bearing advances from the Distributor in connection with the Exclusive Supply and Distribution Agreement effective March 26, 2014. The advances bore interest at the prime rate, as quoted by the Wall Street Journal. During the year ended December 31,2015, interest expense of $21,752 was recorded and is included in current liabilities of discontinued operations as of December 31, 2015 on the accompanying balance sheet. During the year ended December 31, 2016 interest expense of $245 was incurred and included as part of the asset sale. On March 18, 2016, the Company was released from all liabilities owed to the distributor in connection with the Asset Sale.

 

The Company did not recognize any depreciation or amortization expense related to discontinued operations during the year ended December 31, 2016 or 2015. There were no significant capital expenditures or non-cash operating or investing activities of discontinued operations during the years presented.

 

F- 20
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 5 – Inventory

 

As of December 31, 2016, inventory consists of the following vascular bioprostheses:

 

Work-in process   $ 12,884  
Finished goods     78,024  
Total inventory   $ 90,908  

 

Inventory at December 31, 2015 is included in current assets of discontinued operations as indicated in Note 4 - Discontinued Operations.

 

Note 6 – Property and Equipment

 

As of December 31, 2016 and 2015, property and equipment consists of the following:

  

    December 31,  
    2016     2015  
Lab equipment   $ 146,817     $ 172,773  
Furniture and fixtures     84,744       84,744  
Computer software and equipment     12,144       8,728  
Leasehold improvements     158,092       158,092  
      401,797       424,337  
Less: accumulated depreciation     (372,987 )     (359,679 )
Property and equipment, net   $ 28,810     $ 64,658  

 

Depreciation and amortization expense amounted to $39,281 and $47,776 for the years ended December 31, 2016 and 2015, respectively. Depreciation and amortization expense is reflected in general and administrative expenses in the accompanying statements of operations.

 

F- 21
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 7 – Intangible Assets

 

On May 10, 2013, the Company purchased a patent related to heart valve bioprosthesis technology. The patent expires on July 9, 2027.

 

During 2015, the Company paid a deposit of $75,000 to HJLA, in which the Company has a 28.5% ownership interest (see Note 3 – Significant Accounting Policies – Investments), in anticipation of entering into an agreement to acquire the exclusive rights to provide development and manufacturing services to further the development of technology. HJLA is a development stage company with two employees that holds a patent for dermal filler, and to date its efforts have been focused on raising funds to be used for approval and commercialization of the product, for which we own the exclusive rights to develop and manufacture. On April 1, 2016, the Company paid an additional $370,200 to HJLA upon the execution of this agreement (see Note 12 – Commitments and Contingencies- Development and Manufacturing Agreement). The right to provide development and manufacturing services to HJLA expires on December 31, 2025. As of December 31, 2016 and 2015, the Company’s intangible assets consisted of the following:

 

    December 31,  
    2016     2015  
Patent   $ 1,100,000     $ 1,100,000  
Right to develop and manufacture     445,200       -  
      1,545,200       1,100,000  
Less: accumulated amortization     (312,482 )     (200,589 )
Total   $ 1,232,718     $ 899,411  

 

 

Amortization expense charged to operations for the years ended December 31, 2016 and 2015 was $111,893 and $77,647, respectively, and is reflected in general and administrative expense in the accompanying statements of operations.

 

The estimated future amortization of intangible assets is as follows:

  

For the Years Ended
December 31,
    Rights to Develop
and Manufacture
    Patents     Total  
  2017     $ 45,662     $ 77,647     $ 123,309  
  2018       45,662       77,647       123,309  
  2019       45,662       77,647       123,309  
  2020       45,662       77,647       123,309  
  2021       45,662       77,647       123,309  
  Thereafter       182,646       433,528       616,174  
        $ 410,956     $ 821,763     $ 1,232,719  

 

The remaining amortization period of the rights to develop and manufacture and the patents are 9 years and 10.5 years, respectively, as of December 31, 2016 and both have no residual value.

 

F- 22
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

  

Note 8 – Advances to Related Party, net

 

From April 4, through December 31, 2016, the Company paid $497,900 (net of repayments of $119,500) to HJLA, which was recorded as an advance to related party. As of December 31, 2016, the Company reviewed the recoverability of the advances and recorded an allowance of $487,900 for the year ended December 31, 2016 because collectability was not reasonably assured.

 

In connection with the Company’s ownership interest in and advances to HJLA, the Company determined that it had a variable interest in HJLA. However, the Company determined that it was not the primary beneficiary of HJLA because the Company does not have the power to direct the activities of HJLA, and does not have an obligation to absorb any losses, or the right to receive benefits from HJLA.

 

Note 9 – Accrued Expenses and Accrued Expenses – Related Party

 

As of December 31, 2016 and 2015, accrued expenses consist of the following:

  

    December 31,  
    2016     2015  
Accrued compensation costs   $ 294,110     $ 69,196  
Accrued interest     -       786  
Accrued professional fees     15,864       30,425  
Deferred rent     11,951       21,911  
Other accrued expenses     2,931       6,617  
Accrued Expenses   $ 324,856     $ 128,935  

 

Accrued expenses, related parties consisted of accrued interest on notes payable to a major common stockholder and to the Related Party totaling, in the aggregate, $15,652 and $9,749 at December 31, 2016 and 2015, respectively.

 

Note 10 - Note Payable

 

During October 2015, the Company borrowed $111,000 which was formalized under a promissory note dated March 15, 2016. The note bears interest at 3% per annum and matures on April 30, 2016. The note was repaid in full during 2016, prior to the maturity date.

 

See Note 14 – Related Party Transactions, below, regarding notes payable to related parties.

 

F- 23
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 11 – Income Taxes

 

The following summarizes the Company’s income tax provision (benefit):

  

    For the Years Ended
December 31,
 
    2016     2015  
Federal:                
Current   $ -     $ -  
Deferred     (898,378 )     (532,249 )
                 
State and local:                
Current                
Deferred     (158,537 )     (93,926 )
      (1,056,915 )     (626,175 )
Change in valuation allowance     1,056,915       626,175  
Income tax provision (benefit)   $ -     $ -  

  

The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective tax rate for the year’s ended December 31, 2016 and 2015 is as follows:

 

    For the Years Ended
December 31,
 
    2016     2015  
Tax benefit at federal statutory rate     (34.0 )%     (34.0 )%
State taxes, net of federal benefit     (6.0 )%     (6.0 )%
Permanent differences     4.9 %     1.1 %
Research and development tax credit     0.0 %     0.0 %
Prior year adjustments     0.0 %     0.0 %
Change in valuation allowance     35.1 %     38.9 %
Effective income tax rate     0.0 %     0.0 %

  

F- 24
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 11 – Income Taxes, continued

 

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:

  

    December 31,  
    2016     2015  
Deferred tax assets:                
Net operating loss carryforwards   $ 2,299,235     $ 1,985,651  
Research and development credit carryforwards     185,680       185,680  
Intangible assets     138,614       145,675  
Property and equipment     47,804       37,158  
Accrued salaries     91,710       26,023  
Stock-based compensation     474,118       -  
Deferred rent     4,780       -  
Allowance on investment     195,160       -  
Total gross deferred tax assets     3,437,101       2,380,187  
                 
Less: valuation allowance     (3,437,101 )     (2,380,187 )
Total   $ -     $ -  

  

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes to offset its post-change income taxes may be limited. As a result of the Section 382 limitation, deferred tax assets related to approximately $5.0 million of the Company’s NOLs were written off in connection with a change in ownership of the Company during 2006.

 

At December 31, 2016 and 2015, the Company had post-ownership change net operating loss carryforwards for federal and state income tax purposes of approximately $5.7 million and $5.0 million, respectively. The federal and state net operating loss (“NOL”) carryovers may be carried forward for twenty years and begin to expire in 2026. The Company also has federal research and development tax credit carryforwards of approximately $0.2 million which begin to expire in 2027.

 

The Company files income tax returns in the U.S. federal jurisdiction as well as California and local jurisdictions and is subject to examination by those taxing authorities. The Company’s federal, state and local income taxes for the years beginning in 2013 remain subject to examination.

 

F- 25
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 11 – Income Taxes, continued

 

Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2016 and 2015. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.

 

Note 12 – Commitments and Contingencies

 

Legal Matters

 

From time to time, the Company may be involved in litigation relating to claims arising in the ordinary course of business. There are currently no material claims or actions pending or threatened against the Company.

 

Property Lease Obligation

 

On or about July 1, 2010, the Company’s seven-year lease for 14,507 square foot industrial building located in Orange County, California became effective. The lease required a $26,113 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $21,761 and payments increase by 5% every 24 months. Payments under the lease also include real estate taxes not to exceed $7,254 per month. The lease expired on June 30, 2017. As of December 31, 2016, remaining future minimum lease payments under the lease are $151,143 to be paid through June 30, 2017, the date that the lease expires. Subsequent to June 30, 2017, the Company has entered into a month to month agreement with the landlord.

 

On May 1, 2016, the Company entered into a one-year lease of an apartment located in Irvine, California, for the use by a member of the board of directors. The lease required a $3,720 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $1,860.

 

The Company recognizes rent expense on a straight-line basis over the term of the lease. Differences between the straight-line net expenses and rent payments are included in accrued expenses on the accompanying balance sheets. Rent expense for the years ended December 31, 2016 and 2015 was $373,986 and $366,801, respectively.

 

Development and Manufacturing Agreement

 

On April 1, 2016, the Company entered into a development and manufacturing agreement with HJLA, pursuant to which: (1) the Company paid $445,200 for the exclusive right to provide development and manufacturing services to HJLA for a period of ten years (see Note 7 – Intangible Assets), and (2) the Company has the right to purchase up to 484,358 shares of common stock of HJLA at $8.66 per share for an aggregate purchase price of $4,194,540 through April 1, 2021. Through the date these financial statements were available to be issued, no shares were purchased pursuant to this agreement.

 

F- 26
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 12 – Commitments and Contingencies, continued

 

Death of President and Appointment of Interim President

 

On June 19, 2016, the Company’s President and Chief Executive Officer (the “Former President”) passed away. On July 22, 2016, the Company’s Chief Financial Officer (the “CFO”) was appointed the Company’s Secretary and Interim President.

 

Board of Directors

 

The death of the Former President on June 19, 2016 and the resignation of a member of the board of directors on July 22, 2016 resulted in two vacancies on the board of directors (the “Board”). On July 22, 2016, the CMO was appointed to the Board and the number of authorized members of the Board was decreased from three to two.

 

Amendment to Certificate of Incorporation

 

On July 22, 2016, the Company adopted an amendment to the existing Certificate of Incorporation, in order to effectuate the aforementioned 2.1144 for 1.00 forward stock split which had been approved by the Board of Directors on September 1, 2015 (See Note 1 – Business Organization, Nature of Operations and Basis of Operations, above). All share and per share information has been retroactively adjusted to reflect the forward stock split for all periods presented.

 

Employment Agreements

 

On July 1, 2016, the Company entered into an employment agreement with the Company’s Business Development Manager (the “BDM Agreement”). The BDM Agreement ends on December 31, 2016, after which it is automatically extended for additional one-year renewal terms, unless either party gives written notice to the other to terminate the BDM Agreement at least thirty days prior to the end of each calendar year. The BDM Agreement provides for a base salary of $24,000 per year, subject to annual review and adjustments by the board of directors, and automatically increases to $180,000 per year, starting from the date of an initial public offering. Further, the BDM Agreement provides for the payment of a bonus of $250,000 upon the completion of a strategic transaction, of which $175,000 was paid and $2,500 was accrued through December 31, 2016, in connection with the issuances of Series A Preferred stock, to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The BDM Agreement may be terminated by the Business Development Manager with 30 days written notice, or immediately upon written notice by the Company for cause. On December 2, 2016, the Company entered into an amendment of the BDM Agreement whereby the BDM (See Note 12 – Commitments and Contingencies – Employment Agreements) became the Company’s Chief Business Development Officer (the ‘CBDO Agreement”). The CBDO Agreement ends on December 31, 2018, after which is it automatically extended for additional three-year renewal terms, unless either party gives written notice to the other to terminate the amended BDM Agreement at least thirty days prior to the end of each calendar year. The CBDO Agreement provides for a base salary of $300,000 per year. Further, the CBDO Agreement amended the performance requirements in order to receive the remaining payment of the bonus which is payable upon the earlier of (a) a commercial sale of one of the Company’s devices, or (b) upon the entry into a definitive agreement for the distribution or license of one of the Company’s devices.

 

F- 27
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 12 – Commitments and Contingencies, continued

 

Employment Agreements , continued

 

On June 12, 2017, the Company entered into an amendment of the BDM Agreement whereby the Company agreed to provide relocation services and reimburse relocation expenses for the BDM, which were paid during August 2017. Furthermore pursuant to the amended BDM agreement, the Company shall pay the BDM for costs incurred by the BDM as a result of relocation such as a furnished primary residence in the designated area outlined in the agreement and a vehicle for the sole use of the BDM. The total amount of these outgoing payments is not to exceed $5,000 dollars per month. Lastly, the amended agreement states that upon employee relocation, the BDM shall receive a lump sum payment in an amount that is the total of the gross salary that would have been due to the BDM under the BDM Agreement.

 

The Company hired its CFO on March 21, 2016. On July 22, 2016, the Company entered into an employment agreement with the CFO which provides for annual base salary of $225,000, as well as standard employee insurance and other benefits (the “CFO Agreement”). Pursuant to the CFO Agreement the CFO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CFO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company.

 

In addition, in connection with the CFO Agreement, the CFO received a ten-year option for the purchase of 293,000 shares of the Company’s common stock at an exercise price of $5.00 per share with a grant date fair value of $155,290 (see Note 13 –Temporary Equity and Stockholder’s Deficiency). The CFO Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CFO Agreement. The CFO Agreement may be terminated by the CFO with 30 days written notice, or immediately upon written notice by the Company for cause.

 

On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President of Operations, Regulatory Affairs and Quality Assurance (the “SVP”) which provides for an annual base salary of $295,000, as well as standard employee insurance and other benefits (the “SVP Agreement”). Pursuant to this agreement the SVP is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The SVP Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the SVP Agreement, the SVP received a ten-year option for the purchase of 1,637,000 shares of the Company’s common stock at an exercise price of $5.00 per share with a grant date fair value of $867,610 (see Note 13 – Temporary Equity and Stockholder’s Deficiency).

 

F- 28
 

   

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 12 – Commitments and Contingencies, continued

 

Employment Agreements , continued

 

The SVP Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the SVP Agreement. The SVP Agreement may be terminated by the SVP with 30 days written notice, or immediately upon written notice by the Company for cause.

 

The Company hired its Senior Vice President and Chief Medical Officer (the “CMO”) on May 1, 2016. On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President and Chief Medical Officer (the “CMO”) which provides for an annual base salary of $300,000, as well as standard employee insurance and other benefits (the “CMO Agreement”). Pursuant to this agreement the CMO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CMO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CMO Agreement, the CMO received a ten-year option for the purchase of 369,000 shares of the Company’s common stock with a grant date fair value of $195,570 (see Note 13 –Temporary Equity and Stockholder’s Deficiency). The CMO Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CMO Agreement. The CMO Agreement may be terminated by the CMO with 30 days written notice, or immediately upon written notice by the Company for cause.

 

On August 30, 2016, the Company entered into an employment agreement with the Company’s Chief Executive Officer (the “CEO”) which provides for an annual base salary of $360,000, as well as standard employee insurance and other benefits (the “CEO Agreement”). Pursuant to the CEO Agreement, the CEO is eligible for annual salary increases at the discretion of the board of directors. In addition, in connection with the CEO Agreement, the CEO received a ten-year option for the purchase of 293,000 shares of the Company’s common stock at an exercise price of $5.00 per share with a grant date fair value of $155,290 (see Note 13 –Temporary Equity and Stockholder’s Deficiency). The CEO Agreement may be terminated by the CEO or the Company with 30 days written notice.

 

Litigations, Claims and Assessments

 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. In the opinion of management, such matters are currently not expected to have a material impact on the Company’s financial statements.

 

The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

  

F- 29
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency

 

Preferred Stock

 

Pursuant to the Amended and Restated Articles of Incorporation filed on December 2, 2015, the Company is authorized to issue shares of preferred stock with such designations, rights and preferences as may be determined from time to time by its Board. Accordingly, the Board is authorized, without stockholder approval, to issue preferred stock with dividend, liquidation conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. The Company is authorized to issue a total of 6,000,000 shares of preferred stock of which 1,300,000 and 2,000,000 preferred shares have been designated as the Company’s Series A Preferred Stock and Series B Preferred Stock, respectively, and 2,700,000 preferred shares remain undesignated. The Company’s preferred shares feature certain redemption rights that are considered by the Company to be outside of the Company’s control. Accordingly, the Series A Preferred Stock is presented as temporary equity on the Company’s balance sheets. See Note 15 – Subsequent Events – Preferred Stock.

 

Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”)

 

The holders of the Company’s Series A Preferred Stock have voting rights equal to common stockholders on an as-converted basis, and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series A Preferred Stock ranks senior to the Series B Preferred Stock and common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series A Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined. As of December 31, 2016, the holders of Series A Preferred Stock are entitled to receive a liquidation preference payment of $10.00 per share, plus accrued and unpaid dividends totaling, in the aggregate, $10,399,859. The liquidation preference of The Series A Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

 

Each share of Series A Preferred Stock is convertible at the option of the holder at any time into one share of the Company’s common stock, subject to certain typical anti-dilution provisions, such as stock dividend or stock splits. Each share of Series A Preferred Stock is mandatorily converted into the Company’s common stock (a) at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock; (b) the consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, or (c) FDA approval for either the Company’s venous valve, pediatric heart valve or coronary artery bypass graft product candidates. Because the conversion option associated with the Series A Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability.

 

F- 30
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency

 

Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”)

 

At any time after the third anniversary of the original issuance of the Series A Preferred Stock, the Series A Preferred Stock may be redeemed as a result of the written request of the holder of the Series A Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series A Preferred Stock is classified as temporary equity.

 

As of the issuance date, the carrying amount of the Series A Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

During December 2015, the Company issued 436,000 shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the private placement were $2,180,000 and the Company incurred cash offering costs of $309,250 (including $272,500 of placement agent fees) and non-cash offering costs valued at $74,266 (see Placement Agent Warrants, below) resulting in an original carrying value of the Series A Preferred Stock of $1,796,484.

 

During the year ended December 31, 2016, the Company issued 569,700 additional shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the additional shares were $2,848,500 and the Company incurred cash offering costs of $615,369 (including $366,211 of placement agent fees) and non-cash offering costs valued at $93,977 (see Placement Agent Warrants, below) resulting in an original carrying value of the additional Series A Preferred Stock of $2,139,156.

 

Cumulative dividends in arrears on the Series A preferred stock were $342,859 at December 31, 2016.

 

Common Stock

 

The Company is authorized to issue up to 30,000,000 shares of common stock with a par value of $0.00001 per share. The holders of common stock are entitled to dividends after the preferred stock holders, when funds are legally available and when declared by the Board of Directors.

 

Exchange of Debt for Equity

 

On August 31, 2016 principal and interest of $1,200,000 and $34,816, respectively, owed to a majority (78%) common stock holder in connection with a note payable were exchanged for 246,963 shares of the Company’s common stock at a price of $5.00 per share.

 

F- 31
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency, continued

 

Placement Agent Warrants

 

During the year ended December 31, 2016 and 2015, the Series A Preferred Stock placement agent received a cash fee in the aggregate of $366,211 and $272,500, respectively, and five-year warrants to purchase an additional 56,970 and 43,600, respectively, shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing. The warrants had a grant date fair value of $93,977 and $74,266, respectively, which was charged against the proceeds received from the sale of the shares Due to the variable exercise price, the warrants were deemed to be a derivative liability.

 

The value of the warrant liability was determined using a Monte Carlo simulation model which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard error. This valuation is revised on a quarterly basis until the warrants are reclassified, exercised or they expire, with the changes in fair value recorded in other income (expense) on the statement of operations. The value of the warrant liability as of December 31, 2016 and 2015 was $551,351 and $74,089, respectively. During the year ended December 31, 2016 and 2015, the Company recorded a (loss) gain of ($383,285) and $177, respectively, on the change in the value of the derivative liabilities.

 

The significant assumptions used in the valuation model were as follows:

 

    For The Year Ended
December 31, 2016
 
Risk free interest rate     1.01% - 1.93 %
Expected term (years)     3.93 - 5.00  
Expected volatility     32.4% - 33.7 %
Expected dividends     0.00 %

  

Employee Warrant

 

On May 5, 2016, the Company granted a warrant for the purchase of 833,333 shares of common stock to its Business Development Manager. The warrant is immediately vested and is exercisable for 7 years at an exercise price of $6.00 per share (subject to adjustment in the event of certain stock dividends and distributions, stock splits, reclassifications or similar events affecting the Company’s common stock). The warrants had an aggregate fair value of $1,143,883 on the date of grant, which was charged to stock-based compensation expense in the statement of operations. Further, upon certain subsequent issuances of common stock or common stock equivalents at a price per share less than the exercise price in effect at the time of issuance, the exercise price of the warrant is to be reduced to a price equal to the consideration per share received by the Company with respect to those issuances. In accordance with FASB ASC 815, equity instruments issued to employees for compensation are not subject to derivative accounting.

 

F- 32
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency, continued

 

Employee Warrant, continued

 

The grant date value of the warrant was determined using a Monte Carlo simulation model which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard error.

 

The significant assumptions used in the valuation model were as follows:

 

    For The Year Ended
December 31, 2016
 
Risk free interest rate     1.20 %
Expected term (years)     7.0  
Expected volatility     32.4 %
Expected dividends     0.00 %

 

Omnibus Incentive Plan

 

On November 21, 2016, the board of directors approved the Company’s 2016 Omnibus Incentive Plan (the “2016 Plan”), which enables the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share based awards and cash awards to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company. Stock options granted under the 2016 Plan may be non-qualified stock options or incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an affiliate shall in all cases be non-qualified stock options. The option price must be at least 100% of the fair market value on the date of grant and if issued to a 10% or greater shareholder must be 110% of the fair market value on the date of the grant.

 

The 2016 Plan is to be administered by the Board, which shall have discretion over the awards and grants thereunder. The aggregate maximum number of shares of common stock for which stock options or awards may be granted pursuant to the 2016 Plan is 3,300,000. As of December 31, 2016, 708,000 shares of common stock remain eligible to be issued under the 2016 plan. No awards may be issued after November 21, 2026.

 

F- 33
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency, continued

 

Stock Options

 

In applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:

  

    For The Year Ended
December 31, 2016
 
Risk free interest rate     1.14 %
Expected term (years)     5.21  
Expected volatility     32.4 %
Expected dividends     0.00 %

 

The weighted average estimated fair value of the stock options granted during the year ended December 31, 2016 was approximately $0.53 per share.

 

On October 1, 2016, the Company issued non-qualified stock options to purchase an aggregate of 2,592,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $5.00 per share, pursuant to the CFO Agreement, SVP agreement, CMO agreement, and the CEO agreement, of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The options expire ten years from the date of issuance. The options have an aggregate grant date fair value of $ 1,373,760 and will be amortized ratably over the vesting period of the options.

 

A summary of the option activity during the year ended December 31, 2016 is presented below:

 

          Weighted     Weighted        
          Average     Average     Aggregate  
    Number of     Exercise     Remaining     Intrinsic  
    Options     Price     Life in Years     Value  
Outstanding, December 31, 2015     -     $ -                  
Granted     2,592,000       5.00                  
Forfeited     -       -                  
Outstanding, December 31, 2016     2,592,000       5.00       9.7     $ -  
                                 
Exercisable, December 31, 2016           $ 5.00       9.7     $ -  

 

The Company recognized stock-based compensation expense related to stock options for the year ended December 31, 2016 of $366,336. As of December 31, 2016, there was $1,007,424 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of 1.75.

 

F- 34
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 13 – Temporary Equity and Stockholders’ Deficiency, continued

 

Contributions to Capital

 

During the year ended December 31, 2015, the Company received a contribution to capital from certain employees of the Company, totaling, in the aggregate, $38,554, resulting from their forgiveness of certain compensation payable amounts.

 

Note 14 – Related Party Transactions

 

Consulting Expense

 

During 2015, the Company engaged a consulting company (the “Consultant”), of which the Company’s Former President was the sole owner, to provide consulting services related to device design, clinical trials and patents, at a cost or $13,500 per month, pursuant to a Consulting Agreement dated March 1, 2006 as amended on January 1, 2013. The Company recognized consulting expense of $152,700 and $162,000 related to the Consulting Agreement during the years ended December 31, 2016 and 2015, respectively.

 

Repayment of Advances from a Related Party

 

Prior to January 1, 2015, HJLA paid $266,000 of certain accounts payable owed to the Consultant on behalf of the Company. The Company repaid HJLA in full during the year ended December 31, 2015.

 

Notes Payable

 

During 2013, the Company issued a note payable (“the Asset Purchase Note”) with a principal balance amount of $1,070,000 in connection with the purchase of certain assets from a related entity, of which the Company’s Former President and Vice President of Operations are officers, and of which a member of the Company’s Board of Directors is a shareholder. The Asset Purchase Note bore interest at 6% per annum, and matured on May 10, 2014. During the years ended December 31, 2016 and 2015, the Company repaid an aggregate principal balance of $75,624 and $247,615, respectively, related to the Asset Purchase Note.

 

As of December 31, 2016 and 2015, the principal balance due on the Asset Purchase Note was $444,772 and $520,396, respectively, and the related accrued interest was $15,419 and $954, respectively, which is included in accrued expenses-related party on the accompanying balance sheets (Note 9 – Accrued Expenses and Accrued Expenses – Related Party). The balance owed on the Asset Purchase Note is currently past due.

 

F- 35
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 14 – Related Party Transactions, continued

 

Notes Payable, continued

 

On June 30, 2015, the Company entered into a loan agreement with the majority (78%) common stock shareholder, (“the 2015 Note”). The 2015 note has a maximum borrowing capacity of $2,200,000 and bears interest at 3% per annum. On April 1,2016, the 2015 Note was amended such that the note is convertible at the option of the lender into shares of the Company’s common stock at a conversion price of $5.00 per share. During the years ended December 31, 2016 and 2015, the Company borrowed $188,000 and $1,200,000, respectively under the 2015 Note. On August 31, 2016 principal and interest of $1,200,000 and $34,816 owed on the 2015 Note, respectively, were exchanged for 246,963 shares of the Company’s common stock at a price of $5.00 per share (see Note 13 – Temporary Equity and Stockholders’ Deficiency). On June 26, 2017, the Company amended the loan agreement to extend the due date of the 2015 Note’s principal and accrued interest to January 31, 2018.

 

As of December 31, 2016 and 2015, the principal balance due on the 2015 Note was $188,000 and 1,200,000, respectively, and the related accrued interest was $233 and $8,795, respectively, which is included in accrued expenses – related party on the accompanying balance sheets.

 

Advances to Related Party

 

During 2015, the Company paid a deposit of $75,000 to HJLA, in anticipation of entering into an agreement to acquire the exclusive rights to provide development and manufacturing services to HJLA. On April 1, 2016, the Company paid an additional $370,200 upon the execution of this agreement (see Note 6 —Intangible Assets).

 

During 2016, the Company also paid an additional $497,900 (net of repayments of $119,500) to HJLA, which was recorded as an advance to HJLA. The Company reviewed the recoverability of its advances to HJLA and recorded an allowance of $487,900 (see Note 8 – Advances to Related Party), because collectability was not reasonably assured.

 

Note 15 – Subsequent Events

 

Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”)

 

On March 1, 2017 and June 6, 2017, the Company filed a Certificate of Designation with the Secretary of State of the state of Delaware, designating 200,000 shares and then 2,000,000 shares, respectively, of the Company’s preferred stock as Series B Redeemable Convertible Preferred Stock at a par value of $0.00001 per share. The Series B Redeemable Convertible Preferred Stock have a stated value of $6 per share with an initial conversion price of $6 per common share (subject to adjustment as provided in the Series B Certificate of Designation).

 

F- 36
 

 

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 15 – Subsequent Events, continued

 

Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) , continued

 

The holders of the Company’s Series B Preferred Stock have voting rights equal to common stockholders on an as converted basis, and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series B Preferred Stock ranks senior to the common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event after payments have been made to the holders of Series A Preferred Stock, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series B Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series A Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series B Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined. The liquidation preference of The Series B Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

 

Each share of Series B Preferred Stock is convertible at the option of the holder at any time into one share of the Company’s common stock, subject to certain typical anti-dilution provisions, such as stock dividend or stock splits. Each share of Series B Preferred Stock is mandatorily converted into the Company’s common stock (a) at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock; (b) the consent of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, or (c) FDA approval for either the Company’s venous vale, pediatric heart valve or coronary artery bypass graft product candidates. Because the conversion option associated with the Series B Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability. At any time after the third anniversary of the original issuance of the Series B Preferred Stock, the Series B Preferred Stock may be redeemed as a result of the written request of the holder of the Series B Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series B Preferred Stock is classified as temporary equity.

 

Subsequent to December 31, 2016, the Company issued 127,125 shares of Series B at a purchase price of $6 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum. The gross proceeds from the additional shares were $762,750 and the Company incurred cash offering costs of $107,500 (including $96,250 of placement agent fees) and non-cash offering costs valued at $2,130 (see Placement Agent Warrants, below) resulting in an original carrying value of the additional Series B Preferred Stock of $630,770.

 

F- 37
 

  

HANCOCK JAFFE LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

Note 15 – Subsequent Events, continued

 

Senior Secured Convertible Debt with Warrants

 

Subsequent to the year ended December 31, 2016, the Company received net cash proceeds of $1,649,800 from the sale of Senior Secured Convertible Notes (the “Convertible Notes”) totaling, in the aggregate $1,835,500 and five-warrants for the purchase of 152,965 shares of the Company’s common stock. The Convertible Notes are convertible into common stock at the lesser of $6.00 per share, or at price equal to 70% of the highest price per common share sold in the Company’s initial public offering. In connection with the sale of the Convertible Notes, the Company also issued five-year warrants to the placement agent for the purchase of 18,475 shares of common stock.

 

Related Party Note Payable

 

Subsequent to December 31, 2016, the Company borrowed an additional aggregate amount of $311,000 under the 2015 Note.

 

Forfeiture of Employee Warrant

 

On June 30, 2017, a warrant for the purchase of 500,000 shares of common stock, which had been granted to the Business Development Manager, was forfeited by the Business Development Manager.

 

Advances to Related Party

 

Subsequent to December 31, 2016, the Company paid $206,000 as short-term advances to HJLA, net of repayments of $174,650.

 

Stock Options

 

On August 31, 2017, the Company granted options for the purchase of 80,000 shares of the Company’s common stock to each of three members of the board of directors. The options vested immediately, have a ten-year contractual life, and are exercisable at $6.00 per share.

 

Appointment of Co-Chief Executive Officer

 

On August 31, 2017, the board of directors appointed the Business Development Manager to the position of co-chief executive officer of the Company. The appointment solely represents a change of position and title for the Business Development Manager; all other terms of the BDM Agreement remain unchanged.

 

F- 38
 

 

                              Shares

Common Stock

 

 

 

 

 

PROSPECTUS

 

 

 

                                        , 2017

 

Network 1 Financial Securities, Inc.

 

 

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table indicates the expenses to be incurred in connection with 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 Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the Nasdaq Capital Market listing fee.

 

    Amount
to be Paid
SEC registration fee   $ *
FINRA filing fee   $ *
The Nasdaq Capital Market initial listing fee   $ *
Printing and engraving expenses   $ *
Accounting fees and expenses   $ *
Legal fees and expenses   $ *
Transfer agent and registrar fees   $ *
Miscellaneous fees and expenses   $ *
Total   $ *

 

* To be provided by amendment.

 

Item 14. Indemnification of Directors and Officers.

 

Section 102 of the General Corporation Law of the State of Delaware permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for breaches of the director’s duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of a law, authorizations of the payments of a dividend or approval of a stock repurchase or redemption in violation of Delaware corporate law or for any transactions from which the director derived an improper personal benefit. Our certificate of incorporation will provide that no director will be liable to us or our stockholders for monetary damages for breach of fiduciary duties as a director, subject to the same exceptions as described above. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors which may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. We also expect to maintain standard insurance policies that provide coverage (1) to our directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments we may make to such officers and directors.

 

Section 145 of the General Corporation Law of the State of Delaware provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with a threatened, pending, or completed action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, indemnification is limited to expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with defense or settlement of such action or suit and no indemnification shall be made with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. In addition, to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding described above (or claim, issue, or matter therein), such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be advanced by the corporation upon receipt of an undertaking by such person to repay such amount if it is ultimately determined that such person is not entitled to indemnification by the corporation under Section 145 of the General Corporation Law of the State of Delaware.

 

 

 

 

Our amended and restated certificate of incorporation will provide that we will, to the fullest extent permitted by law, indemnify any person made or threatened to be made a party to an action or proceeding by reason of the fact that he or she (or his or her testators or intestate) is or was our director or officer or serves or served at any other corporation, partnership, joint venture, trust or other enterprise in a similar capacity or as an employee or agent at our request, including service with respect to employee benefit plans maintained or sponsored by us, against expenses (including attorneys’), judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend, or defense of such action, suit, proceeding, or claim. However, we are not required to indemnify or advance expenses in connection with any action, suit, proceeding, claim, or counterclaim initiated by us or on behalf of us. Our amended and restated bylaws will provide that we will indemnify and hold harmless each person who was or is a party or threatened to be made a party to any action, suit, or proceeding by reason of the fact that he or she is or was our director or officer, or is or was serving at our request in a similar capacity of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (whether the basis of such action, suit, or proceeding is an action in an official capacity as a director or officer or in any other capacity while serving as a director of officer) to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability and loss (including attorneys fees, judgments, fines, ERISA excise taxes, or penalties and amounts paid in settlement) reasonably incurred or suffered by such person in connection with such action, suit or proceeding, and this indemnification continues after such person has ceased to be an officer or director and inures to the benefit of such person’s heirs, executors and administrators. The indemnification rights also include the right generally to be advanced expenses, subject to any undertaking required under Delaware General Corporation Law, and the right generally to recover expenses to enforce an indemnification claim or to defend specified suits with respect to advances of indemnification expenses.

 

Item 15. Recent Sales of Unregistered Securities.

 

Set forth below is information regarding securities sold and issued by us since January 1, 2014 that were not registered under the Securities Act, as well as 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.

 

(1) On July 25, 2016, we issued 598,800 shares of common stock to Steven Cantor, our Co-Chief Executive Officer and a member of our board of directors, pursuant to his Employment Agreement, dated September 4, 2013.
   
(2) On July 25, 2016, we issued 598,800 shares of common stock to Corbiz, LLC pursuant to a unanimous written consent of the Board of Directors, dated September 4, 2013.
   
(3) On May 5, 2016 and pursuant to his employment agreement, we issued a five year warrant to purchase 833,333 shares of our common stock to Mr. Cantor, at a per share exercise price of $6.00. As of June 30, 2017, Mr. Cantor returned to us 500,000 of such warrants and transferred the balance of 333,333 warrants to others.
   
(4) On November 28, 2016, we completed a private placement of our Series A preferred stock, or the Series A Offering. We issued an aggregate of 1,005,700 shares of Series A preferred stock at a purchase price of $5.00 per share. We received aggregate gross proceeds of $5,028,500.
   
(5) From December 4, 2015 to December 1, 2016, we issued five year warrants to 3 placement agents in the Series A Offering, to purchase an aggregate of 105,700 shares of our Series A preferred stock at an initial exercise price of $5.00 per share.
   
(6) On August 31, 2016, we issued 247,358 shares of our common stock to Biodyne Holding, S.A., pursuant to an amendment to the Loan Agreement, dated as of June 30, 2015.

 

 

 

 

(7) From September 2016 to date, we granted stock options under our 2016 Omnibus Incentive Plan to purchase an aggregate of 2,592,000 shares of common stock at an exercise price of $5.00 per share to certain directors, officers, employees and service providers.
   
(8) On October 1, 2016, we agreed to issue 20,000 shares of our common stock to CorProminence LLC in accordance with a marketing and consulting agreement dated August 18, 2016, in exchange for consulting services to be rendered by CorProminence LLC.
   
(9) From February 14, 2017 to May 10, 2017 we issued 127,125 shares of our Series B Preferred Stock in foreign and private offerings to a total of 18 investors for a price of $6.00 per share. We received aggregate gross proceeds of $762,750.

 

The offers, sales and issuances of securities listed in items (1) through (6), above, were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering. The recipients of such securities in each of these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The offers, sales and issuances of securities listed in item (7) above, were deemed exempt from registration in reliance on Section 4(a)(2) of the Securities Act or Rule 701 promulgated thereunder as transactions pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our stock option plans. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act and appropriate legends were affixed to the securities issued in such transactions.

 

Item 16. Exhibits and Financial Statement Schedules.

 

(a)          Exhibits.

 

The exhibits to the registration statement are listed in the Exhibit Index attached hereto and are incorporated by reference herein.

 

(b)          Financial Statement Schedules.

 

All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or the related notes to financial statements thereto.

 

Item 17. Undertakings.

 

The undersigned registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or 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 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue

 

The undersigned registrant hereby undertakes that:

 

(1) For purposes of determining any liability under the Securities Act, 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, 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

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on this 7th day of September, 2017.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By: /s/ Benedict Broennimann
    Benedict Broennimann, M.D.
    Co-Chief Executive Officer

 

POWER OF ATTORNEY

 

We, the undersigned directors and officers of Hancock Jaffe Laboratories, Inc., hereby severally constitute and appoint Yury Zhivilo and Benedict Broennimann, M.D., and each of them, our true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933, as amended 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 and necessary to be done in and about the premises, as fully to all intents and purposes as we might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact 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/ Benedict Broennimann   Co-Chief Executive Officer   September 7, 2017
Benedict Broennimann, M.D.   (Principal Executive Officer)    
         
/s/ Steven Cantor   Co-Chief Executive Officer and Director   September 7, 2017
Steven Cantor        
         
/s/ William R. Abbott   Senior Vice President, Chief Financial Officer    
William R. Abbott   (Principal Financial Officer and Principal Accounting Officer)   September 7, 2017
         
/s/ Yury Zhivilo   Chairman and Director   September 7, 2017
Yury Zhivilo        
         
/s/ Robert Anderson   Director   September 7, 2017
Robert Anderson        
         
/s/ Robert Doyle   Director   September 7, 2017
Robert Doyle        
         
/s/ Steven Girgenti   Director   September 7, 2017
Steven Girgenti        

 

 

 

 

EXHIBIT INDEX

 

Exhibit
Number
  Description of Exhibits
     
1.1*   Form of Underwriting Agreement
3.1 *   Third Amended and Restated Certificate of Incorporation, as currently in effect
3.2 *   Bylaws, as currently in effect
3.3 *   First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock
3.3*   Form of Amended and Restated Certificate of Incorporation, to be in effect upon the completion of this offering
3.4*   Form of Amended and Restated Bylaws, to be in effect upon the completion of this offering
4.1   Specimen common stock certificate
5.1*   Opinion of Counsel to Registrant
10.1+   2016 Omnibus Incentive Plan
10.2+   Employment Agreement, dated as of August 30, 2016, by and between the Registrant and Benedict Broennimann, M.D.
10.3+   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and William R. Abbott
10.4+   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Marc Glickman, M.D.
10.5+   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Susan Montoya
10.6+   Employment Agreement, dated as of July 1, 2016, by and between the Registrant and Steven Cantor
10.7*   Asset Purchase Agreement, dated as of March 18, 2016, by and between LeMaitre Vascular, Inc. and the Registrant
10.8 *   Post-Acquisition Supply Agreement, dated as of March 18, 2016, by and between the Registrant and LeMaitre Vascular, Inc.
10.9 *   Development and Manufacturing Agreement, dated as of February 1, 2013, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc.
10.10   Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Steve Elias, M.D.
10.11   Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Antonios Gasparis
10.12   Medical Advisory Board Agreement, dated as of September 1, 2016, by and between the Registrant and Wade Dimitri, M.D.
10.13   Medical Advisory Board Agreement, dated as of October 1, 2016, by and between the Registrant and Mark Meissner, M.D.
10.14*   Loan Agreement, dated as of June 30, 2015, by and between Byodine Holding S.A. and the Registrant
10.15   First Amendment to Loan Agreement, dated as of April 1, 2016, by and between Byodine Holding S.A. and the Registrant
10.16   Second Amendment to Loan Agreement, dated as of October 18, 2016, by and between Byodine Holding S.A. and the Registrant
10.17   Third Amendment to Loan Agreement, dated as of December 9, 2016, by and between Byodine Holding S.A. and the Registrant
10.18*   Fourth Amendment to Loan Agreement, dated as of March 27, 2017, by and between Byodine Holding S.A. and the Registrant
10.19*   Fifth Amendment to Loan Agreement, dated as of June 19, 2017, by and between Byodine Holding S.A. and the Registrant

 

 

 

 

10.20   Common Stock Purchase Agreement, dated as of April 1, 2016, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc.
10.21*   Services and Material Supply Agreement, dated as of March 4, 2016, by and between the Registrant and ATSCO, Inc.
10.22+*   First Amendment to Employment Agreement, dated as of June 1, 2017, by and between the Registrant and William Abbott
10.23+   First Amendment to Employment Agreement, dated as of December 1, 2016, by and between the Registrant and Steven Cantor
10.24+*   First Amendment to Employment Agreement, dated as of June 12, 2017, by and between the Registrant and Steven Cantor
10.25*   Securities Purchase Agreement dated as of June 15, 2017, by and among the Registrant and each purchaser identified on the signature pages thereto
21.1   Subsidiaries of the Registrant
23.1   Consent of Marcum LLP, independent registered public accounting firm
23.2*   Consent of Counsel to the Registrant (included in Exhibit 5.1)
24.1   Power of Attorney (included on signature page to this registration statement)

 

 

*   To be filed by amendment.
+   Indicates a management contract or compensatory plan.

 

     
 

 

 

 

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

 

Number _______ __** Shares

 

HANCOCK JAFFE LABORATORIES, INC.

COMMON STOCK

Authorized Capital Stock: 32,000,000 Shares

 

Common Stock: 30,000,000 Shares, $0.00001 par value Preferred Stock: 2,000,000 Shares, $0.00001 par value

 

This Certifies That                    * *                     IS THE REGISTERED HOLDER OF   (**)                     SHARES OF THE COMMON STOCK OF

hancock jaffe laboratories, inc.

 

HEREINAFTER DESIGNATED “THE CORPORATION,” TRANSFERABLE ON THE SHARE REGISTER OF THE CORPORATION UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR ASSIGNED.

 

A STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED TO OR IMPOSED UPON THE RESPECTIVE CLASSES OF SHARES OF STOCK OF THE CORPORATION AND UPON THE HOLDERS THEREOF MAY BE OBTAINED BY ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE, AT THE PRINCIPAL OFFICE OF THE CORPORATION.

 

THE SHARES REPRESENTED HEREBY ARE RESTRICTED TO THE TRANSFER AS DESCRIBED OR SET FORTH ON THE REVERSE SIDE HEREOF.

 

WITNESS The Seal of the Corporation and the Signatures of its duly authorized officers this day of .

 

     
WILLIAM ABBOTT, PRESIDENT   WILLIAM ABBOTT, SECRETARY

 

 
 

 

FOR VALUE RECEIVED, _______________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO ___________________________________________________________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT _____________________________________________ ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION, WITH FULL POWER OF SUBSTITUTION ON THE PREMISES.

 

DATED _____________________, ________

 

   
   
   

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) AND ARE “RESTRICTED SECURITIES” AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 OF THE ACT.

 

 
 

 

 

HANCOCK JAFFE LABORATORIES, INC.

 

2016 OMNIBUS INCENTIVE PLAN

 

Hancock Jaffe Laboratories, Inc. sets forth herein the terms of its 2016 Omnibus Incentive Plan, as follows:

 

1. PURPOSE

 

The Plan is intended to enhance the ability of the Company and its Affiliates to attract and retain highly qualified officers, Non-employee Directors, employees, consultants and advisors, and to motivate such individuals to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share-based awards and cash awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein.

 

2. DEFINITIONS

 

For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:

 

2.1. “Acquiror” shall have the meaning set forth in Section 15.2.1.

 

2.2. “Affiliate” means any company or other trade or business that “controls,” is “controlled by” or is “under common control with” the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including any Subsidiary.

 

2.3. “Award” means a grant under the Plan of an Option, SAR, Restricted Stock, RSU, Other Share-based Award or cash award.

 

2.4. “Award Agreement” means a written agreement between the Company and a Grantee, or notice from the Company or an Affiliate to a Grantee that evidences and sets out the terms and conditions of an Award.

 

2.5. “Board” means the Board of Directors of the Company.

 

2.6. “Business Combination” shall have the meaning set forth in Section 15.2.2.

 

2.7. “Cause” shall be defined as that term is defined in the Grantee’s offer letter or other applicable employment agreement; or, if there is no such definition, “Cause” means, unless otherwise provided in the applicable Award Agreement: (i) the commission of any act by a Grantee constituting financial dishonesty against the Company or its Affiliates (which act would be chargeable as a crime under applicable law); (ii) a Grantee’s engaging in any other act of dishonesty, fraud, intentional misrepresentation, moral turpitude, illegality or harassment that would: (a) materially adversely affect the business or the reputation of the Company or any of its Affiliates with their respective current or prospective customers, suppliers, lenders or other third parties with whom such entity does or might do business or (b) expose the Company or any of its Affiliates to a risk of civil or criminal legal damages, liabilities or penalties; (iii) the repeated failure by a Grantee to follow the directives of the chief executive officer of the Company or any of its Affiliates or the Board; or (iv) any material misconduct, violation of the Company’s or Affiliates’ policies, or willful and deliberate non-performance of duty by the Grantee in connection with the business affairs of the Company or its Affiliates.

 

 
 

 

2.8. “Change in Control” shall have the meaning set forth in Section 15.2.2.

 

2.9. “Code” means the Internal Revenue Code of 1986.

 

2.10. “Committee” means the Compensation Committee of the Board, or such other committee as determined by the Board. The Compensation Committee of the Board may designate a subcommittee of its members to serve as the Committee (to the extent the Board has not designated another person, committee or entity as the Committee). Following the Initial Public Offering: (i) the Board shall cause the Committee to satisfy the applicable requirements of any securities exchange on which the Common Stock may then be listed; (ii) for purposes of Awards to Covered Employees intended to constitute Performance Awards, to the extent required by Section 162(m), Committee means all of the members of the Compensation Committee who are “outside directors” within the meaning of Section 162(m); and (iii) for purposes of Awards to Grantees who are subject to Section 16 of the Exchange Act, Committee means all of the members of the Compensation Committee who are “non-employee directors” within the meaning of Rule 16b-3 adopted under the Exchange Act.

 

2.11. “Company” means Hancock Jaffe Laboratories, Inc., a Delaware corporation.

 

2.12. “Common Stock” means the common stock of the Company.

 

2.13. “Consultant” means a consultant or advisor that provides bona fide services to the Company or any Affiliate and who qualifies as a consultant or advisor under Rule 701 of the Securities Act (during any period in which the Company is not a public company subject to the reporting requirements of the Exchange Act) or Form S-8 (during any period in which the Company is a public company subject to the reporting requirements of the Exchange Act).

 

2.14. “Covered Employee” means a Grantee who is a “covered employee” within the meaning of Section 162(m) as qualified by Section 12.4.

 

2.15. “Disability” shall be defined as that term is defined in the Grantee’s offer letter or other applicable employment agreement; or, if there is no such definition, “Disability” means, unless otherwise provided in the applicable Award Agreement, the Grantee is unable to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided , however , that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantee’s Service, “Disability” means “permanent and total disability” as set forth in Code Section 22(e)(3).

 

2.16. “Effective Date” means [Date], the date the Plan was approved by the Stockholders.

 

2.17. “Exchange Act” means the Securities Exchange Act of 1934.

 

2.18. “Fair Market Value” of a Share as of a particular date means (i) if the Common Stock is listed on a national securities exchange, the closing or last price of the Common Stock on the composite tape or other comparable reporting system for the applicable date, or if the applicable date is not a trading day, the trading day immediately preceding the applicable date, or (ii) if the Common Stock is not then listed on a national securities exchange, or the value of the Common Stock is not otherwise determinable, such value as determined by the Board.

 

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2.19. “Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law or sister-in-law, including adoptive relationships, of the applicable individual, any person sharing the applicable individual’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than 50% of the beneficial interest, a foundation in which any one or more of these persons (or the applicable individual) control the management of assets and any other entity in which one or more of these persons (or the applicable individual) own more than 50% of the voting interests.

 

2.20. “Grant Date” means the latest to occur of (i) the date as of which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 or (iii) such other date as may be specified by the Board in the Award Agreement.

 

2.21. “Grantee” means a person who receives or holds an Award.

 

2.22. “Holder” means, with respect to any Issued Shares, the person holding such Issued Shares, including the initial Grantee or any Permitted Transferee.

 

2.23. “Incentive Stock Option” means an “incentive stock option” within the meaning of Code Section 422.

 

2.24. “Incumbent Directors” shall have the meaning set forth in Section 15.2.2.

 

2.25. “Initial Public Offering” means the initial public offering of Shares pursuant to a registration statement (other than a Form S-8 or successor forms) filed with, and declared effective by, the SEC.

 

2.26. “Issued Shares” means, collectively, all outstanding Shares issued pursuant to Awards (including outstanding Shares of Restricted Stock prior to or after vesting and Shares issued in connection with the exercise of an Option or SAR).

 

2.27. “New Shares” shall have the meaning set forth in Section 15.1.

 

2.28. “Non-employee Director” means a member of the Board or the board of directors of an Affiliate, in each case who is not an officer or employee of the Company or any Affiliate.

 

2.29. “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

 

2.30. “Offered Shares” shall have the meaning set forth in Section 17.4.1.

 

2.31. “Offering” shall have the meaning set forth in Section 17.5.

 

2.32. “Option” means an option to purchase one or more Shares pursuant to the Plan.

 

2.33. “Option Price” means the exercise price for each Share subject to an Option.

 

2.34. “Other Share-based Awards” means Awards consisting of Share units, or other Awards, valued in whole or in part by reference to, or otherwise based on, Shares.

 

2.35. “Performance Award” means an Award made subject to the attainment of performance goals (as described in Section 12) over a performance period of at least one year.

 

2.36. “Permitted Transferee” means any of the following to whom a Holder may transfer Issued Shares hereunder (as set forth in Section 17.11.3 ): the Holder’s spouse, children (natural or adopted), stepchildren or a trust for their sole benefit of which the Holder is the settlor; provided , however , that any such trust does not require or permit distribution of any Issued Shares during the term of the Plan unless subject to its terms. Upon the death of the Holder, the term Permitted Transferees shall also include such deceased Holder’s estate, executors, administrators, personal representatives, heirs, legatees and distributees, as the case may be.

 

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2.37. “Plan” means this Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan.

 

2.38. “Purchase Price” means the purchase price for each Share pursuant to a grant of Restricted Stock.

 

2.39. “Restricted Period” shall have the meaning set forth in Section 10.1.

 

2.40. “Restricted Stock” means restricted Shares, awarded to a Grantee pursuant to Section 10.

 

2.41. “Restricted Stock Unit” or “RSU” means a bookkeeping entry representing the equivalent of Shares, awarded to a Grantee pursuant to Section 10.

 

2.42. “SAR Exercise Price” means the per Share exercise price of a SAR granted to a Grantee under Section 9.

 

2.43. “SEC” means the United States Securities and Exchange Commission.

 

2.44. “Section 162(m)” means Code Section 162(m).

 

2.45. “Section 409A” means Code Section 409A.

 

2.46. “Securities Act” means the Securities Act of 1933.

 

2.47. “Separation from Service” means the termination of a Service Provider’s Service, whether initiated by the Service Provider or the Company or an Affiliate; provided , however , that if any Award governed by Section 409A is to be distributed on a Separation from Service, then the definition of Separation from Service for such purposes shall comply with the definition provided in Section 409A.

 

2.48. “Service” means service as a Service Provider to the Company or an Affiliate. Unless otherwise provided in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate.

 

2.49. “Service Provider” means an employee, officer, non-employee member of the Board or Consultant of the Company or an Affiliate.

 

2.50. “Share” means a share of Common Stock.

 

2.51. “Stock Appreciation Right” or “SAR” means a right granted to a Grantee pursuant to Section 9.

 

2.52. “Stockholders” means the stockholders of the Company.

 

2.53. “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Code Section 424(f).

 

2.54. “Substitute Award” means any Award granted in assumption of or in substitution for an award of a company or business acquired by the Company or an Affiliate or with which the Company or an Affiliate combines.

 

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2.55. “Ten Percent Stockholder” means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Code Section 424(d) shall be applied.

 

2.56. “Termination Date” means the date that is 10 years after the Effective Date, unless the Plan is earlier terminated by the Board under Section 5.2.

 

2.57. “Transition Period” means the period beginning with the consummation of an Initial Public Offering and ending as of the earlier of (i) the date of the first annual meeting of Stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the Initial Public Offering occurs and (ii) the expiration of the “reliance period” under Treasury Regulation Section 1.162-27(f)(2).

 

2.58. “Voting Securities” shall have the meaning set forth in Section 15.2.2.

 

3. ADMINISTRATION OF THE PLAN

 

3.1 General. The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s certificate of incorporation and bylaws and applicable law. The Board shall have the power and authority to delegate its responsibilities hereunder to the Committee, which shall have full authority to act in accordance with its charter (as in effect from time to time), and with respect to the power and authority of the Board to act hereunder, all references to the Board shall be deemed to include a reference to the Committee, unless such power or authority is specifically reserved by the Board. Except as specifically provided in Section 14 or as otherwise may be required by applicable law, regulatory requirement or the certificate of incorporation or the bylaws of the Company, the Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan. Following the Initial Public Offering, the Committee shall administer the Plan; provided , however , the Board shall retain the right to exercise the authority of the Committee to the extent consistent with applicable law and the applicable requirements of any securities exchange on which the Common Stock may then be listed. All actions, determinations and decisions by the Board or the Committee under the Plan or any Award Agreement, or with respect to any Award, shall be in the sole discretion of the Board and shall be final, binding and conclusive on all persons. Without limitation, the Board shall have full and final power and authority, subject to the other terms and conditions of the Plan, to:

 

(i) designate Grantees;

 

(ii) determine the type or types of Awards to be made to Grantees;

 

(iii) determine the number of Shares to be subject to an Award;

 

(iv) establish the terms and conditions of each Award (including the Option Price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the Shares subject thereto and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options);

 

(v) prescribe the form of each Award Agreement; and

 

(vi) amend, modify or supplement the terms of any outstanding Award, including the authority, in order to effectuate the purposes of the Plan, to modify Awards to foreign nationals or individuals who are employed outside the United States to recognize differences in local law, tax policy or custom.

 

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3.2. Award Agreements; Clawbacks.

 

The grant of any Award may be contingent upon the Grantee executing the appropriate Award Agreement. The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof, or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is terminated for Cause.

 

All awards, amounts or benefits received or outstanding under the Plan shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any Company clawback or similar policy or any applicable law related to such actions, as may be in effect from time to time. A Grantee’s acceptance of an Award shall be deemed to constitute the Grantee’s acknowledgement of and consent to the Company’s application, implementation and enforcement of any applicable Company clawback or similar policy that may apply to the Grantee, whether adopted prior to or following the Effective Date, and any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, and the Grantee’s agreement that the Company may take such actions as may be necessary to effectuate any such policy or applicable law, without further consideration or action.

 

3.3. Deferral Arrangement.

 

The Board may permit or require the deferral of any Award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish and in accordance with Section 409A, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Share units.

 

3.4. No Liability.

 

No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any Award or Award Agreement.

 

3.5. Book Entry.

 

Notwithstanding any other provision of the Plan to the contrary, the Company may elect to satisfy any requirement under the Plan for the delivery of stock certificates through the use of book entry.

 

3.6. Director Awards.

 

The maximum value of Awards granted during any calendar year to any Non-employee Director, taken together with any cash fees paid to such Non-employee Director during the calendar year and the value of awards granted to the Non-employee Director under any other equity compensation plan of the Company or an Affiliate during the calendar year, shall not exceed the following in total value (calculating the value of any Awards or other equity compensation plan awards based on the grant date fair value for financial reporting purposes): (i) $500,000 for the Chair of the Board and (ii) $250,000 for each Non-employee Director other than the Chair of the Board; provided , however , that awards granted to Non-employee Directors upon their initial election to the Board or the board of directors of an Affiliate shall not be counted towards the limit under this Section 3.6. Any Awards or other equity compensation plan awards that are scheduled to vest over a period of more than one calendar year shall be applied pro rata (based on grant date fair value as provided above) for purposes of the limit under this Section 3.6 based on the number of years over which such awards are scheduled to vest.

 

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4. STOCK SUBJECT TO THE PLAN

 

4.1. Authorized Number of Shares.

 

Subject to adjustment under Section 15 , the aggregate number of Shares that may be initially issued pursuant to the Plan is 3,300,000. The total number of Shares described in the preceding sentence shall be available for issuance under Incentive Stock Options. Shares issued under the Plan may consist in whole or in part of authorized but unissued Shares, treasury Shares or Shares purchased on the open market or otherwise. No later than the end of the Transition Period, the maximum number of Shares for each type of Other Share-based Award, and the maximum amount of cash for any cash-based Award, intended to qualify as “performance-based compensation” under Section 162(m) granted to any Grantee in any specified period shall be established by the Company and approved by the Stockholders.

 

4.2. Share Counting.

 

Any Award settled in cash shall not be counted as issued Shares for any purpose under the Plan. If any Award expires, or is terminated, surrendered or forfeited, in whole or in part, the unissued Shares covered by such Award shall again be available for the grant of Awards. If Shares issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to the Company at no more than cost, such Shares shall again be available for the grant of Awards. If Shares issuable upon exercise, vesting or settlement of an Award, or Shares owned by a Grantee (which are not subject to any pledge or other security interest), are surrendered or tendered to the Company in payment of the Option Price or Purchase Price of an Award or any taxes required to be withheld in respect of an Award, in each case, in accordance with the terms and conditions of the Plan and any applicable Award Agreement, such surrendered or tendered Shares shall again be available for the grant of Awards. Substitute Awards shall not be counted against the number of Shares available for the grant of Awards.

 

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

 

5.1. Term.

 

The Plan shall be effective as of the Effective Date, provided that it has been approved by the Stockholders. The Plan shall terminate automatically on the 10-year anniversary of the Effective Date and may be terminated on any earlier date as provided in Section 5.2 .

 

5.2. Amendment and Termination of the Plan.

 

The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any Awards which have not been made. An amendment shall be contingent on approval of the Stockholders to the extent stated by the Board, required by applicable law or required by applicable securities exchange listing requirements. No Awards shall be made after the Termination Date. The applicable terms of the Plan, and any terms and conditions applicable to Awards granted prior to the Termination Date, shall survive the termination of the Plan and continue to apply to such Awards. No amendment, suspension or termination of the Plan shall, without the consent of the Grantee, materially impair rights or obligations under any Award theretofore awarded.

 

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6. AWARD ELIGIBILITY AND LIMITATIONS

 

6.1. Service Providers.

 

Subject to this Section 6 , Awards may be made to any Service Provider as the Board may determine and designate from time to time.

 

6.2. Successive Awards.

 

An eligible person may receive more than one Award, subject to such restrictions as are provided herein.

 

6.3. Stand-Alone, Additional, Tandem, and Substitute Awards.

 

Awards may be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate or any business entity to be acquired by the Company or an Affiliate, or any other right of a Grantee to receive payment from the Company or any Affiliate. Such additional, tandem or substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another award, the Board shall have the right to require the surrender of such other award in consideration for the grant of the new Award. Subject to the requirements of applicable law, the Board may make Awards in substitution or exchange for any other award under another plan of the Company, any Affiliate or any business entity to be acquired by the Company or an Affiliate. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Affiliate, in which the value of Shares subject to the Award is equivalent in value to the cash compensation (for example, RSUs or Restricted Stock).

 

7. AWARD AGREEMENT

 

The grant of any Award may be contingent upon the Grantee executing an appropriate Award Agreement, in such form or forms as the Board shall from time to time determine. Without limiting the foregoing, an Award Agreement may be provided in the form of a notice which provides that acceptance of the Award constitutes acceptance of all terms of the Plan and the notice. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.

 

8. TERMS AND CONDITIONS OF OPTIONS

 

8.1. Option Price.

 

The Option Price of each Option shall be fixed by the Board and stated in the related Award Agreement. The Option Price of each Option intended to be an Incentive Stock Option (except those that constitute Substitute Awards) shall be at least the Fair Market Value on the Grant Date; provided , however , that in the event that a Grantee is a Ten Percent Stockholder as of the Grant Date, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a Share.

 

8.2. Vesting.

 

Subject to Section 8.3 , each Option shall become exercisable at such times and under such conditions (including performance requirements) as stated in the Award Agreement.

 

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8.3. Term.

 

Each Option shall terminate, and all rights to purchase Shares thereunder shall cease, upon the expiration of the Option term stated in the Award Agreement not to exceed 10 years from the Grant Date, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Board and stated in the related Award Agreement; provided , however , that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option at the Grant Date shall not be exercisable after the expiration of five years from its Grant Date.

 

8.4. Limitations on Exercise of Option.

 

Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, (i) prior to the date the Plan is approved by the Stockholders as provided herein or (ii) after the occurrence of an event which results in termination of the Option.

 

8.5. Method of Exercise.

 

An Option that is exercisable may be exercised by the Grantee’s delivery of a notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. To be effective, notice of exercise must be made in accordance with procedures established by the Company from time to time.

 

8.6. Rights of Holders of Options.

 

Unless otherwise provided in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a Stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject Shares or to direct the voting of the subject Shares) until the Shares covered thereby are fully paid and issued to him. Except as provided in Section 15 or the related Award Agreement, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.

 

8.7. Delivery of Stock Certificates.

 

Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the Shares subject to the Option.

 

8.8. Limitations on Incentive Stock Options.

 

An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.

 

8.9. Early Exercise.

 

An Option may, but need not, include a provision whereby the Grantee may elect at any time before the Grantee’s Separation from Service to exercise the Option as to any part or all of the Shares subject to the Option prior to the full vesting of the Option. Any unvested Shares so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate.

 

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9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

 

9.1. Right to Payment.

 

A SAR shall confer on the Grantee a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value on the date of exercise over (ii) the SAR Exercise Price. The Award Agreement for a SAR shall specify the SAR Exercise Price. SARs may be granted alone or in conjunction with all or part of an Option or at any subsequent time during the term of such Option or in conjunction with all or part of any other Award.

 

9.2. Other Terms.

 

The Board shall determine at the Grant Date or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following Separation from Service or upon other conditions, the method of exercise, whether or not a SAR shall be in tandem or in combination with any other Award and any other terms and conditions of any SAR.

 

9.3. Term of SARs.

 

The term of a SAR granted under the Plan shall be determined by the Board; provided , however , that such term shall not exceed 10 years.

 

9.4. Payment of SAR Amount.

 

Upon exercise of a SAR, a Grantee shall be entitled to receive payment from the Company (in cash or Shares, as set forth in the Award Agreement) in an amount determined by multiplying:

 

(i) the difference between the Fair Market Value on the date of exercise over the SAR Exercise Price; by

 

(ii) the number of Shares with respect to which the SAR is exercised.

 

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS

 

10.1. Restrictions.

 

At the time of grant, the Board may establish a period of time (a “ Restricted Period ”) and any additional restrictions including the satisfaction of corporate or individual performance objectives applicable to an Award of Restricted Stock or RSUs. Each Award of Restricted Stock or RSUs may be subject to a different Restricted Period and additional restrictions. Neither Restricted Stock nor RSUs may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other applicable restrictions.

 

10.2. Restricted Stock Certificates.

 

The Company shall issue Shares, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates or other evidence of ownership representing the total number of Shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse or (ii) such certificates shall be delivered to the Grantee; provided , however , that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and make appropriate reference to the restrictions imposed under the Plan and the Award Agreement.

 

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10.3. Rights of Holders of Restricted Stock.

 

Unless otherwise provided in the applicable Award Agreement, holders of Restricted Stock shall have rights as Stockholders, including voting and dividend rights.

 

10.4. Rights of Holders of RSUs.

 

10.4.1. Settlement of RSUs.

 

RSUs may be settled in cash or Shares, as set forth in the Award Agreement. The Award Agreement shall also set forth whether the RSUs shall be settled (i) within the time period specified in Section 17.9 for short term deferrals or (ii) otherwise within the requirements of Section 409A, in which case the Award Agreement shall specify upon which events such RSUs shall be settled.

 

10.4.2. Voting and Dividend Rights.

 

Unless otherwise provided in the applicable Award Agreement, holders of RSUs shall not have rights as Stockholders, including voting or dividend or dividend equivalents rights.

 

10.4.3. Creditor’s Rights.

 

A holder of RSUs shall have no rights other than those of a general creditor of the Company. RSUs represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

 

10.5. Purchase of Restricted Stock.

 

The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the Shares represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the related Award Agreement. If specified in the Award Agreement, the Purchase Price may be deemed paid by Services already rendered. The Purchase Price shall be payable in a form described in Section 11 or, if so determined by the Board, in consideration for past Services rendered.

 

10.6. Delivery of Shares.

 

Upon the expiration or termination of any Restricted Period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to Shares of Restricted Stock or RSUs settled in Shares shall lapse, and, unless otherwise provided in the applicable Award Agreement, a stock certificate for such Shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee’s beneficiary or estate, as the case may be.

 

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11. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

 

11.1. General Rule.

 

Payment of the Option Price for the Shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company, except as provided in this Section 11 .

 

11.2. Surrender of Shares.

 

To the extent the Award Agreement so provides, payment of the Option Price for Shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be made all or in part through the tender to the Company of Shares, which Shares shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price for Restricted Stock has been paid thereby, at their Fair Market Value on the date of exercise or surrender. Notwithstanding the foregoing, in the case of an Incentive Stock Option, the right to make payment in the form of already-owned Shares may be authorized only at the time of grant.

 

11.3. Cashless Exercise.

 

With respect to an Option only (and not with respect to Restricted Stock) following the Initial Public Offering, to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price may be made all or in part by delivery (on a form acceptable to the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 17.3 .

 

11.4. Other Forms of Payment.

 

To the extent the Award Agreement so provides, payment of the Option Price or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules, including the Company’s withholding of Shares otherwise due to the exercising Grantee.

 

12. TERMS AND CONDITIONS OF PERFORMANCE AWARDS

 

12.1. Performance Conditions.

 

The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Board. The Board may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may reduce the amounts payable under any Award subject to performance conditions, except as limited under Section 12.2 in the case of a Performance Award intended to qualify under Section 162(m).

 

12.2. Performance Awards Granted to Designated Covered Employees.

 

If and to the extent that the Board determines that a Performance Award to be granted to a Grantee who is designated by the Board as likely to be a Covered Employee should qualify as “performance-based compensation” for purposes of Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 12.2 . Notwithstanding anything herein to the contrary, the Board may provide for Performance Awards to Covered Employees that are not intended qualify as “performance-based compensation” for purposes of Section 162(m).

 

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12.2.1. Performance Goals Generally.

 

The performance goals for Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Board consistent with this Section 12.2 . Following the end of the Transition Period, performance goals shall be objective and shall otherwise meet the requirements of Section 162(m), including the requirement that the level or levels of performance targeted by the Board result in the achievement of performance goals being “substantially uncertain.” The Board may determine that Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of the Performance Awards. Performance goals may be established on a Company-wide basis, or with respect to one or more business units, divisions, Affiliates or business segments, as applicable. Performance goals may be absolute or relative (to the performance of one or more comparable companies or indices). Measurement of performance goals may exclude the impact of charges for restructuring, discontinued operations and other extraordinary, unusual or non-recurring items, and the cumulative effects of tax or accounting changes (each as defined by generally accepted accounting principles and as identified in the Company’s financial statements or other SEC filings). Performance goals may differ for Performance Awards granted to any one Grantee or to different Grantees.

 

12.2.2. Business Criteria.

 

One or more of the following business criteria for the Company, on a consolidated basis, and/or specified Affiliates or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used exclusively by the Board in establishing performance goals for Performance Awards: (i) cash flow; (ii) earnings per share, as adjusted for any stock split, stock dividend or other recapitalization; (iii) earnings measures; (iv) return on equity; (v) total stockholder return; (vi) share price performance, as adjusted for any stock split, stock dividend or other recapitalization; (vii) return on capital; (viii) revenue; (ix) income; (x) profit margin; (xi) return on operating revenue; (xii) brand recognition or acceptance; (xiii) customer satisfaction; (xiv) productivity; (xv) expense targets; (xvi) market share; (xvii) cost control measures; (xviii) balance sheet metrics; (xix) strategic initiatives; (xx) implementation, completion or attainment of measurable objectives with respect to recruitment or retention of personnel or employee satisfaction; or (xxi) any other business criteria established by the Board; provided , however , that such business criteria shall include any derivations of business criteria listed above ( e.g. , income shall include pre-tax income, net income and operating income).

 

12.2.3. Timing for Establishing Performance Goals.

 

Following the Transition Period, performance goals shall be established not later than 90 days after the beginning of any performance period applicable to Performance Awards, or at such other date as may be required or permitted for “performance-based compensation” under Section 162(m).

 

12.2.4. Settlement of Performance Awards; Other Terms.

 

Settlement of Performance Awards may be in cash, Shares, other Awards or other property. The Board may reduce the amount of a settlement otherwise to be made in connection with such Performance Awards.

 

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12.3. Written Determinations.

 

All determinations by the Board as to the establishment of performance goals, the amount of any Performance Award pool or potential individual Performance Awards and the achievement of performance goals relating to Performance Awards, shall be made in writing in the case of any Award intended to qualify as “performance-based compensation” under Section 162(m) to the extent required by Section 162(m). To the extent permitted by Section 162(m), the Board may delegate any responsibility relating to Performance Awards.

 

12.4. Status of Section 12.2 Awards under Section 162(m).

 

The provisions of this Section 12.4 are applicable following the Transition Period. It is the intent of the Company that Performance Awards under Section 12.2 granted to persons who are designated by the Board as likely to be Covered Employees within the meaning of Section 162(m) shall, if so designated by the Board, qualify as “performance-based compensation” within the meaning of Section 162(m). Accordingly, the terms of Section 12.2 , including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Section 162(m). The foregoing notwithstanding, because the Board cannot determine with certainty whether a given Grantee will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Board, at the time of grant of Performance Awards, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards does not comply or is inconsistent with the requirements of Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

 

13. other SHARE-based awards

 

13.1. Grant of Other Share-based Awards.

 

Other Share-based Awards may be granted either alone or in addition to or in conjunction with other Awards. Other Share-based Awards may be granted in lieu of other cash or other compensation to which a Service Provider is entitled from the Company or may be used in the settlement of amounts payable in Shares under any other compensation plan or arrangement of the Company, including any other Company incentive compensation plan. The Board shall determine the persons to whom and the time or times at which such Awards will be made, the number of Shares to be granted pursuant to such Awards, and all other terms and conditions of such Awards. Unless the Board determines otherwise, any such Award shall be confirmed by an Award Agreement, which shall contain such provisions as the Board determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award.

 

13.2. Terms of Other Share-based Awards.

 

Any Common Stock subject to Awards made under this Section 13 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.

 

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14. REQUIREMENTS OF LAW

 

14.1. General.

 

The Company shall not be required to sell or issue any Shares under any Award if the sale or issuance of such Shares would constitute a violation by the Grantee, any other individual exercising an Option or the Company of any provision of any law or regulation of any governmental authority, including any federal or state securities laws or regulations. If at any time the Board determines that the listing, registration or qualification of any Shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of Shares hereunder, no Shares may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Specifically, in connection with the Securities Act, upon the exercise of any Option or the delivery of any Shares underlying an Award, unless a registration statement under such Act is in effect with respect to the Shares covered by such Award, the Company shall not be required to sell or issue such Shares unless the Board has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such Shares pursuant to an exemption from registration under the Securities Act. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of Shares pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable until the Shares covered by such Option are registered or are exempt from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.

 

14.2. Section 25102(o) of the California Corporations Code.

 

The Plan is intended to comply with Section 25102(o) of the California Corporations Code. In that regard, to the extent required by Section 25102(o), (i) the terms of any Options or SARs, to the extent vested and exercisable upon a Grantee’s Separation from Service, shall include any minimum exercise periods following Separation from Service specified by Section 25102(o), and (ii) any repurchase right of the Company with respect to Shares issued under the Plan shall include a minimum 90-day notice requirement. Any provision of the Plan which is inconsistent with Section 25102(o) shall, without further act or amendment by the Company or the Board, be reformed to comply with the requirements of Section 25102(o).

 

14.3. Rule 16b-3.

 

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards and the exercise of Options will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board or Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may modify the Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.

 

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15. EFFECT OF CHANGES IN CAPITALIZATION

 

15.1. Adjustments for Changes in Capital Structure.

 

Subject to any required action by the Stockholders, in the event of any change in the Common Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the Stockholders in a form other than Shares (excepting normal cash dividends) that has a material effect on the Fair Market Value, appropriate and proportionate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, and in the Option Price, SAR Exercise Price or Purchase Price per Share of any outstanding Awards in order to prevent dilution or enlargement of Grantees’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” If a majority of the Shares which are of the same class as the Shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to a Change in Control) shares of another corporation (the “ New Shares ”), the Board may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of Shares subject to, and the Option Price, SAR Exercise Price or Purchase Price per Share of, the outstanding Awards shall be adjusted in a fair and equitable manner. Any fractional share resulting from an adjustment pursuant to this Section 15.1 shall be rounded down to the nearest whole number and the Option Price, SAR Exercise Price or Purchase Price per share shall be rounded up to the nearest whole cent. In no event may the exercise price of any Award be decreased to an amount less than the par value, if any, of the stock subject to the Award. The Board may also make such adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate. Adjustments determined by the Board pursuant to this Section 15.1 shall be made in accordance with Section 409A to the extent applicable.

 

15.2. Change in Control.

 

15.2.1. Consequences of a Change in Control.

 

Subject to the requirements and limitations of Section 409A if applicable, the Board may provide for any one or more of the following in connection with a Change in Control, which such actions need not be the same for all Grantees:

 

(a) Accelerated Vesting. The Board may provide in any Award Agreement, or in the event of a Change in Control may take such actions as it deems appropriate to provide, for the acceleration of the exercisability, vesting and/or settlement in connection with such Change in Control of each or any outstanding Award or portion thereof and Shares acquired pursuant thereto upon such terms and conditions, including termination of the Grantee’s Service prior to, upon, or following such Change in Control, to such extent as determined by the Board.

 

(b) Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing, successor or purchasing corporation or other business entity or parent thereof, as the case may be (the “ Acquiror ), may, without the consent of any Grantee, either assume or continue the Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable. For purposes of this Section 15.2.1 , an Award denominated in Shares shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a Stockholder on the effective date of the Change in Control was entitled; provided , however , that if such consideration is not solely common stock of the Acquiror, the Board may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each Share subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per Share consideration received by Stockholders pursuant to the Change in Control. If any portion of such consideration may be received by Stockholders pursuant to the Change in Control on a contingent or delayed basis, the Board may determine such Fair Market Value as of the time of the Change in Control on the basis of the Board’s estimate of the present value of the probable future payment of such consideration. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.

 

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(c) Cash-Out of Awards. The Board may, without the consent of any Grantee, determine that, upon the occurrence of a Change in Control, each or any Award or a portion thereof outstanding immediately prior to the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested Share (and each unvested Share, if so determined by the Board) subject to such canceled Award in (i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control or (iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair Market Value of the consideration to be paid per Share in the Change in Control, reduced by the exercise or purchase price per Share, if any, under such Award. If any portion of such consideration may be received by Stockholders pursuant to the Change in Control on a contingent or delayed basis, the Board may determine such Fair Market Value as of the time of the Change in Control on the basis of the Board’s estimate of the present value of the probable future payment of such consideration. In the event such determination is made by the Board, the amount of such payment (reduced by applicable withholding taxes, if any) shall be paid to Grantees in respect of the vested portions of their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards. For avoidance of doubt, if the amount determined pursuant to this Section 15.2.1(c) for an Option or SAR is zero or less, the affected Option or SAR may be cancelled without any payment therefore.

 

15.2.2. Change in Control Defined.

 

Unless other provided in the applicable Award Agreement, a “ Change in Control ” means the consummation of any of the following events:

 

(a) the acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than the Company or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act) or employee benefit plan of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “ Voting Securities ”); or

 

(b) a reorganization, merger, consolidation or recapitalization of the Company (a “ Business Combination ”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities; or

 

(c) a complete liquidation or dissolution of the Company, or a sale of all or substantially all of the assets of the Company; or

 

(d) during any period of 24 consecutive months, the Incumbent Directors cease to constitute a majority of the Board ; “ Incumbent Directors ” means individuals who were members of the Board at the beginning of such period or individuals whose election or nomination for election to the Board by the Stockholders was approved by a vote of at least a majority of the then Incumbent Directors (but excluding any individual whose initial election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors).

 

Notwithstanding the foregoing, if it is determined that an Award is subject to the requirements of Section 409A and payable upon a Change in Control, the Company will not be deemed to have undergone a Change in Control for purposes of the Plan unless the Company is deemed to have undergone a “change in control event” pursuant to the definition of such term in Section 409A.

 

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15.3. Adjustments.

 

Adjustments under this Section 15 related to Shares or other securities of the Company shall be made by the Board. No fractional Shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole Share.

 

16. No Limitations on Company

 

The making of Awards shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets.

 

17. TERMS APPLICABLE GENERALLY TO AWARDS GRANTED UNDER THE PLAN

 

17.1. Disclaimer of Rights.

 

No provision in the Plan or in any Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company or any Affiliate either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company or any Affiliate. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise provided in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a Service Provider. The obligation of the Company to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.

 

17.2. Nonexclusivity of the Plan.

 

Neither the adoption of the Plan nor the submission of the Plan to the Stockholders for approval shall be construed as creating any limitations upon the right or authority of the Board or its delegate to adopt such other compensation arrangements as the Board or its delegate determines desirable.

 

17.3. Withholding Taxes.

 

The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state or local taxes of any kind required by law to be withheld (i) with respect to the vesting of or other lapse of restrictions applicable to an Award, (ii) upon the issuance of any Shares upon the exercise of an Option or SAR or (iii) otherwise due in connection with an Award. At the time of such vesting, lapse or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Board, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to withhold the minimum required number of Shares otherwise issuable to the Grantee as may be necessary to satisfy such withholding obligation or (ii) by delivering to the Company or the Affiliate Shares already owned by the Grantee. The Shares so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the Shares used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 17.3 may satisfy his or her withholding obligation only with Shares that are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements.

 

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17.4. Right of First Refusal; Right to Repurchase.

 

17.4.1. Right of First Refusal.

 

Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Holder is a party, at any time prior to registration by the Company of its Common Stock under Section 12 of the Exchange Act, in the event that the Holder desires at any time to sell or otherwise transfer all or any part of such Holder’s Issued Shares (to the extent vested), the Holder first shall give written notice to the Company of the Holder’s intention to make such transfer. Such notice shall state the number of Issued Shares which the Holder proposes to sell (the “ Offered Shares ”), the price and the terms at which the proposed sale is to be made and the name and address of the proposed transferee. At any time within 30 days after the receipt of such notice by the Company, the Company or its assigns may elect to purchase all or any portion of the Offered Shares at the price and on the terms offered by the proposed transferee and specified in the notice. The Company or its assigns shall exercise this right by mailing or delivering written notice to the Holder within the foregoing 30-day period. If the Company or its assigns elect to exercise its purchase rights under this Section 17.4.1 , the closing for such purchase shall, in any event, take place within 45 days after the receipt by the Company of the initial notice from the Holder. In the event that the Company or its assigns do not elect to exercise such purchase right, or in the event that the Company or its assigns do not pay the full purchase price within such 45-day period, the Holder may, within 60 days thereafter, sell the Offered Shares to the proposed transferee at the same price and on the same terms as specified in the Holder’s notice. Any Issued Shares purchased by such proposed transferee shall continue to be subject to the terms of the Plan. Any Issued Shares not sold to the proposed transferee shall remain subject to the Plan.

 

17.4.2. Right of Repurchase.

 

Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Grantee is a party, at any time prior to registration by the Company of its Common Stock under Section 12 of the Exchange Act, in the case of any Grantee whose Separation from Service is for Cause, or where the Grantee has, in the Board’s reasonable determination, taken any action prior to or following his Separation of Service which would have constituted grounds for Cause, the Company shall have the right, exercisable at any time and from time to time thereafter, to repurchase from the Grantee (or any successor in interest by purchase, gift or other mode of transfer) any Shares issued to such Grantee under the Plan for the purchase price paid by the Grantee for such Shares (or the Fair Market Value of such Common Stock at the time of repurchase, if lower).

 

17.5. Market Standoff Requirement.

 

Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Grantee is a party, in connection with any underwritten public offering of its Common Stock (“ Offering ”) and upon request of the Company or the underwriters managing the Offering, Grantees shall not be permitted to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise directly or indirectly dispose of any Shares delivered under the Plan (other than those Shares included in the Offering) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of the registration statement with respect to such Offering as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters in connection with such Offering.

 

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17.6. Other Provisions.

 

Each Award Agreement may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Board. In the event of any conflict between the terms of an employment agreement and the Plan, the terms of the employment agreement shall govern.

 

17.7. Severability.

 

If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.

 

17.8. Governing Law.

 

The Plan shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law.

 

17.9. Section 409A.

 

The Plan is intended to comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted and administered to be in compliance therewith. Any payments described in the Plan that are due within the “short-term deferral period” as defined in Section 409A shall not be treated as deferred compensation unless applicable laws require otherwise. Notwithstanding anything to the contrary in the Plan, to the extent required to avoid accelerated taxation and tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six-month period immediately following the Grantee’s Separation from Service shall instead be paid on the first payroll date after the six-month anniversary of the Grantee’s Separation from Service (or the Grantee’s death, if earlier). Notwithstanding the foregoing, neither the Company nor the Committee shall have any obligation to take any action to prevent the assessment of any excise tax or penalty on any Grantee under Section 409A and neither the Company nor the Board shall have any liability to any Grantee for such tax or penalty.

 

17.10. Separation from Service.

 

The Board shall determine the effect of a Separation from Service upon Awards, and such effect shall be set forth in the applicable Award Agreement. Without limiting the foregoing, the Board may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, the actions that will be taken upon the occurrence of a Separation from Service, including accelerated vesting or termination, depending upon the circumstances surrounding the Separation from Service.

 

17.11. Transferability of Awards and Issued Shares.

 

17.11.1. Transfers in General.

 

Except as provided in Section 17.11.2 , no Award shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution, and, during the lifetime of the Grantee, only the Grantee personally (or the Grantee’s personal representative) may exercise rights under the Plan.

 

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17.11.2. Family Transfers.

 

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Award (other than Incentive Stock Options) to any Family Member. For the purpose of this Section 17.11.2 , a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights or (iii) a transfer to an entity in which more than 50% of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 17.11.2 , any such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Awards are prohibited except to Family Members of the original Grantee in accordance with this Section 17.11.2 or by will or the laws of descent and distribution.

 

17.11.3. Issued Shares.

 

No Issued Shares shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless (i) such transfer is in compliance with the terms of the applicable Award, all applicable securities laws, and with the terms and conditions of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3 ), (ii) such transfer does not cause the Company to become subject to the reporting requirements of the Exchange Act, and (iii) the transferee consents in writing to be bound by the terms and conditions of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3 ). In connection with any proposed transfer, the Board may require the transferor to provide at the transferor’s own expense an opinion of counsel to the transferor, satisfactory to the Board, that such transfer is in compliance with all foreign, federal and state securities laws. Any attempted disposition of Issued Shares not in accordance with the terms and conditions of this Section 17.11.3 shall be null and void, and the Company shall not reflect on its records any change in record ownership of any Issued Shares as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of Issued Shares. Subject to the foregoing general provisions, and unless otherwise provided in the applicable Award Agreement, Issued Shares may be transferred pursuant to the following specific terms and conditions:

 

(a) Transfers to Permitted Transferees . The Holder may sell, assign, transfer or give away any or all of the Issued Shares to Permitted Transferees; provided, however, that following such sale, assignment or other transfer, such Issued Shares shall continue to be subject to the terms of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3 ) and such Permitted Transferee(s) shall, as a condition to any such transfer, deliver a written acknowledgment to that effect to the Company.

 

(b) Transfers upon Death . Upon the death of the Holder, any Issued Shares then held by the Holder at the time of such death and any Issued Shares acquired thereafter by the Holder’s legal representative shall be subject to the terms and conditions of the Plan, and the Holder’s estate, executors, administrators, personal representatives, heirs, legatees and distributees shall be obligated to convey such Issued Shares to the Company or its assigns under the terms contemplated hereby.

 

17.12. Dividends and Dividend Equivalent Rights.

 

If specified in the Award Agreement, the recipient of an Award may be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the Common Stock or other securities covered by an Award. The terms and conditions of a dividend equivalent right may be set forth in the Award Agreement. Dividend equivalents credited to a Grantee may be paid currently or may be deemed to be reinvested in additional Shares or other securities of the Company at a price per unit equal to the Fair Market Value on the date that such dividend was paid to Stockholders.

 

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17.13. Plan Construction.

 

In the Plan, unless otherwise stated, the following uses apply: (i) references to a statute or law refer to the statute or law and any amendments and any successor statutes or laws, and to all valid and binding governmental regulations, court decisions and other regulatory and judicial authority issued or rendered thereunder, as amended, or their successors, as in effect at the relevant time; (ii) in computing periods from a specified date to a later specified date, the words “from” and “commencing on” (and the like) mean “from and including,” and the words “to,” “until” and “ending on” (and the like) mean “to and including”; (iii) indications of time of day shall be based upon the time applicable to the location of the principal headquarters of the Company; (iv) the words “include,” “includes” and “including” (and the like) mean “include, without limitation,” “includes, without limitation” and “including, without limitation” (and the like), respectively; (v) all references to articles and sections are to articles and sections in the Plan; (vi) all words used shall be construed to be of such gender or number as the circumstances and context require; (vii) the captions and headings of articles and sections have been inserted solely for convenience of reference and shall not be considered a part of the Plan, nor shall any of them affect the meaning or interpretation of the Plan or any of its provisions; (viii) any reference to an agreement, plan, policy, form, document or set of documents, and the rights and obligations of the parties under any such agreement, plan, policy, form, document or set of documents, shall mean such agreement, plan, policy, form, document or set of documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions or replacements thereof; and (ix) all accounting terms not specifically defined shall be construed in accordance with GAAP.

 

Adopted by the Board: October 1, 2016

 

Approved by the Stockholders: October 1, 2016

 

Scheduled Termination Date: October 1, 2026

 

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HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of August 30, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Hancock Jaffe ”) and Benedict Broennimann, M.D. (“ Executive ,” and together with Hancock Jaffe, the “ Parties ”).

 

WHEREAS, Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Chief Executive Officer. Executive shall be responsible for all financial and administrative activities of the company. Executive shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chairman of the Board of Directors of Hancock Jaffe (the “ Board ”) from time to time.

 

(b) Executive shall report directly to the Chairman of the Board.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.

 

2. TERM. This Agreement may be terminated by Hancock Jaffe or Executive at any time with thirty (30) days written notice.

 

3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (the “ Base Salary ”) at an annual rate of $360,000, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall the Base Salary be reduced from the preceding year without the consent of Executive.

 

4. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ ISO ”), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 293,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Section 409A (as defined below).

 

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5. EMPLOYEE BENEFITS.

 

(a) VACATIONS. Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.

 

(b) HOLIDAYS AND PERSONAL DAYS. Executive shall be entitled to Holidays and Personal Days, as defined in, and in accordance with, Hancock Jaffe’s then existing employment policy (currently 12 paid Holidays and 10 Personal Days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.

 

(c) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive and in connection with the performance of Executive’s duties hereunder.

 

6. RESTRICTIVE COVENANTS.

 

(a) Confidentiality.

 

(i) Company Information. At all times during Executive’s employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which have become publicly known and made generally available through no wrongful act of Executive.

 

(ii) Executive-Restricted Information. Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.

 

(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during Executive’s employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b) Nonsolicitation of Employees. During Executive’s employment and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates (as defined below), solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.

 

(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “ Claims ”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 6(d) , and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance rendered hereunder.

 

(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, while employed by Hancock Jaffe and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. While employed by Hancock Jaffe and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

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(iii) Moreover, if while employed by Hancock Jaffe, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both while employed by Hancock Jaffe and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance rendered hereunder.

 

(iv) Notwithstanding the foregoing provisions of this Section 6(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 6(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.

 

(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

7. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 6 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

8. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 8 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

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9. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.

 

10. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

11. 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 provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

12. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

 

13. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

14. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

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15. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.

 

By signing this Agreement Below, Executive acknowledges that Executive:

 

(1) has read and understood the entire Agreement;

 

(2) has had the opportunity to task questions and consult counsel or other advisors about its terms; and

 

(3) agrees to be bound by it.

 

In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   EXECUTIVE
     

Yury Zhivilo

   

Chairman of the Board

   

 

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HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of July 22, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc. (“ Hancock Jaffe ”) and William R. Abbott (“ Executive ,” and together with Hancock Jaffe, the “ Parties ”).

 

A. The Parties previously entered into an employment agreement, dated March 21, 2016 (the “ Prior Employment Agreement ”).

 

B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.

 

C. This Agreement will supersede the Prior Employment Agreement in its entirety.

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Senior Vice President, Chief Financial Officer, Secretary and Treasurer. Executive shall be responsible for all financial and administrative activities of the company. Executive shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.

 

(b) Executive shall report directly to the Chief Executive Officer.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.

 

2. TERM. Subject to the severance provisions of Section 7 , this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “ Initial Term ”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term, a “ Renewal Term ,” and each Renewal Term together with the Initial Term, the “ Term ”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.

 

3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“ Base Salary ”) at an annual rate of $225,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.

 

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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “ Annual Bonus ”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.

 

5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”) “), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 293,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.

 

6. EMPLOYEE BENEFITS.

 

(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.

 

(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.

 

(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.

 

(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.

 

(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.

 

6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:

 

(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “ Disability ” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.

 

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(b) DEATH. Automatically upon the death of Executive.

 

(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “ Cause ” shall mean Executive’s:

 

(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;

 

(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);

 

(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;

 

(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;

 

(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or

 

(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.

 

Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.

 

(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “ Good Reason ” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:

 

(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;

 

(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;

 

(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or

 

(iv) a material breach by Hancock Jaffe of a material term of this Agreement.

 

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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.

 

(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).

 

(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).

 

7. CONSEQUENCES OF TERMINATION.

 

(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):

 

(i) any unpaid Base Salary through the date of termination;

 

(ii) any Annual Bonus earned but unpaid prior to the date of termination;

 

(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;

 

(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and

 

(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “ Accrued Benefits ”).

 

(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).

 

(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:

 

(i) the Accrued Benefits; and

 

(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “ Severance Amount ”).

 

Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.

 

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(d) CHANGE IN CONTROL. A “ Change in Control ” shall mean the consummation of any of the following events:

 

(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “ Voting Securities ”);

 

(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “ Business Combination ”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;

 

(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or

 

Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.

 

(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.

 

(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a) , (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.

 

(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7 , and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.

 

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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.

 

(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.

 

8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).

 

9. RESTRICTIVE COVENANTS.

 

(a) Confidentiality.

 

(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.

 

(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.

 

(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.

 

(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “ Claims ”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d) , and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(iv) Notwithstanding the foregoing provisions of this Section 9(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.

 

(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “ Bad Leaver .” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.

 

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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.

 

13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

14. 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 provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

 

16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.

 

19. TAX MATTERS.

 

(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.

 

(b) SECTION 409A COMPLIANCE.

 

(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “ Code ”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.

 

(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.

 

(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.

 

(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.

 

(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “ Payment ”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “ Parachute Threshold ”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “ Excise Tax ”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.

 

By signing this Agreement Below, Executive acknowledges that Executive:

 

(1) has read and understood the entire Agreement;

 

(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and

 

(3) agrees to be bound by it.

 

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In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   WILLIAM R. ABBOTT
     
     
Yury Zhivilo    
Chairman of the Board    

 

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HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of July 22, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc. (“ Hancock Jaffe ”) and Marc Glickman, M.D. (“ Executive ,” and together with Hancock Jaffe, the “ Parties ”).

 

A. The Parties previously entered into an employment agreement, dated May 1, 2016 (the “ Prior Employment Agreement ”).

 

B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.

 

C. This Agreement will supersede the Prior Employment Agreement in its entirety.

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Senior Vice President and Chief Medical Officer. Executive shall be responsible for advancing the science and development of new products and acting as chief liaison with the medical community. Executive shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.

 

(b) Executive shall report directly to the Chief Executive Officer.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.

 

2. TERM. Subject to the severance provisions of Section 7 , this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “ Initial Term ”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term, a “ Renewal Term ,” and each Renewal Term together with the Initial Term, the “ Term ”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.

 

3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“ Base Salary ”) at an annual rate of $300,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.

 

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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “ Annual Bonus ”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.

 

5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”) “), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 369,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.

 

6. EMPLOYEE BENEFITS.

 

(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.

 

(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.

 

(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.

 

(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.

 

(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.

 

6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:

 

(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “ Disability ” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.

 

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(b) DEATH. Automatically upon the death of Executive.

 

(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “ Cause ” shall mean Executive’s:

 

(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;

 

(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);

 

(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;

 

(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;

 

(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or

 

(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.

 

Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.

 

(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “ Good Reason ” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:

 

(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;

 

(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;

 

(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or

 

(iv) a material breach by Hancock Jaffe of a material term of this Agreement.

 

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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.

 

(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).

 

(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).

 

7. CONSEQUENCES OF TERMINATION.

 

(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):

 

(i) any unpaid Base Salary through the date of termination;

 

(ii) any Annual Bonus earned but unpaid prior to the date of termination;

 

(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;

 

(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and

 

(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “ Accrued Benefits ”).

 

(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).

 

(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:

 

(i) the Accrued Benefits; and

 

(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “ Severance Amount ”).

 

Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.

 

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(d) CHANGE IN CONTROL. A “ Change in Control ” shall mean the consummation of any of the following events:

 

(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “ Voting Securities ”);

 

(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “ Business Combination ”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;

 

(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or

 

Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.

 

(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.

 

(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a) , (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.

 

(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7 , and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.

 

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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.

 

(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.

 

8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).

 

9. RESTRICTIVE COVENANTS.

 

(a) Confidentiality.

 

(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.

 

(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.

 

(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.

 

(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “ Claims ”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d) , and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(iv) Notwithstanding the foregoing provisions of this Section 9(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.

 

(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “ Bad Leaver .” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.

 

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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.

 

13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

14. 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 provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

 

16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.

 

19. TAX MATTERS.

 

(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.

 

(b) SECTION 409A COMPLIANCE.

 

(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “ Code ”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.

 

(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.

 

(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.

 

(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.

 

(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “ Payment ”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “ Parachute Threshold ”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “ Excise Tax ”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.

 

By signing this Agreement Below, Executive acknowledges that Executive:

 

(1) has read and understood the entire Agreement;

 

(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and

 

(3) agrees to be bound by it.

 

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In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.     MARC GLICKMAN, M.D.
     
     
William R. Abbott    
Chief Financial Officer    

 

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HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of July 22, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc. (“ Hancock Jaffe ”) and Susan Montoya (“ Executive ,” and together with Hancock Jaffe, the “ Parties ”).

 

A. The Parties previously entered into an employment agreement, dated March 1, 2016 (the “ Prior Employment Agreement ”).

 

B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.

 

C. This Agreement will supersede the Prior Employment Agreement in its entirety.

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Senior Vice President of Operations and RA/QA. Executive shall be responsible for Operations, Regulatory Affairs and Quality Assurance. Executive shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.

 

(b) Executive shall report directly to the Chief Executive Officer.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.

 

2. TERM. Subject to the severance provisions of Section 7 , this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “ Initial Term ”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of the each term , (each term, a “ Renewal Term ,” and each Renewal Term together with the Initial Term, the “ Term ”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.

 

3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“ Base Salary ”) at an annual rate of $295,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.

 

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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “ Annual Bonus ”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.

 

5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 1,637,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.

 

6. EMPLOYEE BENEFITS.

 

(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.

 

(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.

 

(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.

 

(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.

 

(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.

 

6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:

 

(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “ Disability ” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.

 

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(b) DEATH. Automatically upon the death of Executive.

 

(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “ Cause ” shall mean Executive’s:

 

(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;

 

(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);

 

(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;

 

(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;

 

(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or

 

(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.

 

Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.

 

(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “ Good Reason ” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:

 

(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;

 

(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;

 

(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or

 

(iv) a material breach by Hancock Jaffe of a material term of this Agreement.

 

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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.

 

(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).

 

(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).

 

7. CONSEQUENCES OF TERMINATION.

 

(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):

 

(i) any unpaid Base Salary through the date of termination;

 

(ii) any Annual Bonus earned but unpaid prior to the date of termination;

 

(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;

 

(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and

 

(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “ Accrued Benefits ”).

 

(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).

 

(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:

 

(i) the Accrued Benefits; and

 

(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “ Severance Amount ”).

 

Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.

 

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(d) CHANGE IN CONTROL. A “ Change in Control ” shall mean the consummation of any of the following events:

 

(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “ Voting Securities ”);

 

(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “ Business Combination ”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;

 

(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or

 

Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.

 

(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.

 

(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a) , (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.

 

(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7 , and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.

 

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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.

 

(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.

 

8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).

 

9. RESTRICTIVE COVENANTS.

 

(a) Confidentiality.

 

(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.

 

(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.

 

(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.

 

(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “ Claims ”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d) , and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(iv) Notwithstanding the foregoing provisions of this Section 9(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.

 

(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “ Bad Leaver .” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.

 

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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.

 

13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

14. 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 provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

 

16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.

 

19. TAX MATTERS.

 

(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.

 

(b) SECTION 409A COMPLIANCE.

 

(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “ Code ”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.

 

(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.

 

(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.

 

(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.

 

(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “ Payment ”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “ Parachute Threshold ”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “ Excise Tax ”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.

 

By signing this Agreement Below, Executive acknowledges that Executive:

 

(1) has read and understood the entire Agreement;

 

(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and

 

(3) agrees to be bound by it.

 

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In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.     SUSAN MONTOYA
     
     
William R. Abbott    
Chief Financial Officer    

 

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HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of July 1, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc. (“ Hancock Jaffe ”) and Steven Cantor (“ Employee ,” and together with Hancock Jaffe, the “ Parties ”).

 

A .        The Parties previously entered into an employment agreement, on or about September 2, 2013 (the “Prior Employment Agreement”).

 

B .        Hancock Jaffe desires to employ Employee and Employee desires to be so employed, pursuant to the terms of this Agreement.

 

C.        This Agreement will supersede the Prior Employment Agreement in its entirety.

 

D.       Upon signing this Agreement, Employee shall be paid in full the deferred income owed Employee from the Prior Employment Agreement to the date of this Agreement.

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1.       POSITION AND DUTIES.

 

(a)       Hancock Jaffe shall employ Employee as its Business Development Manager. Upon Hancock Jaffe’s initial public offering (IPO) of its stock, Employee shall assume the new position of Vice President of Business Development. Employee shall be responsible for assisting in advancing the exit strategy and/or development routes of Hancock Jaffe’s products. Employee shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Employee’s position and those employment duties that may be assigned to Employee by the Chief Executive Officer of Hancock Jaffe from time to time.

 

(b)       Employee shall report directly to the Chief Executive Officer.

 

(c)       Employee shall devote such time, energy, judgment, knowledge and skill and Employee’s best commercial efforts to the performance of Employee’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Employee from (i) participating in charitable, civic, educational, professional, community or industry affairs, (ii) managing Employee’s passive personal investments, so long as such activities in the aggregate do not create a business or fiduciary conflict, or (iii) participating in any business that does not compete with Hancock Jaffe’s cardiovascular, orthopedic and dermal filler products. Hancock Jaffe acknowledges that Employee’s non-competitive activities in other medical companies may help Hancock Jaffe advance the exit strategy and/or development routes of its products.

 

2.       TERM. Subject to the severance provisions of Section 7 , this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2016 (the “ Initial Term ”) This Agreement shall automatically be extended for additional one (1) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each calendar year, (each year, a “ Renewal Term ,” and each Renewal Term together with the Initial Term, the “ Term ”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement. Notwithstanding the above in this Section 2, upon a Hancock Jaffe IPO, Employee Agreement shall automatically be for a term of two (2) years from such IPO and subject to the renewal terms described herein.

 

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3.       BASE SALARY. Hancock Jaffe shall pay Employee a base salary (“ Base Salary ”) at an annual rate of $24,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Employee. Notwithstanding the above in this Section 3, upon IPO, the Base Salary shall automatically increase to an annual rate of $180,000 per year for two (2) years starting from date of IPO.

 

4.       BONUS. Employee shall receive a Bonus of $250,000 upon completion of a strategic transaction, such as the completion of the Series A Private Placement or a strategic transaction regarding a Hancock Jaffe product candidate. Hancock Jaffe, at its sole discretion, may advance all or portions of the Bonus as certain milestones are met.

 

5.       EQUITY .

 

(a) Upon signing this Agreement, Employee shall be issued a replacement stock certificate representing 598,800 shares of Hancock Jaffe Common Stock. Such 598,800 shares of Hancock Jaffe common stock, which are considered founders shares with a zero or near zero value at issuance, Employee received September 2, 2013 from Prior Employment Agreement. These 598,800 shares have been previously earned in accordance with the Prior Employment Agreement and are not subject to claw back or other similar action by Hancock Jaffe.

 

(b) Upon signing this Agreement, Hancock Jaffe ratifies the warrant agreement between Hancock Jaffe and Employee dated May 5, 2016, which among other terms, provides for Employee to purchase 833,333 shares of Hancock Jaffe common stock at a price of $6.00 per share. Such warrants are not subject to claw back or other similar action by Hancock Jaffe.

 

6.       EMPLOYEE BENEFITS.

 

(a)        BENEFIT PLANS. During the Term, Employee shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Employee hereunder. Employee’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Employee and Employee’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Employee and Employee’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.

 

(b)        VACATIONS. During the Term, Employee shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Employee shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.

 

(c)        HOLIDAYS AND PERSONAL DAYS. During the Term, Employee shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently 12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.

 

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(d)        PENSION AND PROFIT SHARING PLANS. During the Term, Employee shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Employees and/or employees generally.

 

(e)        BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Employee shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Employee during the Term and in connection with the performance of Employee’s duties hereunder.

 

6.       TERMINATION. Employee’s employment under this Agreement shall terminate on the first to occur of the following:

 

(a)        DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Employee of termination due to Disability. “ Disability ” shall mean Employee is unable to perform each of the essential duties of Employee’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.

 

(b)        DEATH. Automatically upon the death of Employee.

 

(c)        CAUSE. Immediately upon written notice by Hancock Jaffe to Employee of a termination for Cause. “ Cause ” shall mean Employee’s:

 

(i)       willful misconduct or gross negligence in the performance of Employee’s duties to Hancock Jaffe;

 

(ii)       willful failure to perform Employee’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);

 

(iii)       indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;

 

(iv)       repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;

 

(v)       performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or

 

(vi)       material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.

 

Employee shall be given written notice detailing the specific Cause event and a period of 10 days following Employee’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Employee’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Employee. A termination for Cause shall be deemed to include a determination by the Board or its designee following Employee’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Employee for Cause. All rights Employee has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Employee, regarding any actual or alleged act or omission by Employee of the type described in this definition of Cause.

 

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(d)        GOOD REASON. Upon written notice by Employee to Hancock Jaffe of a termination for Good Reason. “ Good Reason ” shall mean the occurrence of any of the following events, without the consent of Employee, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Employee to Hancock Jaffe of the occurrence of one of the events:

 

(i)       material diminution in Employee’s Base Salary or Annual Bonus opportunity;

 

(ii)       material diminution in Employee’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law; or

 

(iii)       a material breach by Hancock Jaffe of a material term of this Agreement.

 

Employee shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Employee.

 

(e)        WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Employee of an involuntary termination without Cause (other than for death or Disability).

 

(f)        VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Employee to Hancock Jaffe of Employee’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).

 

7.       CONSEQUENCES OF TERMINATION.

 

(a)        DEATH/DISABILITY. In the event that Employee’s employment ends on account of Employee’s death or Disability, Employee or Employee’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):

 

(i)       any unpaid Base Salary through the date of termination;

 

(ii)       any Annual Bonus earned but unpaid prior to the date of termination;

 

(iii)       reimbursement for any unreimbursed business expenses incurred through the date of termination;

 

(iv)       any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Employee’s employment with Hancock Jaffe is terminated; and

 

(v)       all other payments, benefits or fringe benefits to which Employee shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “ Accrued Benefits ”).

 

(b)        TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Employee’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Employee without Good Reason, Hancock Jaffe shall pay to Employee the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).

 

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(c)        TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Employee’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Employee for Good Reason, Hancock Jaffe shall pay or provide Employee the following:

 

(i)       the Accrued Benefits; and

 

(ii)       subject to Employee’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “ Severance Amount ”).

 

Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Employee may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Employee die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Employee in accordance with the schedule set forth herein.

 

(d)        CHANGE IN CONTROL. A “ Change in Control ” shall mean the consummation of any of the following events:

 

(i)       the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “ Voting Securities ”);

 

(ii)       a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “ Business Combination ”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;

 

(iii)       a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or

 

Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.

 

(e)        OTHER OBLIGATIONS. Upon any termination of Employee’s employment with Hancock Jaffe, Employee shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other Hancock Jaffe entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Employee serves at the direction of or as a result of his position as Employee with Hancock Jaffe; and Employee shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.

 

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(f)        EXCLUSIVE REMEDY. The amounts payable to Employee following termination of employment hereunder pursuant to Sections 7(a) , (b) and (c) above shall be in full and complete satisfaction of Employee’s rights under this Agreement and any other claims that Employee may have in respect of Employee’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Employee acknowledges that such amounts are fair and reasonable, and are Employee’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Employee’s employment hereunder or any breach of this Agreement.

 

(g)        NO MITIGATION OR OFFSET. Employee shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7 , and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Employee from other sources.

 

(h)        NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Employee of any benefits accrued for or due to Employee under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Employee shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.

 

(i)        CLAWBACK. All awards, amounts or benefits outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action. Notwithstanding the above in this section, all awards, amounts, Hancock Jaffe common stock, warrants or benefits already received, accrued and/or earned but not yet paid, shall not be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action.

 

8.       RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Employee delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Employee within two business days after Employee’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).

 

9.       RESTRICTIVE COVENANTS.

 

(a)        Confidentiality.

 

(i)        Company Information. At all times during the Term and thereafter, Employee shall hold in strictest confidence, and shall not use, except in connection with the performance of Employee’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Employee by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Employee.

 

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(ii)        Employee-Restricted Information. During the Term, Employee shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Employee has an agreement or duty to keep such information or secrets confidential.

 

(iii)        Third Party Information. Employee recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Employee shall hold in strictest confidence, and shall not use, except in connection with the performance of Employee’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Employee’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b)        Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Employee shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

(c)        NONDISPARAGEMENT. Employee shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Employee discharging his duties for Hancock Jaffe.

 

(d)        COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Employee shall respond and provide information with regard to matters in which Employee has knowledge as a result of Employee’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Employee’s employment with Hancock Jaffe (collectively, the “ Claims ”). Employee shall promptly inform Hancock Jaffe if Employee becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Employee also shall promptly inform Hancock Jaffe (to the extent that Employee is legally permitted to do so) if Employee is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Employee (other than in connection with any litigation or other proceeding in which Employee is a party-in-opposition) with respect to matters Employee believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Employee shall not communicate with anyone (other than Employee’s attorneys and tax and/or financial advisors and except to the extent that Employee determines in good faith is necessary in connection with the performance of Employee’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Employee for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Employee in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d) , and Employee shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

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(e)        Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i)       As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Employee or which are disclosed or made known to Employee, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

(ii)       In particular, Employee hereby specifically assigns and transfers to Hancock Jaffe all of Employee’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Employee shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

(iii)       Moreover, if during the Term, Employee creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Employee or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Employee in the scope of Employee’s employment; or, if the work is not prepared by Employee within the scope of Employee’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Employee within the scope of Employee’s employment or is not a work specially ordered and deemed to be a work made for hire, then Employee shall assign, and by these presents, does assign, to Hancock Jaffe all of Employee’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Employee shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Employee shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(iv)       Notwithstanding the foregoing provisions of this Section 9(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Employee that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Employee’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Employee for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Employee upon Employee’s request.

 

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(f)        RETURN OF COMPANY PROPERTY. On the date of Employee’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Employee shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

(g)        EFFECT OF EMPLOYEE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Employee breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Employee’s termination of employment with Hancock Jaffe for any reason and (ii) Employee fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Employee shall be deemed a “ Bad Leaver .” If Employee is or becomes a Bad Leaver, then (i) any severance being paid to Employee pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Employee shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.

 

10.       EQUITABLE RELIEF AND OTHER REMEDIES. Employee acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

11.       NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

12.       NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Employee from time to time; and to Employee at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Employee, by notice to Hancock Jaffe, may designate in writing from time to time.

 

13.       SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

14.       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 provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

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15.       COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in several counterparts electronically, by fax, and by signing and scanning and emailing.

 

16.        Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a)       All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

(b)       For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

(c)       Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

17.       MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Employee and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

18.       REPRESENTATIONS. Employee represents and warrants to Hancock Jaffe that (a) Employee has the legal right to enter into this Agreement and to perform all of the obligations on Employee’s part to be performed hereunder in accordance with its terms, and (b) Employee is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Employee from entering into this Agreement or performing all of Employee’s duties and obligations hereunder.

 

19.       TAX MATTERS.

 

(a)        WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.

 

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(b)        SECTION 409A COMPLIANCE.

 

(i)       The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “ Code ”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Employee by Section 409A or damages for failing to comply with Section 409A.

 

(ii)       A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Employee is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Employee, and (B) the date of Employee’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Employee in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

(iii)       To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Employee, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.

 

(iv)       For purposes of Section 409A, Employee’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.

 

(v)       Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.

 

(c)        Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Employee pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Employee’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “ Payment ”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Employee being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “ Parachute Threshold ”), so that Employee would be subject to the excise tax imposed by Code Section 4999 (the “ Excise Tax ”) and the net after-tax benefit that Employee would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Employee would receive if the full amount of the Payments were paid to Employee, then the Payments payable to Employee shall be reduced (but not below zero) so that the Payments due to Employee do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.

 

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By signing this Agreement Below, Employee acknowledges that Employee:

 

(1) has read and understood the entire Agreement;

 

(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and

 

(3) agrees to be bound by it.

 

In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Employee acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   STEVEN CANTOR
     
     
William R. Abbott    
Chief Financial Officer    

 

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EXHIBIT 10.10

  

HANCOCK JAFFE LABORATORIES, INC.

 

MEDICAL ADVISORY BOARD AGREEMENT

 

THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1 st day of May, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Steve Elias, M.D. having an address at 350 Engle Street, Englewood, New Jersey 07631.

 

WHEREAS, t he Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;

 

WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;

 

WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.

 

IT IS HEREBY AGREED:

 

1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.

 

2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:

 

(a)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;

 

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(b)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;

 

(c)       When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.

 

(d)        When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.

 

The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.

 

3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.

 

4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.

 

5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15 th day of each month.

 

6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.

 

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7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.

 

8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)

 

9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.

 

10. Miscellaneous.

 

  (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given.

 

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  (b) Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member.
     
  (c) Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void.
     
  (d) Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
     
  (e) Notices. All notices required or permitted hereunder 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 facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below:

 

  Page 4 of 6  
 

 

(i) if to HJL: Hancock Jaffe Laboratories Aesthetics, Inc.

70 Doppler

Irvine, California 92618

 

(ii) if to MAB Member:

 

   (f)   Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine.
     
  (g) Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
     
  (h) Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered.

 

THIS SPACE LEFT INTENTIONALLY BLANK

SIGNATURE PAGE FOLLOWS

 

  Page 5 of 6  
 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.

 

HANCOCK JAFFE LABORATORIES, INC.  
     
By:  
     
Name: Norman Jaffe  
Its: President  
     
MEDICAL ADVISORY BOARD MEMBER  
     
By:  
     
Name: Steve Elias, M.D.  

 

  Page 6 of 6  
 

 

EXHIBIT 10.11

  

HANCOCK JAFFE LABORATORIES, INC.

 

MEDICAL ADVISORY BOARD AGREEMENT

 

THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1 st day of May, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Antonios Gasparis, M.D. as a principal of APG Investor Group having an address at 1703 Court North Drive, Melville, New York 11747.

 

WHEREAS, t he Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;

 

WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;

 

WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.

 

IT IS HEREBY AGREED:

 

1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.

 

2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:

 

(a)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;

 

  Page 1 of 6  
 

 

(b)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;

 

(c)       When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.

 

(d)       When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.

 

The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.

 

3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.

 

4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.

 

5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15 th day of each month.

 

6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.

 

  Page 2 of 6  
 

 

7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.

 

8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)

 

9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.

 

10. Miscellaneous.

 

  (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given.

 

  Page 3 of 6  
 

 

  (b) Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member.
     
  (c) Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void.
     
  (d) Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
     
  (e) Notices. All notices required or permitted hereunder 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 facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below:

 

  Page 4 of 6  
 

 

(i) if to HJL: Hancock Jaffe Laboratories Aesthetics, Inc.

70 Doppler

Irvine, California 92618

 

(ii) if to MAB Member:

 

  (f)   Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine.
     
  (g) Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
     
  (h) Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered.

  

THIS SPACE LEFT INTENTIONALLY BLANK

SIGNATURE PAGE FOLLOWS

 

  Page 5 of 6  
 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.

 

HANCOCK JAFFE LABORATORIES, INC.  
     
By:    
Name: Norman Jaffe  
Its: President  
   
MEDICAL ADVISORY BOARD MEMBER  
     
By:    
Name: Antonios Gasparis, M.D.  

  

  Page 6 of 6  
 

 

EXHIBIT 10.12

 

HANCOCK JAFFE LABORATORIES, INC.

 

MEDICAL ADVISORY BOARD AGREEMENT

 

THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1 st day of September 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Wade Dimitri, M.D.

 

WHEREAS, t he Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;

 

WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;

 

WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.

 

IT IS HEREBY AGREED:

 

1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.

 

2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:

 

(a)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;

 

(b)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;

 

  Page 1 of 6  
 

 

(c)       When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.

 

(d)        When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.

 

The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.

 

3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.

 

4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.

 

5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15 th day of each month.

 

6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.

 

  Page 2 of 6  
 

 

7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.

 

8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)

 

9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.

 

10. Miscellaneous.

 

  (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given.

 

  Page 3 of 6  
 

 

  (b) Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member.
     
  (c) Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void.
     
  (d) Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
     
  (e) Notices. All notices required or permitted hereunder 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 facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below:

 

  Page 4 of 6  
 

 

  (i) if to HJL: Hancock Jaffe Laboratories, Inc.
      70 Doppler
      Irvine, California 92618
       
  (ii) if to MAB Member:

  Street:    
  City, State, Zip:    

   

  (f)   Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine.
     
  (g) Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
     
  (h) Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered.

 

THIS SPACE LEFT INTENTIONALLY BLANK

SIGNATURE PAGE FOLLOWS

 

  Page 5 of 6  
 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.

 

HANCOCK JAFFE LABORATORIES, INC.  
     
By:    
     
Name: Yury Zhivilo  
Its: Chairman  
     
MEDICAL ADVISORY BOARD MEMBER  
     
By:    
     
Name:    

 

  Page 6 of 6  
 

 

EXHIBIT 10.13  

 

HANCOCK JAFFE LABORATORIES, INC.

 

MEDICAL ADVISORY BOARD AGREEMENT

 

THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of October 1, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Mark Meissner, M.D.

 

WHEREAS, t he Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;

 

WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;

 

WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.

 

IT IS HEREBY AGREED:

 

1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.

 

2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:

 

(a)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;

 

(b)       Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;

 

  Page 1 of 6  
 

 

(c)       When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.

 

(d)        When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.

 

The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.

 

3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.

 

4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.

 

5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15 th day of each month.

 

6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.

  

  Page 2 of 6  
 

 

7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.

 

8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)

 

9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.

 

10. Miscellaneous.

 

  (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given.

 

  Page 3 of 6  
 

 

  (b) Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member.
     
  (c) Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void.
     
  (d) Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
     
  (e) Notices. All notices required or permitted hereunder 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 facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below:

  

  (i) if to HJL: Hancock Jaffe Laboratories, Inc.
      70 Doppler
      Irvine, California 92618

 

  Page 4 of 6  
 

 

  (ii) if to MAB Member:
    Street:  
    City, State, Zip:       

 

  (f)   Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine.
     
  (g) Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
     
  (h) Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered.

  

THIS SPACE LEFT INTENTIONALLY BLANK

SIGNATURE PAGE FOLLOWS

 

  Page 5 of 6  
 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.

 

HANCOCK JAFFE LABORATORIES, INC.  
     
By:    
Name: Yury Zhivilo  
Its: Chairman  
     
MEDICAL ADVISORY BOARD MEMBER  
     
By:    
Name: Mark Meissner, M.D  

 

  Page 6 of 6  
 

 

EXHIBIT 10.15

 

AMENDMENT 1

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement (the “ Amendment ”) is made and entered into as of April 1, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “ Lender ”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “ Borrower ”).

 

RECITALS

 

WHEREAS , the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.

 

WHEREAS , the Lender and the Borrower desire to amend the Loan Agreement to provide for repayment of the Note and any unpaid accrued interest thereon through the issuance of common shares of the Borrower, at the sole discretion of the Lender, but not later than August 31, 2016.

 

AGREEMENT

 

NOW, THEREFORE , in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

  1. Section 5.5 of the Loan Agreement is hereby added:
     
    At the sole discretion of the Lender, the Loan, plus any unpaid accrued interest, may be paid by the Borrower through the issuance of common shares of the Borrower. Lender and Borrower agree that the price per share shall be based on the valuation of the Borrower as established for the Borrower’s current Series A Preferred Stock Offering. Such valuation is set at $5.00 per share.

 

2.        Except as herein amended, all provisions of the Loan Agreement shall remain in full force and effect.

   

3.        This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute one instrument.

 

     
 

 

IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.

 

  LENDER
   
  Biodyne Holding SA
     
  By:  
    Yury Zhivilo, Managing Director
     
  BORROWER
   
  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
    William Abbott, Chief Financial Officer

   

    2  
 

 

EXHIBIT 10.16

 

AMENDMENT No. 2

 

TO LOAN AGREEMENT

  

This Amendment to Loan Agreement (the “ Amendment ”) is made and entered into as of October 18, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “ Lender ”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “ Borrower ”).

 

RECITALS

 

WHEREAS , the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.

 

WHEREAS , the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.

 

NOW, THEREFORE , in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

Section 1.1 of the Loan Agreement is hereby amended to read as follows:

 

Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200,000 (two million two hundred thousand US Dollars) in several installments through December 29, 2016.

 

Section 5 of the loan agreement is hereby amended to read as follows:

 

  Section 5: REPAYMENT
   
  5.1. The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower
  5.2. Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on December 29, 2016.
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by December 29, 2016. The Borrower is entitled to repay the loan and the accrued interests at any time before December 29, 2016 without penalty.

  

      1
 

  

IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.

 

  LENDER
     
  Biodyne Holding SA
     
  By:  
    Yury Zhivilo, Managing Director
     
  BORROWER
     
  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
    William Abbott, Chief Financial Officer

 

      2
 

 

EXHIBIT 10.17

AMENDMENT No. 3

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement DRICBDH0615 (the “ Amendment ”) is made and entered into as of December 9, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “ Lender ”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “ Borrower ”).

 

RECITALS

 

WHEREAS , the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.

 

WHEREAS , the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.

 

NOW, THEREFORE , in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

Section 1.1 of the Loan Agreement is hereby amended to read as follows:

 

Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200,000 (two million two hundred thousand US Dollars) in several installments through March 31, 2017.

 

Section 5 of the loan agreement is hereby amended to read as follows:

 

  Section 5: REPAYMENT
   
  5.1. The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower
  5.2. Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on March 31, 2017.
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by March 31, 2017. The Borrower is entitled to repay the loan and the accrued interests at any time before March 31, 2017 without penalty.

 

      1
 

 

IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.

 

  LENDER
     
  Biodyne Holding SA
     
  By:  
    Yury Zhivilo, Managing Director
     
  BORROWER
     
  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
    William Abbott, Chief Financial Officer

  

      2
 

 

EXHIBIT 10.20

 

COMMON STOCK PURCHASE AGREEMENT

 

THIS COMMON STOCK PURCHASE AGREEMENT (this “ Agreement ”) is made as of April 1, 2016 by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ HJL ”) and Hancock Jaffe Laboratories Aesthetics, Inc., a Delaware corporation (“ HJL Aesthetics ”).

 

RECITALS

 

WHEREAS, HJL desires to provide certain development and related services to HJL Aesthetics for the development of HJL Aesthetic’s dermal filler product candidate;

 

WHEREAS, HJL has previously paid HJL Aesthetics $445,200.00 in exchange for the exclusive and worldwide right to provide the development and manufacturing services to HJL Aesthetics through December 31, 2025 and for the right to buy 484,358 shares of Common Stock, $0.001 par value per share (the “ Common Stock ”) for an aggregate of $4,194,540.28 which purchase price shall be payable in accordance with the terms set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises of the parties, the parties agree as follows:

 

1.        Purchase of Shares . Subject to the terms and conditions of this Agreement, HJL has the right, but not the obligation, to purchase an aggregate of 484,358 shares of Common Stock (the “ Shares ”) in accordance with Schedule A . The purchase price for each of the Shares is $8.66. In the event that HJL elects not to purchase any Shares on a date indicated on Schedule A , it may purchase such Shares on another date upon the mutual agreement of HJL and HJL Aesthetics but not later than January 15, 2017.

 

2.        Closing; Delivery of Shares . The closing of the purchase and sale of the Shares shall take place at the offices of HJL Aesthetics (the “ Closing ”) at such other time or place as the parties mutually agree. At the Closing, HJL Aesthetics shall deliver to HJL a certificate representing the Shares that HJL is purchasing at the Closing against payment of the purchase price therefor by check or wire transfer.

 

3.        Exclusive Right to Provide Services . HJL Aesthetics hereby grants to HJL an exclusive right for a period through December 31, 2025, to provide development and manufacturing services for any and all product candidates developed by HJL Aesthetics during that period. If HJL agrees to provide such services, HJL and HJL Aesthetics shall enter into a separate development and/or manufacturing services agreement for such services, on or before January 15, 2017.

 

4.        Investment Representations of HJL . HJL acknowledges that it is aware that the Shares to be sold to it by HJL Aesthetics pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the “ Act ”). In connection therewith, HJL warrants and represents to HJL Aesthetics as follows:

 

    1  
 

 

(a)       HJL is receiving the Shares solely for HJL’s own account for investment and not with a view to or for sale or distribution of the Shares or any portion thereof and not with any present intention of selling, offering to sell or otherwise disposing of or distributing the Shares or any portion thereof. HJL also represents that the entire legal and beneficial interest of the Shares is being transferred for, and will be held for the account of, HJL only and neither in whole nor in part for any other person. HJL is receiving the Shares in a private transaction and not pursuant to a distribution or through a general solicitation or advertisement.

 

(b)       HJL is an “accredited investor” for purposes of Regulation D promulgated by the Securities and Exchange Commission under the Act.

 

(c)       HJL hereby acknowledges that:

 

(i)       The Shares have not been registered under the Act, and such Shares must be held indefinitely unless a transfer of them is subsequently registered under the Act or an exemption from such registration is available; and

 

(ii)       It is understood that the certificates representing the Shares may bear one or more legends including, but not limited to, a legend in substantially the following form:

 

(A)       “THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.”

 

(B)       Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the Shares represented by the certificate so legended.

 

5.        Representations and Warranties of HJL Aesthetics . HJL Aesthetics hereby represents and warrants and covenants to HJL as follows:

 

(a )        Organization, Good Standing and Qualification. HJL Aesthetics is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now being conducted and proposed to be conducted in the future. HJL Aesthetics is duly qualified to transact business and is in good standing in each jurisdiction where failure to so qualify would have a material adverse effect on its business or properties.

 

    2  
 

 

(b)         Authorization . All corporate actions on the part of HJL Aesthetics, its officers, directors, and stockholders necessary for the authorization, execution, and delivery of this Agreement, the performance of all obligations of HJL Aesthetics hereunder and thereunder, and the authorization, issuance (or reservation for issuance), and delivery of the Shares have been taken or will be taken prior to the Closing. This Agreement constitutes a valid and legally binding obligation of HJL Aesthetics, enforceable in accordance with its terms, except as limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (b) laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (c) state and federal securities laws with respect to rights to indemnification or contribution.

 

(c)         Valid Issuance of Shares . The Shares when authorized, issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of HJL in this Agreement, will be issued in compliance with all applicable federal and state securities laws.

 

(d)        No Conflict . The execution and delivery by HJL Aesthetics of this Agreement and the performance by HJL Aesthetics of its obligations hereunder (including the issuance and sale of the Shares) do not require HJL Aesthetics to obtain any consent, approval or action of, or make any filing with or give any notice to, any corporation, person or firm or any public, governmental or judicial authority that has not already been obtained prior to the date hereof or not required to be obtained until after the date hereof.

 

(e)        Capitalization . The authorized capital stock of HJL Aesthetics, as of the date of this Agreement, consists of 2,000,000 shares of Common Stock, of which 1,054,000 shares are issued and outstanding. There are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), or agreements of any kind for the purchase or acquisition from HJL Aesthetics of any of its securities.

 

(f)        Absence of Defaults . The execution and delivery of this Agreement and the performance of its obligations hereunder (including the issuance and sale of the Shares) will not result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or permit the acceleration of rights under or termination of, any material indenture, mortgage, deed of trust, credit agreement, note or other evidence of indebtedness, or other material agreement of HJL Aesthetics or the Certificate of Incorporation or Bylaws of HJL Aesthetics. No event has occurred and no condition exists which, upon notice or the passage of time (or both), would constitute a default under any such key agreements and instruments or in any license, permit or authorization to which HJL Aesthetics is a party or by which it may be bound.

 

(g)        Litigation . There is no action, suit, proceeding or investigation pending or, to HJL Aesthetics’s knowledge, currently threatened against HJL Aesthetics that questions the validity of this Agreement or the right of HJL Aesthetics to enter into it, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of HJL Aesthetics, financially or otherwise, nor is HJL Aesthetics aware that there is any basis for the foregoing. HJL Aesthetics is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by HJL Aesthetics currently pending or which HJL Aesthetics intends to initiate.

 

    3  
 

 

(h)        Compliance with Laws . HJL Aesthetics has conducted its business in compliance with all applicable (i) laws, statutes, ordinances, regulations, rules, notice requirements, common law, agency guidelines and orders of any foreign, federal, state or local courts or governmental agencies, departments or authorities (“ Authorities ”) (together, “ Regulations ”) and (ii) judgments, decisions, consent decrees, injunctions, rulings or orders of any Authorities that are binding on HJL Aesthetics or its property under applicable law (together, “ Court Orders ”), except as would not reasonably be expected to cause a material adverse effect on HJL Aesthetics’s business.

 

6. Miscellaneous .

 

(a)        Entire Agreement; Amendment . This Agreement embodies all of the agreements and understandings of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. The parties agree to execute such further instruments and to take such further instruments and to take such further action as may be reasonably necessary to carry out the intent of this Agreement. This Agreement may not be amended or modified, except by a written instrument signed by all of the parties affected thereby. No waiver of any right hereunder shall be effective unless it is given in a written document or instrument signed by the party waiving such right.

 

(b)        Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of California.

 

(c)        Headings . The paragraph headings included herein are for convenience of reference only and shall not be considered in, and shall not affect, the interpretation or application of any of the provisions hereof.

 

(d)        Counterparts . This Agreement may be executed in separate counterparts, each of which shall constitute one and the same agreement and, provided that each of the parties hereto has executed and delivered at least one such counterpart, this Agreement shall be effective even if all of the parties have not executed the same counterpart of this Agreement.

 

(e)        Successors and Assigns . The provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.

 

(f)        Severability . Any provision of this Agreement that is declared by a court of competent jurisdiction to be illegal, unenforceable or invalid, shall be ineffective to the extent of such illegality, unenforceability or invalidity, but any such provision shall be enforced to the fullest extent possible to avoid such illegality, unenforceability or invalidity, and each other provision of this Agreement shall continue in full force and effect.

 

    4  
 

 

IN WITNESS WHEREOF, the undersigned have executed this Common Stock Purchase Agreement as of the date first written above.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
  Name: William Abbott
  Its: Chief Financial Officer
     
  HANCOCK JAFFE LABORATORIES AESTHETICS, INC.
     
  By:  
  Name: Norman Jaffe
  Its: President

 

    5  
 

 

Schedule A

 

Payment   Date   Number of Shares
         
$ 179,998.10       April 18, 2016       20,785  
                     
$ 179,998.10       May 18, 2016       20,785  
                     
$ 179,998.10       June 18, 2016       20,785  
                     
$ 179,998.10       July 18, 2016       20,785  
                     
$ 179,998.10       August 18, 2016       20,785  
                     
$ 179,998.10       September 18, 2016       20,785  
                     
$ 179,998.10       October 18, 2016       20,785  
                     
$ 179,998.10       November 18, 2016       20,785  
                     
$ 179,998.10       January 1, 2017       20,785  
                     
$ 2,574,557.38       January 15, 2017       297,293  

 

    6  
 

 

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

 

This First Amendment to Employment Agreement (this “ Amendment ”), dated as of December 1, 2016 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Hancock Jaffe ”) and Steven Cantor (“ Employee ,” and together with Hancock Jaffe, the “ Parties ”), and amends that certain Employment Agreement, dated as of July 1, 2016, by and between Hancock Jaffe and Employee (the “ Employment Agreement ”).

 

RECITALS

 

WHEREAS, Hancock Jaffe and Employee previously entered into the Employment Agreement, pursuant to which Employee serves as Hancock Jaffe’s Business Development Manager;

 

WHEREAS, pursuant to Section 17 of the Employment Agreement, no provision of the Employment Agreement may be modified unless such modification is agreed to in writing and signed by Employee and such officer as may be designated by Hancock Jaffe; and

 

WHEREAS, the Parties desire to amend the Employment Agreement to, among other things, promote Employee to Chief Business Development Officer, increase Employee’s base salary, and adjust the bonus structure to incorporate more relevant milestones, all as set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. Amendment to Section 1(a) . Section 1(a) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
   
  “(a) Hancock Jaffe shall employ Employee as its Chief Business Development Officer. Employee shall be responsible for assisting in advancing the exit strategy and/or development routes of Hancock Jaffe’s products. Employee shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Employee’s position and those employment duties that may be assigned to Employee by the Chief Executive Officer of Hancock Jaffe from time to time.”
   
2. Amendment to Section 2 . Section 2 of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
   
  TERM”. Subject to the severance provisions of Section 7 , this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “ Initial Term ”) This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term a “ Renewal Term ,” and each Renewal Term together with the Initial Term, the “ Term ”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.

 

   
   

 

3. Amendment to Section 3 . Section 3 of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
   
  BASE SALARY. Hancock Jaffe shall pay Employee a base salary (“ Base Salary ”) at an annual rate of $300,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall the Base Salary be reduced from the preceding year without the consent of Employee. Notwithstanding the above in this Section 3, upon IPO, the Base Salary shall automatically increase to an annual rate of $300,000 per year for two (2) years starting from date of IPO.”
   
4. Amendment to Section 4 . Section 4 of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
   
  BONUS. Employee shall receive a Bonus of $250,000 upon completion of the earlier of (1) a commercial sale of one of Hancock Jaffe’s devices, or (3) the entry into a definitive agreement for the distribution or license of one of Hancock Jaffe’s devices. Hancock Jaffe, at its sole discretion, may advance all or portions of the Bonus as certain milestones are met.”
   
5. Effect on the Employment Agreement; Reaffirmation . The Employment Agreement is not modified or amended other than as expressly indicated herein, and all other terms and conditions of the Employment Agreement shall remain in full force and effect. Hancock Jaffe and Employee hereby reaffirm every term, condition, covenant, representation and warranty set forth in the Employment Agreement not amended herein as originally made and given.
   
6. Governing Law . This Amendment, for all purposes, shall be construed in accordance with the laws of the State of California without regard to conflicts of law principles.
   
7. Counterparts . This Amendment may be executed (a) in one or more partially or fully executed counterparts, each of which will be deemed an original and will bind the signatory, but all of which together will constitute the same instrument, and (b) by facsimile or other electronic transmission of signatures.

 

[ Signature page follows ]

 

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In witness whereof , Hancock Jaffe has caused this Amendment to be executed in its name and on its behalf, and Employee acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   STEVEN CANTOR
     
     
Yury Zhivilo    
Chairman    

 

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EXHIBIT 21.1

 

Subsidiaries of Hancock Jaffe Laboratories, Inc.

 

Name   Jurisdiction of Operations
     
Hancock Jaffe Laboratories Vascular, Inc.   Delaware

 

     
 

 

Independent Registered Public Accounting Firm’s Consent

 

We consent to the inclusion in this Registration Statement of Hancock Jaffe Laboratories, Inc. on Form S-1 of our report dated September 6, 2017,which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the financial statements of Hancock Jaffe Laboratories, Inc. as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.

  

/s/ Marcum LLP

 

 

Marcum LLP

New York, NY

September 6, 2017