As filed with the Securities and Exchange Commission on November 6, 2017.

Registration No. 333-220372

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

AMENDMENT NO. 1

to

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

55 West 39 th Street, 18th 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. [X]

 

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 [X]
Emerging growth company [X]      

 

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. [X]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered   Amount to be
Registered
    Proposed Maximum
Offering Price per
Share
    Proposed
Maximum
Aggregate Offering Price (2)(3)
    Amount of
Registration Fee (9)
 
Common Stock, $0.00001 par value per share     2,156,250 (1)   $ 8.00     $ 17,250,000 (1)   $ 2,148  
Underwriters’ Warrants (3)(4)(5)                        
Shares of Common Stock underlying Underwriters’ Warrants (4)     107,813 (4)   $ 10.00     $ 1,078,130 (4)   $ 135  
Common Stock, $0.00001 par value per share, upon conversion of Convertible Notes (6)     530,708     $ 8.00     $ 4,245,664     $ 529  
Common Stock, $0.00001 par value per share, upon exercise of warrants (7)     372,871     $ 8.00     $ 2,982,965     $ 372  
Common Stock, $0.00001 par value per share (8)     7,500     $ 8.00     $ 60,000     $ 8  
Total:     3,175,141                 $ 3,192  

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, or the Securities Act. Includes the offering price of 281,250 shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Pursuant to Rule 416(a) under the Securities Act, if prior to completion of the distribution of the securities covered hereby, (i) additional securities of the same class are issued or issuable as a result of a stock split or stock dividend, this registration statement shall be deemed to cover the additional securities resulting from the split or the stock dividend on the registered securities, and (ii) all the securities of a class which includes the registered securities are combined by a reverse split into a lesser amount of securities of the same class, the amount of undistributed securities of such class deemed to be covered hereby shall be proportionately reduced.
(4) Registers warrants to be granted to the underwriters, or designees, for an amount equal to 5% of the number of the shares of common stock sold to the public, and assuming a per share exercise price equal to 125% of the price per share in this offering. See “Underwriting” on page 116 of the first appearing prospectus contained within this registration statement for information on underwriting arrangements.
(5) No registration fee required pursuant to Rule 457(g) under the Securities Act.
(6) Represents shares of common stock that the Registrant expects could be issuable upon the conversion of certain convertible notes, as described in this registration statement.
(7) Represents shares of common stock that the Registrant expects could be issuable upon exercise of certain warrants to purchase shares of common stock, as described in this registration statement.
(8) Represents shares of common stock being registered hereunder for sale by a selling stockholder, as described in this registration statement.
(9) A registration fee of $1,738.50 was previously paid in connection with the initial filing of the Registration Statement.

 

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.

 

 

 

 
 

 

EXPLANATORY NOTE

 

This Registration Statement contains two forms of prospectuses. The first appearing prospectus is to be used in connection with the initial public offering of our common stock, which we refer to as the Prospectus, consisting of an aggregate of (i) 2,156,250 shares of our common stock (including 281,250 shares of common stock which may be sold upon exercise of the underwriters’ over-allotment option to cover over-allotments, if any) through the underwriters named on the cover page of this Prospectus, (ii) warrants to be granted to the underwriters, or designees, for an amount equal to 5% of the number of the shares of our common stock sold to the public, which we refer to as the Underwriters’ Warrants, and (iii) the shares of our common stock issuable upon exercise of the Underwriters’ Warrants.

 

The second appearing prospectus is to be used in connection with the potential resale by certain stockholders of our company, which we refer to as the Selling Stockholders, of an aggregate of 911,079 shares of our common stock, which we refer to as the Selling Stockholder Prospectus, consisting of (i) 530,708 shares of our common stock, which we refer to as the Note Shares, issuable upon conversion of our outstanding senior convertible notes, which we refer to as the Notes, (ii) 372,871 shares of our common stock, which we refer to as the Warrant Shares, issuable upon exercise of outstanding warrants, which we refer to as the Warrants, and (iii) 7,500 shares of our common stock held by COVA Capital Partners, LLC, in each case calculated using the midpoint of the price range listed on the cover page of this Prospectus.

 

The Prospectus and Selling Stockholder Prospectus are identical in all respects except for the alternate pages for the Selling Stockholder Prospectus included herein, which are labeled “Alternate Pages for Selling Stockholder Prospectus,” and are set forth below:

 

  they contain different outside and inside front covers;
     
  they contain different “Prospectus Summary” sections;
     
  they contain different “Use of Proceeds” sections;
     
  the “Capitalization” section does not appear in the Selling Stockholder Prospectus;
     
  a “Selling Stockholder” section is included at the beginning of the Selling Stockholder Prospectus;
     
  ●  the Underwriting section set forth in the Prospectus does not appear in the Selling Stockholder Prospectus and instead, a “Plan of Distribution” section is inserted in its place in the Selling Stockholder Prospectus; and
     
  ●  the “Legal Matters” section in the Selling Stockholder Prospectus does not reference counsel for the underwriters.

 

We have included in this Registration Statement, after the financial statements, the Alternate Pages for the Selling Stockholder Prospectus, which reflect the foregoing differences of the Selling Stockholder Prospectus as compared to the Prospectus.

 

The sales of the shares of our common stock registered in the Prospectus and the Selling Stockholder Prospectus may result in two offerings taking place concurrently which could affect the price and liquidity of, and demand for, shares of our common stock. This risk and other risks are included in “Risk Factors” beginning on page 10 of the Prospectus.

 

 
 

 

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 NOVEMBER 6, 2017

 

PRELIMINARY PROSPECTUS

 

 

 

1,875,000 Shares of

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 1,875,000 shares of common stock. We currently expect the initial public offering price to be between $6.00 and $8.00 per share.

 

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

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 10 of this prospectus.

 

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

 

  (1) See “Underwriting” beginning on page 116 of this prospectus for a description of the compensation payable to the underwriters.

 

We have granted to the underwriters an option to purchase up to 281,250 additional shares of common stock at the public offering price, less the underwriting discounts and commissions, for 45 days after the date of this prospectus.

 

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

 

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

 

WallachBeth Capital, LLC Network 1 Financial Securities, Inc.

 

The date of this prospectus is               , 2017
 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
RISK FACTORS 10
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA 46
USE OF PROCEEDS 48
DIVIDEND POLICY 49
CAPITALIZATION 50
DILUTION 52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 55
BUSINESS 66
MANAGEMENT 87
EXECUTIVE COMPENSATION 95
PRINCIPAL STOCKHOLDERS 103
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 104
DESCRIPTION OF CAPITAL STOCK 105
SHARES ELIGIBLE FOR FUTURE SALE 111
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK 113
UNDERWRITING 116
LEGAL MATTERS 119
EXPERTS 119
WHERE YOU CAN FIND MORE INFORMATION 119
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 ® and CoreoGraft™, in this prospectus. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations, such as ProCol Vascular Bioprosthesis®. 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.

 

 
 

 

 

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, which we refer to as BHV, 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 BHV is a bioprosthetic, porcine, or 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 pre-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 its performance concomitant with the growth of 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. If we receive approval 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, bovine, or cow, derived coronary artery bypass graft 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. If we complete these studies, 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 conducting 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, porcine 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 4.5 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. In preclinical studies, the VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, the VenoValve has functioned normally in acute animal implant as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. 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. If we commence a first-in-human trial, we will seek to obtain reimbursement approval for this product candidate. In the fourth quarter of 2017, we and the FDA discussed the pre-clinical tests submitted by us in the third quarter of 2017 and the FDA recommended we perform an additional 90 day animal study before commencing a first-in-human trial, which we are in the process of preparing to commence.

 

In addition, we previously manufactured, developed and obtained FDA pre-market approval, or PMA, 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 bovine mesenteric vein. The ProCol Vascular Bioprosthesis received a 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 our agreement with LMAT.

 

Our Industry and Market

 

Our three product candidates currently under development are designed to address three different cardiovascular diseases. 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 to 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.

 

 

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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.

 

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 375,000 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 4.5 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 worldwide . 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 the 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 could 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 product 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. We believe our patents pertaining to unique design advantages and processing methods of biologic valvular tissue as a “bioprosthetic” device provides 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, and 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 product candidates like ours that are intended to 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 patent applications 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:

 

 

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  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
     
  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 10 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.

 

 

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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.
     
  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 Marketplace Rules, and may rely on exemptions afforded to us under the Nasdaq Marketplace Rules relating to corporate governance matters and as a result, 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.

 

 

6
 

 

 

THE OFFERING

 

Common stock offered by us   1,875,000 shares
     
Underwriters’ option to purchase additional shares of common stock from us   We have granted the underwriters an option for a period of 45 days from the date of this prospectus to purchase an additional 281,250 shares of common stock.
     
Common stock to be outstanding after this offering     8,803,386 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 48 .
     
Risk Factors   See “Risk Factors” on page 10 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   HJLI

 

The number of shares of our common stock to be outstanding after this offering is based on 6,928,386 shares of common stock outstanding as of November 1, 2017, and excludes:

 

  539,535 shares of our common stock issuable upon the exercise of warrants outstanding as of November 1, 2017, at a weighted average exercise price of $11.86 per share;
     
  93,750 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $9.00;
     
  530,708 shares of our common stock issuable upon the conversion of the Notes outstanding as of November 1, 2017;
     
  1,416,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Omnibus Incentive Plan, or the 2016 plan, as of November 1, 2017; and
     
  234,000 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 additional shares of our common stock;
     
  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 794,707 shares of our common stock, the conversion of which will occur immediately prior to the closing of this offering;
     
  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; and
     
  a one-for-two reverse stock split of our common stock to be effected before the closing of this offering.

 

 

7
 

 

 

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 nine month periods ended September 30, 2017 and 2016 and the balance sheet data as of September 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.

 

A one-for-two reverse stock split of our common stock will be effected prior to the closing of this offering, or the Reverse Stock Split. With the exception of the securities that are not affected by the Reverse Stock Split, all share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated.

 

    For The Years Ended     For The Nine Months Ended  
    December 31,     September 30,  
    2016     2015     2017     2016  
Statement of Operations Data:               (unaudited)  
Revenues     785,912             246,988       481,053  
Cost of goods sold     810,294             321,675       598,295  
Gross Loss     (24,382 )           (74,687 )     (117,242 )
Selling, general and administrative expenses     4,634,801       1,289,851       3,799,211       3,406,367  
Research and development expenses                 300,648        
Loss from Operations     (4,659,183 )     (1,289,851 )     (4,174,546 )     (3,523,609 )
                                 
Other Expense (Income):     929,075       88,347       492,884       524,395  
                                 
Loss from Continuing Operations     (5,588,258 )     (1,378,198 )     (4,667,430 )     (4,048,004 )
Discontinued Operations:                                
Loss from discontinued operations, net of tax     (298,286 )     (225,815 )           (298,286 )
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       (225,815 )           2,200,768  
                                 
Net Loss     (3,387,490 )     (1,604,013 )     (4,667,430 )     (1,847,236 )
Deemed dividend to preferred stockholders     (342,859 )     (4,352 )     (331,607 )     (243,938 )
Net Loss Attributable to Common Stockholders     (3,730,349 )     (1,608,365 )     (4,999,037 )     (2,091,174 )

 

 

8
 

 

 

 

As of September 30, 2017

 
    Actual     Pro
Forma(1)
    Pro Forma as
Adjusted(2)(3)
 
    (unaudited)              
Balance Sheet Data:                        
Cash   $ 311,483     $ 762,985     $ 12,090,743  
Working capital deficit   $ (4,976,567 )   $ (4,525,065 )   $ (4,525,065 )
Total assets   $ 1,931,225     $ 2,382,727     $ 2,382,727  
Total liabilities   $ 5,525,525     $ 5,525,525     $ 5,525,525  
Accumulated deficit   $ (32,395,780 )   $ (32,395,780 )   $ (32,395,780 )
Total stockholders’ deficiency   $ (8,160,708 )   $ (3,142,798 )   $ 7,991,939  

 

(1)

Gives effect to the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 794,707 shares of our common stock, the sale of 86,667 additional shares of Series B preferred stock subsequent to September 30, 2017 for net proceeds of $451,502 and the filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the closing of this offering.

   
(2) Reflects, in addition to the pro forma adjustment set forth in footnote 1, the sale of 1,875,000 shares of our common stock in this offering at an assumed initial public offering price of $7.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   
(3) A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) each of cash, total assets and total stockholders’ (deficit) equity by $1.7 million, assuming the number of shares offered by us as stated on the cover page of this prospectus remains unchanged and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, total assets and total stockholders’ (deficit) equity by $6.3 million, assuming the assumed initial public offering price of $7.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

9
 

 

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 and 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 $4,667,430 for the nine months ended September 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 $32,395,780 as of September 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 device , the disease or condition that the products are 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:

 

10
 

 

  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;

 

11
 

 

  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.

 

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 November 1, 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.

 

12
 

 

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, pursuant to that certain Services and Material Supply Agreement, dated as of March 4, 2016, or the Supply Agreement, by and between us and ATSCO, Inc., or ATSCO. We intend to use ATSCO 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 ATSCO may cancel our arrangements on short notice, we may be relatively less important as a customer to ATSCO and ATSCO may have disruptions to its operations.

 

Pursuant to the Supply Agreement, ATSCO exclusively provides us with bovine veins, a key component for the manufacturing of ProCol Vascular Bioprosthesis. ATSCO trains its staff to collect materials from audited abattoirs under our specifications and procedures. In exchange, we agreed to purchase at least 700 units every month. The Supply Agreement terminates on March 3, 2019, but may be extended upon mutual agreement between us and ATSCO. The Supply Agreement may be terminated by either party with reasonable cause upon 90 days written notice if (i) we fail to pay without cure in limited situations, (ii) ATSCO willfully fails to follow procedures set forth therein, (iii) upon our mutual agreement with ATSCO without penalty, and (iv) if we cease manufacturing the ProCol Vascular Bioprosthesis for LMAT.

 

13
 

 

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 ATSCO 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.

 

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.

 

14
 

 

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.

 

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:

 

15
 

 

  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.

 

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;

 

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  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.

 

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.

 

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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.

 

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

 

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  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;
     
  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.

 

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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.

 

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.

 

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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.

 

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.

 

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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 officers .

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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.

 

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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:

 

  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.

 

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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.

 

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.

 

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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.

 

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:

 

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  the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, 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;
     
  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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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;

 

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  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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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 have applied 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 6,400,902 shares of our common stock, which in the aggregate will represent approximately 66.4% of the outstanding shares of our common stock, or 64.2% 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. After giving effect to this offering and based on 6,928,386 shares outstanding as of the date of this prospectus, we will have outstanding 8,803,386 shares of common stock, assuming no conversion of existing convertible notes or e xercise of outstanding options and warrants. Of these shares, 1,875,000 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.

 

After the lock-up agreements pertaining to this offering expire and based on shares outstanding after this offering, an additional 5,514,564 shares will be eligible for sale in the public market. In addition, upon issuance, the 1,416,000 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. 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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Sales of our common stock in this offering may take place concurrently with sales of our common stock by selling stockholders, which might affect the price and liquidity of, and demand for, shares of our common stock.

 

We are registering shares of common stock underlying the Underwriters’ Warrants, and the Notes and the Warrants that were issued together to certain Selling Stockholders, concurrently with this offering. The conversion price per share of the Notes, before giving effect to the Reverse Stock Split to be effected prior to the completion of this offering, is the lesser of (i) $6.00 or (ii) the per share price in this offering, multiplied by 70%. The exercise price per share of the related Warrants, before giving effect to the Reverse Stock Split to be effected prior to the completion of this offering, is the lesser of (i) $7.20 or (ii) 120% of the conversion price of the senior secured convertible notes. As a result, the shares of our common stock issued to Selling Stockholders upon conversion of the Notes or exercise of the related Warrants may be issued at a discount to the price of the shares of our common stock sold in this offering, which would result in further dilution of your investment. Concurrent or future sales of our common stock by these Selling Stockholders may reduce the price of our common stock and demand for the shares sold in the offering and, as a result, the liquidity of your investment.

 

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 $7.00 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 $5.97 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 26% of the aggregate price paid by all purchasers of our stock but will own only approximately 21% 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 of 1933, as amended, or 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.

 

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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.

 

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 emerging growth company 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.

 

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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.

 

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.

 

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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.

 

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 product candidates in a timely manner or at all;
     
  whether surgeons and patients in our target markets accept our product candidates, if approved;
     
  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 product candidates in a timely manner, or at all;
     
  failure to manufacture our product candidates at a competitive price;
     
  our ability to retain and recruit key personnel, including the development of a sales and marketing infrastructure;
     
  reliance on third party suppliers for certain components of our product candidates;
     
  reliance on third parties to commercialize and distribute our product candidates 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 product candidates; and
     
  changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the medical device industry.

 

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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 1,875,000 shares of common stock in this offering will be approximately $11.32 million (or approximately $13.10 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 $7.00 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 $7.00 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 $1.69 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 one million in the number of shares we are offering at the assumed initial public offering price of $7.00 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 $6.3 million, assuming the assumed initial public offering price remains the same.

 

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

 

  approximately $2.0 million to fund our research and development activities;
     
  approximately $7.25 million to fund the regulatory review process for all three 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.

 

The 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 product candidates 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.

 

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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. 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.

 

In addition, subject to limited exceptions, the terms of the Notes prohibit us from paying dividends on our equity securities so long as at least 33% of the principal amount of the Notes remains outstanding.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of September 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 794,707 shares of our common stock, which will occur immediately prior to the closing of this offering, and (2) 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 1,875,000 shares of common stock in this offering at an assumed initial public offering price of $7.00 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.

 

    Actual     Pro Forma     Pro Forma As Adjusted (1)  
          (unaudited)        
Cash and cash equivalents   $ 311,483     $ 762,985     $ 12,090,743  
                         
Total debt   $ 4,130,280     $ 4,130,280     $ 4,130,280  
                         
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, 6,133,679 shares issued and outstanding, actual; 30,000,000 shares authorized, 6,928,386 shares issued and outstanding, pro forma; 50,000,000 shares authorized, 8,803,386 shares issued and outstanding, pro forma as adjusted     61       69       88  
Preferred stock, $0.00001 par value per share; 6,000,000 shares authorized, 1,132,825 shares issued and outstanding, actual; 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted                        
Additional paid-in capital     24,235,011       29,252,913       40,580,652  
Accumulated deficit     (32,395,780 )     (32,395,780 )     (32,395,780 )
                         
Total stockholders’ (deficit) equity   $ (8,160,780 )     (3,142,798 )     8,184,960  
                         
Total capitalization   $ 535,980     $ 987,482     $ 12,315,240  

 

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(1) A $1.00 increase or decrease in the assumed initial public offering price of $7.00 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 $1.69 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 one 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 $6.3 million, assuming the assumed initial public offering price of $7.00 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 6,928,386 shares of common stock outstanding as of November 1, 2017, and excludes:

 

  539,535 shares of our common stock issuable upon the exercise of warrants outstanding as of November 1, 2017, at a weighted average exercise price of $11.86 per share;
     
  93,750 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $9.00;
     
  530,708 shares of our common stock issuable upon the conversion of the Notes outstanding as of November 1, 2017;
     
  1,416,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 plan, as of November 1, 2017; and
     
  234,000 shares of our common stock reserved for future issuance under the 2016 plan.

 

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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 September 30, 2017 was ($4,927,628) , or ($0.80) per share of common stock. Our pro forma net tangible book value (deficit) as of September 30, 2017 was ($4,476,126 or ($0.65) per share of common stock, after giving effect to the sale of 86,667 additional shares of Series B preferred stock prior to the offering, for net proceeds of $451,502 and the conversion of all our outstanding shares of preferred stock into 794,707 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 1,875,000 shares of our common stock in this offering at an assumed initial public offering price of $7.00 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 $1.45 per share to our existing stockholders, and an immediate dilution of $6.20 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           $ 7.00  
Historical net tangible book value (deficit) per share as of September 30, 2017   $ (0.80 )        
Increase in pro forma net tangible book value (deficit) attributable to the sale of Series B preferred stock prior to the offering     0.07          
Increase in pro forma net tangible book value (deficit) attributable to conversion of our convertible preferred stock     0.08          
Pro forma net tangible book value (deficit) per share as of September 30, 2017, before giving effect to this offering     (0.65 )        
Increase in pro forma net tangible book value (deficit) per share attributable to new investors participating in this offering     1.45          
Pro forma as adjusted net tangible book value (deficit) per share after this offering             0.80  
Dilution in pro forma net tangible book value (deficit) per share to new investors participating in this offering           $ 6.20  

 

A $1.00 increase or decrease in the assumed initial public offering price of $7.00 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 $0.19 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 $0.19 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 one 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 $0.56 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 $0.56 , assuming the assumed initial public offering price of $7.00 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.

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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 281,250 additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase to $0.95 per share, representing an immediate increase in pro forma net tangible book value to existing stockholders of $0.17 per share and a decrease in immediate dilution of $0.17 per share to new investors participating in this offering.

 

The following table sets forth, as of the date of this prospectus , 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 $7.00 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     6,928,386       78.7 %   $ 29,844,994       69.5 %   $ 4.31  
                                         
New investors   1,875,000     21.3 %   $ 13,125,000     30.5 %   $ 7.00  
                                         
Total     8,803,386       100 %   $ 42,969,994       100 %   $ 4.88  

 

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 76.3% 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 23.7% of the total number of shares of common stock that will be outstanding upon completion of the offering, before any sales by any Selling Stockholders of any of the shares of common stock registered concurrently with this offering.

 

If the Selling Stockholders sell, in a separate offering covered by the Selling Stockholder Prospectus, all 911,079 shares of our common stock registered concurrently with this offering (calculated using the midpoint of the price range listed on the cover page of this prospectus, assuming the conversion of all Notes, and the exercise of all Warrants, held by the Selling Stockholders, and after giving effect to the Reverse Stock Split to be effected prior to the completion of this offering), the number of shares held by existing stockholders will be further reduced to 69.4% of the total number of shares of common stock that will be outstanding upon completion of both offerings, and the number of shares of common stock held by new investors will be further increased to 30.6% of the total number of shares of common stock that will be outstanding upon completion of both offerings.

 

A $1.00 increase or decrease in the assumed initial public offering price of $7.00 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 $1.69 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 one million shares in the number of shares offered by us would increase or decrease, as appropriate, the total consideration paid by new investors by $6.3 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.

 

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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 6,928,386 shares of common stock outstanding as of November 1, 2017, and excludes:

 

  539,535 shares of our common stock issuable upon the exercise of warrants outstanding as of November 1, 2017, at a weighted average exercise price of $11.86 per share;
     
  93,750 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $9.00;
     
  530,708 shares of our common stock issuable upon the conversion of the Note outstanding as of November 1, 2017;
     
  1,416,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 plan, as of November 1, 2017; and
     
  234,000 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, which we refer to as BHV, 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, or Series A preferred stock. On the same date, we adopted a certificate of designation, preferences, rights and limitations of Series B convertible preferred stock, 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 $6.00 per share to certain accredited investors. The gross proceeds from the Series B preferred stock was $762,750 and we incurred offering expenses of $129,850, including $77,075 for placement agent fees. In connection with the sale of shares of our Series B preferred stock, the placement agent also received a warrant for the purchase of an aggregate of 8,490 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.

 

During October 2017, we issued 86,667 additional 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 $520,002 and we incurred cash offering costs of $68,500 (including $13,000 of placement agent fees). Warrants for the purchase of 12,567 shares of Series B preferred stock were granted to the placement agent in connection with the issuance of the Series B preferred stock shares.

 

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Senior Convertible Notes and Warrants

 

During the period from June 15, 2017 through September 26, 2017, we received proceeds aggregating $2,600,500 pursuant to the issuance of convertible promissory notes, or the Notes, and five-year warrants for the purchase of 108,359 shares of our common stock, or the Warrants. The 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) $12.00 per share, or (ii) 70% of the highest price per common share sold in an initial public offering, or 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 Note, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the Conversion price.

 

Reverse Stock Split

 

A one-for-two reverse stock split of our common stock, or the Reverse Stock Split, will be effected in connection with the closing of this offering, or the Reverse Stock Split. The Reverse Stock Split will not be effected on shares of our preferred stock, however, the Reverse Stock Split will be effected upon the shares of common stock our preferred stock will convert into in connection with this offering. With the exception of the securities that are not affected by the Reverse Stock Split, all share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated.

 

Results of Operations

 

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

 

    For The Years Ended     For The Nine Months Ended  
    December 31,     September 30,  
    2016     2015     2017     2016  
                (unaudited)        
Revenues:                                
Product sales     694,118       -       152,400       412,400  
Royalty income   91,794     -     94,588     68,653  
      785,912       -       246,988       481,053  
Cost of goods sold     810,294       -       321,675       598,295  
Gross Loss     (24,382 )     -       (74,687 )     (117,242 )
                                 
Selling, general and administrative expenses     4,634,801       1,289,851       3,799,211       3,406,367  
Research and development expenses     -       -       300,648       -  
Loss from Operations     (4,659,183 )     (1,289,851 )     (4,174,546 )     (3,523,609 )
                                 
Other Expense (Income):                                
Allowance on advances to related party     487,900       -       -       487,900  
Interest expense, net     57,890       88,524       100,523       50,471  
Amortization of debt discount     -       -       394,789       -  
Change in fair value of derivative liabilities     383,285       (177 )     (2,428 )     (13,976 )
Total Other Expense     929,075       88,347       492,884       524,395  
                                 
Loss from Continuing Operations     (5,588,258 )     (1,378,198 )     (4,667,430 )     (4,048,004 )
Discontinued Operations:                                
Loss from discontinued operations, net of tax     (298,286 )     (225,815 )     -       (298,286 )
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       (225,815 )     -       2,200,768  
                                 
Net Loss     (3,387,490 )     (1,604,013 )     (4,667,430 )     (1,847,236 )
Deemed dividend to preferred stockholders     (342,859 )     (4,352 )     (331,607 )     (243,938 )
Net Loss Attributable to Common Stockholders     (3,730,349 )     (1,608,365 )     (4,999,037 )     (2,091,174 )

 

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Comparison of the Nine Months Ended September 30, 2017 and 2016

 

Our net loss for the nine months ended September 30, 2017, increased by $2,820,194 or 153%, to $4,667,430 as compared to $1,847,236 for the nine months ended September 30, 2016. The increase in net loss is primarily related to $2,200,768 of income from discontinued operations recognized during the nine months ended September 2016, with no such income during the nine months ended September 30, 2017, as well as an increase in selling, general and administrative expenses of $392,844, and an increase in research and development expense of $300,648, as described below.

 

Revenue

 

For the nine months ended September 30, 2017 and 2016, we generated $152,400 and $412,400, respectively, of revenues for product sales and $94,588 and $68,653, respectively, of royalty income. The decrease in product sales resulted from decreased orders for product from 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 are approved, if at all, our revenue will be dependent upon LMAT’s sales efforts for the ProCol product.

 

Royalty income is earned pursuant to the terms of our March 2016 asset sale agreement with LMAT. The increase in royalty income results from royalties earned for nine months during 2017, versus six months in 2016, from the date of the asset purchase agreement through September 30, 2016.

 

Gross Loss

 

For the nine months ended September 30, 2017, our cost of sales decreased by $276,620, or 49%, to $321,675 as compared to $598,295 for the nine months ended September 30, 2016, primarily as the result of decreased product sales during the period. Cost of goods sold consists primarily of direct labor costs, supplies and material costs used in the manufacturing process of the ProCol product 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 the ProCol product.

 

Selling, General and Administrative Expenses

 

For the nine months ended September 30, 2017, selling, general and administrative expenses increased by $392,844 or 12%, from $3,406,367 to $3,799,211 as compared to the nine months ended September 30, 2016. The increase is primarily due to an increase of approximately $695,000 in administrative salaries resulting from the hiring of our Chief Medical Officer, Chief Financial Officer and Business Development Manager during 2016, such that salaries were paid for only a partial period during the nine months ended September 30, 2016, and an increase of approximately $186,000 resulting from less overhead being charged to inventory during the period, partially offset by a decrease of approximately $496,000 in stock based compensation during the period.

 

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Research and Development Expenses

 

We incurred $300,648 of research and development expenses during the nine months ended September 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 during the nine months ended September 30, 2016. During 2016, our efforts were primarily focused on manufacturing product pursuant to our manufacturing supply arrangement with LMAT. We have not manufactured any heart values for LMAT during the second or third quarter of 2017, allowing us to increase our research and development activities.

 

Allowance on Advances to Related Party

 

During the nine months ended September 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 $487,900 for the nine months ended September 30, 2016 related to our advances to HJLA. We recorded no such allowances in 2017.

 

Interest Expense

 

For the nine months ended September 30, 2017, interest expense increased by $50,052 or 99%, as compared to the nine months ended September 30, 2016 due to an increase in the average balance of loans payable outstanding, principally from the issuance of the Notes during the period.

 

Amortization of Debt Discount

 

During the nine months ended September 30, 2017, we recognized $394,789 of amortization of debt discount related to the embedded conversion option in the Notes, as well as the Warrants granted with the Notes issued during the period. We recorded no such amortization during 2016.

 

Change in Fair Value of Derivative Liability

 

For the nine months ended September 30, 2017, we recorded a gain of $2,428 as compared to a gain of $13,976 for the nine months ended September 30, 2016. Our derivative liabilities are related to warrants issued in connection with our Series A preferred stock and Series B preferred stock financing, plus Warrants issued in connection with the Notes, as well as the embedded conversion option in the Notes.

 

Loss from Continuing Operations

 

Loss from continuing operations was $4,667,430 for the nine months ended September 30, 2017 compared to $4,048,004 for the nine months ended September 30, 2016, representing a decrease of $619,426 or 15%. The increase was primarily attributable to increases in (i) selling, general and administrative expenses of $392,844, (ii) research and development expenses of $300,648, (iii) interest expense of $50,052, and (iv) amortization of debt discount of $394,789, partially offset by a $487,900 decrease in expense for allowance on advances to HJLA.

 

Income from Discontinued Operations, Net of Tax

 

During the nine months ended September 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.

 

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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.

 

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.

 

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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.

 

Liquidity and Capital Resources

 

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

 

    September 30,     December 31,  
    2017     2016     2015  
    (unaudited)              
Cash     311,483       56,514       1,585,205  
Working capital deficiency   (4,976,567 )   (1,673,367 )   (2,870,602 )

 

We have incurred losses since inception and negative cash flows from operating activities for the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015. As of September 30, 2017, we had an accumulated deficit of $32.4 million. Since inception, we have funded our operations primarily through private placements of equity and convertible debt securities as well as from modest sales of ProCol. As of September 30, 2017, we had cash and cash equivalents of $311,483.

 

Based upon our working capital situation as of September 30, 2017, we require additional equity and or debt financing in order to meet our obligations as they become due within one year after the filing date and sustain operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

 

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 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.

 

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For the Nine Months Ended September 30, 2017 and 2016

 

During the nine months ended September 30, 2017, we financed our activities primarily from proceeds from the issuance of notes and convertible notes payable, net of repayments, of $2,551,666 and net proceeds derived from sales of our Series B preferred stock and warrants of $632,900.

 

For the nine months ended September 30, 2017 and 2016, we used cash of $2,931,029 and $2,367,407, respectively, in operations. Cash used during the nine months ended September 30, 2017 was primarily attributable to our net loss of $4,667,430, adjusted for an add back of net non-cash expenses in the aggregate amount of $1,222,428, partially offset by $513,973 of net cash provided by changes in the levels of operating assets and liabilities. Cash used during the nine months ended September 30, 2016 was primarily attributable to our net loss of $1,847,236, adjusted for a deduction associated with net non-cash income in the aggregate amount of $770,826, partially offset by $250,655 of net cash provided by changes in the levels of operating assets and liabilities.

 

During the nine months ended September 30, 2017, cash provided by investing activities was $96,248, of which $166,250 was from the collection of a receivable resulting from a sale of assets, and $10,000 was received from the repayment of advances issued HJLA, partially offset by $77,737 cash paid in exchange for a note receivable HJLA. During the nine months ended September 30, 2016, cash used in investing activities was $861,516, of which $370,200 was used for the purchase of intangible assets and $487,900 related to advances issued to HJLA.

 

During the nine months ended September 30, 2017, cash provided from financing activities was $3,089,750, of which $632,900 was related to net proceeds from the issuance of shares of our Series B preferred stock and related warrants, $311,000 represented proceeds from the issuance of notes payable, and $2,415,400 was net proceeds from the issuance of convertible notes payable, partially offset by the payment of deferred offering costs associated with this offering of $94,816 and $174,734 of repayments of notes payable to a related party. During the nine months ended September 30, 2016, cash provided from financing activities was $1,721,766, of which $1,970,665 was related to proceeds from the issuance of shares of our Series A preferred stock and related warrants, partially offset by $111,000 of repayments of notes payable, $75,624 of repayments of notes payable to a related party, and payments of $62,275 of deferred offering costs associated with this offering.

 

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.

 

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Recent Accounting Pronouncements

 

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. We are currently evaluating ASU 2016-02 and its impact on our financial statements.

 

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. We are in the process of determining the timing of adoption and the adoption method. We are currently evaluating the impact of the adoption of these ASUs on our financial position and results of operations, however, based on our preliminary analysis, we do not believe the adoption of these ASUs will have a material impact on our recognition of revenue from product sales or our recognition of royalties which are based on a percent of sales.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of the adoption of this standard on our financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. 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. We are currently evaluating the impact of the adoption of this standard on our financial statements.

 

In September 2017, the FASB issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions, accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above become effective on the same schedule as Topics 605, 606, 840 and 842.

 

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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”, or 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 nine months ended September 30, 2017 or for the years ended December 31, 2016 or 2015.

 

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.

 

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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.

 

Derivative Liabilities

 

During 2017, we issued warrants for a variable number of shares of common 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 irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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

 

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  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,” except that we have irrevocably elected not to take advantage of 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, which we refer to as BHV, 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 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. If we receive approval 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 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. If we complete these studies, 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 developing 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 4.5 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. In preclinical studies, the VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, the VenoValve has functioned normally in acute animal implant as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. 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. If we commence a first-in-human trial, we will seek to obtain reimbursement approval for this product candidate. In the fourth quarter of 2017, we and the FDA discussed the pre-clinical tests submitted by us in the third quarter of 2017 and the FDA recommended we perform an additional 90 day animal study before commencing a first-in-human trial, which we are in the process of preparing to commence.

 

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In addition, we previously manufactured, developed and obtained FDA pre-market approval , or PMA, 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 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 our 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 for either a first-in-human study or for an investigational device exemption, or IDE, which we plan to submit in 2018. 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 on 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 at least two 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.

 

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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. In preclinical studies, VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, VenoValve has functioned normally in acute animal implant as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. Ascending and descending venography of the VenoValve in sheep, demonstrated competency of the valve as well as patency in appropriate flow patterns.

 

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.

 

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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.

 

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 inclusive of the pediatric market to be approximately $4 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 2016, 150,000 CABG procedures were performed in the United States, accounting for approximately 375,000 bypass grafts ( 2.5 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.

 

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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.

 

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 4.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in approximately 700,000 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.

 

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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 worldwide . Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI.

 

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.

 

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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.

 

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. We believe our patents pertaining to unique design advantages and processing methods of biologic valvular tissue as a “bioprosthetic” device provides 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, and 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 product candidates like ours that are intended to 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.

 

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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

 

The 2015 Global Data Report reported the global heart valve market to be approximately $4 billion, based on an ASP for standard adult valve prostheses of $5,000 to $9,000.

 

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.”

 

Inclusive of the global market and according to the American Heart Association, each year, approximately 10 of every 1,000 children , worldwide (approximately 1.3 million children worldwide ) including 8 of every 1,000 in the United States ( approximately 35,000 children in the U.S. ) are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% ( approximately 400,000 children worldwide ) will undergo either aortic or mitral valve replacement surgery during the first two decades of life.

 

In the US, this results in approximately 14,000 - 17,000 procedures with the vast majority requiring 19, 21 or 23 millimeter sized prostheses. 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 pediatric BHV is approximately $250 million - $ 300 million in the United States and we estimate double that market size in Western Europe and Asia Pacific ($500 million to $600 million).

 

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 approximately 150,000 procedures per year and a market value of approximately $2.25 billion .

 

It appears that a cost for a device that substitutes for graft harvest alleviates the inevitable cost of treatment subsequent to incomplete revascularization with stents . 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 4.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 700,000 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%.

 

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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.

 

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 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 time to receive a PMA for commercialization may be shortened 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 FFDCA , 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, pre-market 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 FFDCA .

 

FDA Pre-market 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) pre-market notification, or approval of a PMA application. Under the FFDCA , 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) pre-market notification requirement, manufacturers of most Class II devices are required to submit to the FDA a pre-market notification under Section 510(k) of the FFDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) pre-market 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 pre-market 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.

 

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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.

 

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.

 

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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.

 

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 the Food and Drug Administration Safety and Innovation, or the 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.

 

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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.

 

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.

 

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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.

 

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 pre-market 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.

 

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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.

 

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, 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.

 

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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.

 

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 protected health information, or 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. 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.

 

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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).

 

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 October 16, 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.

 

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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. We renewed our lease on September 20, 2017, effective October 1, 2017, for five years with an option to extend the lease for an additional 60 month term at the end of lease term. 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 October 16, 2017 :

 

Name   Age   Position(s)
Executive Officers and Directors        
Benedict Broennimann, M.D.   60   Co-Chief Executive Officer
Steven A . 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   65   Senior Vice President of Operations, Regulatory Affairs and Quality Assurance
Non-Employee Directors        
Yury Zhivilo   58   Chairman of the Board of Directors
Robert A . Anderson   77   Director
Robert W . 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 A . 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. Since 2013, Mr. Cantor has been a partner at Medi-Pharm Consulting, LLC. 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.

 

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William R. Abbott has served as our Chief Financial Officer since March 2016. In July 2016 he was appointed as our Interim President, Chief Financial Officer and Secretary and in September 2017 he was named as Senior Vice President and Chief Financial Officer, 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.

 

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.

 

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Robert A . Anderson has served as a member of our board of directors since August 2016. Since April of 2014, Mr. Anderson has been a member of the board of directors at BioAffinity Technologies, Inc. For the past five years, Mr. Anderson has been providing marketing, business, and strategic consulting services as a partner of Medi-Pharm Consulting LLC to small pharmaceutical and medical device companies. 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, 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.

 

Robert W . Doyle has served as a member of our board of directors since August 2016. Since December of 2011, Mr. Doyle has been a partner at Medi-Pharm Consulting LLC. 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. Mr. Girgenti concurrently serves as the chairman of the board of directors at BioAffinity Technologies, Inc. Since 2013, Mr. Girgenti has been the managing partner of Medi-Pharm Consulting LLC. 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 or executive officers . There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.

 

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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 a Co-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.

 

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 Messrs. Anderson, Doyle and Girgenti , who will each serve on our audit committee, our compensation committee, and 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.

 

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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.

 

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 Mr. Doyle , who is the chair of the committee, and Messrs. Anderson and Girgenti. 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 Mr. Doyle 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 of directors has considered Mr. Doyle’s extensive financial experience and business background. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

 

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Compensation Committee

 

Our compensation committee consists of Mr. Girgenti, who is the chair of the committee, and Messrs. Anderson and Doyle. 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;
     
  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 Mr. Anderson , who is the chair of the committee, and Messrs. Doyle and Girgenti. 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 our board of directors and applicable committees of our board of directors and determining whether continued service on our board of directors 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 Medical 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.

 

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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.

 

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.

 

Afksendyios Kalangos, M.D., Ph.D., is a world-renowned pediatric cardiac surgeon. Dr. Kalangos was the 2015 President of the World Society of Cardiothoracic Surgeons, and he has written 300 articles in journals with editorial policy and 10 book chapters, delivered 450 lectures as guest speaker, and presented 700 abstracts in national and international congresses. He was Chairman of the Department of Cardiovascular Surgery at University of Geneva from 2011-2016 and presently Chairman of Cardiovascular Surgery at the Mitera Hospital in Athens, Greece. He has many distinguish honors and has been involved in many of the Cardiovascular Societies in Europe and the Mideast. His interests included development of third general tissue heart valve and in Congenital Heart Surgery.

 

Code of Business Conduct and Ethics

 

Prior to the closing of this offering, our board of directors will adopt a written code of conduct 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.

 

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Board Leadership Structure

 

Our board of directors is free to select the Chairman of the board of directors and a Co-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 A . 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 Co-Chief Executive Officers’ 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 our 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 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 one of our Co-Chief Executive Officers 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 $320,000 as of September 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.

 

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  “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.
     
  “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., one of our Co-Chief Executive Officers. 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 146,500 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 A . 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 299,400 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 416,667 shares of our common stock at an exercise price of $12.00 per share. As of June 30, 2017, Mr. Cantor returned to us 250,000 of such warrants and transferred the balance of 166,667 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 146,500 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 818,500 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 184,500 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 1,650,000 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.

 

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  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.
     
  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.

 

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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.

 

Director Compensation

 

We did not provide any compensation to our nonemployee directors for their service on our board of directors during 2015 or 2016. Our named executive officers who also served on our board of directors did not receive any additional compensation for their service on our board of directors during 2015 or 2016. Upon completion of this offering, our board of directors plans to adopt a nonemployee director compensation program.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth certain information concerning the ownership of our common stock as of October 16, 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 6,928,386 shares of common stock outstanding as of October 16, 2017 and reflects the issuance of 794,707 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 October 16 , 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.

 

Except as otherwise noted below, the address for each person or entity listed in the table is c/o Hancock Jaffe Laboratories, Inc., 70 Doppler, Irvine, California 92618.

 

    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)     4,374,164       63.1 %     4,374,164       49.7 %
Steven A. Cantor     750,400       10.8 %     750,400       8.5 %
Susan Montoya (3)     545,669       7.3 %     545,669       5.8 %
Rosewall Ventures Ltd. (4)     487,669       6.9 %     487,669       5.5 %
Named Executive Officers and Directors                                
Yury Zhivolo (2)     4,374,164       63.1 %     4,374,164       49.7 %
Susan Montoya (3)     545,669       7.3 %     545,669       5.8 %
Marc Glickman, M.D. (3)     123,000       1.7 %     123,000       1.4 %
Benedict Broennimann, M.D. (3)     487,669       6.9 %     487,669       5.5 %
Steven A. Cantor     750,400       10.8 %     750,400       8.5 %
Robert A. Anderson (3)     40,000       * %     40,000       * %
Robert W. Doyle (3)     40,000       * %     40,000       * %
Steven Girgenti (3)     40,000       * %     40,000       * %
All directors and executive officers as a group (8 persons)     6,400,902       81.9 %     6,400,902       66.4  

 

* Represents beneficial ownership of less than 1%.

 

(1) Except as otherwise noted below, the address for each person or entity listed in the table is c/o Hancock Jaffe Laboratories, Inc., 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.
   
(4) Dr. Broennimann may be deemed to be the beneficial owner of the shares of common stock owned by Rosewall Ventures Ltd. The principal business address of Rosewall Ventures Ltd. is Route de Lausanne 3, CH-1303 Penthaz, Switzerland.

 

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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 $10.00 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 123,679 shares of our common stock. Biodyne owns 4,374,164 shares of our common stock, representing an ownership interest of approximately 71.3% . 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 50,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.

 

Common Stock

 

As the date of this prospectus, 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 6,928,386 shares of common stock issued and outstanding, 539,535 shares of common stock issuable upon exercise of outstanding warrants (including the subsequent conversion of preferred stock warrants), and 1,416,000 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 the date of this prospectus, there were 1,005,700 outstanding shares of Series A preferred stock, which will be converted into 655,420 shares of common stock immediately prior to the closing of this offering, and 213,792 outstanding shares of Series B preferred stock, which will be converted into 139,287 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;

 

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  whether the series will have conversion privileges and, if so, the terms and conditions of conversion;
     
  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 30, 2017, we had outstanding options to purchase an aggregate 1,416,000 shares of our common stock, with a weighted-average exercise price of $10.17 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 A. Cantor, our Co-Chief Executive Officer and director, to purchase 416,667 shares of our common stock at an initial exercise price of $12.00 per share. As of June 30, 2017, Mr. Cantor forfeited 250,000 of such warrants and transferred the balance of 166,667 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, with the Reverse Stock Split reflected, 213,792 shares of Series B preferred stock from February 14, 2017 and in connection therewith, we issued Newbridge warrants to purchase an aggregate of 14,773 shares of our common stock with an exercise price of $12.00 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 September 30, 2017, in connection with our senior convertible debt financing, we issued warrants to purchase an aggregate amount of 108,359 shares of our common stock to debt holders. We also issued warrants to purchase an aggregate amount of 14,339 shares of our common stock to Alexander Capital, LP, our placement agent and financial advisor in connection with the senior convertible debt financing.

 

Underwriters’ Warrants

 

We are registering the offer and sale of Underwriters’ Warrants (and the underlying shares of common stock) to purchase up to a total of 93,750 shares of our common stock. See “Underwriting” beginning on page 116 for a description of the Underwriters’ Warrants.

 

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Senior Convertible Notes

 

Through September 30, 2017, in connection with our senior convertible debt financing, we issued Notes for an aggregate principal amount of $2,600,500. 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 a price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common share sold in our initial public offering.

 

Registration Rights

 

Demand Registration Rights

 

Pursuant to our Securities Purchase Agreement, within 90 days of our initial public offering and subject to certain terms of limitation, we agreed to register (i) shares of our common stock issued or issuable upon conversion or redemption of the Notes purchased by the parties to such agreement, and (ii) shares of our common stock issued or issuable upon exercise of the Warrants issued to the parties to such agreement, including the placement agents of the Notes issued. We are required to pay all expenses relating to the registration of (i) and (ii), subject to certain limitations. We are registering the shares of common stock issuable upon conversion of the Notes and issuable upon exercise of the Warrants on the Selling Stockholder Prospectus.

 

Pursuant to the Underwriters’ Warrants, the underwriters can request that we file up to two registration statements registering all or a portion of the common stock issued or issuable upon exercise of such Underwriters’ Warrant. Under specified circumstances, we have the right to defer filing of a requested registration statement for a period of not more than 60 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 that the underwriters are required to pay all of the expenses for the second demand registration.

 

Form S-3 Demand Registration Rights

 

Pursuant to our Investors’ Rights Agreements, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the following held by the holders of our Series A preferred stock, and the holders of at least 30% of the following held by the holders of our Series B preferred stock, (i) shares of our common stock issued or issuable upon conversion, exercise of any of our securities by the parties to such agreement, (ii) shares of our common stock issued or issuable upon conversion, exercise of any other securities of the company, acquired by the parties to such agreement subsequent to entering 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 additional registration statements, including 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 our Investors’ Rights Agreements and Underwriters’ Warrant s, 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 , exercise of any of our securities by the parties to such agreement, (ii) shares of our common stock issued or issuable upon conversion, exercise of any other securities of our company, acquired by the parties to such agreement subsequent to entering 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.

 

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Expenses of Registration

 

We are required to pay all expenses except for all underwriting discounts, selling commissions, and stock transfer taxes relating to any Form S-3 or piggyback registration by the holders of registerable securities under the Investors’ Rights Agreement, subject to certain limitations.

 

Expiration of Registration Rights

 

The registration rights described under our Investors’ Rights Agreement will expire for each holder at such time (i) the company liquidates , (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 this offering .

 

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.

 

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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.
     
  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 2,000,000 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 Ad v ance 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.

 

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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.

 

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 have applied to list our common stock on the Nasdaq Capital Market under the trading symbol “ HJLI ”.

 

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, there has been no public market 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 cause the prevailing market price of our common stock to fall and impede our ability to raise capital through an offering of equity securities.

 

Upon the completion of this offering, we will have a total of 8,803,386 shares of common stock outstanding based upon 6,928,386 shares outstanding as of the date of this prospectus, assuming an initial public offering price of $7.00 per share and assuming no exercise by the underwriters’ option to purchase additional shares of common stock, and no exercise of outstanding options, Warrants, or Notes to purchase shares of common stock prior to completion of this offering. 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. Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with Rule 144.

 

Lock-Up Agreements

 

We and all of our executive officers, directors and other certain holders of our outstanding common stock have entered into contractual “lock-up” agreement. As a result of these contractual restrictions and the provisions of Rules 144 and 701 promulgated under the Securities Act, 5,514,564 common stock 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. The representatives may, in their discretion, release any of the securities subject to these lock-up agreements at any time.

 

Rule 144

 

In general, under Rule 144, as amended, a 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 our common stock 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.

 

A person (or persons whose shares are 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 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 87,612 shares immediately after this offering (assuming no exercise of the underwriters’ option to purchase additional shares and no outstanding options, Notes or Warrants); or
     
  the average weekly trading volume of our common stock on the Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.

 

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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 above and in the section titled “Underwriting” and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

 

Form S-8 Registration Statement

 

We intend to file a registration statement 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 statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations applicable to affiliates and the lock-up arrangement described above, if applicable.

 

Registration Rights

 

After the closing of this offering, the holders of the Note, the Warrants, and Underwriters’ Warrants may convert and exercise their security instrument for 713,526 shares of our common stock. These holders will be entitled to certain rights with respect to the registration of such shares under the Securities Act. If we register any securities for public sale other than for our initial public offering, these holders will have the right to include their shares in the registration statement. In an underwritten offering, we have agreed to use our best efforts to cause the shares to be included in the underwriting on the same terms and conditions as the securities being sold through any such underwriters. We have agreed to indemnify the holders of this registration right against liabilities under the Securities Act, the Exchange Act, or other federal or state securities laws.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

 

The following discussion describes the material U.S. federal income tax considerations for Non-U.S. Holders (as defined below) with respect to the acquisition, ownership and disposition of our common stock acquired in this offering. This discussion does not address all aspects of U.S. federal income tax law that may be relevant to Non-U.S. Holders in light of their particular circumstances, nor does it address any U.S. federal estate or gift tax, or any state, local or non-U.S. tax consequences or U.S. federal tax consequences other than income taxes. Non-U.S. Holders should consult their tax advisors as to these matters. Rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the Code such as:

 

  banks, financial institutions, or insurance companies;
     
  tax-exempt organizations;
     
  tax-qualified retirement plans;
     
  broker-dealers and traders in securities, commodities or currencies;
     
  certain former citizens or long-term residents of the U.S.;
     
  persons that own, or are deemed to own, more than five percent of our common stock (except to the extent specifically set forth below);
     
  regulated investment companies or real estate investment trusts;
     
  “controlled foreign corporations,” “passive foreign investment companies,” or corporations that accumulate
     
  earnings to avoid U.S. federal income tax;
     
  persons that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic
     
  security” or other integrated investment or risk reduction strategy;
     
  holders deemed to sell our common stock under the constructive sale provisions of the Code;
     
  holders who hold or receive our common stock pursuant to the exercise of employee stock options or otherwise as compensation;
     
  holders who are subject to the alternative minimum tax or Medicare contribution tax; or
     
  partnerships and other pass-through entities, and investors in such pass-through entities or entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their places of organization or formation).

 

Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code, and Treasury regulations, published administrative pronouncements, rulings and judicial decisions thereunder as of the date hereof. Such authorities may be repealed, revoked or modified, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary. In addition, the IRS could challenge one or more of the tax consequences described herein. This discussion assumes that the Non-U.S. Holder holds our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment).

 

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The following discussion is for general information only and is not tax advice for any Non-U.S. Holders under their particular circumstances. Persons considering the purchase of our common stock pursuant to this offering should consult their own tax advisors concerning the U.S. federal income tax consequences of acquiring, owning and disposing of our common stock in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction or under any applicable tax treaty, including any state, local and non-U.S. tax consequences and any U.S. federal non-income tax consequences. For the purposes of this discussion, a “Non-U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of our common stock that is not a U.S. Holder. A “U.S. Holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes, (a) an individual who is a citizen or resident of the United States, (b) a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if it (1) is subject to the primary supervision of a court within the United States and one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. Also, partnerships, or other entities that are treated as partnerships for U.S. federal income tax purposes (regardless of their place of organization or formation) and entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their place of organization or formation), are not addressed by this discussion and are, therefore, not considered to be Non-U.S. Holders for the purposes of this discussion. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

 

Distributions on Our Common Stock

 

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of our common stock in the foreseeable future. However, distributions of cash or property, if any, made on our common stock to a Non-U.S. Holder of our common stock generally will constitute dividends for U.S. federal income tax purposes to the extent made out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) and will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide us with a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. In the case of a Non-U.S. Holder that is an entity, Treasury regulations and the relevant tax treaty provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends will be treated as paid to the entity or to those holding an interest in that entity. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you should consult with your tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.

 

We generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that such holder maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or, if stock is held through a financial institution or other agent, to such agent). In general, such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates, unless a specific treaty exemption applies. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments. To the extent distributions on our common stock, if any, exceed our current and accumulated earnings and profits, they will first reduce your adjusted basis in our common stock as a non-taxable return of capital, but not below zero, and then any excess will be treated as gain and taxed in the same manner as gain realized from a sale or other disposition of common stock as described in the next section.

 

Gain on Disposition of Our Common Stock

 

Subject to the discussion below regarding backup withholding and foreign accounts, a Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless (a) the gain is effectively connected with a trade or business of such holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that such holder maintains in the United States), (b) the Non-U.S. Holder is a nonresident alien individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, or (c) we are or have been a United States real property holding corporation, or a USRPHC, within the meaning of Code Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period for the relevant shares of our common stock.

 

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In the case of gain described in (a) above, a Non-U.S. Holder generally will be required to pay tax on the net gain derived from the sale at regular graduated U.S. federal income tax rates, unless a specific treaty exemption applies, and a corporate Non-U.S. Holder may be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. An individual Non-U.S. Holder described in (b) above generally will be subject to U.S. federal income tax at a rate of 30% on the gain derived from the sale (or such lower rate as may be specified by an applicable income tax treaty), which gain may be offset by certain of the Non-U.S. Holder’s U.S. source capital losses (even though the Non-U.S. Holder is not considered a resident of the United States), provided the Non-U.S. Holder timely files U.S. federal income tax returns with respect to such losses. With respect to (c) above, in general, we would be a USRPHC if our interests in U.S. real property interests constituted (by fair market value) at least half of our assets. We believe that we are not, and do not anticipate becoming, a USRPHC; however, there can be no assurance that we will not become a USRPHC in the future. Even if we are treated as a USRPHC, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly and constructively, no more than 5% of our common stock at all times within the shorter of (a) the five-year period preceding the disposition or (b) the holder’s holding period for the relevant shares of our common stock and (2) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market. There can be no assurance that our common stock will qualify as regularly traded on an established securities market.

 

Information Reporting Requirements and Backup Withholding

 

Generally, we or certain financial middlemen must report information to the IRS with respect to any dividends we pay on our common stock, including the amount of any such dividends, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.

 

Dividends paid by us (or our paying agents) to a Non-U.S. Holder may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder that provides a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, or other appropriate form, or otherwise establishes an exemption. Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or non-U.S., unless the holder provides a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8ECI or other appropriate form, or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. For information reporting purposes, certain brokers with substantial U.S. ownership or operations will generally be treated in a manner similar to U.S. brokers.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. Non-U.S. Holders you should consult with their tax advisors to determine if they are eligible to obtain a tax refund or credit with respect to amounts withheld under the backup withholding rules.

 

Foreign Accounts

 

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a U.S. federal withholding tax of 30% may apply to dividends on, and the gross proceeds of, a disposition of our common stock paid to a foreign financial institution (as specifically defined by applicable rules), including when the foreign financial institution holds our common stock on behalf of a Non-U.S. Holder, unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which may include certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing these withholding and reporting requirements may be subject to different rules. FATCA withholding tax will also apply to dividends on, and the gross proceeds of, a disposition of our common stock paid to a non-financial foreign entity (as specifically defined by applicable rules) unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. Withholding under FATCA will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. Holders are encouraged to consult with their own tax advisors regarding the possible implications of FATCA on their investment in our common stock.

 

The withholding provisions described in the preceding paragraph will generally apply to payments of dividends and will begin to apply to payments of gross proceeds from a sale or other disposition of our common stock on or after January 1, 2019.

 

EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, NON-U.S. OR U.S. FEDERAL NON- INCOME TAX LAWS

 

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UNDERWRITING

 

WallachBeth Capital, LLC and Network 1 Financial Securities, Inc. are acting as representatives of the several underwriters of the offering, and we have entered into an underwriting agreement on the date of this prospectus, with them as underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters and the underwriters have agreed to purchase from us, at the public offering price per share less the underwriting discounts set forth on the cover page of this prospectus.

 

Name   Number of Shares  
WallachBeth Capital, LLC.        
Network 1 Financial Securities, Inc.        
Total     1,875,000  

 

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 45 -day option to purchase on a pro rata basis up to 281,250 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 our 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 shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

    Per Share     Total Without
Over-Allotment
Option
    Total With
Over-Allotment
Option
 
Public offering price   $       $       $    
Underwriting discount   $       $       $    
Proceeds, before expenses, to us   $       $       $    

 

In addition to the discount set forth in the above table, we have agreed to issue to the underwriters or their designees, Underwriters’ Warrants to purchase 93,750 the shares of common stock. The terms of the Underwriters’ Warrants are more fully described below.

 

We estimate that our out of pocket expenses for this offering (not including any underwriting discounts and commissions) will be approximately $830,000. The representatives have informed us that they do 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.

 

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We will bear all of our fees, disbursements and expenses in connection with this offering. 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).

 

Upon the closing of this offering, we will grant 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 to pay the underwriters’ non-accountable expenses allowance equal to 1% of the gross proceeds of the public offering of the shares (including shares that we may sell to the underwriters to cover over-allotments). We have also agreed to pay for a certain amount of the underwriters’ accountable expenses including actual accountable road show expenses for the offering, the cost associated with the underwriters’ use of book-building and compliance software for the offering, reasonable and documented fees and disbursements of the underwriters’ counsel up to an amount of $75,000 (which maximum shall apply solely to such fees and disbursements of counsel and not to other accountable fees and expenses), background checks of our officers and directors, and other offering related expenses up to $130,000, including the fees and disbursements of the Underwriter’s counsel.

 

We have agreed to issue to the underwriters the Underwriters’ Warrants exercisable for 93,750 shares of common stock to be allocated in full to the underwriters or their designated affiliates. The Underwriters’ Warrants are not included in the securities being sold in this offering. The shares issuable upon exercise of the Underwriters’ Warrants are identical to those offered by this prospectus.

 

The Underwriters’ Warrants will be exercisable at a per share price of $ , which is125% of the public offering price, beginning six months from the effective date of the registration statement of which this prospectus is a part, which we refer to as the effective date, and for a period of five years from the effective date. As is customary, the number of shares to be issued under the Underwriters’ Warrants and the exercise price will be subject to adjustments in certain events, including stock splits, stock dividends, and recapitalizations. The Underwriters’ Warrants may not be transferred, assigned, sold or hypothecated nor will the underwriters be able to engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the underwriters’ warrants or the common stock underlying the Underwriters’ Warrants for a period of six months after the effective date except to officers, partners or registered representatives of the underwriter as permitted by FINRA or to dealers participating in the offering, all in accordance with Rule 5110(g)(1) of FINRA. The Underwriters’ Warrants and shares of common stock underlying the Underwriters’ Warrants are deemed compensation by FINRA. The terms and number of shares underlying the Underwriters’ Warrants shall be modified if necessary to comply with FINRA rules or regulations. We are registering the offer and sale of the Underwriters’ Warrants (and underlying shares of common stock) under the registration statement of which this prospectus is a part.

 

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 representatives 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 representatives , 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 representatives 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.

 

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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.

 

We have applied to list the shares of our common stock on the Nasdaq Capital Market under the symbol “ HJLI ”.

 

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 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 representatives 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.

 

119
 

 

HANCOCK JAFFE LABORATORIES, INC.

INDEX TO FINANCIAL STATEMENTS

 

Condensed Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 F-2
   
Unaudited Condensed Statements of Operations for the Nine Months Ended September 30, 2017 and 2016 F-3
   
Unaudited Condensed Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Nine Months Ended September 30, 2017 F-4
   
Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 F-5
   
Notes to Unaudited Condensed Financial Statements F-7

 

F- 1
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED BALANCE SHEETS

 

    September 30, 2017     December 31, 2016  
    (unaudited)        
Assets                
Current Assets:                
Cash   $ 311,483     $ 56,514  
Accounts receivable, net     27,880       23,500  
Receivables from sale of assets     -       166,250  
Inventory     -       90,908  
Advances to related party, net     -       10,000  
Note receivable - related party     77,737       -  
Prepaid expenses and other current assets     131,858       46,049  
Total Current Assets     548,958       393,221  
Property and equipment, net     17,597       28,810  
Intangible asset, net     1,140,237       1,232,718  
Deferred offering costs     193,091       98,275  
Security deposits and other assets     31,342       29,843  
Total Assets   $ 1,931,225     $ 1,782,867  
                 
Liabilities, Temporary Equity and Stockholders’ Deficiency                
Current Liabilities:                
Accounts payable     766,332       541,957  
Accrued expenses     616,322       324,856  
Accrued expenses - related party     12,591       15,652  
Convertible notes payable, net of debt discount of $780,936 at June 30, 2017     900,178       -  
Notes payable - related party     270,038       444,772  
Convertible note payable - related party     499,000       188,000  
Derivative liabilities     2,461,064       551,351  
Total Liabilities   $ 5,525,525     $ 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 $10,700,536 and $10,399,859 at September 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 September 30, 2017 and December 31, 2016, respectively; liquidation preference of $1,556,430 and $0 at September 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, 6,133,679 and 6,123,482 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively     61       122  
Additional paid-in capital     24,235,011       23,508,869  
Accumulated deficit     (32,395,780 )     (27,728,350 )
Total Stockholders’ Deficiency   $ (8,160,708 )   $ (4,219,359 )
Total Liabilities, Temporary Equity and Stockholders’ Deficiency   $ 1,931,225     $ 1,782,867  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 2
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

    For The Nine Months Ended
September 30,
 
    2017     2016  
Revenues:                
Product sales   $ 152,400     $ 412,400  
Royalty income     94,588       68,653  
      246,988       481,053  
Cost of goods sold     321,675       598,295  
Gross Loss     (74,687 )     (117,242 )
                 
Selling, general and administrative expenses     3,799,211       3,406,367  
Research and development expenses     300,648       -  
Loss from Operations     (4,174,546 )     (3,523,609 )
                 
Other Expense (Income):                
Allowance on advances to related party     -       487,900  
Interest expense, net     100,523       50,471  
Amortization of debt discount     394,789       -  
Change in fair value of derivative liabilities     (2,428 )     (13,976 )
Total Other Expense     492,884       524,395  
                 
Loss from Continuing Operations     (4,667,430 )     (4,048,004 )
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     (4,667,430 )     (1,847,236 )
Deemed dividend to preferred stockholders     (331,607 )     (243,938 )
Net Loss Attributable to Common Stockholders   $ (4,999,037 )   $ (2,091,174 )
                 
Net Loss Per Basic and Diluted Common Share:                
Loss from continuing operations   $ (0.82 )   $ (0.71 )
Income from discontinued operations     -       0.37  
Net Loss Per Basic and Diluted Common Share:   $ (0.82 )   $ (0.35 )
                 
Weighted Average Number of Common Shares Outstanding:                
Basic and Diluted     6,124,580       6,013,520  

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2017

(unaudited)

 

    Series A Redeemable     Series B Redeemable                                
    Convertible     Convertible     Common           Additional           Total  
    Preferred Stock     Preferred Stock     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       -     $ -       6,123,482     $ 61     $ 23,508,930     $ (27,728,350 )   $ (4,219,359 )
Series B redeemable convertible preferred stock issued     -       -       127,125       630,770       -       -       -       -       -  
Exchange of accrued interest into common stock     -       -       -       -       197       -       1,973       -       1,973  
Stock-based compensation:                                                                        
-options     -       -       -       -       -       -       647,328       -       647,328  
-common stock     -       -       -       -       10,000       -       76,780       -       76,780  
Net loss     -       -       -       -       -       -       -       (4,667,430 )     (4,667,430 )
Balance at September 30, 2017     1,005,700     $ 3,935,638       127,125     $ 630,770       6,133,679     $ 61     $ 24,235,011     $ (32,395,780 )   $ (8,160,708 )

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 4
 

 

HANCOCK JAFFE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

( unaudited)

 

    For The Nine Months Ended  
    September 30,  
    2017     2016  
Cash Flows from Operating Activities                
Net loss   $ (4,667,430 )   $ (1,847,236 )
Adjustments to reconcile net loss to cash used in operating activities                
Stock-based compensation     724,108       1,143,883  
Amortization of debt discount     394,789       -  
Depreciation and amortization     105,959       110,421  
Gain on sale of discontinued operations     -       (2,499,054 )
Allowance for uncollectable advances to related party     -       487,900  
Change in fair market value of derivatives     (2,428 )     (13,976 )
Changes in operating assets and liabilities:                
Accounts receivable, net     (4,380 )     299,828  
Receivables from sale of assets     -       166,250  
Inventory     90,908       (219,353 )
Prepaid expenses and other current assets     (85,809 )     (102,005 )
Security deposit and other assets     (1,499 )     -  
Accounts payable     224,375       (262,627 )
Accrued expenses     290,378       221,761  
Advances from distributor     -       100,000  
Deferred revenues     -       46,801  
Total adjustments     1,736,401       (520,171 )
Net Cash Used in Operating Activities   (2,931,029 )   (2,367,407 )
                 
Cash Flows from Investing Activities                
Receivable for sale of assets collected     166,250       -  
Issuance of note receivable to related party     (77,737 )     -  
Advances to (from) related party     10,000       (487,900 )
Purchase of property and equipment     (2,265 )     (3,416 )
Purchase of intangible assets     -       (370,200 )
Net Cash Provided by (Used in) Investing Activities   96,248     (861,516 )
                 
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 issuance costs of $185,100     2,415,400       -  
Payments of deferred offering costs associated with initial public offering     (94,816 )     (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     (174,734 )     (75,624 )
Advances from distributor     -       -  
Net Cash Provided by Financing Activities     3,089,750       1,721,766  
                 
Net Increase (Decrease) in Cash     254,969       (1,507,157 )
Cash - Beginning of Period     56,514       1,585,205  
Cash - End of Period   311,483     78,048  

 

See Notes to these Unaudited Condensed Financial Statements

 

F- 5
 

 

    For The Nine Months Ended  
    September 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   $ 800,236     $ -  
Embedded conversion option in convertible debt included in derivative liabilities   $ 1,109,775     $ -  
Forgiveness of debt in connection with the sale of discontinued operations   $ -     $ 2,805,297  
Exchange of note payable and accrued interest into common stock   $ 1,973     $ 1,234,816  

 

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. On October 31, 2017, our Board of Directors approved a one-for-two reverse stock split of the Company’s common stock, which be effected in connection with the pricing of the Company’s offering discussed in the registration statement of which these financial statements are a part (See Note 11 - Subsequent Events). The reverse stock split will not be effected on shares of the Company’s preferred stock or warrants for the purchase of preferred stock, however, the reverse stock split will be effected upon the shares of common stock our preferred stock will convert into in connection with this offering. Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the aforementioned stock splits. 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 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 $4,667,430 during the nine months ended September 30, 2017, and has an accumulated deficit of $ 32,395,780 at September 30, 2017. Cash used in operating activities was $ 2,931,029 for the nine months ended September 30, 2017. 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- 7
 

 

During the nine months ended September 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 $2,415,400 from the issuance of convertible notes payable (see Note 7 – Convertible Notes Payable), and $311,000 of cash proceeds related to the convertible note payable to a related party. As of September 30, 2017, Hancock Jaffe had a cash balance of $311,483 and working capital deficiency of $4,976,567 .

 

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 September 30, 2017, and for the nine months ended September 30, 2017 and 2016. The results of operations for the nine months ended September 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.

 

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 September 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 $193,091 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.

 

F- 8
 

 

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 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:

 

  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.

 

Note 3 – Sig n ificant 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 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 September 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                        
September 30, 2017   $ -     $ -     $ 543,000  
December 31, 2016   $ -     $ -     $ 551,351  
Derivative liabilities - Preferred Stock Series B Warrants                        
September 30, 2017   $ -     $ -     $ 1,711  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Warrants                        
September 30, 2017   $ -     $ -     $ 804,802  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Conversion Feature                        
September 30, 2017   $ -     $ -     $ 1,111,551  
December 31, 2016   $ -     $ -     $ -  

 

F- 9
 

 

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     800,236  
Issuance of derivative liabilities - convertible debt conversion feature     1,109,775  
Change in fair value of derivative liabilities     (2,428 )
Balance - September 30, 2017   $ 2,461,064  

 

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.

 

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 derivative liabilities 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.

 

F- 10
 

 

The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:

 

    For the Nine Months Ended  
    September 30,  
    2017     2016  
Loss from continuing operations   $ (4,667,430 )   $ (4,048,004 )
Less: Deemed dividend to Series A preferred stockholders     (331,607 )     (243,938 )
Net loss from continuing operations attributable to common stockholders   $ (4,999,037 )   $ (4,291,942 )

 

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 nine months ended September 30, 2017 and 2016:

 

    For the Nine Months Ended  
    September 30,  
    2017     2016  
Shares of common stock issuable upon conversion of preferred stock     566,413       467,850  
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith     50,285       46,785  
Shares of common stock issuable upon conversion of senior secured convertible debt     530,708       -  
Shares of common stock issuable upon exercise of warrants     297,854       416,667  
Shares of common stock issuable upon exercise of options     1,416,000       -  
Potentially dilutive common share equivalents excluded from diluted net loss per share     2,861,260       931,302  

 

Note 3 – Significant Accounting Policies, continued

 

Major Customers

 

During the nine months ended September 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 nine months ended September 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 nine months ended September 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).

 

F- 11
 

 

Concentrations

 

The Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were aggregate uninsured cash balances of $141,946 at September 30, 2017. There were no cash balances in excess of federally insured amounts at December 31, 2016.

 

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.

 

Recent Accounting Pronouncements

 

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 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. We are in the process of determining the timing of adoption and the adoption method. The Company has is currently evaluating the impact of the adoption of these ASUs on its consolidated financial position and results of operations, however, based on its preliminary analysis, the Company does not believe the adoption of these ASUs will have a material impact on its recognition of revenue from product sales or its recognition of royalties which are based on a percent of sales.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

 

In September 2017, the FASB issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions, accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above become effective on the same schedule as Topics 605, 606, 840 and 842.

 

F- 12
 

 

Note 4- 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. 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 nine months ended September 2016, the Company also paid an additional $487,900 to HJLA, which was recorded as advances to a related party. As of September 30, 2016, the Company reviewed the recoverability of the advances and recorded an allowance of $482,700 for the nine months ended September 30, 2016, because collectability was not reasonably assured.

 

During the nine months ended September 30, 2017, the Company received repayments of advances, net of additional advances, totaling $10,000 from HJLA.

 

Note 5 - Loan 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 were due on September 15, 2017. As of September 30, 2017, HJLA owed $77,737 and $799 of principal and interest, respectively, to the Company related to the Note Receivable.

 

Note 6 – Accrued Expenses and Accrued Expenses - Related Party

 

Accrued expenses consist of the following:

 

    September 30,
2017
    December 31,
2016
 
Accrued compensation costs   $ 491,905     $ 294,110  
Accrued professional fees     93,894       15,864  
Deferred rent     -       11,951  
Other accrued expenses     30,523       2,931  
Accrued Expenses   $ 616,322     $ 324,856  

 

Accrued expenses, related parties consisted of accrued interest on notes payable to a major common stockholder and to HJLA, in the aggregate, $12,591 and $15,652 at September 30, 2017 and December 31, 2016, respectively.

 

Note 7 – Convertible Notes Payable and Convertible Note Payable - Related Party

 

Convertible Notes

 

During the period from June 15, 2017 through September 26, 2017, the Company received proceeds aggregating $2,600,500 pursuant to the issuance of senior secured convertible promissory notes (the “Convertible Notes”) and five-year warrants for the purchase of 108,359 shares of the Company’s common stock. 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) $12.00 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) $14.40 per share or (ii) 120% of the Conversion price (see Note 10 – Temporary Equity and Stockholders’ Deficiency, Warrants). In connection with the sale of the Convertible Notes, the Company issued five-year warrants to the placement agent for the purchase of 14,339 shares of common stock.

 

F- 13
 

 

The conversion option and the warrants had a grant date value of $1,109,775 and $800,236 , respectively, and the aggregate $1,910,011 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     42.1% - 42.3 %
Risk free interest rate     1.636% - 1.92 %

 

The debt discount is amortized over the term of the notes 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 2015 Note became convertible at the option of the lender at a conversion price of $10.00 per share. During the nine months ended September 30, 2017 and 2016, the Company borrowed $311,000 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, or the Related Party Note , of which the Company’s Former President and Vice President of Operations were 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 $270,038 and $444,772 at September 30, 2017 and December 31, 2016, respectively.

 

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 Obligations

 

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 $16,889 and $8,062 for the nine months ended September 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.

 

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. The Company rented the building on a month-to-month basis from July 1, 2017 through September 30, 2017. On September 20, 2017, the Company entered into an agreement to renew the lease effective October 1, 2017. The lease renewal has a five-year term. Rent expense pursuant to the lease is $26,838 per month for the first year and increases by 3% on each anniversary of the lease inception date

 

Amendment to Employment Agreement

 

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 his employment agreement remain unchanged.

 

F- 14
 

 

Note 10 – Temporary Equity and Stockholders’ Deficiency

 

Common Stock

 

During the nine month ended September 30, 2017, the Company issued 197 shares of common stock, valued in the aggregate at $1,973, in satisfaction of accrued interest payable.

 

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 September 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, $1,556,430 . 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 a half 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 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.

 

F- 15
 

 

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 nine months ended September 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 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 8,490 warrants for the purchase of Series B Preferred Stock, valued at $2,130 (see Warrants, below) resulting in an original carrying value of the Series B Preferred Stock of $630,770.

 

Cumulative undeclared dividends in arrears on Series A and Series B Preferred Stock are $643,536 and $30,930, respectively, as of September 30, 2017.

 

Options

 

On August 31, 2017, the Company granted options for the purchase of 40,000 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 $12.00 per share. The options had an aggregate grant date value of $235,200, or $1.96 per share, valued using the Black Scholes method with the following assumptions:

 

    For the Nine Months Ended
September 30, 2017
 
Risk free interest rate     1.93 %
Expected term (years)     5.00  
Expected volatility     42.1 %

 

A summary of options activity during the nine months ended September 30, 2017 is presented below:

 

                Weighted        
          Weighted     Average        
          Average     Remaining     Aggregate  
    Number of     Exercise     Life     Intrinsic  
    Options     Price     In Years     Value  
                         
Outstanding, December 31, 2016     1,296,000     $ 10.00                  
Granted     120,000     $ 12.00                  
Forfeited     -       -                  
Outstanding, September 30, 2017     1,416,000     $ 10.17       9.1     $ -  
                                 
Exercisable, September 30, 2017     854,400     $ 10.17       9.1     $ -  

 

Warrants

 

During the nine months ended September 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 8,490 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 relating to the down-round feature, 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.

 

F- 16
 

 

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 nine months ended September 30, 2017 were as follows:

 

Risk free interest rate     1.63% - 1.93 %
Expected term (years)     5.00  
Expected volatility     42.1% - 42.3% %

 

On September 30, 2017, a warrant for the purchase of 250,000 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 nine months ended September 30, 2017 is presented below:

 

    Series A and Series B Convertible Preferred Stock     Common Stock  
    Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value     Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value  
Outstanding, December 31, 2016     100,570       5.00                       416,667       12.00                  
Issued     -       -                       131,188       12.00                  
Exercised     -       -                       -       -                  
Cancelled     -       -                       (250,000 )     12.00                  
Outstanding, September 30, 2017     100,570     $ 5.00     $ 3.5       -       297,854     $ 12.00     $ 5.3       -  
Exercisable, September 30, 2017     100,570     $ 5.00     $ 3.5       -       297,854     $ 12.00     $ 5.3       -  

 

F- 17
 

 

A summary of outstanding and exercisable warrants as of September 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
 
$ 12.00     Common Stock     297,854       5.4       297,854  
$ 5.00     Series A Preferred Stock     100,570       3.4       100,570  
$ 6.00     Series B Preferred Stock     -       -       -  
        Total     398,424               398,424  

 

Note 11 - Subsequent Events

 

Series B Preferred Stock

 

During October 2017, the Company issued 86,667 additional 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 $520,002 and the Company incurred cash offering costs of $68,500 (including $13,000 of placement agent fees). Warrants for the purchase of 12,567 shares of Series B Preferred Stock were granted to the placement agent in connection with the issuance of the Series B Preferred Stock shares.

 

Reverse Stock Split

 

A one-for-two reverse stock split of the Company’s common stock will be effected in connection with the pricing of the Company’s offering discussed in the registration statement of which these financial statements are a part (the “Reverse Stock Split”). The Reverse Stock Split will not be effected on shares of the Company’s preferred stock, however, but will be effected upon the shares of common stock the preferred stock will convert into. See Note 1 – Business Organization, Nature of Operations and Basis of Operations.

 

Note Receivable Related Party

 

On October 20, 2017, the Company received $79,035 representing payment in full of all principal and interest receivable in connection with the note receivable from related party.

 

F- 18
 

 

 

HANCOCK JAFFE LABORATORIES, INC.

 

FINANCIAL STATEMENTS

 

For the Years Ended December 31, 2016 and 2015

 

HANCOCK JAFFE LABORATORIES, INC.

 

INDEX TO FINANCIAL STATEMENT

 

  Page
   
Report of Independent Registered Public Accounting Firm F-20
   
Balance Sheets as of December 31, 2016 and 2015 F-21
   
Statements of Operations for the Years Ended December 31, 2016 and 2015 F-22
   
Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Years Ended December 31, 2016 and 2015 F-23
   
Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 F-24
   
Notes to Financial Statements F-26

 

F- 19
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

After the effectiveness of the reverse stock split described in the last paragraph of Note 16 to the financial statements of Hancock Jaffe Laboratories, Inc., we expect to be in a position to render the following audit report.

 

   
   
/s/ Marcum LLP  
New York, New York  
November 3, 2017  

 

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.

 

New York, New York

September 6, 2017, except for Note 16, as to which the date is November 3, 2017

 

F- 20
 

 

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, 6,123,481 and 6,000,000 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- 21
 

 

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     6,041,160       6,000,000  

 

See Notes to these Financial Statements

 

F- 22
 

 

HANCOCK JAFFE LABORATORIES, INC.

 

STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

 

    Series 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     -     $ -       6,000,000     $ 60     $ 20,725,342     $ (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       6,000,000       60       20,763,896       (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     -       -       123,481       1       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       6,123,481     $ 61     $ 23,508,930     $ (27,728,350 )   $ (4,219,359 )

 

See Notes to these Financial Statements

 

F- 23
 

 

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- 24
 

 

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- 25
 

 

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.

 

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.

 

F- 26
 

 

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.

 

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.

 

F- 27
 

 

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.

 

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- 28
 

 

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  

 

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.

 

F- 29
 

 

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.

 

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   $ (5,931,117 )   $ (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     502,850       218,000  
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith     50,285       21,800  
Shares of common stock issuable upon exercise of warrants     416,666       -  
Shares of common stock issuable upon exercise of options     1,296,000       -  
Potentially dilutive common share equivalents excluded from diluted net loss per share     2,265,801       239,800  

 

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.).

 

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.)

 

F- 30
 

 

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.

 

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- 31
 

 

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.

 

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.

 

F- 32
 

 

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.

 

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  

 

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 )

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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 %

 

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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.

 

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.

 

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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.

 

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.

 

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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.

 

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 146,500 shares of the Company’s common stock at an exercise price of $10.00 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 818,500 shares of the Company’s common stock at an exercise price of $10.00 per share with a grant date fair value of $867,610 (see Note 13 – Temporary Equity and Stockholder’s Deficiency).

 

F- 39
 

 

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 184,500 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 146,500 shares of the Company’s common stock at an exercise price of $10.00 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.

 

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.

 

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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.

 

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.

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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 123,481 shares of the Company’s common stock at a price of $10.00 per share.

 

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 416,666 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 $12.00 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- 42
 

 

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 1,650,000. As of December 31, 2016, 354,000 shares of common stock remain eligible to be issued under the 2016 plan. No awards may be issued after November 21, 2026.

 

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 $1.06 per share.

 

On October 1, 2016, the Company issued non-qualified stock options to purchase an aggregate of 1,296,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $10.00 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.

 

F- 43
 

 

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     1,296,000       10.00                  
Forfeited     -       -                  
Outstanding, December 31, 2016     1,296,000       10.00       9.7     $ -  
                                 
Exercisable, December 31, 2016           $ 10.00       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.

 

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- 44
 

 

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 123,481 shares of the Company’s common stock at a price of $10.00 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 $12.00 per share with an initial conversion price of $6 per common share (subject to adjustment as provided in the Series B Certificate of Designation).

 

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.

 

F- 45
 

 

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.

 

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 76,482 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, before giving effect to the one-for-two reverse stock split to be effected prior to the completion of this 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 250,000 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 40,000 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 $12.00 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.

 

NOTE 16 – REVERSE STOCK SPLIT

 

A one-for-two reverse stock split of the Company’s common stock will be effected in connection with the pricing of the Company’s offering discussed in the registration statement of which these financial statements are a part (the “Reverse Stock Split”). The Reverse Stock Split will not be effected on shares of the Company’s preferred stock, however, the Reverse Stock Split will be effected upon the shares of common stock the preferred stock will convert into in connection with the Company’s initial public offering. With the exception of the securities that are not affected by the Reverse Stock Split, all share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated.

 

F- 46
 

 

1,875,000 Shares of

 

Common Stock

 

 

PROSPECTUS

 

                      , 2017

 

WallachBeth Capital, LLC Network 1 Financial Securities, Inc.

 

 
 

 

ALTERNATE PAGES FOR SELLING STOCKHOLDER PROSPECTUS

 

The information in this preliminary prospectus is not complete and may be changed. The selling security holders named in this preliminary prospectus 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 NOVEMBER 6, 2017

 

PRELIMINARY PROSPECTUS

 

 

 

Up to 911,079 Shares

Common Stock

 

This prospectus relates to the offer and sale from time to time by the selling stockholders identified in this prospectus, or the Selling Stockholders, of up to 911,079 shares of our common stock. These shares consist of (i) 530,708 shares, or the Note Shares, of our common stock issuable upon conversion of our senior convertible notes, or the Notes, (ii) 372,871 shares, or the Warrant Shares, of our common stock issuable upon exercise of outstanding warrants, or the Warrants, and (iii) 7,500 shares of our common stock held by COVA Capital LLC, or COVA Shares.

 

The aggregate amount of Note Shares, Warrant Shares, and COVA Shares was calculated using the midpoint of the price range listed on the cover page of the IPO Prospectus, assumes the conversion of all Notes and the exercise of all Warrants held by the Selling Stockholders, and gives effect to the one-for-two reverse stock split of our common stock to be effected prior to the closing of our initial public offering.

 

The Selling Stockholders must sell their shares at a fixed price per share of $7.00 until there is a public market for our shares of common stock. Thereafter, the shares of our common stock registered hereby may be offered and sold by the Selling Stockholders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution.”

 

We are not selling any shares of common stock under this prospectus, and we will not receive any of the proceeds from the offer and sale of shares of our common stock by the Selling Stockholders. See “Use of Proceeds.”

 

By separate prospectus, or the Prospectus, we have registered an aggregate of 1,875,000 shares of our common stock (excluding 281,250 shares issuable upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any) which we are offering for sale to the public through an underwritten offering, which we refer to herein as the initial public offering. We currently expect the initial public offering price to be between $6.00 and $8.00 per share.

 

This prospectus describes the general manner in which shares of common stock may be offered and sold by any Selling Stockholders. When the Selling Stockholders sell shares of common stock under this prospectus, we may, if necessary and required by law, provide a prospectus supplement that will contain specific information about the terms of that offering. Any prospectus supplement may also add to, update, modify or replace information contained in this prospectus. We urge you to read carefully this prospectus, any accompanying prospectus supplement and any documents we incorporate by reference into this prospectus and any accompanying prospectus supplement before you make your investment decision.

 

We have applied to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “HJLI.” Upon the closing of our initial public 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 10 of the Prospectus.

 

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

 

The date of this prospectus is                    , 2017

 

1
 

 

EXPLANATORY NOTE

 

Concurrently with the registration of shares of common stock pursuant to this prospectus, which we refer to as the Selling Stockholder Prospectus, we are registering shares of our common stock in connection with our initial public offering of 1,875,000 shares of our common stock (excluding 281,250 shares of our common stock which may be sold upon exercise of the underwriters’ over-allotment option) through the underwriters. Sales of our common stock by stockholders that purchase shares in our initial public offering may reduce the price of our common stock, demand for our shares and, as a result, the liquidity of shares of our common stock purchased from the Selling Stockholders.

 

2
 

 

SELLING STOCKHOLDERS

 

The shares of common stock being registered hereby are those issuable to the Selling Stockholders upon conversion of the Notes and the exercise of the Warrants, except in the case for the COVA Shares. For additional information regarding the Notes, the Warrants, the COVA Shares and certain rights of the Selling Stockholders with respect thereto, see “Recent Sales of Unregistered Securities” and “Description of Capital Stock” below. We are registering the shares of common stock in order to permit the Selling Stockholders to offer the shares for resale from time to time. Except as set forth in this Selling Stockholder Prospectus and except for certain ownership of our securities, the Selling Stockholders have not had any material relationship with us within the past three years.

 

The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of common stock by the Selling Stockholders. The second column lists the number of shares of common stock beneficially owned by the Selling Stockholders prior to this offering. The third column lists the shares of common stock being offered by this Selling Stockholder Prospectus by the Selling Stockholders, which is comprised of our common stockholder COVA Capital Partners, LLC, and, the Note Shares and the Warrant Shares beneficially owned by the applicable Selling Stockholder. The amounts in the second and third columns were calculated using the midpoint of the price range listed on the cover page of the Prospectus and assume the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders, and give effect to the one-for-two reverse stock split of our common stock to be effected prior to the completion of our initial public offering. The conversion price per share of the Notes is the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common share sold in our initial public offering, or the Conversion Price. The exercise price per share of the Warrants issued with the Note is the lesser of $14.40 per share or (ii) 120% of the Conversion price. The original exercise prices per share of the Warrants issued with the shares of our Series A preferred stock and Series B preferred stock are $5.00 and $6.00, respectively, and are subjected to certain adjustments. The fourth and fifth columns list the number and percentage, respectively, of shares of common stock beneficially owned by the Selling Stockholders after the closing of the offering, based on their ownership as of the date of this Selling Stockholder Prospectus, based on 6,928,386 shares of common stock outstanding as of the date of this Selling Stockholder Prospectus, and assuming the sale of all of the shares offered by the Selling Stockholders pursuant to this Selling Stockholder Prospectus.

 

Name of Selling Stockholder   Number of
Shares
Beneficially
Owned Prior
to Offering(1)
    Maximum
Number of
Shares to be
Sold
Pursuant to
this
Prospectus(1)(3)
    Number of
Shares
Beneficially
Owned
After
Offering(2)
    Percentage of
Shares
Beneficially
Owned After
Offering(2)
 
Sergey Gogin     275,510       275,510       -       0.00 %
William J. Peck     91,836       91,836       -       0.00 %
Catalytic Capital, LLC (4)     45,918       45,918       -       0.00 %
NYFF Investors, LLC (5)     61,224       61,224       -       0.00 %
Viktoriia Malyshkina     3,060       3,060       -       0.00 %
Nata Solutions Inc. (6)     30,612       30,612       -       0.00 %
Michael Semidubersky     9,183       9,183       -       0.00 %
Roman Shteynshlyuger     12,245       12,245       -       0.00 %
Daniel Tulbovich     12,398       12,398       -       0.00 %
Chen Lu Yi     6,122       6,122       -       0.00 %
Jose D. Rios     3,060       3,060       -       0.00 %
Matthew D. Lowery     30,612       30,612       -       0.00 %
Wallace Johnson     76,530       76,530       -       0.00 %
Brian FitzPatrick     107,142       107,142       -       0.00 %
Secured and Collateralized Lending LLC (7)     30,612       30,612       -       0.00 %
Alexander Capital, LP (8)     42,457       42,457       -       0.00 %
COVA Capital Partners, LLC (9)     7,500       7,500       -       0.00 %
Legend Securities, Inc.     44,216       44,216       -       0.00 %
Arthur Coffey     360       360       -       0.00 %
Jody Eisenman     84       84       -       0.00 %
Leone G.I.S. LLC     5,625       5,625       -       0.00 %
New Bridge Securities Corporation     14,773       14,773       -       0.00 %

 

3
 

 

(1) The number of shares of common stock owned are those “beneficially owned” as determined under the rules of the SEC, including any shares of common stock as to which the Selling Stockholders has sole or shared voting or investment power and any shares of common stock that the Selling Stockholders has the right to acquire within 60 days of September 30, 2017 through the exercise of any option, warrant, or right, without giving effect to any prohibitions on such conversion or exercise subject to the receipt of stockholder approval or any beneficial ownership limitations. These amounts were calculated using the midpoint of the price range listed on the cover page of the Prospectus and assume the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders.
   
(2) The “Number of Shares Beneficially Owned After Offering” assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this Selling Stockholder Prospectus. The “Percentage of Shares Beneficially Owned After Offering” are based on 8,803,386 shares of our common stock outstanding assuming all shares registered herein are issued to the Selling Stockholders and sold and assuming the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders.
   
(3) We issued to certain of the Selling Stockholders the Notes and Warrants, collectively. The Notes are convertible into shares of our common stock the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common share sold in our initial public offering, or the Conversion Price. The exercise price per share of the Warrants issued with the Note is the lesser of $14.40 per share or (ii) 120% of the Conversion price.
   
(4) Care of Dmitriy Shapiro located at 135 Oceana Drive East, Apartment 4E, Brooklyn, NY 11235.
   
(5) Care of Adam B. Kaufman, Esq. located at 585 Stewart Avenue, Suite 302, Garden City, NY 11530.
   
(6) Natalia Shapiro is the President located at 170 Coleridge Street, Brooklyn, NY 11235.
   
(7) Sean FitzPatrick is the sole member located at 100 Golf House Road, Haverford, PA 19041.
   
(8) Jonathan Gazdak is the Managing Director located at 17 State Street, 5th floor, New York, NY 10004.
   
(9) Edward T. Gibstein is the CEO located at 6851 Jericho Turnpike Suite 120A, Syosset, NY 11791.

 

4
 

 

PLAN OF DISTRIBUTION

 

We are registering for resale by the Selling Stockholders from time to time after the date of this Selling Stockholder Prospectus a total of 903,579 shares of common stock underlying the Notes and the Warrants. We will not receive any of the proceeds from the sale by the Selling Stockholders of the shares of common stock. See “Use of Proceeds” beginning on page 7 of this Selling Stockholder Prospectus. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock registered hereby in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The Selling Stockholders must sell their shares at a fixed price per share of $7.00 until there is a public market for our shares of common stock. Thereafter, the shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling their shares of common stock:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares of common stock as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  settlement of short sales;
     
  in transactions through broker-dealers that agree with the selling stockholders to sell a specified number of such shares of common stock at a stipulated price per share;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell the shares of common stock under Rule 144 under the Securities Act, if available, rather than under this Selling Stockholder Prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of the shares of common stock, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

5
 

 

In connection with the sale of the shares of common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares of common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell the shares of common stock short and deliver these shares of common stock to close out its short positions, or loan or pledge the shares of common stock to broker-dealers that in turn may sell these shares of common stock. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of the shares of common stock offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholders have informed us that they do not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock.

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares of common stock. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed the selling stockholders of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

6
 

 

USE OF PROCEEDS

 

The proceeds from the sale of the shares offered pursuant to this Selling Stockholder Prospectus are solely for the accounts of the Selling Stockholders. Accordingly, we will not receive any of the proceeds from the sale of shares offered by this Selling Stockholder Prospectus. See “Selling Stockholders” and “Plan of Distribution.”

 

We will however, receive proceeds upon the exercise of the Warrants, with respect to which the underlying shares of common stock are being registered in the registration statement of which this Selling Stockholder Prospectus forms a part, provided that the Warrants are exercised for cash. If exercised, we plan to use the proceeds from the exercise of such Warrants for working capital and general corporate purposes. If all of the Warrants are exercised, and assuming they are not exercised using a cashless exercise procedure, this would result in an aggregate of approximately $2,567,335.41 of possible funding, calculated using the midpoint of the price range listed on the cover page of the Prospectus. However, the timing and manner of use of the net proceeds may vary, depending on the number of Warrants exercised and the time of exercise, the applicable exercise price at the time of exercise, the amount of actual proceeds actually received, if any, the timing of the receipt of such proceeds, our rate of growth and other factors. The foregoing represents our best estimate of our use of the net proceeds of the offering based on current planning and business conditions. We reserve the right to change our use of proceeds when and if market conditions or unexpected changes in operating conditions or results occur, or in our management’s discretion. Pending the use of the net proceeds from the cash exercise of the Warrants as described above, we intend to invest the proceeds in investment grade, interest-bearing instruments. Additionally, we can provide no assurances that any of the Warrants will be exercised in the future, or that such exercise will be in cash.

 

The Selling Stockholders will pay any underwriting discounts and commissions and expenses incurred by the Selling Stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Stockholders in disposing of the shares. We will bear all other costs, fees, and expenses incurred in effecting the registration of the shares covered by this Selling Stockholder Prospectus, including, without limitation, all registration and filing fees, exchange listing fees (if any), and fees and expenses of our counsel and our accountants.

 

7
 

 

DETERMINATION OF OFFERING PRICE

 

There currently is no public market for our common stock. The Selling Stockholders must sell their shares at a fixed price per share of $7.00 until there is a public market for our shares of common stock. Thereafter, the Selling Stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices or at privately negotiated prices. See “Plan of Distribution.”

 

8
 

 

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.

 

9
 

 

911,079 Shares of

 

Common Stock

 

 

PROSPECTUS

 

                       , 2017

 

 
 

 

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   $ 3,192  
FINRA filing fee   $ 2,750  
The Nasdaq Capital Market initial listing fee   $ 75,000  
Printing and engraving expenses   $ 10,000  
Accounting fees and expenses   $ 50,000  
Legal fees and expenses   $ 250,000  
Transfer agent and registrar fees   $ 20,000  
Miscellaneous fees and expenses   $ 75,000  
Total   $ 485,942  

 

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.

 

II- 1
 

 

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 299,400 shares of common stock to Steven A. 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 299,400 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 416,667 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 250,000 of such warrants and transferred the balance of 166,667 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.
   
(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 52,850 shares of our Series A preferred stock at an initial exercise price of $10.00 per share.

 

II- 2
 

 

(6) On August 31, 2016, we issued 123,679 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 1,296,000 shares of common stock at an exercise price of $10.00 per share to certain directors, officers, employees and service providers.
   
(8) On October 1, 2016, we agreed to issue 10,000 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 63,563 shares of our Series B Preferred Stock in foreign and private offerings to a total of 18 investors for a price of $12.00 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.

 

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.

 

II- 3
 

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

(i) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.

 

(5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

  (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
     
  (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

II- 4
 

 

  (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
     
  (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(6) Provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

(7) 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.

 

(8) 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.

 

II- 5
 

 

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   Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock
3.4*   Amendment to Third Amended and Restated Certificate of Incorporation
3.5*   Form of Amended and Restated Certificate of Incorporation, to be in effect upon the completion of this offering
3.6*   Form of Amended and Restated Bylaws, to be in effect upon the completion of this offering
4.1#   Specimen common stock certificate
4.2*   Form of Underwriters’ Warrant
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, M.D.
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 Afksendyios Kalangos, M.D.
10.14   Standard Industrial/Commercial Single-Tenant Lease, dated as of September 20, 2017, by and between the Registrant and Corbiz, LLC
10.15   Loan Agreement, dated as of June 30, 2015, by and between Biodyne Holding S.A. and the Registrant
10.16#   First Amendment to Loan Agreement, dated as of April 1, 2016, by and between Biodyne Holding S.A. and the Registrant
10.17#   Second Amendment to Loan Agreement, dated as of October 18, 2016, by and between Biodyne Holding S.A. and the Registrant
10.18#   Third Amendment to Loan Agreement, dated as of December 9, 2016, by and between Biodyne Holding S.A. and the Registrant
10.19   Fourth Amendment to Loan Agreement, dated as of March 27, 2017, by and between Biodyne Holding S.A. and the Registrant
10.20   Fifth Amendment to Loan Agreement, dated as of June 26 , 2017, by and between Biodyne Holding S.A. and the Registrant
10.21#   Common Stock Purchase Agreement, dated as of April 1, 2016, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc.
10.22   Services and Material Supply Agreement, dated as of March 4, 2016, by and between the Registrant and ATSCO, Inc.
10.23+   First Amendment to Employment Agreement, dated as of June 1, 2017, by and between the Registrant and William Abbott
10.24+#   First Amendment to Employment Agreement, dated as of December 1, 2016, by and between the Registrant and Steven Cantor
10.25+   Second Amendment to Employment Agreement, dated as of June 12, 2017, by and between the Registrant and Steven Cantor
10.26   Securities Purchase Agreement dated as of June 15, 2017, by and among the Registrant and each purchaser identified on the signature pages thereto
10.27   Promissory Note, dated June 15, 2017, by and between the Registrant and Hancock Jaffe Laboratories Aesthetic, Inc.
10.28   Promissory Note, dated August 22, 2017, by and between the Registrant and Hancock Jaffe Laboratories Aesthetic, Inc.
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.
#   Previously filed.

 

 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on this 6th day of November, 2017.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By: /s/ Benedict Broennimann, M.D.
    Benedict Broennimann, M.D.
    Co-Chief Executive Officer

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Benedict Broennimann, M.D.   Co-Chief Executive Officer   November 6 , 2017
Benedict Broennimann, M.D.   (Principal Executive Officer)    
         
/s/ Steven A. Cantor   Co-Chief Executive Officer and Director   November 6 , 2017
Steven A. Cantor        
         
/s/ William R. Abbott   Senior Vice President, Chief Financial Officer    
William R. Abbott   (Principal Financial Officer and Principal Accounting Officer)   November 6 , 2017
*        
    Chairman and Director   November 6 , 2017
Yury Zhivilo        
         
*        
    Director   November 6 , 2017
Robert A. Anderson        
         
*        
    Director   November 6 , 2017
Robert W. Doyle        
         
*        
    Director   November 6 , 2017
Steven Girgenti        

 

*By: /s/ Benedict Broennimann , M.D.  
  Benedict Broennimann, M.D.  
  Attorney-in-Fact  

 

 
 

 

THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HANCOCK JAFFE LABORATORIES, INC.

 

(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)

 

Hancock Jaffe Laboratories, Inc., (the “ Corporation ”) a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “ General Corporation Law ”),

 

DOES HEREBY CERTIFY:

 

1. That the name of the Corporation is Hancock Jaffe Laboratories, Inc., and that this corporation was originally incorporated pursuant to the General Corporation Law on December 22, 1999 under the name Hancock Jaffe Laboratories, Inc.

 

2. On December 2, 2015, the Corporation amended and restated its Certificate of Incorporation (the “ Restated Certificate of Incorporation ”).

 

3. On August 30, 2016, the Corporation filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Corporation.

 

4. On March 1, 2017, the Corporation filed a Second Amended and Restated Certificate of Incorporation amending and restating the Restated Certificate of Incorporation (the “ Second Restated Certificate of Incorporation ”).

 

5. That the Board of Directors duly adopted resolutions proposing to amend and restate the Second Amended and Restated Certificate of the Corporation, declaring said amendment and restatement to be advisable and in the best interests of this Corporation and its stockholders, and authorizing the appropriate officers of this Corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:

 

RESOLVED , that the Second Amended and Restated Certificate of Incorporation of the Corporation be amended and restated in its entirety to read as follows:

 

First: The name of the Corporation is Hancock Jaffe Laboratories, Inc. (the “ Corporation ”).

 

Second: The address of the registered office of the Corporation in the State of Delaware is Corporation Service Company, 2711 Centerville Rd., Suite 400, in the City of Wilmington, County of New Castle, State of Delaware, 19808. The name of its registered agent at such address is Corporation Service Company.

 

 
 

 

Third: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.

 

Fourth: The total number of shares of all classes of stock which the Corporation shall have authority to issue is thirty six million (36,000,000) which are divided into (i) thirty million (30,000,000) shares of Common Stock, $0.00001 par value per share (“ Common Stock ”) and (ii) six million (6,000,000) shares of preferred stock, $0.00001 par value per share (“ Preferred Stock ”).

 

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

 

  A. COMMON STOCK

 

1. General . The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.

 

2. Voting . The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings); provided , however , that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series and/or closer of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to the Certificate of Incorporation or pursuant to the General Corporation Law. There shall be no cumulative voting.

 

  B. PREFERRED STOCK

 

1. General . The board of directors of the Corporation (the “ Board of Directors ”) is expressly authorized to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a certificate of designation pursuant to the General Corporation Law (a “ Certificate of Designation ”), to establish from time to time the number of shares to be included in each such series, to fix the designation, powers (including voting powers), preferences and relative, participating, optional or other rights, if any, of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase (but not above the total number of authorized shares of Preferred Stock authorized) or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series. The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of capital stock of the corporation entitled to vote thereon, without a separate vote of the holders of the Preferred Stock or any series thereof, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law, unless a vote of any such holders is required pursuant to the terms of any Certificate of Designation designating a series of Preferred Stock.

 

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Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this ARTICLE FOURTH, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting powers, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock.

 

  C. DESIGNATION OF SERIES A PREFERRED:

 

One million three hundred thousand (1,300,000) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “ Series A Preferred Stock ” with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “sections” or “subsections” in this Part B of this Article Fourth refer to sections and subsections of Part B of this Article Fourth.

 

    1. Dividends .

 

From and after the date of the issuance of any shares of Series A Preferred Stock, dividends at the rate per annum of eight percent (8%) of the original purchase price of the Series A Preferred Stock from the Corporation shall accrue on such shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock) (the “ Accruing Dividends ”). Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative; provided , however , that except as set forth in the following sentence of this Section 1 or in Section 2.1 and Section 5 , such Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors and the Corporation shall be under no obligation to pay such Accruing Dividends. The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock provided such is also paid simultaneously to all holders of the Series A Preferred Stock on an “as converted basis”) unless (in addition to the obtaining of any consents required elsewhere in the Certificate of Incorporation) the holders of the Series A Preferred Stock then outstanding shall each first or simultaneously receive, a dividend on each outstanding share of Series A Preferred Stock in an amount at least equal to the greater of (i) the amount of the aggregate Accruing Dividends then accrued on such share of Series A Preferred Stock and not previously paid and (ii) (A) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series A Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of Series A Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series A Preferred Stock determined by (1) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (2) multiplying such fraction by an amount equal to the Series A Original Issue Price (as defined below); provided that if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Series A Preferred Stock pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Series A Preferred Stock dividend. The “ Series A Original Issue Price ” shall mean $5.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock.

 

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2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales .

 

2.1 Preferential Payments to Holders of Series A Preferred Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event (as defined below), the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the greater of (i) two times the Series A Original Issue Price, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount payable pursuant to this sentence is hereinafter referred to as the “ Series A Liquidation Amoun t”). If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled under this Section 2.1 , the holders of shares of Series A Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

 

2.2 Payments to Holders of Common Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series A Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.

 

  2.3 Deemed Liquidation Events .

 

2.3.1 Definition . Each of the following events shall be considered a “ Deemed Liquidation Event ” unless the holders of at least a majority of the outstanding shares of Series A Preferred Stock elect otherwise by written notice sent to the Corporation at least ten (10) days prior to the effective date of any such event:

 

    (a) a merger or consolidation in which

 

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    (i) the Corporation is a constituent party or
       
    (ii) a Subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation,

 

except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation; or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or

 

(b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger, consolidation or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation.

 

(c) For purposes hereof, the term “ Subsidiary ” means with respect to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person.

 

    2.3.2 Effecting a Deemed Liquidation Event .

 

(a) The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Section 2.3.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the “ Merger Agreement ”) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 .

 

(b) In the event of a Deemed Liquidation Event referred to in Section 2.3.1(a)(ii) or 2.3.1(b) , if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within ninety (90) days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Series A Preferred Stock no later than the ninetieth (90 th ) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause; (ii) to require the redemption of such shares of Series A Preferred Stock, and (iii) if the holders of at least a majority of the then outstanding shares of Series A Preferred Stock so request in a written instrument delivered to the Corporation not later than one hundred twenty (120) days after such Deemed Liquidation Event and after notice thereof is sent to each such holder by the Corporation as provided herein, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Corporation) , together with any other assets of the Corporation available for distribution to its stockholders, all to the extent permitted by Delaware law governing distributions to stockholders (the “ Available Proceeds ”), on the one hundred fiftieth (150 th ) day after such Deemed Liquidation Event, to redeem all outstanding shares of Series A Preferred Stock at a price per share equal to the Series A Liquidation Amount. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Series A Preferred Stock, the Corporation shall ratably redeem each holder’s shares of Series A Preferred Stock to the fullest extent of such Available Proceeds, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. The provisions of Section 6 shall apply, with such necessary changes in the details thereof as are necessitated by the context, to the redemption of the Series A Preferred Stock pursuant to this Section 2.3.2(b) . Prior to the distribution or redemption provided for in this Section 2.3.2(b) , the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.

 

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2.3.3 Amount Deemed Paid or Distributed . The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the majority of the independent members of the then Board of Directors of the Corporation.

 

2.3.4 Allocation of Escrow and Contingent Consideration . In the event of a Deemed Liquidation Event pursuant to Section 2.3.1(a)(i) , if any portion of the consideration payable to the stockholders of the Corporation is payable only upon satisfaction of contingencies (the “ Additional Consideration ”), the Merger Agreement shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the “ Initial Consideration ”) shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event; and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon satisfaction of such contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 after taking into account the previous payment of the Initial Consideration as part of the same transaction. For the purposes of this Section 2.3.4 , consideration placed into escrow or retained as holdback to be available for satisfaction of indemnification or similar obligations in connection with such Deemed Liquidation Event shall be deemed to be Initial Consideration.

 

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  3. Voting

 

3.1 General . On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of Series A Preferred Stock shall vote together with the holders of Common Stock as a single class.

 

3.2 Election of Directors . Directors shall be elected by the holders of Common Stock and Preferred Stock, voting together as a single class. Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Series A Preferred Stock or Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, then any directorship not so filled shall remain vacant until such time as the holders of the Series A Preferred Stock or Common Stock, voting together as a single class as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship. The holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Series A Preferred Stock), voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this Section 3.2 , a vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series pursuant to this Section 3.2 .

 

3.3 Series A Preferred Stock Protective Provisions . At any time when any shares of Series A Preferred Stock are outstanding, the Corporation shall not (and shall not permit any of its Subsidiaries in which it owns more than 20% of the equity to), directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio , and of no force or effect;

 

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3.3.1 amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of the Corporation and/or any subsidiary in a manner that adversely affects the powers, preferences or rights of the Series A Preferred Stock;

 

3.3.2 increase or decrease the authorized number of directors constituting the Board of Directors;

 

3.3.3 approve any merger, asset sale, license, liquidation or other corporation reorganization or any other Deemed Liquidation Event (other than existing arrangements) of the Corporation and/or any Subsidiary;

 

3.3.4 create, or authorize the creation of, any additional class or series of capital stock that ranks senior to the Series A Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation and/or any Subsidiary, the payment of dividends, voting and rights of redemption;

 

3.3.5 appoint or terminate the Chief Executive Officer of the Corporation;

 

3.3.6 effect any change in the fundamental business of the Corporation;

 

3.3.7 [RESERVED]

 

3.3.8 redeem or repurchase any shares of capital stock of the Corporation and/or any Subsidiary, other than a redemption of Series A Preferred Stock pursuant to Section 2.2 or Section 7 .

 

  4. Optional Conversion .

 

The holders of the Series A Preferred Stock shall have conversion rights as follows (the “ Conversion Rights ”):

 

    4.1 Right to Convert .

 

4.1.1 Conversion Ratio . Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Series A Original Issue Price by the Series A Conversion Price (as defined below) in effect at the time of conversion except that if a conversion is the result of a IPO Mandatory Conversion (as defined in Section 5.1 hereof) then the Series A Conversion Price shall be the lower of (i) a 25% discount to the price per share a share of Common Stock is sold to the public in such Mandatory IPO Conversion, and (ii) the Series A Conversion Price, in both cases as adjusted pursuant to Section 4.4. The “ Series A Conversion Price ” shall initially be equal to the Series A Original Issue Price. Such initial Series A Conversion Price, and the rate at which shares of Series A Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.

 

4.1.2 Termination of Conversion Rights . In the event of a notice of redemption of any shares of Series A Preferred Stock pursuant to Section 6 , the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not fully paid on such redemption date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Series A Preferred Stock.

 

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4.2 Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

 

    4.3 Mechanics of Conversion .

 

4.3.1 Notice of Conversion . In order for a holder of Series A Preferred Stock to voluntarily convert shares of Series A Preferred Stock into shares of Common Stock, such holder shall (a) provide written notice to the Corporation’s transfer agent at the office of the transfer agent for the Series A Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent) that such holder elects to convert all or any number of such holder’s shares of Series A Preferred Stock and, if applicable, any event on which such conversion is contingent and (b) Notwithstanding anything to the contrary provided herein or elsewhere, unless a holder of Series A Preferred Stock is converting all of its Series A Preferred Stock, the holder is not required to submit a certificate representing its Series A Preferred Stock being converted if such holder’s shares are certificated, surrender the certificate or certificates for such shares of Series A Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Series A Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent). Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the shares of Common Stock to be issued. If required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form reasonably satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such notice and, if applicable, certificates (or lost certificate affidavit and agreement) shall be the time of conversion (the “ Conversion Time ”), and the shares of Common Stock issuable upon conversion of the specified shares shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time (i) issue and deliver to such holder of Series A Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of (x) Common Stock issuable upon such conversion in accordance with the provisions hereof and (y) a certificate for the number (if any) of the shares of Series A Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, and (ii) pay in cash such amount as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion.

 

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4.3.2 Reservation of Shares . The Corporation shall at all times when the Series A Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Series A Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time equal the product of (i) 300%, multiplied by (ii) the amount of shares of Common Stock (the “ Reserve Amount ”) to effect the conversion of all outstanding Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to satisfy the Reserve Amount, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes and immediately reserve the Reserve Amount, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the Series A Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Series A Conversion Price.

 

4.3.3 Effect of Conversion . All shares of Series A Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Section 4.2 . Any shares of Series A Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series A Preferred Stock accordingly.

 

4.3.4 Further Adjustment for Dividends . Upon any such conversion, the Series A Conversion Price shall be adjusted to account for any declared but unpaid dividends on the Series A Preferred Stock.

 

4.3.5 Taxes . The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series A Preferred Stock pursuant to this Section 4 . The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

 

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    4.4 Adjustments to Series A Conversion Price for Diluting Issues .

 

4.4.1 Special Definitions . For purposes of this Article Fourth, the following definitions shall apply:

 

(a) “ Option ” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

 

(b) “ Series A Original Issue Date ” shall mean the date on which the first share of Series A Preferred Stock was issued.

 

(c) “ Convertible Securities ” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

 

(d) “ Additional Shares of Common Stock ” shall mean all shares of Common Stock issued (or, pursuant to Section 4.4.3 below, deemed to be issued) by the Corporation after the Series A Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “ Exempted Securities ”):

 

    (i) shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Series A Preferred Stock;
       
    (ii) shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Section 4.5 , 4.6 , 4.7 or 4.8 ;
       
    (iii) shares of Common Stock or Options issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Corporation;
       
    (iv) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security;
       
    (v) shares of Common Stock, Options or Convertible Securities issued to equipment lessors, or to real property lessors pursuant to a debt financing, equipment leasing or real property leasing transaction approved by the Board of Directors of the Corporation;
       
    (vi) shares of Common Stock, Options or Convertible Securities issued to suppliers or third party service providers in connection with the provision of goods or services pursuant to transactions approved by the Board of Directors of the Corporation;

 

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    (vii) shares of Common Stock, Options or Convertible Securities issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets or other reorganization or to a joint venture agreement, provided that such issuances are approved by the Board of Directors of the Corporation; or
       
    (viii) shares of Common Stock, Options or Convertible Securities issued in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar agreements or strategic partnerships approved by the Board of Directors of the Corporation.

 

4.4.2 No Adjustment of Series A Conversion Price . No adjustment in the Series A Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series A Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

 

4.4.3 Deemed Issue of Additional Shares of Common Stock .

 

(a) If the Corporation at any time or from time to time after the Series A Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

 

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(b) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Series A Conversion Price pursuant to the terms of Section 4.4.4 , are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Series A Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Series A Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Series A Conversion Price to an amount which exceeds the lower of (i) the Series A Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Series A Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

 

(c) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Series A Conversion Price pursuant to the terms of Section 4.4.4 (either because the consideration per share (determined pursuant to Section 4.4.5 ) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Series A Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series A Original Issue Date), are revised after the Series A Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Section 4.4.3(a) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

 

(d) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Series A Conversion Price pursuant to the terms of Section 4.4.4 , the Series A Conversion Price shall be readjusted to such Series A Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

 

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(e) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Series A Conversion Price provided for in this Section 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (b) and (c) of this Section 4.4.3 ). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Series A Conversion Price that would result under the terms of this Section 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Series A Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

 

4.4.4 Adjustment of Series A Conversion Price Upon Issuance of Additional Shares of Common Stock . In the event the Corporation shall at any time after the Series A Original Issue Date, and prior to, (i) receipt of an Investigational Device Exemption or PMA approval from the U.S. Food and Drug Administration (“ FDA ”) for either the Corporation’s venous valve, pediatric heart valve or coronary artery bypass graft product candidates (the “ FDA IDE/PMA Approval ”), or (ii) the closing of an underwritten initial public offering of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, of shares of Common Stock with a pre-money valuation of the Corporation of less than One Hundred Fifty Million Dollars ($150,000,000) resulting in the Common Stock being listed for trading (or quoting on any NASDAQ and/or NYSE trading market and/or quotation system), issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4.4.3 ), then the Series A Conversion Price shall be adjusted such that the Series A Preferred Stock shall be convertible into the number of shares of Common Stock equal to the percentage ownership of the holders of the Series A Preferred Stock on the date that such Additional Shares of Common Stock were issued or deemed issued, on a fully-diluted basis.

 

4.5 Adjustment for Stock Splits and Combinations . If the Corporation shall at any time or from time to time after the Series A Original Issue Date effect a subdivision of the outstanding Common Stock, the Series A Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series A Original Issue Date combine the outstanding shares of Common Stock, the Series A Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

 

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4.6 Adjustment for Certain Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series A Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Series A Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price then in effect by a fraction:

 

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

 

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

 

Notwithstanding the foregoing (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of Series A Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series A Preferred Stock had been converted into Common Stock on the date of such event.

 

4.7 Adjustments for Other Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series A Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Series A Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Series A Preferred Stock had been converted into Common Stock on the date of such event.

 

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4.8 Adjustment for Merger or Reorganization, etc . Subject to the provisions of Section 2.3 , if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Series A Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Sections 4.4 , 4.6 or 4.7 ), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Series A Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Series A Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series A Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Series A Preferred Stock.

 

4.9 Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Series A Conversion Price pursuant to this Section 4 , the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than thirty (30) days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Series A Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Series A Preferred Stock (but in any event not later than thirty (30) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Series A Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Series A Preferred Stock.

 

  4.10 Notice of Record Date . In the event:

 

(a) the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Series A Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

 

(b) of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or

 

(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation,

 

then, and in each such case, the Corporation will send or cause to be sent to the holders of the Series A Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Series A Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Series A Preferred Stock and the Common Stock. Such notice shall be sent at least ten (10) days prior to the record date or effective date for the event specified in such notice.

 

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  5. Mandatory Conversion .

 

5.1 Trigger Events . Upon either (a) the closing of an underwritten initial public offering of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, of shares of Common Stock, resulting in the Common Stock being listed for trading (or quotation on any NASDAQ and/or NYSE trading market and/or quotation system (an “ IPO Mandatory Conversion ”)), (b) the consent, in the form of a vote or written consent, of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “ Mandatory Conversion Time ”), or (c) receipt by the Corporation of FDA IDE/PMA Approval, then (i) all outstanding shares of Series A Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate as calculated pursuant to Section 4.1.1 and (ii) such shares may not be reissued by the Corporation.

 

5.2 Procedural Requirements . All holders of record of shares of Series A Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Series A Preferred Stock pursuant to this Section 5 . Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Series A Preferred Stock in certificated form shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Series A Preferred Stock converted pursuant to Section 5.1 , including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender any certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of any certificate or certificates of such holders (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Section 5.2 . As soon as practicable after the Mandatory Conversion Time and, if applicable, the surrender of any certificate or certificates (or lost certificate affidavit and agreement) for Series A Preferred Stock, the Corporation shall (a) issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and (b) pay cash as provided in Section 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion. Such converted Series A Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series A Preferred Stock accordingly.

 

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6. Principal Cash Distribution . The Company agrees that it shall diligently use its best efforts to sell and/or license its U.S. Patent No. 7,815,677, bioprosthetic pediatric heart valve, bioprosthetic venous valve, and bioprosthetic coronary artery bypass graft; along with all regulatory and other pertinent records (“ Product Candidates ”). From the first one hundred thirty million dollars ($130,000,000) in aggregate cash proceeds generated from such sale(s) and/or license(s) (the “ $130,000,000 Maximum Amount ”), 50% thereof ($65,000,000 in the aggregate if aggregate sales and licenses of Product Candidates result in the $130,000,000 Maximum Amount) shall be distributed if, as and when received by the Company (but in no event shall the Company make any such distributions resulting from aggregate cash proceeds that exceed the $130,000,000 Maximum Amount), to holders of: (i) Series A Preferred Stock (whether previously converted mandatorily or voluntarily), (ii) each other class or series of preferred stock that has the express right to a portion of the Principal Cash Distributions (as defined below) and which right expressly ranks junior to the Series A Preferred Stock, rights to Principal Cash Distributions (“ Qualifying Junior Preferred Stock ”), and (iii) the then issued and outstanding shares of Common Stock (each “ Principal Cash Distribution ”) as follows: First , to the holders of the Series A Preferred Stock (whether previously converted mandatorily or voluntarily) in an aggregate amount equal to the sum of (x) the aggregate number of shares of Series A Preferred Stock issued multiplied by the Series A Original Issue Price, plus (y) all accrued but unpaid dividends owed on the Series A Preferred Stock (the “ Aggregate A Share Cash Distribution Amount ”), which Aggregate A Share Cash Distribution Amount shall be distributed pro-rata to all holders of Series A Preferred Shares (whether previously converted voluntarily or mandatorily) based upon the percentage interest a holder of such Series A Preferred Shares owns (whether previously converted mandatorily or voluntarily) out of all Series A Preferred Shares issued and outstanding including such holder’s Series A Preferred Shares (whether previously converted voluntarily or mandatorily) until such time as the entire Aggregate A Share Cash Distribution Amount is paid in full; Second , to the holders of any Qualifying Junior Preferred Stock on the terms and conditions including, but not limited to, as to priority of payment and amount of payment as set forth in the certificate of designation(s) and/or any other document(s) setting forth the terms and conditions of any such Qualifying Junior Preferred Stock; and Third , the remaining balance, if any, of the Principal Cash Distribution being distributed, to the holders of Common Stock pro-rata based upon each holder’s percentage ownership of the issued and outstanding Common Stock. For purposes of clarification; if the Corporation as a result of licenses and sales of Product Candidates received from such sales and licenses $200,000,000 aggregate cash proceeds, the Corporation would be required to make a Principal Cash Distribution of $65,000,000 (50% of the $130,000,000 Maximum Amount of aggregate cash proceeds received by the Corporation from such combined sales and licenses of Product Candidates), and if an aggregate of 1,300,000 shares of Series A Preferred Stock were issued and outstanding (whether they had been previously converted or not), because the Series A Preferred Stock Original Issue Price is $5.00 per share (prior to any adjustment as provided herein), the Aggregate A Share Cash Distribution Amount would be $6,500,000 (1,300,000 shares of Series A Preferred Stock x $5.00), and assuming no dividends had accrued and were unpaid with respect to the Series A Preferred Stock and no Qualifying Junior Preferred Stock had been issued, the $65,00,000 Principal Cash Distribution would be distributed as follows: First , the holders of Series A Preferred Stock would receive in the aggregate, a $6,500,000 Aggregate A Share Cash Distribution Amount (pro-rata to each holder of Series A Preferred Stock as provided above, whether previously converted or not), then, Second because no Qualifying Junior Preferred Stock had been issued, pro-rata, to the holders of the then issued and outstanding Common Stock in an amount equal to $58,500,000 (which equals the remaining portion of the $65,000,000 Principal Cash Distribution after paying the $6,500,000 Aggregate A Share Cash Distribution Amount). Such Principal Cash Distribution shall survive any general distributions, dividend payments, conversion of Series A Preferred Stock to Common Stock, sale, transfer and/or disposition of any Series A Preferred Stock, changes in the capital stock structure of Corporation from the time of original purchase of Series A Preferred Stock; by class or otherwise, merger, amalgamation, reorganization, consolidation, funding ( including an initial public offering) or any other transaction involving any class of stock of the Corporation.

 

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  7. Redemption .

 

7.1 General . Unless prohibited by Delaware law, shares of Series A Preferred Stock shall be redeemed by the Corporation at a price equal to two times the Series A Original Issue Price per share, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared (the “ Redemption Price ”), in three (3) monthly equal installments commencing not more than thirty (30) days after receipt by the Corporation at any time on or after the third anniversary of the Series A Original Issue Date, from the holders of any of the then outstanding shares of Series A Preferred Stock, of written notice requesting redemption of shares of Series A Preferred Stock (the “ Redemption Request ”). Upon receipt of a Redemption Request, the Corporation shall apply all of its assets to any such redemption, and to no other corporate purpose, except to the extent prohibited by Delaware law. The date of each such installment shall be referred to as a “ Redemption Date .” On each Redemption Date, the Corporation shall redeem, on a pro rata basis in accordance with the number of shares of Series A Preferred Stock owned by each holder, that number of outstanding shares of Series A Preferred Stock determined by dividing (i) the total number of shares of Series A Preferred Stock outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). If on any Redemption Date Delaware law governing distributions to stockholders prevents the Corporation from redeeming all shares of Series A Preferred Stock to be redeemed, the Corporation shall ratably redeem the maximum number of shares that it may redeem consistent with such law, and shall redeem the remaining shares as soon as it may lawfully do so under such law.

 

7.2 Redemption Notice . The Corporation shall send written notice of the mandatory redemption (the “ Redemption Notice ”) to each holder of record of Series A Preferred Stock not less than forty (40) days prior to each Redemption Date. Each Redemption Notice shall state:

 

(a) the number of shares of Series A Preferred Stock held by the holder that the Corporation shall redeem on the Redemption Date specified in the Redemption Notice;

 

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(b) each Redemption Date and the Redemption Price for (i) all Series A Preferred Stock owned by such holder and (ii) for the number of shres being redeemed on the redemption date;

 

(c) the date upon which the holder’s right to convert such shares terminates (as determined in accordance with Section 4.1 ); and

 

(d) for holders of shares in certificated form, that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Series A Preferred Stock to be redeemed.

 

7.3 Surrender of Certificates; Payment . On or before the applicable Redemption Date, each holder of shares of Series A Preferred Stock to be redeemed on such Redemption Date, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4 , shall, if a holder of shares in certificated form, surrender the certificate or certificates representing such shares (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof. In the event less than all of the shares of Series A Preferred Stock represented by a certificate are redeemed, a new certificate, instrument, or book entry representing the unredeemed shares of Series A Preferred Stock shall promptly be issued to such holder.

 

7.4 Rights Subsequent to Redemption . If the Redemption Notice shall have been duly given, and if on the applicable Redemption Date the Redemption Price payable upon redemption of the shares of Series A Preferred Stock to be redeemed on such Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that any certificates evidencing any of the shares of Series A Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Series A Preferred Stock shall cease to accrue after such Redemption Date and all rights with respect to such shares shall forthwith after the Redemption Date terminate, except those rights described in Section 6 Principal Cash Distribution, and only the right of the holders to receive the Redemption Price without interest upon surrender of any such certificate or certificates therefor.

 

8. Redeemed or Otherwise Acquired Shares . Any shares of Series A Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted except as described in Section 6 Principal Cash Distribution, to the holders of Series A Preferred Stock following redemption.

 

9. Waiver . Any of the rights, powers, preferences and other terms of the Series A Preferred Stock set forth herein may be waived on behalf of all holders of Series A Preferred Stock by the affirmative written consent or vote of the holders of at least a majority of the shares of Series A Preferred Stock then outstanding.

 

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10. Notices . Any notice required or permitted by the provisions of this Article Fourth to be given to a holder of shares of Series A Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

 

Fifth: Subject to any additional vote required by the Certificate of Incorporation or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.

 

Sixth: Subject to any additional vote required by the Certificate of Incorporation, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation.

 

Seventh: Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

 

Eighth: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

 

Ninth: To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article Ninth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.

 

Any repeal or modification of the foregoing provisions of this Article Ninth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

 

Tenth: To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Corporation (and any other persons to which General Corporation Law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law.

 

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Any amendment, repeal or modification of the foregoing provisions of this Article Tenth shall not adversely affect any right or protection of any director, officer or other agent of the Corporation existing at the time of such amendment, repeal or modification.

 

Eleventh: Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the State of Delaware shall be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers or employees arising pursuant to any provision of the Delaware General Corporation Law or the Corporation’s certificate of incorporation or bylaws or (iv) any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. If any provision or provisions of this Article Eleventh shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article Eleventh (including, without limitation, each portion of any sentence of this Article Eleventh containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby.

 

6. That the foregoing amendment and restatement was approved by the holders of the requisite number of shares of this corporation in accordance with Section 228 of the General Corporation Law.

 

7. That this Third Amended and Restated Certificate of Incorporation, which restates and integrates and further amends the provisions of this Corporation’s Second Amended and Restated Certificate of Incorporation, has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law.

 

IN WITNESS WHEREOF , this Third Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation as of the 24 th day of May 2017.

 

  By: /S/ ZHIVILO YURY
  Name:  Zhivilo Yury
  Title: Chairman of the Board

 

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BYLAWS

 

OF

 

Hancock Jaffe Laboratories, Inc.

 

A Delaware Corporation

 

ARTICLE I

 

Offices

 

Section 1. The registered office of this corporation shall be in the County of New Castle, State of Delaware.

 

Section 2 . The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

 

ARTICLE II

 

Meetings of Stockholders

 

Section 1. All annual meetings of the stockholders shall be held at the registered office of the corporation or at such other place within or without the State of Delaware as the directors shall determine. Special meetings of the stockholders may be held at such time and place within or without the State of Delaware as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof.

 

Section 2. Annual meetings of the stockholders, commencing with the year 2015, shall be held on the 8th day of October each year if not a legal holiday and, if a legal holiday, then on the next secular day following, or at such other time as may be set by the Board of Directors from time to time, at which the stockholders shall elect by vote a Board of Directors and transact such other business as may properly be brought before the meeting. Meetings may be held by telephonic conference call provided all stockholders are present telephonically, or have expressly declined to “attend.”

 

Section 3. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by the President or the Secretary by resolution of the Board of Directors or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose of the proposed meeting.

 

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Section 4. Notices of meetings shall be in writing and signed by the President or a Vice-President or the secretary or an Assistant Secretary or by such other person or persons as the directors shall designate. Such notices shall state the purpose or purposes for which the meeting is called and the time and the place, which maybe within or without this State, where it is to be held. A copy of such notice shall be either delivered personally to or shall be mailed, postage prepaid, to each stockholder of record entitled to vote at such meeting not less than ten nor more than sixty days before such meeting. If mailed, it shall be directed to a stockholder at his address as it appears upon the records of the corporation and upon such mailing of any such notice, the service thereof shall be complete and the time of the notice shall begin to run from the date upon which such notice is deposited in the mail for transmission to such stockholder. Personal delivery of any such notice to any officer of a corporation or association, or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. In the event of the transfer of stock after delivery of such notice of and prior to the holding of the meeting it shall not be necessary to deliver or mail notice of the meeting to the transferee.

 

Section 5. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

 

Section 6. The holders of a majority of the stock, issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.

 

Section 7. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall be sufficient to elect directors or to decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question.

 

Section 8. Each stockholder of record of the corporation shall be entitled at each meeting of stockholders to one vote for each share of stock standing in his name on the books of the corporation. Upon the demand of any stockholder, the vote for directors and the vote upon any question before the meeting shall be by ballot.

 

Section 9. At any meeting of the stockholders any stockholder may be represented and vote by a proxy or proxies appointed by an instrument in writing. In the event that any such instrument in writing shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such written instrument upon all of the persons so designated unless the instrument shall otherwise provide. No proxy or power of attorney to vote shall be used to vote at a meeting of the stockholders unless it shall have been filed with the secretary of the meeting when required by the inspectors of election. All questions regarding the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided by the inspectors of election who shall be appointed by the Board of Directors, or if not so appointed, then by the presiding officer of the meeting.

 

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Section 10. Any action which may be taken by the vote of the stockholders at a meeting may be taken without a meeting if authorized by the written consent of stockholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation require a greater proportion of voting power to authorize such action in which case such greater proportion of written consents shall be required.

 

ARTICLE III

 

Directors

 

Section 1. The business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

 

Section 2. The number of .directors which shall constitute the whole board shall be three (3). The number of directors may from time to time be increased or decreased to not less than one nor more than fifteen by action of the Board of Directors. The directors shall be elected at the annual meeting of the stockholders and except as provided in Section 2 of this Article, each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.

 

Section 3. Vacancies in the Board of Directors including those caused by an increase in the number of Directors, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The holders of a two-thirds of the outstanding shares of stock entitled to vote may at any time peremptorily terminate the term of office of all or any of the directors by vote at a meeting called for such purpose or by a written statement filed with the secretary or, in his absence, with any other officer. Such removal shall be effective immediately, even if successors are not elected simultaneously and the vacancies on the Board of Directors resulting therefrom shall be filled only by the stockholders.

 

A vacancy or vacancies in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any directors, or if the authorized number of directors be increased, or if the stockholders fail at any annual or special meeting of stockholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting.

 

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The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the stockholders shall have power to elect a successor to take office when the resignation is to become effective.

 

No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.

 

ARTICLE IV

 

Meetings of the Board of Directors

 

Section 1. Regular meetings of the Board of Directors shall be held at any place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation regular meetings shall be held at the registered office of the corporation. Special meetings of the Board may be held either at a place so designated or at the registered office.

 

Section 2. The first meeting of each newly elected Board of Directors shall be held immediately following the adjournment of the meeting of stockholders and at the place thereof. No notice of such meeting shall be necessary to the directors in order legally to constitute the meeting, provided a quorum be present. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors.

 

Section 3. Regular meetings of the Board of Directors may be held without call or notice at such time and at such place as shall from time to time be fixed and determined by the Board of Directors.

 

Section 4 . Special meetings of the board of Directors may be called by the Chairman or the President or by any Vice-President or by any two directors. Written notice of the time and place of special meetings shall be delivered personally to each director, or sent to each director by mail or by other form of written communication, charges prepaid, addressed to him at his address as it is shown upon the records or is not readily ascertainable, at the place in which the meetings of the Directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is delivered as above provided, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery as above provided shall be due, legal and personal notice to such director.

 

Section 5 . Notice of the time and place of holding an adjourned meeting need not be given to the absent directors if the time and place be fixed at the meeting adjourned.

 

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Section 6. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present, and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

 

Section 7. A majority of the authorized number of directors shall be necessary to constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number be required by law, or by the Articles of Incorporation. Any action of a majority, although not at a regularly called meeting, and the record thereof, if assented to in writing by all of the other members of the Board shall be as valid and effective in all respects as if passed by the Board in regular meeting.

 

Section 8. A quorum of the directors may adjourn any directors meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum, a majority of the directors present at any directors meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the Board.

 

ARTICLE V

 

Committees of Directors

 

Section l. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more committees of the Board of Directors, each committee to consist of two or more of the directors of the corporation which, to the extent provided in the resolution, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the corporation and may have power to authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by the Board of Directors. The members of any such committee present at any meeting and not disqualified from voting may, whether or not they constitute a quorum, unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. At meetings of such committees, a majority of the members or alternate members shall constitute a quorum for the transaction of business, and the act of a majority of the members or alternate members at any meeting at which there is a quorum shall be the act of the committee.

 

Section 2. The committees shall keep regular minutes of their proceedings and report the same to the Board of Directors.

 

Section 3. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee.

 

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ARTICLE VI

 

Compensation of Directors

 

Section 1. The directors may be paid their expenses of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefore. Members of special or standing committees may be allowed like reimbursement and compensation for attending committee meetings.

 

ARTICLE VII  

 

Notices

 

Section 1. Notices to directors and stockholders shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram.

 

Section 2. Whenever all parties entitled to vote at any meeting, whether of directors or stockholders, consent, either by a writing on the records of the meeting or filed with the secretary, or by presence at such meeting and oral consent entered on the minutes, or by taking part in the deliberations at such meeting without objection, the doings of such meeting shall be as valid as if had at a meeting regularly called and noticed, and at such meeting any business may be transacted which is not excepted from the written consent or to the consideration of which no objection for want of notice is made at the time, and if any meeting be irregular for want of notice or of such consent, provided a quorum was present at such meeting, the proceedings of said meeting may be ratified and approved and rendered likewise valid and the irregularity or defect therein waived by a writing signed by all parties having the right to vote at such meeting; and such consent or approval of stockholders may be by proxy or attorney, but all such proxies and powers of attorney must be in writing.

 

Section 3. Whenever any notice whatever is required to be given under the provisions of the statutes, of the Articles of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

 

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ARTICLE VIII

 

Officers

 

Section 1. The officer of the corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. Any person may hold two or more offices.

 

Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chairman of the Board who shall be a director, and shall choose a President, a Secretary and a Treasurer, none of whom need be directors.

 

Section 3. The Board of Directors may appoint a Vice-Chairman of the Board, Vice-Presidents and one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

 

Section 4. The salaries and compensation of all officers of the corporation shall be fixed by the Board of Directors.

 

Section 5 . The officers of the corporation shall hold office at the pleasure of the Board of Directors. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors.

 

Section 6. The Chairman of the Board shall preside at meetings of the stockholders and the Board of Directors, and shall see that all orders and resolutions of the Board of Directors are carried into effect.

 

Section 7. The Vice-Chairman shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties as the Board of Directors may from time to time prescribe.

 

Section 8. The President shall be the chief executive officer of the corporation and shall have active management of the business of the corporation. He shall execute on behalf of the corporation all instruments requiring such execution except to the extent the signing and execution thereof shall be expressly designated by the Board of Directors to some other officer or agent of the corporation.

 

Section 9. The Vice-President shall act under the direction of the President and in the absence or disability of the President shall perform the duties and exercise the powers of the President. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. The Board of Directors may designate one or more Executive Vice-Presidents or may otherwise specify the order of seniority of the Vice-Presidents. The duties and powers of the President shall descend to the Vice-Presidents in such specified order of seniority.

 

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Section 10. The Secretary shall act under the direction of the President. subject to the direction of the President he shall attend all meetings of the Board of Directors and all meetings of the stockholders and record the proceedings. He shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the President or the Board of Directors.

 

Section 11. The Assistant Secretaries shall act under the direction of the President. In order of their seniority, unless otherwise determined by the President or the Board of Directors, they shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe.

 

Section 12. The Treasurer shall act under the direction of the President. Subject to the direction of the President he shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the President or the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the corporation.

 

Section 13. If required by the Board of Directors, he shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation.

 

Section 14. The Assistant Treasurer in the order of their seniority, unless otherwise determined by the President or the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe.

 

ARTICLE IX

 

Certificates of Stock

 

Section 1. Every stockholder shall be entitled to have a certificate signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such stock.

 

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Section 2. If a certificate is signed (a) by a transfer agent other than the corporation or its employees or (b) by a registrar other than the corporation or its employees, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall cease to be such officer before such certificate is issued, such certificate may be issued with the same effect as though the person had not ceased to be such officer. The seal of the corporation, or a facsimile thereof, may, but need not be, affixed to certificates of stock.

 

Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed.

 

Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for share duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation, if it is satisfied that all provisions of the laws and regulations applicable to the corporation regarding transfer and ownership of shares have been complied with, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

 

Section 5. The Board of Directors may fix in advance a date not exceeding sixty (60) days nor less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or to give such consent, and in such case, such stockholders, and only such stockholders as shall be stockholders of record on the date so fixed, shall be entitled to notice of and to vote at such meeting, or any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid.

 

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Section 6. The corporation shall be entitled to recognize the person registered on its books as the owner of shares to be the exclusive owner for all purposes including voting and dividends, and the corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

 

ARTICLE X

 

General Provisions

 

Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Articles of Incorporation.

 

Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends or for repairing or maintaining any property of the corporation or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created .

 

Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

 

Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

 

Section 5. The corporation may or may not have a corporate seal, as may from time to time be determined by resolution of the Board of Directors. If a corporate seal is adopted, it shall have inscribed thereon the name of the corporation and the words “Corporate Seal” and “Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.

 

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ARTICLE XI

 

Indemnification

 

Every person who was or is a party or is threatened to be made a party to or is involved in any action, suitor proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or a person of whom he is the legal representative is or was a director or officer of the corporation or is or was serving at the request of the corporation or for its benefit as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the General Corporation Law of the State of Delaware from time to time against all expenses, liability and loss (including attorn eys’ fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. The expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. Such right of indemnification shall be a contract right which may be enforced in any manner desired by such person. Such right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may have or hereafter acquire and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw, agreement, vote of stockholders, provision of law or otherwise, as well as their rights under this Article.

 

The Board of Directors may cause the corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the corporation would have the power to indemnify such person.

 

The Board of Directors may from time to time adopt further Bylaws with respect to indemnification and may amend these and such Bylaws to provide at all times the fullest indemnification permitted by the General Corporation Law of the State of Delaware.

 

ARTICLE XII

 

Amendments

 

Section 1. The Bylaws may be amended by a majority vote of all the stock issued and outstanding and entitled to vote at any annual or special meeting of the stockholders, provided notice of intention to amend shall have been contained in the notice of the meeting.

 

Section 2. The Board of Directors by a majority vote of the whole Board at any meeting may amend these bylaws, including Bylaws adopted by the stockholders, but the stockholders may from time to time specify particular provisions of the Bylaws which shall not be amended by the Board of Directors.

 

APPROVED AND ADOPTED this 4th day of August, 2015.

 

    /s/ Sue Montoya
Sue Montoya, Secretary

 

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CERTIFICATE OF SECRETARY

 

I hereby certify that I am the Secretary of Company Name, and that the foregoing Bylaws, consisting of 9 pages, constitute the code of Bylaws of the Corporation, as duly adopted at a regular meeting of the Board of Directors of the corporation held October 8, 2015

 

IN WITNESS WHEREOF, I have hereunto subscribed my name this 8th day of October. 2015.

 

    /s/ Sue Montoya
Sue Montoya, Secretary

 

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FIRST AMENDED AND RESTATED CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS

 

OF

 

SERIES B CONVERTIBLE PREFERRED STOCK

 

OF

 

HANCOCK JAFFE LABORATORIES, INC.

 

(Pursuant to Section 151 of the General Corporation Law of the State of Delaware)

 

 

 

Hancock Jaffe Laboratories, Inc. (the “ Corporation ”), a corporation organized and existing under the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), does hereby certify that, pursuant to the authority conferred upon the board of directors of the Corporation (the “ Board of Directors ”) by the Corporation’s Second Amended and Restated Certificate of Incorporation (as such may be amended, restated and/or otherwise modified at any time and from time to time, the “ Certificate of Incorporation ”), and pursuant to Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation adopted the following resolution creating a series of Preferred Stock designated as “ Series B Convertible Preferred Stock ”:

 

RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Certificate of Incorporation, a series of preferred stock, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows:

 

SERIES B CONVERTIBLE PREFERRED STOCK

 

Two million (2,000,000) shares of the authorized and undesignated preferred stock of the Corporation are hereby designated “ Series B Convertible Preferred Stock ” (the “ Series B Preferred Stock ”) with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations.

 

 
 

 

1. Dividends .

 

From and after the date of the issuance of any shares of Series B Preferred Stock, dividends at the rate per annum of eight percent (8%) of the original purchase price of the Series B Preferred Stock from the Corporation shall accrue on such shares of Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock) (the “ Accruing Dividends ”). Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative; provided , however , that except as set forth in the following sentence of this Section 1 , Section 2.1 and Section 6 , such Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors and the Corporation shall be under no obligation to pay such Accruing Dividends. The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock provided such is also paid simultaneously to all holders of the Series B Preferred Stock on an “as converted basis”) unless (in addition to the obtaining of any approvals and/or consents required elsewhere), pursuant to this First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of Series B Preferred Stock of the Corporation (this “ Certificate ”). The holders of the Series B Preferred Stock then outstanding shall each first or simultaneously receive, a dividend on each outstanding share of Series B Preferred Stock in an amount at least equal to the greater of (i) the amount of the aggregate Accruing Dividends then accrued on such share of Series B Preferred Stock and not previously paid and (ii) (A) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series B Preferred Stock as would equal the product of (1) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (2) the number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series B Preferred Stock determined by (1) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (2) multiplying such fraction by an amount equal to the Series B Original Issue Price (as defined below); provided that if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Series B Preferred Stock pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Series B Preferred Stock dividend. The “ Series B Original Issue Price ” shall mean $6.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock.

 

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2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales .

 

2.1 Preferential Payments to Holders of Series B Preferred Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event (as defined below), the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders after payments have been made to the holders of shares of Series A Convertibe Preferred Stock of the Company (the “ Series A Preferred ”) and before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the greater of (i) two times the Series B Original Issue Price, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount payable pursuant to this sentence is hereinafter referred to as the “ Series B Liquidation Amoun t”). If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled under this Section 2.1 , the holders of shares of Series B Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

 

2.2 Payments to Holders of Common Stock . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series A Preferred Stock and Series B Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.

 

2.3 Deemed Liquidation Events .

 

2.3.1 Definition . Each of the following events shall be considered a “ Deemed Liquidation Event ” unless the holders of at least a majority of the outstanding shares of Series B Preferred Stock elect otherwise by written notice sent to the Corporation at least ten (10) days prior to the effective date of any such event:

 

(a) a merger or consolidation in which;

 

(i) the Corporation is a constituent party, or

 

(ii) a Subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation,

 

except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation; or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or

 

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(b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger, consolidation or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation.

 

(c) For purposes hereof, the term “ Subsidiary ” means with respect to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person.

 

2.3.2 Effecting a Deemed Liquidation Event .

 

(a) The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Section 2.3.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the “ Merger Agreement ”) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 .

 

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(b) In the event of a Deemed Liquidation Event referred to in Section 2.3.1(a)(ii) or 2.3.1(b) , if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within ninety (90) days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Series B Preferred Stock no later than the ninetieth (90 th ) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause; (ii) to require the redemption of such shares of Series B Preferred Stock, and (iii) if the holders of at least a majority of the then outstanding shares of Series B Preferred Stock so request in a written instrument delivered to the Corporation not later than one hundred twenty (120) days after such Deemed Liquidation Event and after notice thereof is sent to each such holder by the Corporation as provided herein, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of (i) any amounts paid to redeem shares of Series A Preferred Stock, and (ii) any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Corporation), together with any other assets of the Corporation available for distribution to its stockholders, all to the extent permitted by Delaware law governing distributions to stockholders (the “ Available Proceeds ”), on the one hundred fiftieth (150 th ) day after such Deemed Liquidation Event, to redeem all outstanding shares of Series B Preferred Stock at a price per share equal to the Series B Liquidation Amount. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Series B Preferred Stock, the Corporation shall ratably redeem each holder’s shares of Series B Preferred Stock to the fullest extent of such Available Proceeds, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. The provisions of Section 6 shall apply, with such necessary changes in the details thereof as are necessitated by the context, to the redemption of the Series B Preferred Stock pursuant to this Section 2.3.2(b) . Prior to the distribution or redemption provided for in this Section 2.3.2(b) , the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.

 

2.3.3 Amount Deemed Paid or Distributed . The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the majority of the independent members of the then Board of Directors of the Corporation.

 

2.3.4 Allocation of Escrow and Contingent Consideration . In the event of a Deemed Liquidation Event pursuant to Section 2.3.1(a)(i) , if any portion of the consideration payable to the stockholders of the Corporation is payable only upon satisfaction of contingencies (the “ Additional Consideration ”), the Merger Agreement shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the “ Initial Consideration ”) shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event; and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon satisfaction of such contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1 and 2.2 after taking into account the previous payment of the Initial Consideration as part of the same transaction. For the purposes of this Section 2.3.4 , consideration placed into escrow or retained as holdback to be available for satisfaction of indemnification or similar obligations in connection with such Deemed Liquidation Event shall be deemed to be Initial Consideration.

 

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3. Voting .

 

3.1 General . On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series B Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series B Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of Series B Preferred Stock shall vote together with the holders of Common Stock as a single class.

 

3.2 Election of Directors . Directors shall be elected by the holders of Common Stock, the Series A Preferred Stock (on an as converted basis) and the Series B Preferred Stock (on an as converted basis), voting together as a single class. Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, then any directorship not so filled shall remain vacant until such time as the holders of the Series A Preferred Stock, voting on an as converted basis, Series B Preferred Stock, voting on an as converted basis and Common Stock, voting together as a single class as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship. The holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Series A Preferred Stock, voting on an as converted basis and Series B Preferred Stock, voting on an as converted basis), voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this Section 3.2 , a vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series pursuant to this Section 3.2 .

 

3.3 Series B Preferred Stock Protective Provisions . At any time when any shares of Series B Preferred Stock are outstanding, the Corporation shall not (and shall not permit any of its Subsidiaries in which it owns more than 20% of the equit to), directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio , and of no force or effect;

 

3.3.1 amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of the Corporation and/or any subsidiary in a manner that adversely affects the powers, preferences or rights of the Series B Preferred Stock;

 

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3.3.2 increase or decrease the authorized number of directors constituting the Board of Directors;

 

3.3.3 approve any merger, asset sale, license, liquidation or other corporation reorganization or any other Deemed Liquidation Event (other than (i) a sale or license of any Product Candidates (as defined in Section 6 hereof, or a sale of the Corporation’s dermal filler stock, provided the Corporation has made the Principal Cash Distribution (as defined in Section 6 hereof) and (ii) other existing arrangements) of the Corporation and/or any Subsidiary;

 

3.3.4 create, or authorize the creation of, any additional class or series of capital stock that ranks senior to the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation and/or any Subsidiary, the payment of dividends, voting and rights of redemption;

 

3.3.5 effect any change in the fundamental business of the Corporation;

 

3.3.6 [RESERVED]

 

or

 

3.3.7 redeem or repurchase any shares of capital stock of the Corporation and/or any Subsidiary, other than a redemption of shares of Series A Preferred and Series B Preferred Stock pursuant to Section 2.2 or Section 7 .

 

4. Optional Conversion .

 

The holders of the Series B Preferred Stock shall have conversion rights as follows (the “ Conversion Rights ”):

 

4.1 Right to Convert .

 

4.1.1 Conversion Ratio . Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Series B Original Issue Price by the Series B Conversion Price (as defined below) in effect at the time of conversion except that if a conversion is the result of a IPO Mandatory Conversion (as defined in Section 5.1 hereof) then the Series B Conversion Price shall be the lower of (i) a 25% discount to the price per share a share of Common Stock is sold to the public in such Mandatory IPO Conversion, and (ii) the Series B Conversion Price, in both cases as adjusted pursuant to Section 4.4. The “ Series B Conversion Price ” shall initially be equal to the Series B Original Issue Price. Such initial Series B Conversion Price, and the rate at which shares of Series B Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.

 

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4.1.2 Termination of Conversion Rights . In the event of a notice of redemption of any shares of Series B Preferred Stock pursuant to Section 6 , the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not fully paid on such redemption date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Series B Preferred Stock.

 

4.2 Fractional Shares . No fractional shares of Common Stock shall be issued upon conversion of the Series B Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series B Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

 

4.3 Mechanics of Conversion .

 

4.3.1 Notice of Conversion . In order for a holder of Series B Preferred Stock to voluntarily convert shares of Series B Preferred Stock into shares of Common Stock, such holder shall (a) provide written notice to the Corporation’s transfer agent at the office of the transfer agent for the Series B Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent) that such holder elects to convert all or any number of such holder’s shares of Series B Preferred Stock and, if applicable, any event on which such conversion is contingent and (b) Notwithstanding anything to the contrary provided herein or elsewhere, unless a holder of Series B Preferred Stock is converting all of its Series B Preferred Stock, the holder is not required to submit a certificate representing its Series B Preferred Stock being converted if such holder’s shares are certificated, surrender the certificate or certificates for such shares of Series B Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Series B Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent). Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the shares of Common Stock to be issued. If required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form reasonably satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such notice and, if applicable, certificates (or lost certificate affidavit and agreement) shall be the time of conversion (the “ Conversion Time ”), and the shares of Common Stock issuable upon conversion of the specified shares shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time (i) issue and deliver to such holder of Series B Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of (x) Common Stock issuable upon such conversion in accordance with the provisions hereof and (y) a certificate for the number (if any) of the shares of Series B Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, and (ii) pay in cash such amount as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion.

 

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4.3.2 Reservation of Shares . The Corporation shall at all times when the Series B Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Series B Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time equal the product of (i) 300%, multiplied by (ii) the amount of shares of Common Stock (the “ Reserve Amount ”) to effect the conversion of all outstanding Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to satisfy the Reserve Amount, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes and immediately reserve the Reserve Amount, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the Series B Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series B Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Series B Conversion Price.

 

4.3.3 Effect of Conversion . All shares of Series B Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Section 4.2 . Any shares of Series B Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series B Preferred Stock accordingly.

 

4.3.4 Further Adjustment for Dividends . Upon any such conversion, the Series B Conversion Price shall be adjusted to account for any declared but unpaid dividends on the Series B Preferred Stock.

 

4.3.5 Taxes . The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series B Preferred Stock pursuant to this Section 4 . The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series B Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

 

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4.4 Adjustments to Series B Conversion Price for Diluting Issues .

 

4.4.1 Special Definitions . For purposes of this Article Fourth, the following definitions shall apply:

 

(a) “ Option ” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

 

(b) “ Series B Original Issue Date ” shall mean the date on which the first share of Series B Preferred Stock was issued.

 

(c) “ Convertible Securities ” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

 

(d) “ Additional Shares of Common Stock ” shall mean all shares of Common Stock issued (or, pursuant to Section 4.4.3 below, deemed to be issued) by the Corporation after the Series B Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “ Exempted Securities ”):

 

(i) shares of Common Stock issued at a price per share greater than or equal to $7.50 per share, Options or Convertible Securities having an exercise price greater than or equal to $7.50 per share;

 

(ii) shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Series A Preferred Stock or Series B Preferred Stock;

 

(iii) shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Section 4.5 , 4.6 , 4.7 or 4.8 ;

 

(iv) shares of Common Stock or Options issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Corporation;

 

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(v) shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security;

 

(vi) shares of Common Stock, Options or Convertible Securities issued to equipment lessors, or to real property lessors pursuant to a debt financing, equipment leasing or real property leasing transaction approved by the Board of Directors of the Corporation;

 

(vii) shares of Common Stock, Options or Convertible Securities issued to suppliers or third party service providers in connection with the provision of goods or services pursuant to transactions approved by the Board of Directors of the Corporation;

 

(viii) shares of Common Stock, Options or Convertible Securities issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets or other reorganization or to a joint venture agreement, provided that such issuances are approved by the Board of Directors of the Corporation; or

 

(ix) shares of Common Stock, Options or Convertible Securities issued in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar agreements or strategic partnerships approved by the Board of Directors of the Corporation.

 

4.4.2 No Adjustment of Series B Conversion Price . No adjustment in the Series B Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series B Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

 

4.4.3 Deemed Issue of Additional Shares of Common Stock .

 

(a) If the Corporation at any time or from time to time after the Series B Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

 

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(b) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Series B Conversion Price pursuant to the terms of Section 4.4.4 , are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Series B Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Series B Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Series B Conversion Price to an amount which exceeds the lower of (i) the Series B Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Series B Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

 

(c) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Series B Conversion Price pursuant to the terms of Section 4.4.4 (either because the consideration per share (determined pursuant to Section 4.4.5 ) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Series B Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series B Original Issue Date), are revised after the Series B Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Section 4.4.3(a) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

 

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(d) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Series B Conversion Price pursuant to the terms of Section 4.4.4 , the Series B Conversion Price shall be readjusted to such Series B Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

 

(e) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Series B Conversion Price provided for in this Section 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (b) and (c) of this Section 4.4.3 ). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Series B Conversion Price that would result under the terms of this Section 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Series B Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

 

4.4.4 Adjustment of Series B Conversion Price Upon Issuance of Additional Shares of Common Stock . In the event the Corporation shall at any time after the Series B Original Issue Date, and prior to, (i) receipt of an Investigational Device Exemption or PMA approval from the U.S. Food and Drug Administration (“ FDA ”) for either the Corporation’s venous valve, pediatric heart valve or coronary artery bypass graft product candidates (the “ FDA IDE/PMA Approval ”), or (ii) the closing of an initial public offering of Common Stock with a valuation of the Corporation of less than One Hundred Fifty Million Dollars ($150,000,000), issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4.4.3 ), then the Series B Conversion Price shall be adjusted such that the Series B Preferred Stock shall be convertible into the number of shares of Common Stock equal to the percentage ownership of the holders of the Series B Preferred Stock on the date that such Additional Shares of Common Stock were issued or deemed issued, on a fully-diluted basis.

 

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4.5 Adjustment for Stock Splits and Combinations . If the Corporation shall at any time or from time to time after the Series B Original Issue Date effect a subdivision of the outstanding Common Stock, the Series B Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series B Original Issue Date combine the outstanding shares of Common Stock, the Series B Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

 

4.6 Adjustment for Certain Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Series B Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series B Conversion Price then in effect by a fraction:

 

4.6.1 the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

 

4.6.2 the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

 

Notwithstanding the foregoing (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series B Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series B Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of Series B Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series B Preferred Stock had been converted into Common Stock on the date of such event.

 

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4.7 Adjustments for Other Dividends and Distributions . In the event the Corporation at any time or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Series B Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Series B Preferred Stock had been converted into Common Stock on the date of such event.

 

4.8 Adjustment for Merger or Reorganization, etc . Subject to the provisions of Section 2.3 , if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Series B Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Sections 4.4 , 4.6 or 4.7 ), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Series B Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Series B Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Series B Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Series B Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Series B Preferred Stock.

 

4.9 Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Series B Conversion Price pursuant to this Section 4 , the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than thirty (30) days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series B Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Series B Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Series B Preferred Stock (but in any event not later than thirty (30) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Series B Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Series B Preferred Stock.

 

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4.10 Notice of Record Date . In the event:

 

4.10.1 the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Series B Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

 

4.10.2 of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or

 

4.10.3 of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation,

 

then, and in each such case, the Corporation will send or cause to be sent to the holders of the Series B Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Series B Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Series B Preferred Stock and the Common Stock. Such notice shall be sent at least ten (10) days prior to the record date or effective date for the event specified in such notice.

 

5. Mandatory Conversion .

 

5.1 Trigger Events . Upon either (a) the closing of an underwritten initial public offering of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, of shares of Common Stock, resulting in the Common Stock being listed for trading (or quoting on any NASDAQ and/or NYSE trading market and/or quotation system (an “ IPO Mandatory Conversion ”)), (b) the consent, in the form of a vote or written consent, of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “ Mandatory Conversion Time ”), or (c) receipt by the Corporation of FDA IDE/PMA Approval, then (i) all outstanding shares of Series B Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate as calculated pursuant to Section 4.1.1 and (ii) such shares may not be reissued by the Corporation.

 

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5.2 Procedural Requirements . All holders of record of shares of Series B Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Series B Preferred Stock pursuant to this Section 5 . Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Series B Preferred Stock in certificated form shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Series B Preferred Stock converted pursuant to Section 5.1 , including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender any certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of any certificate or certificates of such holders (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Section 5.2 . As soon as practicable after the Mandatory Conversion Time and, if applicable, the surrender of any certificate or certificates (or lost certificate affidavit and agreement) for Series B Preferred Stock, the Corporation shall (a) issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and (b) pay cash as provided in Section 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion. Such converted Series B Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series B Preferred Stock accordingly.

 

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6. Principal Cash Distribution . The Corporation agrees that it shall diligently use its best efforts to sell and/or license its U.S. Patent No. 7,815,677, bioprosthetic pediatric heart valve, bioprosthetic venous valve, and bioprosthetic coronary artery bypass graft; along with all regulatory and other pertinent records (“ Product Candidates ”). From the first one hundred thirty million dollars ($130,000,000) in aggregate cash proceeds generated from such sale(s) and license(s) of Product Candidates (the “ $130,000,000 Maximum Amount ”), 50% thereof ($65,000,000 in the aggregate if aggregate sales and licenses of Product Candidates result in the $130,000,000 Maxium Amount), (but in no event shall the Corporation make any such distributions resulting from aggregate cash proceeds of sales and licenses of Product Candidates that exceed the $130,000,000 Maxium Amount) shall be distributed if, as and when received by the Company, to holders of: (i) the Corporation’s Series A Preferred Stock (whether or not previously converted mandatorily or voluntarily), (ii) the Series B Preferred Stock (whether or not voluntarily or mandatorily converted), (iii) each other class or series of preferred stock of the Corporation that has the express right to a portion of the Principal Cash Distributions (as defined below) and which right expressly ranks junior to the Series A Preferred Stock’s and the Series B Preferred Stock’s respective rights to Principal Cash Distributions (“ Qualifying Junior Preferred Stock ”), and (iv) the issued and outstanding Common Stock on the final closing date (the “ B Final Closing Date ”), of sales of the Series B Preferred Stock (each “ Principal Cash Distribution ”) as follows: First , to the holders of the Series A Preferred Stock (whether or not converted voluntarily or mandatorily), in such amount and on such terms and conditions as provided in the Certificate of Incorporation; Second , to the holders of the Series B Preferred Stock (whether or not converted voluntarily or mandatorily) in an aggregate amount equal to the sum of (x) the aggregate number of shares of Series B Preferred Stock issued and outstanding, multiplied by the Series B Original Issue Price, plus (y) all accrued but unpaid dividends owed on the Series B Preferred Stock (the “ Aggregate B Share Cash Distribution Amount ”), which Aggregate B Share Cash Distribution Amount shall be distributed pro-rata to all holders of Series B Preferred Shares issued and outstanding (whether previously converted voluntarily or mandatorily) based upon the percentage interest a holder of such Series B Preferred Shares owns (whether previously converted mandatorily or voluntarily) out of all Series B Preferred Shares (whether previously converted voluntarily or mandatorily) until such time as the entire Aggregate B Share Cash Distribution Amount is paid in full through Principal Cash Distributions; Third , to the holders of any Qualifying Junior Preferred Stock on the terms and conditions to set forth in the certificate of designation(s), any document(s) and/or instrument(s) setting forth the terms and conditions of any such Qualifying Junior Preferred Stock; and Fourth , the remaining balance, if any, of the Principal Cash Distribution being distributed, to the holders of Common Stock on the B Final Closing Date, pro-rata based upon each holder’s percentage ownership of the issued and outstanding Common Stock on the B Final Closing Date. For purposes of clarification: if the Corporation as a result of licenses and sales of Product Candidates received from such licenses and sales $200,000,000 aggregate cash proceeds, the Corporation would be required to make a Principal Cash Distribution of $65,000,000 (50% of the $130,000,000 Maximum Amount of aggregate cash proceeds received by the Corporation from such combined sales and licenses of Product Candidates), and pursuant to the Certificate of Incorporation the Series A Preferred Stock was entitled to receive $6,500,000, and if an aggregate of 1,000,000 shares of Series B Preferred Stock were issued and outstanding (whether previously converted or not) and because the Series B Preferred Stock Original Issue Price is $6.00 per share (prior to any adjustment as provided herein), the Aggregate B Share Cash Distribution Amount would be $6,000,000 (1,000,000 shares of Series B Preferred Stock x $6.00), and assuming no dividends had accrued and were unpaid with respect to the Series A Preferred Stock or the Series B Preferred Stock and no Qualifying Junior Preferred Stock had been issued, the $65,00,000 Principal Cash Distribution would be distributed as follows: First , the holders of Series A Preferred Stock (whether previously converted or not, voluntarily or mandatorily), would receive $6,500,000 in the aggregate; Second , the holders of the Series B Preferred Stock (whether converted or not mandatorily or voluntarily) would receive a $6,000,000 Aggregate B Share Cash Distribution Amount, pro-rata to each holder of Series B Preferred Stock as provided above (whether previously converted or not), and, Third, because no Qualifying Junior Preferred Stock had been issued, pro-rata to the holders of the issued and outstanding Common Stock as of the B Final Closing Date in an amount equal to $52,500,000 (which equals the remaining portion of the $65,000,000 Principal Cash Distribution after payment to the holders of Series A Preferred Stock (whether converted or not mandatorily or voluntarily), of their $6,000,000 payment and to the holders of the Series B Preferred Stock (whether converted or not mandatorily or voluntarily, of their $6,500,000 Aggregate B Share Cash Distribution Amount). The Corporation’s obligation to pay the Principal Cash Distribution shall survive and not be reduced as a result of any general distributions, dividend payments, conversion of Series A Preferred Stock and/or Series B Preferred Stock , sale, transfer and/or disposition of any shares of Series A Preferred Stock and/or Series B Preferred Stock by any holder thereof, changes in the capital stock structure of Corporation by class or otherwise, merger, amalgamation, reorganization, consolidation, funding ( including an initial public offering) or any other transaction involving any class of stock of the Corporation.

 

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7. Redemption .

 

7.1 General . Unless prohibited by Delaware law, and subject to Section 7.7 hereof, shares of Series B Preferred Stock shall be redeemed by the Corporation at a price equal to two times the Series B Original Issue Price per share, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared (the “ Redemption Price ”), in three (3) monthly equal installments commencing not more than thirty (30) days after receipt by the Corporation at any time on or after the third anniversary of the Series B Original Issue Date, from the holders of any of the then outstanding shares of Series B Preferred Stock, of written notice requesting redemption of shares of Series B Preferred Stock (the “ Redemption Request ”). Upon receipt of a Redemption Request, the Corporation shall apply all of its assets to any such redemption, and to no other corporate purpose, except to the extent prohibited by Delaware law. The date of each such installment shall be referred to as a “ Redemption Date .” On each Redemption Date, the Corporation shall redeem, on a pro rata basis in accordance with the number of shares of Series B Preferred Stock owned by each holder, that number of outstanding shares of Series B Preferred Stock determined by dividing (i) the total number of shares of Series B Preferred Stock outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). If on any Redemption Date Delaware law governing distributions to stockholders prevents the Corporation from redeeming all shares of Series B Preferred Stock to be redeemed, the Corporation shall ratably redeem the maximum number of shares that it may redeem consistent with such law, and shall redeem the remaining shares as soon as it may lawfully do so under such law.

 

7.2 Redemption Notice . The Corporation shall send written notice of the mandatory redemption (the “ Redemption Notice ”) to each holder of record of Series B Preferred Stock not less than forty (40) days prior to each Redemption Date. Each Redemption Notice shall state:

 

7.2.1 the number of shares of Series B Preferred Stock held by the holder that the Corporation shall redeem on the Redemption Date specified in the Redemption Notice;

 

7.2.2 each Redemption Date and the Redemption Price for (i) all Series B Preferred Stock owned by such holder and (ii) for the number of shres being redeemed on the redemption date;

 

7.2.3 the date upon which the holder’s right to convert such shares terminates (as determined in accordance with Section 4.1 ); and

 

7.2.4 for holders of shares in certificated form, that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Series B Preferred Stock to be redeemed.

 

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7.3 Surrender of Certificates; Payment . On or before the applicable Redemption Date, each holder of shares of Series B Preferred Stock to be redeemed on such Redemption Date, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4 , shall, if a holder of shares in certificated form, surrender the certificate or certificates representing such shares (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof. In the event less than all of the shares of Series B Preferred Stock represented by a certificate are redeemed, a new certificate, instrument, or book entry representing the unredeemed shares of Series B Preferred Stock shall promptly be issued to such holder.

 

7.4 Rights Subsequent to Redemption . If the Redemption Notice shall have been duly given, and if on the applicable Redemption Date the Redemption Price payable upon redemption of the shares of Series B Preferred Stock to be redeemed on such Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that any certificates evidencing any of the shares of Series B Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Series B Preferred Stock shall cease to accrue after such Redemption Date and all rights with respect to such shares shall forthwith after the Redemption Date terminate, except those rights described in Section 6 Principal Cash Distribution, and only the right of the holders to receive the Redemption Price without interest upon surrender of any such certificate or certificates therefor.

 

7.5 Redeemed or Otherwise Acquired Shares . Any shares of Series B Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted except as described in Section 6 Principal Cash Distribution, to the holders of Series B Preferred Stock following redemption.

 

7.6 Waiver . Any of the rights, powers, preferences and other terms of the Series B Preferred Stock set forth herein may be waived on behalf of all holders of Series B Preferred Stock by the affirmative written consent or vote of the holders of at least a majority of the shares of Series B Preferred Stock then outstanding.

 

7.7 Limitations on Right to Redeem . Notwithstanding anything to the contrary provided in this Section 7 (including but not limited to Section 7.6), this Certificate, the Certificate of Incorporation or elsewhere, in no event shall the Corporation redeem or repurchase any shares of Series B Preferred Stock if otherwise prohibited by and/or not in compliance with the Certificate of Incorporation.

 

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Section 8 . Notices . Any notice required or permitted by the provisions of this Certificate to be given to a holder of shares of Series B Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

 

Section 9 . Amendment, Etc . The affirmative vote of the holders of not less than 50.1% of the then issued and outstanding Series B Preferred shares (i) at a meeting duly called for such purpose, or (ii) by written consent without a meeting, shall be required for any amendment to this Certificate or the Corporation’s Certificate of Incorporation or By-Laws that alters or changes the rights, preferences or privileges of the Series B Preferred Stock so as to materially and adversely affect any of the rights, entitlements or interests of any shares of Series B Preferred Stock.

 

Section 10 . Lost or Stolen Certificates . Upon receipt by the Corporation of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of any Series B Preferred Stock certificates representing the shares of Series B Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the holder to the Corporation in customary form and, in the case of mutilation, upon surrender and cancellation of the Series B Preferred Stock certificate(s), the Corporation shall execute and deliver new preferred stock certificate(s) of like tenor and date.

 

Section 11 . Rights of Series B Preferred Stock Subject to those of the Series A Preferred Stock . Notwithstanding anything to the contrary provided herein or elsewhere, the rights and other terms of the Series B Preferred Stock are subject to the terms and conditions of the Series A Preferred Stock as set forth in the Certificate of Incorporation.

 

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IN WITNESS WHEREOF, HANCOCK JAFFE LABORATORIES, INC. has caused this Certificate to be signed by a duly authorized officer on this 31 st day of May 2017.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By: /S/ ZHIVILO YURY
  Name:  Zhivilo Yury
  Title: Chairman of the Board

 

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Asset Purchase Agreement

 

This Asset Purchase Agreement is dated March 18, 2016 (“Agreement”) and is by and between LeMaitre Vascular, Inc. with offices at 63 Second Avenue, Burlington, MA 01803 (“LMAT”) and Hancock Jaffe Laboratories, Inc. with offices at 70 Doppler, Irvine, CA 92618 (“HJL” and together with LMAT, the “Parties”).

 

WHEREAS, HJL owns and operates a business (“ProCol® Business”) that consists of the development, manufacture and sale of the ProCol® line of Products, as defined on Schedule A ;

 

WHEREAS, HJL is party to an Exclusive Supply and Distribution Agreement date March 26, 2014, as amended to date (“Current Supply Agreement”) with CryoLife, Inc. (“CRY”) pursuant to which CRY distributes the Products;

 

WHEREAS, Article 16 of the Current Supply Agreement grants in favor of CRY an exclusive, freely-transferable option (“Option”) to purchase from HJL all assets used in the manufacture, distribution, marketing and sale of the Products and provides for an asset purchase agreement between the holder of the Option and HJL and a new supply agreement (“Post-Acquisition Supply Agreement”); and

 

WHEREAS, simultaneously with the execution and delivery hereof, LMAT is (i) acquiring the Option from CRY under that certain Option Purchase Agreement (the “Option Purchase Agreement”) between LMAT and CRY of even date, (ii) delivering to HJL a purchase election notice indicating exercise of the Option, (iii) entering into that certain Tripartite Agreement dated as of the date hereof among HJL, CRY and LMAT (the “Tripartite Agreement”) that describes the exchange of rights, monies, and assets among the three entities and (iv) entering into an amended version of the Post-Acquisition Supply Agreement with HJL (the “2016 Supply Agreement”).

 

NOW THEREFORE in consideration of the mutual promises herein set forth and for other good and valuable consideration, receipt of which the parties acknowledge, and conditioned on the complete execution and delivery of the OPA, the Tripartite Agreement and the Supply Agreement by all parties thereto, the Parties agree as follows:

 

  1. Purchase and Sale . Subject to the terms and conditions set forth herein, LMAT hereby purchases from HJL, and HJL hereby sells, assigns, transfers and delivers to LMAT, all legal and beneficial right, title, and interest of HJL in and to all of the following assets, rights, and properties (such assets, rights and properties collectively, the “Purchased Assets”), in each case, free and clear of any and all encumbrances of any kind, including tax liens: All property and assets (including equipment and tooling) used in, developed or acquired for use in, or helpful for the manufacture, distribution, sale, licensing, packaging, sterilization and, marketing and sale of the Products, including without limitation

 

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    a. all documents and electronic files describing the form, fit and function of the Products, including all manufacturing instructions, design and functionality specifications, specifications for deionized water, tissue procurement specifications, specifications and processes for manufacturing, testing, storing, packaging, shipping or labeling the Products and all tangible and intangible rights thereto as well as all art work, prototypes, mechanical renderings, patterns, and all other designs and works of authorship (“Specifications”);
       
    b. the Purchased Technology and the Purchased Intellectual Property, and in each case all documents and information relevant thereto;
       
    c. the physical assets including the equipment, fixtures, molds and tooling listed on Schedule 1C hereto (“Equipment”);
       
    d. The complete master records and studies for each of the Products and the contents thereof including all complaints, validations, clinical data, viral inaction studies, adverse event reports, corrections, recalls, quality management documents and the like (“Product History Files”);
       
    e. All clearances, approvals (including Premarket Approval from the U.S. Food and Drug Administration (the “FDA”)), licenses, registrations, authorizations and permits issued with regard to the Products including those listed on Schedule 1E hereto (“Regulatory Permits”) and all correspondence, documents, data, files, supplements, quality and other systems and filings associated therewith (“Regulatory Files”);
       
    f. All raw materials, components, work-in-process, demonstration and finished goods including the items listed on Schedule 1F (“Inventory”);
       
    g. All literature, brochures and training materials regarding the Products including all manuals, advertisements, instructions for use, customer cards and the like (“Literature”);
       
    h. All information regarding the customers and suppliers of services and products for the Products, including those listed on Schedule 1H hereto (“Customer and Supplier Information”);
       
    i. The costed bill of materials for the Products (the “BOM”); and
       
    j. All rights to the sale and distribution of the Products worldwide.
       
  2. Excluded Assets . The Purchased Assets do not include: cash, accounts receivables, insurance policies, contract rights not specifically included in the Purchased Assets, and the Licensed Intellectual Property.

 

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  3. Purchase Price . The purchase price (the “Purchase Price”) for the Purchased Assets and the IP License (as defined below) is $665,000 (the “Cash Portion”) plus the royalty described in Section 6 (the “Royalty” ) . $332,500, representing 50% of the Cash Portion, is paid herewith by wire transfer. $166,250, representing 25% of the Cash Portion, shall be paid, subject to offset, if any, in accordance with Section 15(f) hereof, by wire transfer on September 18, 2016 (the “First Holdback Amount” ) . $166,250, representing 25% of the Cash Portion (the “Second Holdback Amount” and together with the First Holdback, the “Holdback Amounts”) shall be paid, subject to offset, if any, in accordance with Section l5(f) hereof, by wire transfer upon the earlier of (i) confirmation by LMAT of the commercial sale of a Product manufactured by LMAT at its Burlington, Massachusetts plant and (ii) March 18, 2017. The Purchase Price shall be allocated among the Purchased Assets for tax purposes in a manner mutually agreed to by the parties within 30 days after the Closing. It is agreed by the Parties that such allocation was arrived at by arm’s length negotiation and in the judgment of the Parties properly reflects the fair market value of such assets. It is further agreed that the allocations under this Section 3 will be prepared in a manner consistent with Section 1060 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. Such allocations will be binding on all Parties for federal, state, local and other tax purposes and will be consistently reflected by each Party on such Party’s tax returns.
       
  4. Closing . The closing of the transactions contemplated hereby (“Closing”) will take place simultaneously with the execution and delivery of this Agreement in Irvine, California on March 18, 2016 (“Closing Date”) and shall be effective as of 11:00 a.m., Pacific time, on the Closing Date. The Parties shall deliver to the other the documents and items set forth below:
       
    a. At the Closing, HJL shall deliver to LMAT:
         

      i All tangible embodiments of the Purchased Assets, including, without limitation, the items set forth on Schedule 4A hereto;
         
      ii. Good and sufficient instruments of transfer transferring to LMAT all of HJL’s right, title, and interest in and to the Purchased Assets, including, without limitation, an executed bill of sale in the form of Exhibit A hereto (the “ Bill of Sale ”) and an instrument of assignment of certain of HJL’s Intellectual Property in the form of Exhibit B hereto;
         
      iii. A certificate of an officer of HJL, executed on behalf of HJL as a Party hereto, and dated as of the Closing in the form of Exhibit C hereto;
         
      iv. All written consents, approvals, waivers, notices, or similar authorizations required to be obtained or given by HJL in order to consummate the transactions contemplated hereby, in form and substance reasonably satisfactory to LMAT, including copies of the signed consent of the Board of Directors of HJL and, if necessary, the signed consent of the stockholders of HJL;
         
      v. Non-competition agreements in the form of Exhibit D hereto, signed by each of HJL’s directors;

 

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      vi. Evidence of the termination of that certain Security Agreement dated March 26, 2014, as amended, between HJL and CRY and evidence of the filing of a UCC financing statement with the State of Delaware showing the release of all security interests in the Purchased Assets by CRY;
         
      vii. An executed 2016 Supply Agreement in the form attached hereto as Exhibit E ; and
         
      viii. An executed regulatory letter in the form attached hereto as Exhibit F ;
         
    b. At the Closing, LMAT shall deliver to HJL:
         
      i. A purchase election notice in the form of Exhibit G hereto;
         
      ii. The portion of the Purchase Price due at Closing;
         
      iii. A certificate of an officer of LMAT, executed on behalf of LMAT as a Party hereto, dated as of the Closing in the form of Exhibit H hereto; and
         
      iv. Any Bill of Sale, instrument of assignment of HJL Intellectual Property, or any other ancillary agreement contemplated herein to which LMAT is a party.
     
  5. No Liabilities . LMAT assumes none of HJL’s liabilities, express or implied, whether pertaining to the Purchased Assets or otherwise whether now existing or hereafter arising whether accrued, absolute, contingent, or otherwise, known or unknown, asserted or unasserted. Without limitation, LMAT assumes no liability or responsibility for any of HJL’s employees or any employee compensation.
     
 

6.

 

Royalty . LMAT shall pay to HJL an amount equal to ten percent (10%) of LMAT’s Net Sales (as defined below) of the Products during the three year period ending on March 18, 2019 (the “Royalty Period”). The Royalty shall be paid quarterly in arrears within 60 days of quarter close and shall not exceed $2 million in any 12 month period or $5 million in the aggregate for the Royalty Period. For the purpose of the Royalty, “Net Sales” means the total sales of the Products by LMAT from commercial distribution excluding fees, freight and shipping costs and reduced by credits and returns. The term Net Sales does not include revenues received by LMAT (or any of its affiliates) from transactions with an affiliate of LMAT unless such affiliate is the end user of the Product. For the avoidance of doubt, no Royalty shall apply to any sales of Products after March 18, 2019.

 

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    During the Royalty Period and for a period of one year thereafter, HJL shall have a right to audit at its own expense upon reasonable notice, through an independent accounting firm reasonably acceptable to LMAT (the “Reviewing Firm”), the records of LMAT relating to Net Sales under customary confidentiality obligations to confirm that proper Royalty payments have been made. If, however, underpayments of more than 10% are determined by such independent accounting firm and are not disputed by LMAT pursuant to the procedure set forth in the paragraph below, LMAT shall pay the applicable audit expenses and pay HJL to the extent of such underpayment. If overpayments are determined, the HJL shall reimburse LMAT to the extent of such overpayment. HJL may not audit more than once annually and only with respect to the four (4) preceding quarterly periods. LMAT shall keep accurate records of its Net Sales as required by law and to permit the audits described in this Section 6 to be properly conducted.
     
    If LMAT delivers written notice (the “Dispute Notice”) to HJL within ten (10) business days of being informed by the Reviewing CPA in writing of an underpayment in excess of 10%, stating that LMAT objects to the Reviewing CPA’s determination, and specifying the basis for such objection in reasonable detail, the Parties will attempt to resolve the dispute as promptly as practicable. If the Parties are unable to reach agreement within 30 days after delivery of the Dispute Notice, the Parties shall mutually designate an independent accounting firm unaffiliated with the either Party (the “Expert”) to resolve the disputed items specified in the Dispute Notice. The Expert will (i) resolve the disputed items specified in the Dispute Notice and (ii) calculate the Net Sales for, as modified only by the resolution of such items, and in each case in accordance with the methodology for the calculation of “Net Sales” as provided in this Agreement. The determination of the Expert will be made within 30 days after being selected and will be final and binding upon the parties. The fees and expenses of the Expert will be borne by the party whose position did not prevail in such determination, or if the Expert determines that neither party could be fairly found to be the prevailing party, then such fees, costs and expenses will be borne 50% by LMAT, on the one hand, and 50% by HJL, on the other.
     
  7. Release . This Asset Purchase Agreement and the 2016 Supply Agreement replace the Current Supply Agreement in its entirety, including without limitation, the Option and the provisions of the Current Supply Agreement that pertain to the purchase and sale of the Purchased Assets. HJL hereby releases and forever discharges LMAT from any and all obligations and liabilities under the Current Supply Agreement, including the Option and all obligations to pay any amounts thereunder, including Advances, Profit Sharing Payments and/or Deductions (as those terms are defined in the Current Supply Agreement).
       
  8. HJL’s Representations and Warranties . HJL hereby makes to LMAT the representations and warranties contained in this Section 8:
       
    a. Authority; Organization . HJL hereby represents and warrants to LMAT that (A) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action required on the part of HJL and no other proceedings on the part of HJL are necessary to authorize this Agreement to which it is a Party or to consummate the transactions contemplated hereby, (B) this Agreement has been duly and validly executed and delivered by HJL and constitutes the legal, valid, and binding agreement of HJL, enforceable against HJL in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (C) HJL is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

 

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    b. No Conflicts . HJL hereby represents and warrants to LMAT that the execution, delivery, and performance by HJL of this Agreement, and the consummation of the transactions contemplated hereby, does not and will not violate or conflict with the bylaws of HJL, any material contract, agreement, or instrument to which HJL is a party or by which it or its properties are bound, or any judgment, decree, order, or award of any court, Governmental Body, or arbitrator by which HJL is bound, or any law, rule, or regulation applicable to HJL.
       
    c. Title to Purchased Assets . HJL exclusively owns all of the Purchased Assets, and has and is conveying to LMAT hereunder good, valid, and marketable title in and to all of its property and rights, tangible and intangible, included in the Purchased Assets, in each case free and clear of all liens, licenses and encumbrances of any kind, including tax liens.
       
    d. Sufficiency . Other than premises and working capital, the Purchased Assets and the Licensed Intellectual Property (A) are all of the assets used or held for use in the ProCol Business as the same has been operated immediately prior to the date hereof, and (B) constitute all of the assets necessary for LMAT to continue to operate the ProCol Business as operated by HJL as of the date hereof and as presently proposed to be conducted.
       
    e. No Liability . HJL hereby represents and warrants to LMAT that to HJL’s knowledge, LMAT will not be subject to any liabilities relating to the Purchased Assets or the Licensed Intellectual Property or the operation of the ProCol Business prior to the Closing, whether accrued, absolute, contingent, or otherwise, which individually, or in the aggregate, could have a material adverse effect on the ProCol Business.
       
    f. Intellectual Property . The Product IP includes all of the Intellectual Property used in the ProCol Business. HJL exclusively owns all of the Licensed Intellectual Property, in each case free and clear of all liens, licenses and encumbrances of any kind, including tax liens. HJL hereby represents and warrants that (A) there is no pending or threatened claim, action, suit, or proceeding involving a claim that the manufacture, distribution, or sale of any Products, or the use of any materials to be provided by HJL to LMAT, infringes or violates the Intellectual Property Rights of any other Person; (B) neither the Licensed Intellectual Property nor the manufacture, distribution, or sale of any Products nor the Purchased Assets, infringes, violates, or misappropriates the Intellectual Property Rights of any other Person; and (C) to its knowledge, there is no safety or efficacy issue with regard to the Product that would impair the ability of LMAT to successfully market and sell the Product worldwide.

 

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    g. Litigation . There is no Proceeding pending or currently threatened in writing against HJL that involves any of the Purchased Assets, the Licensed Intellectual Property, current customers or any suppliers serving the ProCol Business, questions the validity of this Agreement, or the right of HJL to enter into or consummate, or seeks to enjoin or obtain damages with respect to, the transactions contemplated hereby. The foregoing includes, without limitation, Proceedings pending or threatened in connection with the ProCol Business involving the use of any current employees of HJL of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with former employers. There is no Proceeding with respect to the ProCol Business by HJL currently pending or which HJL intends to initiate.
       
    h. Regulatory . The Purchased Assets, the Licensed Intellectual Property, the Products and HJL’s manufacturing, promotion and sale of the Products have complied and are in compliance, in all material respects, with all current applicable laws, statutes, rules, regulations, ordinances, standards, guidelines, or orders administered, issued, or enforced by the FDA or any other Governmental Body having regulatory authority or jurisdiction over the ProCol Business and the Products. HJL and, to its knowledge, its suppliers and manufacturers are in compliance, in all material respects, with all applicable laws, statutes, rules, regulations, ordinances, standards, guidelines, or orders administered, issued, or enforced by the FDA or any other Governmental Body, relating to the methods and materials used in, and the facilities and controls used for, the design, manufacture, processing, packaging, labeling, storage, and distribution of the Products, and all Products have been processed, manufactured, packaged, labeled, stored, handled, and distributed by HJL in compliance with all applicable laws, statutes, rules, regulations, ordinances, standards, guidelines, or orders administered, issued, or enforced by the FDA or any other Governmental Body. Further, no action has been taken by any Governmental Body, or is in the process of being taken, that will slow, halt, or enjoin the manufacturing of the Products or the operation of the ProCol Business or subject the manufacturing of the Products or the ProCol Business to regulatory enforcement action. HJL has not received from the FDA or any other Governmental Body, and there are no facts which would furnish any reasonable basis for, any notice of adverse findings, FDA warning letters, regulatory letters, notices of violations, warning letters, Section 305 criminal proceeding notices under the FDCA (The United States Federal Food, Drug, and Cosmetic Act), or other similar communication from the FDA or other Governmental Body, and there have been no seizures conducted or, to HJL’s knowledge, threatened by the FDA or other Governmental Body, and no recalls, market withdrawals, field notifications, notifications of misbranding or adulteration, or safety alerts conducted, requested, or threatened by the FDA or other Governmental Body relating to the ProCol Business or to the Products. Immediately before Closing, there are no currently existing facts that will (A) cause the withdrawal or recall, or require suspension or additional approvals or clearances, of any Products currently sold by HJL, (B) require a change in the manufacturing, marketing classification, labeling (other than any changes required due to the transactions contemplated hereby), or intended use of any such Products, or (C) require the termination or suspension of marketing of any such Products. None of the Products have been recalled or subject to a field safety notification (whether voluntarily or otherwise); and HJL has not received written notice (whether completed or pending) of any proceeding seeking recall, suspension, or seizure of any Products.

 

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    i. Product Liability . Attached hereto as Schedule 8I is a true and complete copy of the Product warranty. There are no existing or threatened claims against HJL for services or merchandise related to the ProCol Business which are defective or fail to meet any service or product warranties. HJL has not incurred liability arising out of any injury to individuals as a result of the ownership, possession, or use of any Product, and there has been no inquiry or investigation made in respect thereof by any Governmental Body.
     
    j. Copies . HJL has provided LMAT true and complete copies or originals of the Specifications, Product History Files, Regulatory Permits, Regulatory Files, and Literature.
     
    k. Suppliers . A true and complete list of all suppliers of the ProCol Business, together with contact information, to the extent available, and pricing for each component sold to HJL, is attached hereto as Schedule 8K . Except for that certain Services and Materials Supply Agreement dated as of March 4, 2016 between ATSCO, Inc, and HJL, there are no contracts between HJL and any of its suppliers to the ProCol Business. HJL has no knowledge of any condition, event or occurrence that could reasonably be anticipated to materially adversely affect the supply of materials or provision of services to the ProCol Business by any third party.
     
    l. Customers . A true and complete list of all customers (the “Customer List” ) that purchased Products from HJL during the two year period prior to March 26, 2014, showing the customer name, customer city and state is attached hereto as Schedule 8L-l . HJL’s total Product sales for 2013 were at least $300,000.
     
    m. Regulatory Permits. The Regulatory Permits constitute all of the permits, licenses, approvals, registrations, consents and authorizations required for the conduct of the ProCol Business in all jurisdictions where the Products are manufactured or sold. All such Regulatory Permits are valid and subsisting and in good standing and there is no default thereunder. HJL has not received notice or threat regarding revocation, suspension or limitation of any of the Regulatory Permits and HJL is in compliance in all material respects therewith.

 

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    n. Financial Information . HJL’s unaudited income statement for the ProCol Business for the twenty-two month period ended December 31, 2015 is attached as Scheduled 8N-1 , except that it excludes corresponding revenues from this period of $2,258,070 received by HJL from CRY. The unaudited income statement accurately reflects the costs and expenses of the operations for the ProCol Business for the period reflected therein. HJL has operated in the ordinary course since November 2, 2015, and there have been no material adverse changes in HJL’s financial position or operations since the dates thereof. Since March 26, 2014 (the “Initiation Date” ) , HJL has not sold or transferred any Product to any Person other than CRY.
     
    o. BOM . The BOM attached hereto as Schedule 8O accurately and completely sets forth the raw materials and parts, and the quantities of each, needed to manufacture the Products.
     
    p. Insurance . HJL presently maintains, and has continually maintained for the past 36 months, the insurance coverages set forth in the insurance certificate dated February 11, 2016 (“Insurance Certificate”) and attached as Schedule 8P . There have been no claims made under such policies in the past 36 months.
     
    q. Solvency . HJL has paid, and will continue to pay, its debts as they come due.
     
  r. Maintenance . HJL has maintained the Equipment in good condition, reasonable wear and tear excepted.
     
  s. Inventory . HJL does not hold or own any raw Inventory or finished goods Inventory. All other Inventory consists of solely of items that (i) do not contain any materials that have less than twelve (12) months of remaining shelf life and (ii) are not damaged (due to failure to store at the requisite temperature or otherwise), obsolete or faulty.
     
    t. Confidentiality . None of the processes, methodologies, trade secrets, research and development results, and other know-how included in the Product Intellectual Property the value of which is contingent upon maintenance of the confidentiality thereof, has been disclosed by HJL to any person other than employees, contractors, customers, consultants, representatives and agents of HJL who are parties to customary confidentiality and non-disclosure agreements with HJL.
     
    u. Brokers’ Fees . HJL has made no agreement or taken any other action which will cause LMAT to become obligated for any broker’s or other fee or commission as a result of any of the transactions contemplated by this Agreement.
     
  9. LMAT’s Representations and Warranties . LMAT represents and warrants to HJL that:

 

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    a. Authority, Organization . The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action required on the part of LMAT and no other proceedings on the part of LMAT are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by LMAT and constitutes the legal, valid, and binding agreement of LMAT, enforceable against LMAT in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. LMAT is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.
     
    b. No Conflicts . The execution, delivery, and performance by LMAT of this Agreement, and the consummation of the transactions contemplated hereby, does not and will not violate or conflict with the governing documents of LMAT, any material contract, agreement, or instrument to which LMAT is a party or by which it or its properties are bound, or any judgment, decree, order, or award of any court, governmental body, or arbitrator by which LMAT is bound, or any law, rule, or regulation applicable to LMAT.
     
    c. Litigation . There is no proceeding pending or, to LMAT’s knowledge, currently threatened against LMAT that questions the validity of this Agreement or the right of LMAT to enter into or consummate, or seeks to enjoin or obtain damages with respect to, the transactions contemplated hereby. There is no proceeding with respect to the ProCol Business by LMAT currently pending or which LMAT intends to initiate.
     
    d. Brokers’ Fees . LMAT has made no agreement or taken any other action which will cause HJL to become obligated for any broker’s or other fee or commission as a result of any of the transactions contemplated by this Agreement.
     
  10. Use of Certain Purchased Assets .
     
    a. Transition Equipment . HJL may continue to use the Equipment listed on Schedule l0A (the “Transition Equipment” ) for the sole purpose of complying with HJL’s obligations under the 2016 Supply Agreement. HJL shall at its own expense maintain the Transition Equipment in good condition, reasonable wear and tear excepted. Upon termination of the 2016 Supply Agreement for any reason, HJL shall promptly comply, at LMAT’s expense, with LMAT’s instructions with regard to the disposition of the Transition Equipment then in HJL’s possession, which may include, in LMAT’s sole discretion, their destruction, sale or shipment to LMAT (or any combination of the same).

 

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    b. Intellectual Property . HJL’s use of the Purchased Intellectual Property and the Purchased Technology shall be governed by Article 10 of the 2016 Supply Agreement.
     
    c. Reference to PMA . HJL shall be entitled to reference the Premarket Approval P020049 (“PMA”) for the Products or any of its contents to support the FDA approval or clearance of the Specified Products. LMAT agrees to provide to HJL a letter to FDA indicating LMAT’s consent to such reference. Nothing in this Section 10(c) is intended to grant HJL any ownership or license rights in the PMA.
     
  11. Additional Covenants of HJL . HJL shall hereafter:
     
    a. 2016 Supply Agreement . Comply with and timely perform its obligations under the 2016 Supply Agreement;
     
    b. Insurance . Maintain the insurance coverage described in the Insurance Certificate for at least three years following the termination of the 2016 Supply Agreement and name LMAT as an additional insured on its product liability policy from the date hereof until such three years has lapsed;
     
    c. Further Assurances . Upon the reasonable request of LMAT and without further consideration, HJL shall execute, acknowledge, and deliver all such further deeds, bills of sale, assignments, transfers, conveyances, powers of attorney, and assurances as may reasonably be required or appropriate to convey and transfer to and vest in LMAT and protect its right, title, and interest in the Purchased Assets to be transferred hereunder and in the Licensed Intellectual Property and to carry out the transactions contemplated by this Agreement;
     
    d. Non-Compete . Until March 18, 2021, HJL will not, and will cause its affiliates not to, either alone or in conjunction with any Person, directly or indirectly, (i) engage in any competition with LMAT with respect to the design, development, manufacture, marketing or sale of any of the Products (a “Competing Business” ); (ii) enter the employ of, render services to, or have services rendered from any Person (or any affiliate of any person) who or which is engaged in a Competing Business with respect to such Competing Business (whether directly or indirectly); or (iii) acquire a financial interest in, or otherwise become actively involved with, any Competing Business, directly or indirectly, as a partner, shareholder, officer, director, principal, agent, trustee, or consultant.
     
    e. Non-Solicitation . HJL will not, whether on its own behalf or on behalf of its affiliates or in conjunction with any Person, directly or indirectly employ or solicit, encourage or attempt to solicit, or encourage any person who is, at the time of such solicitation, encouragement, or attempted solicitation or encouragement, an employee of LMAT or any of its affiliates to leave the employment of LMAT or its affiliates.

 

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    f. No Interference . HJL will not, whether on its own behalf or on behalf of its affiliates or in conjunction with any Person, directly or indirectly interfere with the business relationship that LMAT has or may have with any supplier to the ProCol Business.
     
    g. Non-Disclosure . HJL shall not at any time directly or indirectly divulge, or permit to be divulged to others, or use in any way any Proprietary Information. As used herein, the term “Proprietary Information” shall mean the terms of this Agreement, the 2016 Supply Agreement and the Tripartite Agreement and all confidential information concerning LMAT, the ProCol Business and the Purchased Assets, including customer lists, trade secrets and any other Intellectual Property, data, information, documents, inventions, developments, or forms owned or used by HJL and included in the Purchased Assets transferred to LMAT pursuant to this Agreement, whether or not any of the foregoing is published or unpublished, protected or susceptible to protection under patent, trademark, copyright or similar laws and whether or not any party has elected to secure or attempted to secure such protection; provided however, that HJL may disclose Proprietary Information solely to the extent and in the circumstances reasonably required to be disclosed by a court of competent jurisdiction or required by law to be disclosed to a Governmental Body; provided, however, that HJL provides to LMAT reasonable advance opportunity, where practicable, to seek in camera or other protection with respect to such disclosure; provided, further, that HJL may disclose the existence of this Agreement, the 2016 Supply Agreement or the Tripartite Agreement if required pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in which case the Parties shall seek confidential treatment in such agreements as permitted by the Securities and Exchange Commission. Proprietary Information shall not include any information that has become public knowledge other than by breach of this Agreement by HJL. HJL shall not disclose the Licensed Intellectual Property to any third party unless such third party has entered into a customary confidentiality and non-disclosure agreement in writing with HJL, which HJL shall provide to LMAT upon reasonable request.

 

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    h. Warranty on CRY Inventory . With respect to the Products LMAT is concurrently purchasing from CRY, HJL hereby warrants to LMAT that, at the time HJL shipped such Products to CRY: (i) the Products were free from defects in design, manufacture, materials, and workmanship under normal intended use and service, in accordance with all Applicable Laws (as defined below) and requirements including, but not limited to, the United States Food, Drug and Cosmetic Act and the regulations promulgated thereunder, as amended from time to time ( the “Act’’), and the Good Manufacturing Practices/Quality System Regulations set forth in 21 C.F.R. Section 820 (“GMP/QSR Regulations”) and not adulterated under the Act; (ii) the Products were manufactured, tested, stored, packaged, labeled, and shipped in compliance with the Specifications and all Applicable Laws including, but not limited to, the Act and GMP/QSR Regulations; (iii) the Product labeling (including instructions and information relating to the storage, handling, maintenance, transportation, and implantation of the Product labeling) and related Product information provided by HJL (“Product Information”) is approved, accurate and complete in all respects and in compliance with regulatory clearances for the Products, not misbranded under the Act, and in compliance with Applicable Laws; (iv) the Products have a shelf life of at least 36 months with a minimum of 30 complete months shelf life remaining; and (v) HJL’s manufacturing facility, and manufacturing process for the Products, were in compliance with all OMP/QSR Regulations and ISO 13485:2003, EN 46001 requirements. LMAT shall have available any and all remedies available in law or equity in the event any Products do not meet the foregoing warranties. Prior to returning any Products alleged to be defective, LMAT shall notify HJL in writing of the claimed defect and, where available, shall include the lot and serial number of such Products. THE WARRANTIES SET FORTH IN THIS SECTION 11H ARE INTENDED SOLELY FOR THE BENEFIT OF LMAT. ALL LOSSES UNDER THIS SECTION 11H SHALL BE MADE BY LMAT AND MAY NOT BE MADE BY LMAT’S CUSTOMERS.
     
    i. Post-Closing Deliverables . Within 30 days of the Closing Date, HJL shall deliver to LMAT the following documents: original IDE G990018, original IDE G900154 and original IDE G000322.
     
  12. Additional Covenants of LMAT .
     
    a. Non-Solicitation . LMAT will not, without the written consent of HJL, whether on its own behalf or on behalf of its affiliates or in conjunction with any Person, directly or indirectly employ or solicit, encourage or attempt to solicit or encourage any person who is, at the time of such solicitation, encouragement, or attempted solicitation or encouragement, an employee of HJL or any of its affiliates, to leave the employment of HJL or its affiliates.
     
  13. Additional Covenants of Both Parties.
     
    a. Notification of Certain Matters . Each Party to this Agreement shall give prompt notice to the other Party of the occurrence or non-occurrence of any event that would likely cause any representation or warranty made by such Party herein to be untrue or inaccurate or any covenant, condition, or agreement contained herein not to be complied with or satisfied (provided, however, that any such disclosure shall not in any way be deemed to amend, modify, or in any way affect the representations, warranties, and covenants made by any Party in or pursuant to this Agreement).
     
    b. No Disparagement . The Parties will not, whether on their own behalf or on behalf of such Party’s affiliates or in conjunction with any Person, directly or indirectly disparage the Products or the business reputation or employees of the other Party, or any of such Party’s affiliates, or take any actions, knowingly, willfully, or recklessly that are harmful to the other Party or its affiliates’ goodwill with their customers, clients, publishers, advertisers, marketers, vendors, employees, service providers, media, or the public.

 

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    c. Regulatory Matters . Each Party shall cooperate to promptly obtain all consents from all Governmental Bodies that may be or become necessary for the performance of its and the other Party’s obligations pursuant to this Agreement, including the transfer of the Purchased Assets, the IP License and the consummation of transactions contemplated by this Agreement.
     
  14. Transition Services . HJL shall allow LMAT’s employees reasonable access to HJL’s manufacturing facility for the purpose of training in the manufacturing processes for the Products until March 18, 2017. This shall include, but not be limited to, allowing LMAT employees to observe and videotape the manufacture of Products at HJL’s Irvine, CA facility within 14 days of the Closing Date. Until March 18, 2017, HJL shall also provide LMAT at a facility of LMAT’s choosing: (a) a manufacturing engineer (or such other HJL employee acceptable to LMAT) to assist LMAT for up to ten business days in assembling manufacturing equipment and implementing manufacturing processes for the Products, and (b) a group leader to assist LMAT for up to ten business days in training LMAT’s employees in such manufacturing processes. Until March 18, 2017, HJL shall also provide up to twenty hours per month of related consultation services by telephone and email, but no more than 120 hours in the aggregate over such twelve-month period. All such manufacturing transition services during this twelve-month period shall be provided without charge. Thereafter HJL shall provide LMAT with such additional manufacturing transition services as LMAT may reasonably request at a rate of $400 per day ( the “Consulting Rate”) per person. Until September 18, 2017, HJL shall provide LMAT with sales and marketing consulting services as LMAT may reasonably request, which will not exceed 10 business days, at the Consulting Rate. Travel for all such consulting and transition services shall be at LMAT’s sole cost and expense. Travel, hotel, and any other direct expenses must be pre-approved by LMAT and will be billed at cost. It is expected that air travel will be in coach class only and moderately priced hotels will be used. Rental cars may be used if less expensive than alternate means of transportation. Any additional expenses incurred for the purpose of delivering the activities in this section must be approved in writing by LMAT.
     
  15. Indemnification.
     
    a. Breach and Negligence . Each Party shall indemnify, defend and hold harmless the other and the other’s directors, officers, employees, agents and affiliated entities (“lndemnitees”) against any claim, damage or liability, including reasonable defense costs (“Damages”) to the extent caused by (i) a breach of any representation or warranty contained in this Agreement by such Party or (ii) a breach or default in the observance or performance of any term or provision of this Agreement by such Party; provided that the indemnity hereunder shall not be applicable to the extent such Damages are caused by the breach, negligence or willful misconduct of one or more Indemnitees.

 

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    b. HJL Indemnity . HJL shall indemnify, defend and hold harmless the LMAT Indemnitees against any and all Damages that (i) arise with respect to Products made by HJL prior to Closing (except to the extent LMAT recovers Damages from CRY under the Option Purchase Agreement) and (ii) may result from one or more claims by CRY or any other party under the Current Supply Agreement, including without limitation all obligations to repay Advances and/or Deductions, in each case except to the extent caused by LMAT’s breach, negligence or willful misconduct. LMAT agrees that it shall not make any claim for Damages under Section 15(b)(i) until it has fully pursued any claim for Damages against CRY under the Option Purchase Agreement and LMAT has determined in good faith that it is not entitled to any further indemnification from CRY.
       
    c. LMAT Indemnity . LMAT shall indemnify, defend and hold harmless the HJL Indemnitees against Damages that may result from LMAT’s marketing and sale of Products after Closing, except to the extent caused by HJL’s breach of this Agreement or the 2016 Supply Agreement, negligence or willful misconduct.
       
    d. Process . The indemnified party shall provide the indemnifying party with (i) prompt notice of any indemnifiable loss or claim, (ii) the option to assume the defense of any indemnified claim, and (iii) the right to approve or reject the settlement of any indemnified claim. If the indemnifying party assumes the defense, the indemnifying party shall not be liable for attorneys’ fees thereafter incurred by the indemnified party. Each Party’s indemnification obligation shall survive termination of this Agreement. No Party hereto shall settle any claim or action on behalf of another Party hereto without the other Party’s prior written consent not to be unreasonably withheld.
       
    e. Limitations on Indemnification . Neither Party shall seek recourse against, and shall not recover from the other Party on account of any Damages pursuant to the indemnity provisions of this Section 15 until the cumulative and aggregate amount of all such Damages exceeds $20,000, in which case all such Damages shall be recoverable by the indemnified Party (including the first $20,000) subject to the limitation in the next sentence. Neither Party shall be entitled to recover from the other Party any Damages pursuant to the indemnity provisions of Section 15 to the extent such Damages exceed in the aggregate an amount equal to $2,700,000. Damages for consequential damages, indirect damages, incidental damages, punitive damages, lost profits or diminution of value will not be recoverable (except for losses required to be paid to a third party as a result of a third party claim for any of the foregoing). The obligation of a Party to indemnify any claim under this Section 15 shall be reduced by the full amount of any collectible insurance proceeds actually received by the indemnified Party with respect to such claim or the underlying facts under any applicable policy or policies. These limitations shall not apply in the case of intentional misrepresentation, intentional breach of a covenant or fraud.

 

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    f. Offset . Notwithstanding anything herein to the contrary, LMAT’s claims for indemnification pursuant to this Section 15 shall be satisfied first from the Holdback Amounts, second from any Royalty owing to HJL and third from any other amounts that may be owing from LMAT to HJL and then, to the extent those funds are insufficient to pay all such claims, directly by HJL pursuant to Section 15.
     
  16. Survival of Representations and Warranties . The representations and warranties contained in this Agreement and any other matters giving rise to indemnification related to a representation and warranty shall survive the Closing for a period of three (3) years from the Closing Date; except the representations and warranties under Sections 8A, 8B, 8C and 8H and Sections 8A and 8B shall survive for thirty (30) days following the expiration of the applicable statute of limitations. Each of the covenants and agreements of LMAT and HJL contained herein shall survive the Closing and continue in full force and effect, subject to any limitation specifically applicable to such covenant or agreement hereunder. Any claims for indemnification must be made within the applicable survival period set forth above or such claim shall expire unless written notice by a Party of a breach or alleged breach thereof has been provided to the other Party on or prior to such date. Notwithstanding anything contained herein to the contrary, Section 17 hereof and the IP License shall survive in perpetuity.
     
  17. Irrevocable License . In consideration of LMAT’s agreement to pay the Purchase Price under Section 3(a), HJL hereby grants to LMAT an exclusive, fully paid up, royalty-free, worldwide, transferable, sublicenseable, perpetual and irrevocable right and license to use (and have used), make (and have made), reproduce, and make (and have made) derivative works of the Licensed Intellectual Property (“ IP License”) in all fields other than with respect to (i) surgically implantable (non-percutaneous delivery) bioprosthetic heart valves derived from porcine tissue, (ii) surgically implantable (non-percutaneous delivery) bioprosthetic venous valves derived from porcine tissue and (iii) surgically implantable internal diameter 3mm Coreograft® coronary artery bypass prosthetic graft ((i), (ii) and (iii) constituting the “Specified Products”). For the avoidance of doubt, the exclusive nature of the IP License granted to LMAT means HJL may not use or transfer the Licensed Intellectual Property for any purpose other than the manufacture of the Specified Products by HJL or any acquirer of HJL or any acquirer of a Specified Product, as the right to use (and have used), make (and have made), reproduce, and make (and have made) derivative works of the Licensed Intellectual Property for any purpose other than the manufacture of the Specified Products vests solely in LMAT and its transferee(s).
     
  18. Entire Agreement . This Agreement (including all Schedules and Exhibits) (i) supersedes any other prior or contemporaneous agreement, whether written or oral, that may have been made or entered into by any Party or any of their respective affiliates (or by any director, officer or representative thereof) with respect to the subject matter hereof and (ii) constitutes the entire agreement of the parties hereto with respect to the matters provided for herein and there are no agreements or commitments by or among such parties or their affiliates with respect to the subject matter hereof, in each case except for that certain Tripartite Agreement and the 2016 Supply Agreement. No investigation or receipt of information by or on behalf of LMAT will diminish or obviate any of the representations, warranties, covenants or agreements of HJL under this Agreement.

 

16
 

 

  19. Amendments . No amendment, modification or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by LMAT and HJL.
     
  20. Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the parties hereto, and their respective successors and permitted assigns. This Agreement is freely assignable by LMAT but may not be assigned by HJL, including without limitation by operation of law, without the prior written consent of LMAT; provided, however, that any such assignment by LMAT shall not relieve it of its obligations hereunder. For purposes of this Section, the term “assignment’’ shall include the consolidation or merger of a Party with and into a third party or the sale of all or substantially all of the assets or business of a Party. Any attempted assignment in violation of this Section shall be null and void. Any acquirer of HJL and any acquirer of any Specified Product shall be required to acknowledge LMAT’s rights to the IP License under Section 17 of this Agreement.
     
  21. Counterparts . This Agreement may be executed in any number of counterparts, each of which when executed and delivered, shall constitute an original, but all of which together shall constitute one agreement binding on all Parties, notwithstanding that all Parties are not signatories to the same counterpart. Transmission by fax or by electronic mail of an executed counterpart of this Agreement shall be deemed to constitute due and sufficient execution and delivery of such counterpart. This Agreement, and any amendment or modification thereto, may not be denied legal effect or enforceability solely because it is in electronic form, or because an electronic signature or electronic record was used in its formation.
     
  22. Waiver . No failure or delay by either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law.
       
  23. Expenses . Each Party shall pay all of its respective costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby.
       
  24. Definitions .
       
    a. “Applicable Laws” means all applicable common law, statutes, ordinances, rules, regulations or orders of any governmental authority, including applicable regulatory laws, rules and regulations, worldwide.
       
    b. “Governmental Body” means any: (a) nation, state, province, county, city, town, village, district, or other jurisdiction of any nature; (b) national, federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature, including, without limitation, notified bodies for purposes of complying with the Medical Device Directive.

 

17
 

 

    c. “Intellectual Property” means all licenses, patents, applications, copyrights, designs and drawings, engineering and manufacturing documents, technical manuals, patterns, processes, formulae, know-how, trade secrets, know-how, trademarks, service marks, trade names, domain names, inventions and discoveries (whether patentable or not), computer software, source code, and other similar rights and agreements, including without limitation any license or usage rights with respect to any of the foregoing, and all applications therefor and registrations thereof, including without limitation all including without limitation the names of the products and all trademark and service mark rights relating to such names, if any, along with the rights (common law or otherwise), registrations and logos relating thereto, if any, and to the design elements and any variations or combinations thereof, and any and all rights to sue for past, present and future infringement or other violations of the same, and all goodwill associated with any of the foregoing.
       
    d. “Intellectual Property Rights” means any and all rights in and with respect to patents, copyrights, trademarks, confidential information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise under law, and other similar rights or interests in intellectual or industrial property.
     
    e. “Licensed Intellectual Property” means, whether now existing or developed or acquired during the Transition Period in connection with the manufacture of the Products, all of HJL’s Intellectual Property, other than Purchased Intellectual Property, and all technology of HJL used in or helpful to the manufacture of the Products, other than the Purchased Technology.
       
    f. “Person” means any individual, corporation, limited liability company, partnership, association, trust, or any other entity or organization, including a Governmental Body.
       
    g. “Proceeding’’ means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any court or other Governmental Body or referee, trustee, arbitrator or mediator.
       
    h. “Product IP” means the Purchased Intellectual Property, the Purchased Technology, and the Licensed Intellectual Property.

 

18
 

 

    i. “Purchased Technology” means all technology that is used exclusively in connection with the manufacture of the Products.
       
    j. “Purchased Intellectual Property” means all of HJL’s Intellectual Property used exclusively in connection with the Products, including but not limited to the name ProCol®. Purchased Intellectual Property includes all confidential information concerning the ProCol Business and the Purchased Assets, including client and customer lists, supplier lists, trade secrets, know how, data, information, documents, inventions, developments, or forms owned or used by HJL included in the Purchased Assets transferred to LMAT pursuant to this Agreement, whether or not any of the foregoing is published or unpublished, protected or susceptible to protection under patent, trademark, copyright or similar laws and whether or not any party has elected to secure or attempted to secure such protection, except in each case to the extent not used exclusively in connection with the manufacture of the Products.
       
    k. “Transition Period” means the period from March 18 2016 to March 18 2017.
     
  25. Notices . All notices, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, by e-mail or fax, by United States mail, certified or registered with return receipt requested, or by a nationally recognized overnight courier service, or otherwise actually delivered, addressed to the respective addresses of the Parties set forth below or at such other address as the respective Parties may designate by like notice from time to time. Any such notice, demand or communication shall be deemed given on the date given, if delivered in person, e-mailed or faxed or otherwise actually delivered, on the date received, if given by registered or certified mail, return receipt requested or given by overnight delivery service, or three days after the date mailed, if otherwise given by first class mail, postage prepaid. Notices shall be given as follows:

 

  If to HJL:   Hancock Jaffe Laboratories, Inc.
      70 Doppler
      Irvine, California 92618
      Attn: President
       
      With a copy to:
       
    K&L Gates LLP
      1 Park Plaza, Twelfth Floor
      Irvine, California 92614
      Attn: Michael A. Hedge
       
  If to LMAT:  

LeMaitre Vascular, Inc.

63 Second Ave.

      Burlington, MA 01803
      Attn: Legal Dept.
       
      With a copy by email to: legal@lemaitre.com

 

19
 

 

  26. Injunctive Relief . The Parties acknowledge and agree that the breach of any binding provision of this Agreement by either Party would cause irreparable damage to the other Party and that the other Party will not have an adequate remedy at law. Accordingly the Parties agree that the non-breaching Party may obtain injunctive relief against a breach or threatened breach of any provision of this Agreement. Such remedy, however, shall be cumulative and not exclusive and shall be in addition to any other remedies that the Parties may have under this Agreement or otherwise.
     
  27. Governing Law . This Agreement and the legal relations among the parties hereto shall be governed and construed in accordance with the substantive laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflict of laws thereof. Each Party agrees that, in the event such Party elects to initiate litigation against the other Party, such Party will file such litigation in the state or federal courts of Massachusetts. Each Party hereby expressly and irrevocably waives any claim or defense in any action or proceeding brought in said jurisdictions based on any alleged lack of personal jurisdiction, improper venue, forum non conveniens or any similar basis.
     
  28. Rights of Third Parties . Nothing expressed or implied in this Agreement is intended or will be construed to confer upon or give any person or entity other than the parties hereto and their respective successors and permitted assigns any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby.

 

20
 

 

IN WITNESS WHEREOF, the parties have executed and delivered this agreement under seal.

 

HANCOC JAFFE LABORATORIES, INC.   LEMAITRE VASCULAR, INC.
     
  /s/ Norman Jaffe     /s/ David Roberts
By: Norman Jaffe   By: David Roberts
Its: President   Its: President

 

21
 

 

Schedule A-Products

 

Products shall mean vascular bioprostheses for vascular access and any other vascular indication outside of the heart or brain (currently branded as ProCol®, including but not limited to model nos. HJL016-10-N, HJL016-25-N, HJL016-30-N, and HJL016-40-N), but shall not include products for indications relating to the creation of a blood pathway around a blocked artery in the heart with a diameter of 3 mm or less and a length of 20 cm or less.

 

22
 

 

SCHEDULE 1C

 

Part Number   Description   Manufacturer   Model #   Approximate Cost     Serial #   Date In Service    
HJL0114   Pressure Gauge   Ashcroft   T-1082   $ 335.00     N/A   6/11/03    
HJL0115   Pressure Gauge   Ashcroft   T-1082   $ 335.00     N/A   6/11/03    
HJL0136   Laminar flow bench   Airtech   3636   $ 3,385.00     4950   7/30/14    
HJL0138   Laminar flow bench   Airtech   3636   $ 3,385.00     4952   4/10/14    
HJL0139   Laminar flow bench   Airtech   3636   $ 3,385.00     4953   4/10/14    
HJL0143   Laminar flow bench   Airtech   3636   $ 3,385.00     4957   4/10/14    
HJL0144   Laminar flow bench   Airtech   3636   $ 3,385.00     4958   4/10/14    
HJL0145   Laminar flow bench   Airtech   3636   $ 3,385.00     4959   4/10/14    
HJL0173   Pump -Masterflex peristaltic   Cole Parmer   77410-00   $ 3,234.00     A14000370   4/15/14    
HJL0180   Pump Masterflex peristaltic   Cole Parmer   77410-00   $ 3,234.00     G14000231   7/18/14    
HJL0184   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15000579   4/3/15    
HJL0185   Masterflex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15000583   4/3/15    
HJL0186   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15001031   2/19/15    
HJL0187   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15001036   2/19/15    
HJL0190   23” Shrink Wrap Sealer with Timer   Midwest Pacific   MP-24SWT   $ 250.00     N/A   6/4/15    
    Light Boxes used for trimming/tying (Qty 10)   Unknown plastic fabricator   n/a   $ 2,000.00     n/a   (10x$200/unit)   Send 2 to burlington at closing
    Mandril Holders   Unknown local machine shop   n/a   $ 100.00     n/a   (2x$50/unit)   Send 2 to burlington at closing
    6mm Glass Mandrils   Unknown local Glass blower   n/a   $ 10,000.00     n/a   (2000x$5ea)   Send 2 to burlington at closing
HJL00113   Pressure Gauge Housing   Unknown plastic fabricator   n/a   $ 100.00     N/A   (1x $100ea)   send 1 to burlington at closing
                                 
                $ 44,498.00              

 

     
 

 

Schedule IE-Regulatory Permits

 

Premarket Approval P020049

 

23
 

 

SCHEDULE 1F

HANCOCK JAFFE

LABORATORIES, INC.

 

March 15, 2016

 

At the present time there are 1261 bovine mesenteric veins in process; all finished goods manufactured in the past 4 months have been shipped to CryoLife.

 

/s/ Norman Jaffe

 

Hancock Jaffe Laboratories, Inc. 70 Doppler Irvine, California 92618 USA

Phone (949) 261 2900 Fax (949) 261 2992 e-mail info@hancockjaffe.com

 

     
 

 

Tissue Lots Nov 2015-2016 (2)

 

Lot #   T2814     T2818     T2819     T2820     T2824     T2825     T2826     T2827     T2828     T2829  
Fixation initiation date   1/6/2016     1/13/2016     1/13/2016     1/13/2016     1/20/2016     1/20/2016     1/20/2016     1/21/2016     1/21/2016     1/26/2016  
# Vessels     38       37       23       22       30       29       36       24       24       29  
                                                                                 
Total     1261                                                                          

 

  Page 1  
 

 

Tissue Lots Nov 2015-2016 (2)

 

T2830     T2831     T2832     T2833     T2834     T2835     T2836     T2837     T2838     T2839     T2840     T2841     T2842     T2843  
1/26/2016     1/27/2016     1/27/2016     1/28/2016     1/28/2016     2/2/2016     2/2/2016     2/3/2016     2/3/2016     2/4/2016     2/4/2016     2/9/2016     2/9/2016     2/10/2016  
  28       28       27       31       31       27       26       27       27       23       23       26       26       23  

 

  Page 2  
 

 

Tissue Lots Nov 2015-2016 (2)

 

T2844     T2845     T2846     T2847     T2848     T2849     T2850     T2851     T2852     T2853     T2854     T2855     T2856     T2857  
2/10/2016     2/11/2016     2/11/2016     2/17/2016     2/17/2016     2/17/2016     2/17/2016     2/17/2016     2/18/2016     2/18/2016     2/23/2016     2/24/2016     2/24/2016     2/24/2016  
  22       33       33       28       29       18       24       23       29       29       32       32       25       24  

 

  Page 3  
 

 

Tissue Lots Nov 2015-2016 (2)

 

T2858     T2859     T2860     T2861     T2862     T2863     T2864     T2865  
2/25/2016     2/25/2016     2/25/2016     3/1/2016     3/1/2016     3/1/2016     3/2/2016     3/2/2016  
  27       27       27       26       26       25       29       28  

 

  Page 4  
 

 

Schedule 4A-Assets Delivered at Closing

 

  All Premarket Approval files and all supplements (originals)
  All validations, including testing results (originals)
  All manufacturing instructions (originals or copies), as further described on the following page
  All tissue procurement specifications (originals or copies), as further described on the following page
  All Component Specifications (copies), as further described on the following page
  Quantity 2 - Light boxes for tissue trimming/tying
  Quantity 2 - Mandril holders
  Quantity 2 - Glass Mandrils
  Quantity 1 - Asset #HJL00113 pressure gauge housing
  Schedule of all Changes made since the last FDA Annual Report

 

  24    
 

 

SCHEDULE 8I

 

T his Agreement necessary or appropriate to allow CL to satisfy such commitments including providing appropriate Products to CL at the Transfer Prices set forth herein as if the Agreement were still in effect.

 

  (e) HJL shall not use CL’s model numbers for the Products except for any Products sold to CL, and shall identify the Products only by model numbers that are not confusingly similar to CL’s designated model numbers.
     
  (f) CL’s and HJL’s obligations pursuant to Sections 2.6, 2.8, 2.9, 2.10, 8.4, 8.5 and Articles 1, 3, 7, and 11-19 shall survive termination of this Agreement. All other provisions of this Agreement shall terminate upon termination of this Agreement.

 

ARTICLE 11

PRODUCT WARRANTIES

 

11.1. Warranty . HJL warrants to CL that: (i) the Products, including the Existing Inventory and Initial Build Inventory, delivered to CL under this Agreement will be saleable and useable in a clinical setting and will conform to the then current and agreed Specifications for Products; (ii) the Products, including the Existing Inventory and Initial Build Inventory, will be free from defects in design, manufacturing, materials and workmanship under normal intended use and service, in accordance with all Applicable Laws and requirements including, but not limited to, the Act and GMP/QSR Regulations; (iii) the Products, including the Existing Inventory and Initial Build Inventory, have been manufactured, tested, stored, packaged, labeled and shipped in compliance with the Specifications and all Applicable Laws including, but not limited to, the Act and GMP/QSR Regulations; (iv) the Product information (including instructions and information relating to the storage, handling, maintenance, transportation and implantation of the Product labeling) and related Product information provided by HJL (“Product Information”) shall be accurate and complete in all respects; (v) the Products shall have a shelf life of at least 54 months with at least 42 months shelf life remaining when received by CL (not including the Existing Inventory); (vi) HJL’s manufacturing facility is and at the time of manufacture shall be in compliance with all GMP/QSR Regulations and ISO 13485:1996, EN 46001 requirements; (vii) HJL has and at the time of manufacture shall have all approvals and consents required to mark the Products with a CE Mark; and (viii) the Products, including the Existing Inventory and Initial Build Inventory, are free and clear of any liens, security interests or encumbrances of any nature whatsoever. CL shall have available the remedies provided for in Section 6.7 in the event any Products do not meet the foregoing warranties prior to returning any Products alleged to be defective, CL shall notify HJL in writing of the claimed defect and shall include the lot and serial number of such Products, as well as the number and date of the invoice therefor.
   
11.2. Limited Warranty . THE WARRANTIES SET FORTH IN SECTION 11.1 ARE INTENDED SOLELY FOR THE BENEFIT OF CL. ALL CLAIMS THEREUNDER SHALL BE MADE BY CL AND MAY NOT BE MADE BY CL’S CUSTOMERS. THE WARRANTIES SET FORTH IN SECTION 11.1 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY HJL, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE. THE SOLE AND EXCLUSIVE REMEDIES OF CL FOR BREACH OF THE WARRANTY DESCRIBED IN SECTION 11.1 SHALL BE LIMITED TO THE REMEDIES PROVIDED IN THIS AGREEMENT.
   
11.3. CL Warranty Obligations . CL shall not make any representations or warranties with respect to HJL’s liability therefore except as set forth in this Article.

 

ARTICLE 12

 REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION

 

12.1. Indemnification

 

  25    
 

 

SCHEDULE 8K

 

COMPONENTS AND CONTROLLED SUPPLIES

 

2/22/2016, 11:54 AM
LIST APPROVED BY:

DATE REQUESTED:

 

REQUESTED BY:

 

 

QTY   CODE   ITEM   SPEC #  

MANUFACTURER

(When required for consistency)

  PURCHASED FROM   CAT #   UNIT
    B   CARTON, UNIT   MD-01-0191   Pacific Western Container   KWW   9QHJ3404   EA/1
    B   CLOSURES (PP, 28-400)   MD-01-0050   Wheaton   Wheaton   W012200RA   M
    B   ENVELOPE, RETURN   MD-01-0215   Main Graphics   Main Graphics   Custom   EA/1
    B   FOAM UNIT CARTON LINER   MD-01-0052   Victory Foam   KWW   Custom   EA/1
    B   GLUTARALDEHYDE   MD-01-0003   Avantor (JT Baker) M757-09   Gallade Chem   9QHJT20G   CS/4x4L
                VWR   JTM752-9   EA/4L
            Fisher Scientific   Fisher Scientific   02957-4   CS/4(4L)
    B   GLASS PACKAGING TUBES   MD-01-0073                
        30x250   A5   Wheaton Science Packaging   Wheaton Science Packaging   Dwg. 1402901   EA/1
        30x400   A6   Wheaton Science Packaging   Wheaton Science Packaging   Dwg. W010909   EA/1
        30x500   A7   Wheaton Science Packaging   Wheaton Science Packaging   Dwg. W010910   EA/1
    B   MANDRILS/ FINAL PACKAGING   MD-01-0196   T & G Scientific Glass   T & G Scientific Glass   Spec #   EA/1
        5 mm x 38.0 -38.5 cm   A3        
        4 mm x 23.0 - 23.5 cm   A4        
        5 mm x 47.0 - 47.5 cm   A6        
    B   PATIENT REGISTRATION FORM   MD-01-0110   Optimal Print Technologies   Optimal Print Technologies   Custom    
    D   LABEL, STOCK device or carton (print in house) white gloss, adhesive backed, 8.5“x2.” for laser printer   Described in appropriate label spec MD-01-0065       onlinelabels.com   OL1985WS   Sheet
    D   LABEL STOCK, carton end panel (print in house) white gloss, adhesive backed, 2.75“x2.75.” for laser printer   Described in appropriate label spec MD-01-0066       onlinelabels.com   OL225WS   Sheet
    B   WALLET CARD - For Dialysis Access Patients   MD-01-0218   Main Graphics   Main Graphics   Custom   EA/1
    B   WARNINGS AND INSTRUCTIONS FOR USE   MD-01-0217   Main Graphics   Main Graphics   Custom   EA/1
    B   ISOPROPANOL ALCOHOL   MD-01-0015   Avantor (Macron) 3032-22   Gallade Chem   303219   EA/20L
                    VWR   MK303222   EA/20L
    B   SHRINK WRAP, DEVICE 10” HPGF 75 GA   MD-01-0045   Bemis (Clysar) CPS287599   KWW or distributors       Cs/ 2 rolls
    B   SHRINK SLEEVE, PVC   MD-01-0194   Crystal Vision Packaging Sys   KWW   9QHJ5301    
    B   SODIUM CHLORIDE   MD-01-0008   Avantor (Macron) 7581-19   Gallade Chem   758112   EA/12KG
                    VWR   MK758119   EA/12KG
    B   SODIUM PHOS. DIBASIC ANHY   MD-01-0007   Avantor (Macron) 3802-01 or 7917-20   Gallade Chem   791705   EA/2.5KG
                    VWR   MK791720   12 kg
    B   SODIUM PHOS. MONOBAS ANHY   MD-01-0006   SIGMA   Sigma   S-2554   EA/500G
    B   SUTURE-GREEN POLYESTER BRAIDED, 3-0   MD-01-0051-A2                
        Spooled       Decknatel Snowden Pencer   Teleflex   110-D   SPOOL/1
        Sterile, armed, 30” lengths       Ethicon   Ethicon or distributors   R832H   Box/36
    B  

SUTURE-BLUE POLYBUTESTER

Novafil 6-0, 30”, CV-11 Double Armed, sterile

  MD-01-0051-A3   Covidien   Covidien   X7005   BOX/36
    B   STERILE WATER FOR IRRIGATION, U.S.P.   MD-01-0080   B Braun (R5007)   Distributors   R5007   CS/4 4L)
                Baxter Healthcare (2F7115)   VWR   68100-012   CS 9 (1.5L)

 

   Page 1 of 1  
 

 

SCHEDULE 8K

 

KWW

 

Kilmer, Wagner and Wise Paper Co

 

12751 Monarch St

 

Garden Grove, CA 92841

 

800 729-2311

 

Earl Stein, Sales Rep

 

Wheaton

 

Wheaton Industries

 

1501 North 10th Street | Millville, NJ 08332 | USA

 

856.776.4208 | 800.225-1437 | 856.825.1368 (F)

 

Brian M. Cawley

 

Territory Manager, Packaging Sales

 

949. 275.2721 (Cell)

 

brian.cawley@wheaton.com

 

T & G Glass

 

23041 La Cadena Drive

 

Laguna Hills CA 92653

 

949-837-8785

 

Tgsciglass.com

 

Owner: Jeff Tait

 

ATSCO

 

Rich Forbes ATSCO, Inc. 214-213-9580 direct rlf@atsco.us

 

   
 

 

Schedule 1H and Schedule 8K: Supplier and Component List

 

Qty   Code   Item   Spec #  

Manufacturer

  Purchased From   Cat #   Unit
        PETG FILM   MD-01-0113   Lustro Company   Lustro Company   HJL Spec #   ea
        Patient Labeling, Procol Vascular Bioprosthesis   MD-01-0216   Unknown            
        Purified Water   MD-01-0004   Unknown            
        Isopropyl Alcohol   MD-01-0015   Unknown            
        Bovine Vein   MD-01-0038   ATSCO            
        Pressure Test System equipment   MD-01-019S                

 

   
 

 

SCHEDULE 8N-l

 

Hancock Jaffe Laboratories Inc.

Profit and Loss Procol

April 2014 - December 2015

 

    Total  
Income        
Revenue        
Sales - Direct - Procol     0.00  
Total Revenue   $ 0.00  
Total Income   $ 0.00  
Cost of Goods Sold        
Cost of Goods        
Freight     46,647.67  
Total Cost of Goods   $ 46,647.67  
Manufacturing        
Chemicals     29,690.18  
Direct Labor     368,374.48  
Disposables/Consumables     247,990.86  
General Supplies     24,742.28  
Direct Labor QA QC     392,901.39  
Medical Waste Disposable     4,023.28  
Packaging Costs     60,725.24  
Quality Assurance     18,474.28  
Tissue     525,216.00  
Uniform     3,717.74  
Total Manufacturing   $ 1,675,855.73  
Total Cost of Goods Sold   $ 1,722,503.40  
Gross Profit   -$ 1,722,503.40
Expenses        
Administration & Operating        
Insurance        
Product Liability Insurance     75,111.01  
Total Insurance   $ 75,111.01  
Repairs & Maintenance     3,150.48  
Total Repairs & Maintenance   $ 3,150.48  
Total Administration & Operating   $ 78,261.49  
Net Operating Income   -$ 1,800,764.89
Other Expenses        
Total Taxes   $ 0.00  
Total Other Expenses   $ 0.00  
Net Other Income   $ 0.00  
Net Income   $ 1,800,764.89  
         
Cost/Unit Based on 3000 Completed Units   $ 600.00  
Value of WIP   $ 127,000.00  
Cost/Unit Based on 3800 Completed Units   $ 473.00  
Cost/Unit based on 400 Units   $ 325.00  

 

   
 

 

SCHEDULE 8P

 

 

Wholesale Trading Co-Op Insurance Services, LLC

 

135 Main Street, Suite 1875
San Francisco, CA 94105
Phone: (415) 442-8500, Fax: (855) 982-3333
CA License #0H02301

 

 

 

CONFIRMATION OF COVERAGE

 

DATE ISSUED : February 11, 2016
   
PRODUCER : EPIC - Irvine
  Denise Jorgenson
  19000 MacArthur Blvd., Penthouse Floor
  Irvine, CA 92612
   
INSURED : Hancock Jaffe Labs Vascular Inc
  70 Doppler
  Irvine, CA 92618
   
INSURER :   Evanston Insurance Company
  Non-Admitted
   
POLICY NO. SP873467
   
COVERAGE : Products Liability
   
POLICY PERIOD : 2/19/2016 TO 2/19/2017

 

12:01 A.M. STANDARD TIME AT THE LOCATION ADDRESS OF THE NAMED INSURED. THE ATTACHED Evanston Insurance Company BINDER WILL BE TERMINATED AND SUPERSEDED UPON DELIVERY OF THE FORMAL POLICY(IES) ISSUED TO REPLACE IT.

 

PREMIUM: $20,222.00
FEES: None
TAXES: $647.10
TRIA PREMIUM: REJECTED
TOTAL: $20,869.10
   
SUBJECT TO: None - Thank you

 

   
 

 

THE TERMS AND CONDITIONS OF THE ATTACHED Evanston Insurance Company BINDER OF INSURANCE MAY NOT COMPLY WITH THE SPECIFICATIONS SUBMITTED FOR CONSIDERATION. PLEASE READ THE ATTACHED Evanston Insurance Company BINDER CAREFULLY AND COMPARE IT WITH ANY QUOTE AND SUBMISSION DOCUMENTS AND REVIEW THE POLICY FORMS FOR THE ACTUAL COVERAGES PROVIDED.

 

IN ACCORDANCE WITH YOUR INSTRUCTIONS, AND IN RELIANCE UPON THE STATEMENTS MADE BY THE RETAIL BROKER IN THE INSURED’S APPLICATION/SUBMISSION, WE HAVE OBTAINED INSURANCE AT YOUR REQUEST AS PER ATTACHED.

 
CANCELLATION: THIS POLICY IS SUBJECT TO THE CANCELLATION PROVISIONS AS FOUND IN THE POLICY(IES) OR CERTIFICATE(S) CURRENTLY IN USE BY THE INSURER. THE INSURANCE EFFECTED UNDER THE INSURER’S BINDER CAN BE CANCELLED BY THE INSURER (SUBJECT TO STATUTORY REGULATIONS) BY MAILING, TO THE INSURED AT THE ADDRESS STATED ON THE FACE OF THIS CONFIRMATION OF INSURANCE, WRITTEN NOTICE STATING WHEN SUCH CANCELLATION SHALL BE EFFECTIVE. IN THE EVENT OF CANCELLATION BY THE INSURED, THE EARNED PREMIUM WOULD BE SUBJECT TO THE MINIMUM PREMIUM IF APPLICABLE.
 
THIS CONFIRMATION OF INSURANCE IS ISSUED BASED UPON THE INSURER’S AGREEMENT TO BIND AND IS ISSUED BY THE UNDERSIGNED WITHOUT ANY LIABILITY WHATSOEVER AS AN INSURER.

 

PREMIUM PAYMENT IS DUE WITHIN TWENTY (20) DAYS FROM EFFECTIVE DATE UNLESS OTHERWISE STIPULATED.

 

                       

 

dbamford@wtcis.com

(415) 442-8507

 

TOTAL NUMBER OF PAGES: 2

INSURED: Hancock Jaffe Labs Vascular Inc

DATE ISSUED: February 11, 2016

 

   
 

 

 

Wholesale Trading Co-Op Insurance Services, LLC

 

135 Main Street, Suite 1875

San Francisco, CA 94105

Phone: (415) 442-8500, Fax: (855) 982-3333

CA License #0H02301

 

 

 

CONFIRMATION OF COVERAGE

 

DATE ISSUED: February 11, 2016
   
PRODUCER: EPIC-Orange
  Denise Jorgenson
  1 City Blvd., Suite 700
 

Orange, CA 92868

   

INSURED :

Hancock Jaffe Labs Vascular Inc
  70 Doppler
  Irvine, CA 92618
   
INSURER :

James River Insurance Company

  Non-Admitted
   
POLICY NO.:

00056656-3

   
COVERAGE:

Follow Form Excess Liability

   

POLICY PERIOD:

2/19/2016 TO 2/19/2017

 

12:01 A.M. STANDARD TIME AT THE LOCATION ADDRESS OF THE NAMED INSURED. THE ATTACHED James River Insurance Company BINDER WILL BE TERMINATED AND SUPERSEDED UPON DELIVERY OF THE FORMAL POLICY(IES) ISSUED TO REPLACE IT.

 

PREMIUM :

$22,078.00

FEES :

Policy Fee - Carrier (Taxable) $350.00

TAXES:

$717.70
TRIA PREMIUM: REJECTED

TOTAL:

$23,145.70

   

SUBJECT TO:

None. Thank You

 

     
 

 

THE TERMS AND CONDITIONS OF THE ATTACHED James River Insurance Company BINDER OF INSURANCE MAY NOT COMPLY WITH THE SPECIFICATIONS SUBMITTED FOR CONSIDERATION. PLEASE READ THE ATTACHED James River Insurance Company BINDER CAREFULLY AND COMPARE IT WITH ANY QUOTE AND SUBMISSION DOCUMENTS AND REVIEW THE POLICY FORMS FOR THE ACTUAL COVERAGES PROVIDED.

 

IN ACCORDANCE WITH YOUR INSTRUCTIONS, AND IN RELIANCE UPON THE STATEMENTS MADE BY THE RETAIL BROKER IN THE INSURED’S APPLICATION/SUBMISSION, WE HAVE OBTAINED INSURANCE AT YOUR REQUEST AS PER ATTACHED.

 
CANCELLATION: THIS POLICY IS SUBJECT TO THE CANCELLATION PROVISIONS AS FOUND IN THE POLICY(IES) OR CERTIFICATE(S) CURRENTLY IN USE BY THE INSURER. THE INSURANCE EFFECTED UNDER THE INSURER’S BINDER CAN BE CANCELLED BY THE INSURER (SUBJECT TO STATUTORY REGULATIONS) BY MAILING, TO THE INSURED AT THE ADDRESS STATED ON THE FACE OF THIS CONFIRMATION OF INSURANCE, WRITTEN NOTICE STATING WHEN SUCH CANCELLATION SHALL BE EFFECTIVE. IN THE EVENT OF CANCELLATION BY THE INSURED, THE EARNED PREMIUM WOULD BE SUBJECT TO THE MINIMUM PREMIUM IF APPLICABLE.
 
THIS CONFIRMATION OF INSURANCE IS ISSUED BASED UPON THE INSURER’S AGREEMENT TO BIND AND IS ISSUED BY THE UNDERSIGNED WITHOUT ANY LIABILITY WHATSOEVER AS AN INSURER.

 

PREMIUM PAYMENT IS DUE WITHIN TWENTY (20) DAYS FROM EFFECTIVE DATE UNLESS OTHERWISE STIPULATED.

 

 

                    

 

dbamford@wtcis.com

(415) 442-8507

 

TOTAL NUMBER OF PAGES: 2

INSURED: Hancock Jaffe Labs Vascular Inc

DATE ISSUED: February 11, 2016

 

     
 

 

 

Date: February 11, 2016
   
To: David Bamford
  WHOLESALE TRADING CO-OP INSURANCE SERVIC
  San Francisco, CA
   
RE:

Coverage Binder for: HANCOCK JAFFE LABORATORIES, INC.; HANCOCK JAFFE VASCULAR, INC.

Binder Expires: When policy is issued

Risk Id No.: 3697464

 

Message: This is to confirm that EVANSTON INSURANCE COMPANY is binding coverage as follows:

 

Named Insured:

HANCOCK JAFFE LABORATORIES, INC.; HANCOCK JAFFE VASCULAR, INC.
  70 DOPPLER
 

IRVINE, CA 92618

   

Policy Form:

EIC 701-02 - Specified Products and Completed Operations Liability

 

Insurance Policy

   
Policy No.:

SP873467

   
Policy Period: February 19, 2016 to February 19, 2017
   
Limits: $1,000,000 / $2,000,000
   
Deductible:

$10,000

   

Annual Premium:

$20,222.00 (does not include applicable state taxes, fees or surcharges)
   
Retroactive Date or Prior Acts Exclusion date if applicable:

 

 

February 19, 2013

   
Products/Completed Operations if applicable:

 

ProCol, Bioprosthesis Vascular Grafts

   
Billing Company: Markel Service, Incorporated

 

Market West Insurance Services

a division of Markel Service, Incorporated

21600 Oxnard Street, Suite 900, Woodland Hills, CA 91367 (800) 969-5999
CA License No. 0D95581 www.markelcorp.com

 

     
 

 

 

February 11, 2016

Page 2

 

Endorsements:

 

  1. ZZ-44003-03 01 15 Certified Acts of Terrorism Exclusion
  2. EIC 4115-01 25% Minimum Earned Premium Endorsement
  3. EIC 832-01 Asbestos Exclusion
  4. ZZ-44002-01 Mold Exclusion
  5. EIC 4276 SpecProd/CompOps Option to Purchase an
   

Extended Discovery Period

  6. EIC 822-01 Claim Expenses Part of and Not in Addition to
    Limits of Liability Endorsement
  7. EIC 4713 Amendment of Cancellation
  8. EIC 4739 Amendment of Exclusion h.
  9. MEGL 1384 03 11 Amendment of Definitions and Exclusions -
      Electronic Data and Distribution of Material in
      Violation of Statutes
  10. ZZ-50000-03 01 15

Policyholder Disclosure Notice of Terrorism

      Insurance Coverage
  11. MEGL 1660 05 15 Exclusion - Unmanned Aircraft
  12. ZZ-49001-05

California Service of Suit

  13. EIC 4355-01 Additional Insured - Vendors (Broad Form)
  14. EIC 3022-01 Amendment of Territory - Worldwide Coverage

 

Issuing Certificates of Insurance: Please note that any Certificate of Insurance issued for the captioned policy should include the policy period, limit(s) of liability and deductible(s). If coverage is claims made it should be so stated.

 

Issuing Binders: While we understand that you may present our terms in your own format, please be aware that our binder and policy supersede any other evidence of coverage that may be presented to the insured.

 

Thank you for your business. If you have any questions or comments, please let me know. I appreciate doing business with you and look forward to hearing from you again.

 

     
 

 

   

P.O. Box 27648, Richmond, VA 23261; (804) 289-2700.

This Binder is only a summary of the coverages(s) you have ordered. For a complete description of the terms and conditions of coverage, please refer to the policy itself including all endorsements.

 

Attention: David Bamford Policy No.: 00056656-3
Firm: Wholesale Trading Co-op Insurance Services (San Contact: Jennifer Stinson
  Francisco)    
Applicant: Hancock Jaffe Laboratories Inc Phone: (804)289-2816
  Hancock Jaffe Vascular Inc Fax: (804)420-1054
Date: 2/11/2016 Email: jennifer.stinson@jamesriverins.com
Description: Manufacturer and Distributor of Vascular Products Division: Life Sciences
Policy Term: 2/19/2016 to 2/19/2017 Company: James River Insurance Company

 

Terms and Conditions:

 

Limits of Insurance      
Annual Aggregate   $ 4,000,000  
Each Occurrence   $ 4,000,000  

 

Coverage Form: Claims Made Retro Date: 2/19/2013

 

Class Description Exposure Base   Exposure Rate
Medical, Dental, or Surgical Diagnostic or Treatment Machines or Devices Mfg. per 1,000 Receipts 500,000        

 

Deposit Premium:   $ 22,078     Company Fee:   $ 350  
Minimum Earned Percent:     25 %            
TRIA:     Coverage Rejected              

 

Schedule of Underlying Insurance(s)

 

Products Liability          
Carrier:   Evanston Insurance Company      
Term:   2/19/2016 to 2/19/2017      
Coverage Form:   Claims Made      
Retro Date   2/19/2013      
Limits            
Each Occurrence       $ 1,000,000  
Products Aggregate       $ 2,000,000  

 

Contingencies:  

THIS BINDER IS SUBJECT TO OUR RECEIPT AND FAVORABLE REVIEW OF THE FOLLOWING, WITHIN 10 BUSINESS DAYS OF BINDING: None

 

Additional Underwriting Information Required:

Copies of all underlying policies are required within 60 days.

All taxes, fees and filings (if applicable) are the responsibility of the broker.

Thank you for your order.

 

    1  
 

 

Audit Information

 

Audit Frequency:

Non-Applicable

Description:

Not Auditable

 

This quote is being offered by a non-admitted insurer subject to 100% minimum policy premium, with 25% minimum earned. All taxes, fees and filings (if applicable) are the responsibility of the broker.

 

Coverage is not bound without confirmation in writing from the Company.

 

Forms to be Attached (Please click form number or name to open a specimen copy in another browser window):

 

XC0001US-0306 Commercial Excess Liability Policy Declarations
AP0001US-0403 Schedule A
XC0003US-0114 Schedule of Underlying Insurance
XC0002US-0607 Commercial Excess Liability Policy
XC2110US-0306 Claims Made/Extended Reporting Provision Endorsement
XC2111US-1103 Restricted Reporting Endorsement
AP2103US-0607 Minimum Policy Premium
XC2108US-0405 Defense Within Limits of Insurance
XC2250US-0403 Unimpaired Aggregate Limit Endorsement (Non-Concurrency)
XC2259US-0104 Sublimited Coverages Exclusion
AP2104US-1012 Common Policy Conditions
AP2107US-0403 Binding Arbitration
XC2135US-1106 Coverage Territory Condition
XC2234US-0403 Designated Products Limitation Endorsement
  (Procol Bioprosthesis Vascular Grafts)
AP2031US-0411 Exclusion - Cross Suits
AP2102US-0403 Communicable Disease Exclusion
AP2111US-1105 Exclusion - Punitive Damages
LS2005US-1110 Specified Products Exclusion Endorsement
XC2100US-0403 Nuclear Energy Liability Exclusion Endorsement (Broad Form)
XC2102US-0403 . Fungi or Bacteria Exclusion
XC2106US-0703 Real and Personal Property Care, Custody or Control Exclusion
XC2123US-1105 Absolute Pollution and Pollution Related Liability - Exclusion
XC2254US-0803 E.R.I.S.A. Exclusion
XC2280US-0811 Business Conduct Exclusion
XC5045US-1211 Exclusions - E-mails, Fax, Phone Calls for Other Methods of Sending, Recording and
  Distributing Material or Information
XC5054US-0412 Combined Policy Exclusions - Commercial Excess
AP5027R-0115 Rejection of Coverage for Certified Acts of Terrorism Coverage
XC5055US-0115 Exclusion of Certified Acts of Terrorism and Exclusion of Other Acts of Terrorism
  Committed Outside the US and Excl
IL1201-0403 Policy Changes
  (Exclusion - BSE (Same as expiring))
AP0100US-0403 Privacy Policy

 

    2  
 

 

Schedule 10A                      
Part Number   Description   Manufacturer   Model #   Approximate Cost     Serial #   Date In Service
HJL0114   Pressure Gauge   Ashcroft   T-1082   $ 335.00     N/A   6/11/03
HJL0115   Pressure Gauge   Ashcroft   T-1082   $ 335.00     N/A   6/11/03
HJL0136   Laminar flow bench   Airtech   3636   $ 3,385.00     4950   7/30/14
HJL0138   Laminar flow bench   Airtech   3636   $ 3,385.00     4952   4/10/14
HJL0139   Laminar flow bench   Airtech   3636   $ 3,385.00     4953   4/10/14
HJL0143   Laminar flow bench   Airtech   3636   $ 3,385.00     4957   4/10/14
HJL0144   Laminar flow bench   Airtech   3636   $ 3,385.00     4958   4/10/14
HJL0145   Laminar flow bench   Airtech   3636   $ 3,385.00     4959   4/10/14
HJL0173   Pump -Masterflex peristaltic   Cole Parmer   77410-00   $ 3,234.00     A14000370   4/15/14
HJL0180   Pump Masterflex peristaltic   Cole Parmer   77410-00   $ 3,234.00     G14000231   7/18/14
HJL0184   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15000579   4/3/15
HJL0185   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15000583   4/3/15
HJL0186   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15001031   2/19/15
HJL0187   MasterFlex peristaltic pump L/S   Cole Parmer   07554-90   $ 1,150.00     A15001036   2/19/15
HJL0190   23” Shrink Wrap Sealer with Timer   Midwest Pacific   MP-24SWT   $ 250.00     N/A   6/4/15

 

     
 

 

 

Post-Acquisition Supply Agreement

 

This Post-Acquisition Supply Agreement (the “Supply Agreement”) made and entered into effective as of March 18, 2016 (the “Effective Date”), is between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“HJL”), with its address at 70 Doppler, Irvine, California 92618, and LeMaitre Vascular, Inc., a Delaware corporation (“LMAT”), with an address at 63 Second Avenue, Burlington, Massachusetts 01803 (hereinafter sometimes individually or collectively referred to as a “Party” or the “Parties,” respectively) . All capitalized terms not defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement (defined hereinafter).

 

WHEREAS, pursuant to that certain Asset Purchase Agreement dated of even date between the Parties, LMAT acquired certain assets of HJL;

 

WHEREAS, in accordance with the terms of the Asset Purchase Agreement, HJL and LMAT desire to enter into this Supply Agreement, whereby HJL will be the contract manufacturer of the Products for LMAT post-Closing, all as further set forth in this Supply Agreement.

 

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, and agreements contained herein, the Parties hereto agree as follows :

 

ARTICLE 1

SCOPE OF AGREEMENT

 

1.1 . This Supply Agreement applies to the post-Closing supply of Products by HJL to LMAT in accordance with the terms of this Supply Agreement.

 

ARTICLE 2

REGULATORY

 

2.1. Medical Device Establishment Registration . During the term of this Supply Agreement or as required by law, which ever date is later, HJL shall continue to maintain a Medical Device Establishment Registration and Listing (as defined under the United States Food, Drug and Cosmetic Act and the regulations promulgated thereunder, as amended from time to time (the “Act”)) as the contract manufacturer.
   
2.2 Regulatory Approvals/Clearances . LMAT shall be responsible, at its sole expense, for filing and obtaining and maintaining (including development of and compliance with necessary quality programs) any further authorizations from regulatory authorities worldwide, including the FDA and the appropriate competent authority or Notified Body, attendant to or necessary for the commercialization of the Products in any jurisdiction. Except as otherwise required by law or agreed by the Parties, LMAT shall be responsible for all dealings with the FDA, or the appropriate competent authority or Notified Body, including but not limited to notifications, medical device vigilance, and national labeling issues .
   
2.2. Registrations/Listings . Within a reasonable time post-Closing as agreed to by the Parties, HJL will take all steps reasonably necessary to update FURLS (FDA Unified Registration and Listing Systems) regarding the change in HJL’s responsibility for the Products from a manufacturer of record to a contract manufacturer. LMAT is responsible for re-listing such Products. Further, on and after the Effective Date, LMAT shall be legally responsible for all post-market surveillance activities, customer service, reporting and all other regulatory filings and compliance requirements for the Products.
   
2.3. Manufacturing Compliance . If HJL determines that its manufacturing, quality systems, post-market surveillance activities, or any portion thereof, are not in compliance with any Applicable Law, it shall promptly notify LMAT in writing within three business days of such determination. In such written notification, HJL shall provide to LMAT an explanation and description of such non-compliance and an explanation of the controls that will be implemented or actions that will be or already have been taken to correct the non-compliance.
   
2.4. Traceability . For as long as required by law or to fulfill the obligations under this Supply Agreement, whichever is longer, each Party will maintain adequate records to permit the Parties to trace the manufacture of the Product and the distribution and use of the Product. Additionally, within 5 business days of the end of each calendar month, HJL shall prepare and send to LMAT a report listing the following information with respect to any implant registration cards received by HJL during such calendar month: 1) serial number; 2) model number; 3) patient ID #; 4) physician last name; 5) Product implant date; and 6) hospital name, city and state; in each case to the extent that the underlying implant cards contain such information.

 

   

1 | Page
 

 

2.5 Remedial Actions . HJL will immediately notify LMAT, and promptly confirm such notice in writing, if it determines or is instructed by a regulatory body that any of the Products are or may be subject to recall, field corrective action, stock recovery or other post-distribution regulatory action with respect to a Product taken either by virtue of applicable federal, state, foreign, or other law or regulation or good business judgment (a “Remedial Action”). LMAT will be responsible for, and HJL will assist as requested by LMAT, in gathering and evaluating such information as may be helpful to determine the necessity of conducting a Remedial Action; provided that LMAT shall have sole responsibility for collecting information from its customers, including customer complaints. LMAT will determine in its sole discretion whether to commence any Remedial Action with respect to the Product and HJL shall fully cooperate in such Remedial Action. If LMAT determines in its sole discretion that any Remedial Action with respect to the Product should be commenced or if a Remedial Action is required by any governmental authority having jurisdiction over the matter, LMAT will control and coordinate all efforts necessary to conduct such Remedial Action. If LMAT conducts any Remedial Action related to the Product and HJL is determined by LMAT in its sole discretion to be responsible for the issue requiring the Remedial Action (e.g., a problem arises from faulty manufacture), HJL, at LMAT’s option, will either issue a credit to LMAT or reimburse LMAT for the sales price of all LMAT devices recalled in such Remedial Action and the other reasonable costs incurred by LMAT associated with such Remedial Action. LMAT shall have responsibility for managing corrective and preventive action (“CAPA”) as defined in the Act.
   
2.6 Complaints and Medical Device Reporting . Each Party will comply with applicable provisions of the 21 CFR Part 820 Quality System Regulation and 21 CFR Part 803 Medical Device Reporting systems, and each Party will cooperate with the other for the timely compliance therewith. HJL agrees to notify LMAT within two business days of receipt of any information that reasonably suggests a complaint or Medical Device Report (“MDR”) relating to the Product has occurred. LMAT agrees to notify HJL within a reasonable period of time of receipt of any information that reasonably suggests a MOR relating to the Product has occurred. HJL will investigate any such complaints or MDRs/Vigilance Reports and forward to LMAT its determinations and conclusions relating to the complaint or MOR. HJL shall investigate all instances of an alleged product failure or product inadequacy documented by LMAT and forwarded by LMAT for investigation. HJL shall provide a written summary of the findings from such investigation and status and ongoing actions to LMAT within seven calendar days following the date that HJL is informed of such complaint or MOR and every 14 calendar days thereafter until the complaint or MOR is formally closed. LMAT shall have sole responsibility for filing the MOR with the appropriate regulatory agency.
   
2.7 Vigilance Reporting . HJL will notify LMAT in writing if a Vigilance Report is required to be filed with respect to the Product. LMAT will be responsible for complying with Vigilance Reporting requirements for the Product.
   
2.8. LMAT Audits. HJL will give LMAT reasonable access to its manufacturing laboratories, supplier, inventory, shipping, and quality procedures and records and facilities to allow LMAT to conduct full compliance audits relating to the Product, its manufacture, and the Product’s regulatory and quality status, at LMAT’s expense, as reasonably deemed necessary by LMAT, but no more frequently than twice in any 12 month period, unless LMAT determines in good faith that exceptional circumstances require more frequent audits. The audit may include, without limitation, records relating to manufacturing compliance with the Specifications (as defined in the Act), compliance with quality control and inspection reports procedures, compliance with GMP/QSR Regulations and regulatory compliance. Such audits will be conducted during HJL’s normal business hours, with at least three business days’ prior written notice to HJL by LMAT. HJL will make its personnel available to LMAT in connection with such audits. LMAT will provide to HJL the audit findings of observations to which HJL will respond within 10 business days with its evaluation of the findings detailing corrective actions with follow-up reports every 30 calendar days until the observations have been formally closed or will inform LMAT in writing of the reasons why HJL believes a corrective action is not required. LMAT will be given access to audit all corrective actions.

 

   

2 | Page
 

 

2.9 Regulatory Inspections . HJL will promptly notify LMAT of any planned or unannounced inspection of its facilities manufacturing the Product or any component part of a Product by the FDA, CE Mark certification organization or other federal, state, local, or other regulatory agency which relates to the manufacture, assembly, packaging or regulatory status of the Product and regularly provide LMAT with information about the progress and outcome of such inspection, including, without limitation, copies of any notice of observations or warnings and copies of HJL responses to these inspection reports or warnings, including, requests for Remedial Action, resulting CAPAs, supporting attachments or other related documentation.

 

2.10 Additional Quality Requirements . HJL shall comply with those additional quality requirements set forth in Exhibit A .
   
2.11 HJL Cooperation : HJL shall cooperate with LMAT to the fullest extent possible as reasonably requested by LMAT regarding any matter set forth in this Article 2. This shall include, without limitation, cooperation in the following: (a) LMAT’s preparation and filing of any regulatory submissions in any jurisdiction, including preparing or providing the documentation necessary for all proposed filings with any regulatory agency worldwide, including with the FDA or the appropriate competent authority or Notified Body; (b) any clinical trials or investigations or follow-up from such clinical trials or investigations; (c) registrations and listings under paragraph 2.2 above; (d) remedial actions and CAPAS, under paragraph 2.3 above; and (e) Complaints, Medical Device Reports, Vigilance Reports, Audits and Regulatory Inspections, under paragraphs 2.6 to 2.9 above.

 

ARTICLE 3

SUPPLY AND ORDERS FOR PRODUCTS

 

3.1. Purchase Orders . On the Effective Date, LeMaitre shall submit a purchase order to HJL in the form attached as Exhibit B (the “Initial Purchase Order”). LMAT shall submit purchase orders to HJL for the Products pursuant to Section 3.3. Each purchase order shall cover the portion of the forecast that has become a firm order under Section 3.3 of this Supply Agreement and shall, at a minimum, include: (a) identification of the Products ordered; (b) quantity; (c) delivery date; and (d) shipping instructions and shipping address.
   
3.2. Acceptance of Orders . Except as otherwise provided in Section 3.4, all purchase orders issued in accordance with this Supply Agreement shall be automatically accepted by HJL. Except for the Initial Purchase Order, purchase orders for the Products must be received by HJL at least 30 calendar days prior to delivery date requested. Each purchase order shall be deemed to be an offer by LMAT to purchase the Products pursuant to the terms of this Supply Agreement and shall give rise to a contract between LMAT and HJL for the sale of the Products ordered and shall be subject to and governed by the terms of this Supply Agreement solely and to no other terms, including the provisions of the Uniform Commercial Code. The terms and conditions of this Supply Agreement shall govern and supersede any additional or contrary terms set forth in LMAT’s purchase order or any HJL or LMAT acceptance, confirmation, invoice, or other document, unless the specific additional or contrary terms are stated in writing and duly signed by authorized officers of LMAT and HJL. With each lot of Products manufactured by HJL, HJL shall supply to LMAT documentation certifying in writing that each shipment of Products complies with (i) the then-current Specifications (as agreed upon by the Parties) and with the testing procedures described therein; and (ii) all other documentation required by LMAT.
   
3.3. Forecasts. Commencing within 10 business days after the Effective Date of this Supply Agreement, LMAT shall provide to HJL a written, rolling six-month forecast (with such first forecast to be for less than six months if the first forecast is not issued at the beginning of a calendar quarter). HJL shall not be required to deliver to LMAT more than 175 units in any thirty day period without HJL’s prior consent. The first three months of each forecast shall constitute a firm order to purchase the units of the Products specified in the forecast, and LMAT shall subsequently issue purchase orders consistent with these firm orders. The balance of each forecast shall constitute a non-binding good faith estimate of expected orders for Products.

 

   

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3.4. Order Limitations . HJL shall maintain an adequate inventory of the Products and shall notify LMAT within two calendar days in writing upon becoming aware of any actual or potential interruption in supply. HJL shall not be required to deliver quantities in excess of 120% of forecasted requirements unless HJL has been given at least 90 calendar days advance written notice of the quantities to be delivered which exceed the forecasted amounts. Notwithstanding the foregoing, HJL shall use all commercially reasonable efforts to supply quantities in excess of 120% of forecasted requirements that were given with less than 90 calendar days advance notice.
   
3.5. Modification of Orders . Except as otherwise provided in Section 3.4, no purchase order shall be modified or canceled except upon the mutual agreement of the Parties, which agreement shall not be unreasonably withheld by either Party. Mutually agreed upon change orders shall be subject to all provisions of this Supply Agreement, whether or not the changed purchase order so states. Notwithstanding the foregoing, any purchase order may be canceled by LMAT as to any Products which are not delivered within five calendar days of the delivery date requested by LMAT pursuant to a purchase order submitted to HJL under Section 3.1 and accepted by HJL under Section 3.2 (the “Requested Delivery Date”), and any such cancellation shall not limit or affect any contract remedies available to LMAT with respect thereto.
   
3.6. Shipment . All Products sold by HJL to LMAT shall be shipped by HJL free on board (“F.O.B.”) LMAT’s facility (the “Destination”) addressed to LMAT’s address (or such other address as set forth by LMAT). HJL shall bear all risk of loss until HJL delivers the Products to the Destination and they are received by LMAT. HJL shall pay all loading, freight, shipping, insurance, forwarding and handling charges, fees, storage, and all other charges applicable to the Products to facilitate delivery of the Products to the Destination.
   
3.7. Inspection . HJL will inspect, test and certify the Product to specifications required by the approved device master record and listed on the Certificate of Analysis identified in Exhibit C . Upon notification to HJL, LMAT will have the right to reject any lot that contains Product that does not meet the Specifications (“Nonconforming Product”). LMAT will provide HJL with information as to the reason for the rejection of the Nonconforming Product including a description of the test procedure and results, if any, on which the rejection is based (i) within 60 calendar days of receipt therefor with respect to nonconformities that can be discovered with reasonable diligence, and (ii) for all other Nonconforming Products, within 45 calendar days after LMAT discovered or was informed by a third party or should have discovered the nonconformity. HJL will instruct LMAT as to the disposal or return of Nonconforming Product. In the event of Nonconforming Product(s), HJL will be responsible for return shipping charges. LMAT may issue a debit memorandum to HJL, which HJL will honor promptly for LMAT’s benefit, for the purchase price, freight, and related costs of the Nonconforming Product, and HJL will promptly replace the Nonconforming Product and invoice LMAT for the Product shipped to replace the Nonconforming Product at the time of shipment of the replacement product.
   
3.8. Process. Material or Labeling Changes.

 

  (a) No material changes, modifications, deviations, or exceptions to the Specifications, materials, or fabrication, manufacturing, or packaging processes in effect as of the date hereof may be made without LMAT’s prior consent and 60 calendar days’ prior written notice of the proposed change by HJL to LMAT.
     
  (b) Any such material, process or labeling changes, modifications, deviations, or exceptions proposed to be implemented by HJL shall be subject to prior LMAT regulatory review of HJL’s determination of significance and shall not be implemented for at least such 60 day period or longer as required to address LMAT’s concerns, if any, including obtaining any necessary regulatory approvals prior to implementing such changes.

 

   

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  (c) HJL shall provide full cooperation in implementing any changes requested by LMAT.
     
  (d) HJL shall provide, at its sole cost and expense, a limited number of samples of the Product incorporating the proposed change for LMAT’s evaluation in accordance with this paragraph, 3.8.
     
  (e) If any HJL proposed change would require approval by any governmental authority, LMAT shall be responsible for, and shall bear all costs associated with, obtaining such approvals.

 

3.9. Labeling . HJL, as a contract manufacturer for LMAT, shall be responsible for affixing the labeling on Products purchased under this Supply Agreement pursuant to Applicable Laws, including, but not limited to, requirements for unique device identifier (UDI) labeling. Product labeling shall read “Manufactured for LeMaitre Vascular, Inc.” unless otherwise agreed to by the Parties. HJL shall deliver the text of proposed packaging, labeling, and instructions for use changes to LMAT for regulatory review and approval at least sixty (60) calendar days prior to printing. HJL shall prepare labeling and instructions for use in all foreign languages that LMAT reasonably requests. LMAT shall be responsible for the costs of translating the labeling into any foreign language.
   
3.10. Time is of the Essence . HJL will advise LMAT in writing within seven calendar days of any delay or anticipated delay in delivery or performance under this Supply Agreement.

 

ARTICLE 4

PRICES AND PAYMENTS

 

4.1. Prices . The F.O.B. Destination purchase price of all Products sold to LMAT post-Closing hereunder (“ Prices ”) shall be as agreed by the Parties in Exhibit D containing Prices and other miscellaneous terms.
   
4.2. Payment Terms . HJL will invoice LMAT upon delivery of Products. Invoices for Products shall be due and payable in full within 10 calendar days following the date of the invoice.
   
4.3. Taxes . The Prices for Products do not include any sales, use, value added, or similar taxes, customs duties, or tariffs imposed by any governmental authority or agency on Products or any components thereof that are imposed on LMAT. LMAT shall pay or reimburse HJL for all such amounts incurred in connection with LMAT’s purchase of Products; provided, however, that HJL shall pay all income, excise, or franchise taxes imposed upon the manufacturing activities or income of HJL.
   
4.4. Resale Prices . LMAT may resell the Products at such prices, as LMAT, in its sole discretion, shall determine.

 

ARTICLE 5

GENERAL RIGHTS AND OBLIGATIONS OF HJL

 

5.1. Manufacture and Supply of Products. During the term of this Supply Agreement, HJL shall manufacture the Products in accordance with the approved Specifications and Applicable Laws, including FDA Clearance (or Approval as may be required by the FDA), and the terms and conditions set forth in this Supply Agreement. HJL shall not sell the Products to, or manufacture the Products for, any party except LMAT.

 

ARTICLE 6

TERM AND TERMINATION

 

6.1. Term . This Supply Agreement shall take effect as of the date first above written and shall continue in force until the earlier of (i) March 18 , 2019 and (ii) the date upon which this Supply Agreement is terminated pursuant to Section 6.2 below.

 

   

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6.2. Termination. This Supply Agreement may be terminated by LMAT upon seven calendar days advance written notice to HJL. HJL may terminate this Supply Agreement upon 35 calendar days advance written notice to LMAT if LMAT is in material breach of any of its representations, warranties or covenants hereunder and, either the breach cannot be cured or, if the breach can be cured, it is not cured by LMAT within 30 calendar days after LMAT’s receipt of written notice of such breach.
   
6.3. Rights and Obligations on Termination . In the event of termination of this Supply Agreement for any reason, the Parties shall have the following rights and obligations:

 

  (a) Termination of this Supply Agreement shall not release either Party from the obligation to make payment of all amounts then or thereafter due and payable.
     
  (b) LMAT shall have the right, at its option, to cancel any or all purchase orders that provide for delivery after the effective date of termination.
     
  (c) LMAT’s and HJL’s obligations pursuant to Articles 2, 4 and 7-14, and this Section 6.3, shall survive termination of this Supply Agreement. All other provisions of this Supply Agreement shall terminate upon termination of this Supply Agreement.

 

ARTICLE 7

PRODUCT WARRANTIES

 

7.1 Warranty. HJL warrants to LMAT that: (i) the Products delivered to LMAT under this Supply Agreement will be saleable and useable in a clinical setting and will conform to the then current and approved Specifications for Products and any documentation contained in literature supplied by HJL with that Product; (ii) the Products will be free from defects in design, manufacture, materials, and workmanship under normal intended use and service, in accordance with all Applicable Laws and requirements including, but not limited to, the Act and GMP/QSR Regulations and not adulterated under the Act; (iii) the Products have been manufactured, tested, stored, packaged, labeled, and shipped in compliance with the Specifications and all Applicable Laws including, but not limited to, the Act and GMP/QSR Regulations; (iv) the Products shall have a shelf life of at least 54 months with a minimum of 48 complete months shelf life remaining when received by LMAT; (v) HJL’s manufacturing facility, and manufacturing process for the Products, are,, and at all times during the duration of the Supply Agreement, shall be, in compliance with all GMP/QSR Regulations and ISO 13485:2003, EN 46001 requirements; and (vi) the Products are free and clear of any liens, security interests, or encumbrances of any nature whatsoever, except for those liens, security interests, or encumbrances held by LMAT as contemplated by the Supply Agreement. LMAT shall have available any and all remedies available in law or equity in the event any Products do not meet the foregoing warranties. Prior to returning any Products alleged to be defective, LMAT shall notify HJL in writing of the claimed defect and, where available, shall include the lot and serial number of such Products, as well as the number and date of the invoice therefor. The foregoing warranty shall not apply to any Product that has been subjected by LMAT to abuse, misuse, neglect, negligence, accident, improper testing, improper storage, improper handling, abnormal physical stress, abnormal environmental conditions or use contrary to any written instructions issued by HJL.
   
7.2. Limited Warranty. THE WARRANTIES SET FORTH IN SECTION 7.1 ARE INTENDED SOLELY FOR THE BENEFIT OF LMAT. ALL LOSSES THEREUNDER SHALL BE MADE BY LMAT AND MAY NOT BE MADE BY LMAT’S CUSTOMERS.
   
7.3 DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 8.5 AND THE PRODUCT WARRANTY SET FORTH IN SECTION 7.1, (A) NEITHER HJL NOR ANY PERSON ON HJL’s BEHALF HAS MADE OR MAKES ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WHATSOEVER, EITHER ORAL OR WRITTEN, INCLUDING ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE WHETHER ARISING BY LAW, COURSE OF DEALING, COURSE OF PERFORMANCE, USAGE OF TRADE OR OTHERWISE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED.

 

   

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ARTICLE 8

REPRESENTATIONS, WARRANTIES, AND INDEMNIFICATION

 

8.1. Product Liability Indemnification .

 

(a) By HJL: HJL hereby agrees to defend, indemnify, and hold LMAT and its Affiliates (each a “LMAT Indemnified Party”) harmless from and against all losses, damages, claims and liability (“Losses”) which arise out of or result from personal injury or death incident to the use of any Products to the extent resulting from: (i) the failure of the Products to meet the Specifications, or (ii) the failure of the Products to be manufactured, tested, stored packaged, labeled, or shipped in compliance with all Applicable Laws, except to the extent resulting from any specific action taken by HJL at the written direction of LMAT or resulting from any specific action not taken by HJL at the written direction of LMAT.

 

(2) By LMAT : LMAT hereby agrees to defend, indemnify and hold HJL and its Affiliates (each a “HJL Indemnified Party”) harmless from and against all Losses which arise out of or result from personal injury incident to the use of any Products to the extent resulting from the negligent or wrongful acts or omissions of LMAT.

 

(3) EXCLUSIVE REMEDY . THIS SECTION 8.1 SETS FORTH THE ENTIRE LIABILITY AND OBLIGATION FOR ANY DAMAGES COVERED BY THIS SECTION 8.1.

 

(4) NO LIABILITY FOR CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL EITHER PARTY OR THEIR REPRESENTATIVES BE LIABLE FOR CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, PUNITIVE OR ENHANCED DAMAGES, LOST PROFITS OR REVENUES OR DIMINUTION IN VALUE (EXCEPT FOR LOSSES REQUIRED TO BE PAID TO A THIRD PARTY AS A RESULT OF A THIRD PARTY CLAIM FOR ANY OF THE FOREGOING), ARISING OUT OF OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF (A) WHETHER SUCH DAMAGES WERE FORESEEABLE, (8) WHETHER OR NOT THE OTHER PARTY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND (C) THE LEGAL OR EQUITABLE THEORY (CONTRACT, TORT OR OTHERWISE) UPON WHICH THE CLAIM IS BASED, AND NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.

 

8.2. Insurance Requirements . HJL will carry product liability insurance covering any loss, damage, expense or liability incurred or suffered by any party other than HJL arising out of any use of a Product. Such policy or policies, which may include umbrella or excess liabilities coverage, shall (i) have aggregate limits of liability of not less than $3,000,000 with respect to any incident or occurrence and of not less than $5,000,000 in the aggregate on the Effective Date; and (ii) provide for a deductible or retained amount of no greater than $500,000; and (iii) provide that such policy may not be canceled except upon written notice in accordance with policy provisions. Upon request, HJL shall provide such evidence of the effectiveness of such insurance to LMAT.
   
8.3. Cooperation as to Indemnified Liability . Each Party hereto shall reasonably cooperate with other parties with respect to access to books, records, or other documentation within such Party’s control, if deemed reasonably necessary or appropriate by any Party in the defense of any matter which may give rise to indemnification hereunder.
   
8.4. LMAT’s Representations and Warranties . LMAT hereby represents and warrants to HJL that as of the date hereof:

 

  (a) LMAT is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and the execution and delivery of this Supply Agreement by an officer of LMAT has been duly authorized by all necessary corporate action.

 

   

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  (b) This Supply Agreement is the legal, valid, and binding obligation of LMAT, enforceable against LMAT in accordance with its terms, except as may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws and equitable principles related to or affecting creditors’ rights generally or the effect of general principles of equity.
     
  (c) Neither the execution and delivery of this Supply Agreement nor the compliance with the terms and conditions hereof will conflict with, result in a breach, violation or failure to perform by LMAT of, or constitute a default under, any of the terms, conditions, or provisions of any order, judgment, contract, agreement, certificate of incorporation, bylaws, or other instrument to which LMAT is or may be bound or affected.
     
  (d) LMAT has full right, power, and authority to enter into and perform its obligations under this Supply Agreement.
     
  (e) LMAT is not under any obligations inconsistent with the provisions of this Supply Agreement.
     

 

8.5. HJL’s Representations and Warranties . HJL hereby represents and warrants to LMAT that as of the date hereof:

 

  (a) HJL is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and the execution and delivery of this Supply Agreement by an officer of HJL has been duly authorized by all necessary corporate action.
     
  (b) This Supply Agreement is the legal, valid, and binding obligation of HJL, enforceable against HJL in accordance with its terms, except as may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws and equitable principles related to or affecting creditors’ rights generally or the effect of general principles of equity.
     
  (c) Neither the execution and delivery of this Supply Agreement nor the compliance with the terms and conditions hereof will conflict with, result in a breach, violation or failure to perform by HJL of, or constitute a default under, any of the terms, conditions, or provisions of any order, judgment, contract, agreement, certificate of incorporation, bylaws, or other instrument to which HJL is or may be bound or affected.
     
  (d) HJL has full right, power, and authority to enter into and perform its obligations under this Supply Agreement and to grant to LMAT the rights granted and to be granted hereunder.
     
  (e) HJL is not under any obligations inconsistent with the provisions of this Supply Agreement.

 

ARTICLE 9

CONFIDENTIAL INFORMATION

 

9.1. Confidentiality. Section 11(g) of the Asset Purchase Agreement shall apply to all confidential information used by or provided to HJL hereunder.

 

   

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ARTICLE 10

INTELLECTUAL PROPERTY AND TRADEMARKS

 

10.1. License . LMAT hereby grants HJL a limited, non-exclusive and non-transferable license to use the Licensed Intellectual Property, the Purchased Intellectual Property and the Purchased Technology (the “Transition IP”), in accordance with LMAT’s instructions, solely for purposes of manufacturing in accordance with this Supply Agreement and packaging and labeling Products under this Supply Agreement, as long as such Transition IP is used by HJL in accordance with LMAT’s standards, specifications, and instructions of which HJL has been advised in writing, but in no event beyond the term (or earlier termination) of this Supply Agreement. HJL shall not acquire any right, title, or interest under the laws of any nation in such Transition IP or any other intellectual property of LMAT other than the foregoing limited license and shall not attempt to assert or register any such right, title, or interest. HJL shall not use any of LMAT’s trademarks, trade names, or logotypes as part of HJL’s corporate or trade names or permit any third party to do so without the prior written consent of LMAT.
   
10.2. Third-Party Infringement . HJL shall promptly notify LMAT of any use by any third party of LMAT’s trademarks, trade names, or logotypes or any use by such third parties of similar marks which may constitute an infringement or sign off of LMAT’s trademarks, trade names, or logotypes, or of any use of any other intellectual property owned by LMAT pursuant to the Asset Purchase Agreement or otherwise, of which HJL has knowledge. LMAT reserves the right in its sole discretion to institute any proceedings against such third party infringers, and HJL shall refrain from doing so. HJL agrees to provide reasonable cooperation to LMAT in any action taken by LMAT against such third parties.
   
10.3. Termination of Use . HJL acknowledges LMAT’s proprietary rights in and to the Transition IP, and HJL hereby waives all right to any trademarks, trade names, and logotypes now or hereafter originated by LMAT. HJL shall not adopt, use, or register any words, phrases, or symbols which are identical to or confusingly similar to any of LMAT’s trademarks. Upon termination of this Supply Agreement, HJL shall cease using the Transition IP in any manner.
   
10.4 Protection of LMAT Intellectual Property. LMAT shall be responsible for filing and prosecuting all U.S. and foreign patent, copyright and trademark applications it deems necessary or appropriate to protect the Transition IP and LMAT’s Intellectual Property.

 

ARTICLE 11

FORUM SELECTION AND GOVERNING LAW

 

11.1. Forum Selection and Governing Law. This Supply Agreement and the legal relations among the parties hereto shall be governed and construed in accordance with the substantive laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflict of laws thereof. Each Party agrees that, in the event such Party elects to initiate litigation against the other Party, such Party will file such litigation in the state or federal courts of Massachusetts. Each Party hereby expressly and irrevocably waives any claim or defense in any action or proceeding brought in said jurisdictions based on any alleged lack of personal jurisdiction, improper venue, forum non conveniens or any similar basis.

 

ARTICLE 12

FORCE MAJEURE

 

12.1. Force Majeure Definition . Force Majeure shall mean any of the following events or conditions, not existing as of the date of this Supply Agreement, not reasonably foreseeable as of such date and not reasonably within the control of either Party, which prevents in whole or in material part the performance by one of the Parties of its obligations hereunder: riots, civil or military disturbances, wars, epidemics, fires, floods, hurricanes, typhoons, earthquakes, lightning, and explosions.
   
12.2. Notice . Upon giving notice to the other Party, a Party affected by an event of Force Majeure shall be released without any liability on its part from the performance of its obligations under this Supply Agreement, except for the obligation to pay any amounts due and owing hereunder, but only to the extent and only for the period that its performance of such obligations is prevented by the event of Force Majeure. Such notice shall include a description of the nature of the event of Force Majeure, its cause, and possible consequences. The Party claiming Force Majeure shall promptly notify the other Party of the termination of such event.

 

   

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12.3. Suspension of Performance . During the period that the performance by one of the Parties of its obligations under this Supply Agreement has been suspended by reason of an event of Force Majeure, the other Party may likewise suspend the performance of all or part of its obligations hereunder, except for the obligation to pay any amounts due and owing hereunder, to the extent that such suspension is commercially reasonable.

 

ARTICLE 13

MISCELLANEOUS

 

13.1. Audit Rights . HJL shall maintain accurate books and records to enable LMAT to monitor compliance by the other with the terms of this Supply Agreement. LMAT (or its accountants) shall have the right to inspect such books and records at reasonable intervals (but no more frequently than twice in any twelve month period) and upon reasonable prior written notice.
   
13.2. Relationship . This Supply Agreement does not make either Party the employee, agent, or legal representative of the other for any purpose whatsoever. Neither Party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other Party. In fulfilling its obligations pursuant to this Supply Agreement each Party shall be acting as an independent contractor.
   
13.3. Assignment . Except as otherwise provided in this Supply Agreement, neither Party may assign or otherwise transfer its rights and obligations under this Supply Agreement without the prior written consent of the other Party. Notwithstanding any other provision in this Supply Agreement to the contrary, either Party may assign this Supply Agreement to a company controlling, controlled by, or under common control with the assigning Party, or to its successor in connection with a change in control of such Party. Any prohibited assignment shall be null and void. All terms and conditions of this Supply Agreement shall be binding on and inure to the benefit of the successors and permitted assigns of the Parties.
   
13.4. Notices . Notice permitted or required to be given under this Supply Agreement shall be deemed sufficient if given in writing by commercial air delivery service or by registered or certified air mail, postage prepaid, return receipt requested, addressed to the respective addresses of the Parties set forth below or at such other address as the respective Parties may designate by like notice from time to time. Notices so given shall be effective upon the earlier of: (a) receipt by the Party to which notice is given; (b) on the seventh business day following the date such notice was deposited in the mail; or (c) when received. Notices shall be given as follows:

 

  If to HJL: Hancock Jaffe Laboratories, Inc.
    70 Doppler
    Irvine, California 92618
     
  If to LMAT: LeMaitre Vascular, Inc.
    63 Second Ave.
   

Burlington, MA 01803

Attn: Legal Dept.

    With a copy by email to: legal@lemaitre.com

 

13.5. Entire Agreement . This Supply Agreement, including the exhibits attached hereto and incorporated as an integral part of this Supply Agreement, and the Asset Purchase Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof, and supersedes all previous proposals, oral or written, and all negotiations, conversations, or discussions heretofore had between the Parties related to this Supply Agreement. To the extent this Supply Agreement is inconsistent with the terms of the Asset Purchase Agreement, the Asset Purchase Agreement shall control.

 

   

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13.6. Amendment . This Supply Agreement shall not be deemed or construed to be modified, amended, rescinded, canceled, or waived, in whole or in part, other than by written amendment signed by the Parties hereto, except as expressly provided in this Supply Agreement.
   
13.7. Severability . In the event that any of the terms of this Supply Agreement are in conflict with any rule of law or statutory provision or otherwise unenforceable under the laws or regulations of any government or subdivision thereof, such terms shall be deemed stricken from this Supply Agreement, but such invalidity or unenforceability shall not invalidate any of the other terms of this Supply Agreement, and this Supply Agreement shall continue in force, unless the invalidity or unenforceability of any such provisions of this Supply Agreement substantially violates, comprises an integral part of or is otherwise inseparable from the remainder of this Supply Agreement.
   
13.8. Counterparts . This Supply Agreement shall be executed in two or more counterparts, and each such counterpart shall be deemed an original hereof.
   
13.9. Waiver . No failure by either Party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.

 

IN WITNESS WHEREOF, the Parties have caused this Supply Agreement to be executed on the date first above written.

 

LEMAITRE VASCULAR, INC.   HANCOCK JAFFE LABORATORIES, INC.
                                                   
By: /s/ David Roberts   By: /s/ NORMAN JAFFE
Name:  David Roberts Name:  NORMAN JAFFE
Title: President   Title: PRESIDENT

 

   

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EXHIBIT A

 

ADDITIONAL QUALITY REQUIREMENTS

 

1. All Products shall be accompanied by a certification that has been assigned a specific HJL serial number and expiration date and certifies that the devices have been manufactured and inspected in accordance with all applicable HJL specifications and procedures with the HJL Order number matching the Packing List HJL Order/Invoice number and the serial number identified on the Packing List. This number(s) shall be clearly identified on the Product and or its packaging, as well as on traceability records.

 

2. All Products shall be clearly labeled with the appropriate unique device identifier (UDI) as required by Applicable Laws.

 

2. HJL shall assign a Products quality representative for the duration of this Supply Agreement. This individual shall be responsible for overseeing HJL activities that impact the Products and acting on HJL’s behalf in matters associated with Product quality.

 

3. Product shall be received with no visual signs of damage and one day from “Ship Date” found on the manufacturer’s packing slip.

 

4. In all events, HJL shall provide reasonable resources, maintain copies of all documentation, and perform failure investigation and reasonable corrective and/or preventative actions with respect to any and all complaints.

 

5. HJL shall retain records as required by Applicable Laws and shall be made available to LMAT upon request.

 

6. The responsibilities noted in the table below apply to the Parties.

 

21 CFR Part 820
820.20 Management Responsibility
820.22 Quality Audit
820.25 Personnel
820.30 Design Controls
820.40 Document Controls
820.50 Purchasing Controls
820.60 Identification
820.65 Traceability
820.70 Production and Process Control
820.72 Inspection, Measuring and test equipment
820.75 Process validation
820.80 Receiving, in process and finished device acceptance
820.86 Acceptance Status
820.90 Non-conforming product
820.100 Corrective and Preventative Action
820.120 Device Labeling
820.130 Device packaging
820.140 Handling
820.150 Storage
820.160 Asset Purchase
820.180 General requirements
820.181 Device master record
820.184 Device history record

820.186 Quality system record
820.198 Complaint files
820.250 Statistical techniques
 
21 CFR Part 803 Medical device reporting
21 CFR Part 806 Recalls
21 CFR Part 801 Labeling
21 CFR Part 11 Electronic Records

 

   

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EXHIBIT B

 

INITIAL PURCHASE ORDER

 

   

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Vendor ID; HAN005   PO#:27716
Company: HANKCOCK JAFFE LABORATORIES, INC.   LeMaitre Vascular
Address: 70 DOPPLER    
.      
City, State, Zip: IRVINE, CA 92618  

63 2nd Avenue

Burlington, MA 01803-441

       
 

Tel: (949)261-2900 Fax: (949)261-2992 

  Tel: 781-425-1690 Fax: 781-425-6295
       
Contact:    

From:

 

www.lemaitre.com  

 

Date: 03/16/2016 Terms: NET 30 Ship Via: UPS Acct# 86X953

 

Line #   Catalog # / Vendor #   Product Description   QTY   Unit Price   Line Total
1   HJL016-10-N  

ProCol® Vascular Bioprosthesis 6 mm X 10 cm 

  25   $400.00   $10,000.00
        Requested by: 4/15/16 Promised by: 4/15/16
                     
2   HJL016-25-N  

ProCol® Vascular Bioprosthesis 6 mm X 25 cm 

  18   $400.00   $7,200.00
        Requested by: 4/15/16 Promised by: 4/15/16
                     
3   HJL016-30-N  

ProCol® Vascular Bioprosthesis 6 mm X 30 cm 

  66   $400.00   $26,400.00
        Requested by: 4/15/16 Promised by: 4/15/16
                     
4   HJL016-40-N  

ProCol® Vascular Bioprosthesis 6 mm X 40 cm 

  66   $400.00   $26,400.00
        Requested by: 4/15/16 Promised by: 4/15/16

 

Subtotal $70,000.00
Trade Discount $0.00
Freight $0.00
Miscellaneous $0.00
Tax $0.00
Total $70,000.00

 

   

14 | Page
 

 

EXHIBIT C

 

Certificate of Conformity

 

Date: _________

 

Invoice #:____________

 

The following products are manufactured per the current GMP standard, passed all final inspections and have met the product specifications. We, Hancock Jaffe Laboratories, Inc. confirm the sterility of these products and hereby release them in accordance to the applicable standards (ISO 10993, ISO 11607, ISO 11135, ISO 14160 and ISO 17665), our Quality system Manual and FDA regulations.

 

The following products were sterilized at:

 

                Sterilization    
Catalogue Number   Product Description   Quantity   Product Lot Number   Order
Number
  Process
Date
  Expiration Date
                     
                         

 

Prepared By: (Name)  
  (Title)  

 

   

15 | Page
 

 

EXHIBIT D

 

PRICE PER UNIT OF PRODUCT (APPLIES TO ALL UNIT LENGTHS)

 

Price Per Unit Units Covered
$400 First 660 units of Product, regardless of when ordered or delivered
$600 Units ordered after the first 660 units of Product

 

   

16 | Page
 

 

Lemaitre Vascular Forecast for ProCol units

March 15, 2016

 

month:

period start date:

period end date:

 

1

3/16/2016

4/15/2016

 

2

4/16/2016

5/15/2016

 

3

5/16/2016

6/15/2016

 

4

7/16/2016

8/15/2016

 

5

7/16/2016

8/15/2016

 

6

8/16/2016

9/15/2016

 

Price

Per Unit

                             
HJL016-10-N   25   25   25   25   25   25   TBD
HJL016-25-N   18   18   18   18   18   18   TBD
HJL016-30-N   66   66   66   66   66   66   TBD
HJL016-40-N   66   66   66   66   66   66   TBD
Total   175   175   175   175   175   175    

 

     
 

 

EXHIBIT F

 

March 18, 2016

 

PMA Amendment

U.S. Food and Drug Administration

Center for Devices and Radiological Heath

Document Mail Center - W066-G609

10903 New Hampshire Avenue

Silver Spring, MD 20993-0002

 

RE : PMA #P020049 Amendment
 

ProCol ® Vascular Bioprosthesis for Vascular Access

  Notification of Sponsor Change

 

This letter is to provide notification that effective March 18, 2016 all rights of PMA #P020049 were transferred to LeMaitre Vascular, Inc. 63 Second Avenue, Burlington, MA 01803.

 

The enclosed eCopy is an exact duplicate of the paper copy.

 

Regards,

 

/s/ Sue Montoya  

 

Sue Montoya

Vice President of Operations and QA/RA

Hancock Jaffe Laboratories

70 Doppler, Irvine, CA 92618

Phone: 949-261-2900

Fax: 949-261-2992

e-mail: suemontoya@hjlinc.com

 

Hancock Jaffe Laboratories - 70 Doppler, Irvine, California 92618 USA

Phone (949) 261 2900 Fax (949) 261 2992

 

     
 

 

 

Development and Manufacturing Agreement

 

This Development and Manufacturing Agreement (the “Agreement”) is made and entered into on this 1st day of February, 2013, by and between Hancock Jaffe Laboratories Aesthetics, Inc. (“HJLA”), a Delaware corporation having a business address at 70 Doppler, Irvine, California and Hancock Jaffe Laboratories, Inc. (the “Company”), a Delaware corporation.

 

RECITALS

 

WHEREAS HJLA is involved in the development of medical devices for aesthetic indications; and

 

WHEREAS HJLA has developed certain technology and processing method for an injectable dermal filler (the “Device”); and

 

WHEREAS the Company possesses biomedical device development and manufacturing capacity and experience; and

 

WHEREAS, HJLA and the Company (hereinafter referred to as the “Parties”) agree that the assistance of the Company will be beneficial to fulfilling preclinical testing, regulatory and quality affair; and

 

WHEREAS HJLA desires to contract the Company to serve HJLA in a capacity upon the term and conditions set forth in this Agreement; and

 

WHEREAS, the Company is willing to serve HJLA in a capacity upon the term and subject to the conditions set for the in this Agreement; and

 

WHEREAS, the Parties agree to utilize their best efforts in a mutually supportive and cooperative manner forth benefit of HJLA.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, the Parties hereby agree as follows:

 

1. Term of Agreement. Subject to the provision for termination set forth in Section 9 hereof, the term of this Agreement shall be from February 1, 2013, through 12:00 midnight on February 1, 2018, unless extended or sooner terminated as provided under Section hereof. In the event this Agreement is extended as provided in Section 8 hereof, its terms shall continue in full force and effect, subject to any amendments or modifications mutually agreed upon by the Parties.

 

     
 

 

2. Duties and Obligations of the Company. The Company shall for the term of this Agreement provide certain services and conduct activities related to the development, validation, preclinical studies and other operations necessary to submit an Investigational device Exemption application to the Federal Food and Drug Administration in accordance with the Company’s established development procedures and Quality System including but not necessarily limited to:

 

2.1 Provide all research and Development operations to develop a Device prototype specification including appropriate Risk Analyses.

 

2.1 Manufacture of Device for preclinical studies and subsequently approved clinical investigation(s).

 

2.2 Complete preclinical in vivo testing.

 

2.3 Complete appropriate validation studies and methodology related to the Device manufacturing.

 

2.4 Development of certain standard operating procedures as may be necessary for quality testing and manufacture of the Device.

 

2.5 Preparation of reports or other written material as may be required for submission to regulatory agencies.

 

3. Duties and Obligations of HJLA. HJLA agrees that during the term of this Agreement subject to the provisions of Section 1 hereinabove HJLA will make available to the Company all materials and information whether in written form or not necessary for the Company to carry out its duties and obligations as provided for in section 2 herein above.

 

4. Compensation. HJLA will reimburse and or pay to the Company all direct and indirect costs related to the provisions of Section 2 hereinabove. HJLA shall pay the Company via bank transfer to an account designated by the Company.

 

4.1 In addition to the compensation as part of Section 4 herein above HJLA will reimburse the Company for all expenses related to the Company’s duties and obligation as provided for in Section 2 hereinabove including, but not limited to, legal services and travel related expenses; payment to be made to the Company in the form of a funds transfer to an account designated by the Company.

 

     
 

 

4.2. In the event HJLA hall fail to pay in a timely manner any two (2) payments as provided under the provisions of this Section 4 the Company shall be relieved from providing any further or additional services under the provisions of Section 2 of this Agreement until such payments are brought current.

 

4.3 Notwithstanding the provisions of Section 4.2 the Company understands that to ethically and responsibly perform its duties and obligations the Company must maintain certain records and perform certain duties and obligations to preserve the regulatory status of HJLA and that the Company will perform these certain duties in good faith until payment issues are settled.

 

5. Intellectual Property and Confidential Information.

 

5.1 All ideas, inventions and other developments or improvements conceived by the Company, alone or with others, during the term of this Agreement which: (i) directly or indirectly relate to those matters for which the Company is to provide services under the provisions of Section 2 hereinabove; ii) relate to any other matters for which the Company shall render services under the provisions of this Agreement; or (iii) are made, conceived, developed or improved by the Company shall become the exclusive property of HJLA. The Company shall provide without any additional compensation such specific documents or record as HJLA may request to perfect HJLA’s rights, whether by patent application or otherwise.

 

5.2 The Company agrees that the Company shall not, without the prior written consent of HJLA, disclose to anyone, excepting authorized HJLA personnel, any “confidential information” derived in the course of the Company’s services hereunder and shall not use such “confidential information” on behalf of the Company. The Company’s obligation to respect such property right and “confidential information” obligation shall survive the termination of this Agreement, and shall remain in effect so long as such information shall be confidential as to HJLA and shall terminate in the event such information shall become part of the “public domain” through no fault or act of the Company.

 

5.3 It is contemplated that from time to time HJLA may deliver and disclose to the Company information which HJLA shall deem to be “confidential information” and to which HJLA may claim a property right. For purposes of this Agreement, “confidential information” shall consist of any information delivered to the Company, including records and documents, which HJLA shall designate as “confidential information” or any information which the Company shall reasonably believe is deemed confidential or proprietary to HJLA. All “confidential information” shall be respected by the Company as confidential, and all records and documents, including all copies, which shall be “confidential information”, shall be returned and delivered to HJLA after date of termination of this Agreement.

 

     
 

 

6. Entire Understanding. This Agreement its forth the entire understanding between the Parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations, and decisions, whether oral or written, of the Parties. This Agreement shall not be changed or added to except by a writing executed by the Company and an authorized officer of HJLA.

 

7. Assignment. The rights and obligations of HJLA under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the HJLA. Neither this Agreement nor any rights or obligations hereunder may be assigned by the Company without the prior written consent of HJLA.

 

8. Notice to the Other Party. Any modifications of or riders to this Agreement must be notified in writing in order to be valid.

 

9. Place of Jurisdiction and Applicable Law. In the event of any dispute concerning the fulfillment of this agreement, the Parties shall be subject to the jurisdiction of the State of California.

 

(THIS SPACE LEFT INTENTIONALLY BLANK)

 

SIGNATURE PAGE FOLLOWS

 

     
 

 

IN WITNESS WHEREOF, each of the Parties hereto has caused this AGREEMENT as to be duly executed as of the date written below.

 

For: HANCOCK JAFFE LABORATORIES AESTHETICS, INC.  
           
/s/ Norman Jaffe   Date: 2/1/13  
Signature        
           
lts: President        
For: HANCOCK JAFFE LABORATORIES, INC.  
           
/s/ Norman Jaffe   Date: 2/1/13  
Signature        
           
lts: President        
           
/s/ Sue Montoya    Date: 2/1/13  
Signature        
           
lts: Vice President of Operations        

 

     
 

 

 

 

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 Afksendyios Kalangos, 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.
     
  (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.

 

Page 3  of 6
 

 

  (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: /S/ Yury Zhivilo  
Name: Yury Zhivilo  
Its: Chairman  
     
MEDICAL ADVISORY BOARD MEMBER  

 

By: /S/ Afksendyios Kalangos  
Name:  Afksendyios Kalangos, M.D.  

 

Page 6  of 6
 

 

 

 

 

 

 

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

 

1. Basic Provisions (“Basic Provisions”).

 

1.1 Parties. This Lease (“ Lease ”), dated for reference purposes only September 20, 2017 , is made by and between Corbiz, LLC, a California limited liability company (“ Lessor ”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Lessee ”), (collectively the “ Parties ,” or individually a “ Party ”).

 

1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known as (street address, city, state, zip): 70 Doppler, Irvine, CA 92618 (“ Premises ”). The Premises are located in the County of Orange , and are generally described as (describe briefly the nature of the property and , if applicable, the “ Project ,” if the property is located within a Project): An approximate 14,507 square foot industrial building . (See also Paragraph 2)

 

1.3 Term: five (5) years and zero (0) months (“ Original Term ”) commencing October 1, 2017 (“ Commencement Date ”) and ending September 30, 2022 (“ Expiration Date ”). (See also Paragraph 3)

 

1.4 Early Possession: If the Premises are available Lessee may have non-exclusive possession of the Premises commencing N/A (“ Early Possession Date ”). (See also Paragraphs 3.2 and 3.3)

 

1.5 Base Rent: $26,838.00 per month (“ Base Rent ”), payable on the first (1st) day of each month commencing October 1, 2017 . (See also Paragraph 4)

 

[X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph 53 .

 

1.6 Base Rent and Other Monies Paid Upon Execution:

 

  (a) Base Rent: $26,838.00 for the period October 1-31, 2017 .
     
  (b) Security Deposit: $26,112.60 (“ Security Deposit ”). (See also Paragraph 5)
     
  (c) Association Fees : $0.00 for the period N/A .
     
  (d) Other: $7,254.00 for estimated operating expenses for October 1-31, 2017 .
     
  (e) Total Due Upon Execution of this Lease: $961.37 (see Addendum) .

 

1.7 Agreed Use : Research and development of heart valves and related uses . (See also Paragraph 6)

 

1.8 Insuring Party. Lessor is the “ Insuring Party ” unless otherwise stated herein. (See also Paragraph 8)

 

1.9 Real Estate Brokers. (See also Paragraph 15 and 25)

 

(a) Representation : The following real estate brokers (the “ Brokers ”) and brokerage relationships exist in this transaction (check applicable boxes):

 

[X] Lee & Associates®-Newport Beach (Jeff Hirsch) represents Lessor exclusively (“ Lessor’s Broker ”);

 

[  ] N/A represents Lessee exclusively (“ Lessee’s Broker ”); or

 

[  ] N/A represents both Lessor and Lessee (“ Dual Agency ”).

 

(b) Payment to Brokers : Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of_____ or _____% of the total Base Rent) for the brokerage services rendered by the Brokers.

 

1.10 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by______ (“ Guarantor ”). (See also Paragraph 37)

 

________

________

INITIALS

 

 

Page 1 of 32

________

________

INITIALS

 

 

1.11 Attached hereto are the following, all of which constitute a part of this Lease:

 

[X] an Addendum consisting of Paragraphs 51 through 55 ;

 

[  ] a plot plan depicting the Premises;

 

[  ] a current set of the Rules and Regulations;

 

[  ] a Work Letter;

 

[X] other (specify): Rent Adjustments (54) and Option(s) to Extend (55) .

 

2. Premises.

 

2.1 Letting . Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. While the approximate square footage of the Premises may have been used in the marketing of the Premises for purposes of comparison, the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different. NOTE: Lessee is advised to verify the actual size prior to executing this Lease.

 

2.2 Condition . Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs (“ Start Date ”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“ HVAC ”), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date, that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the “ Building ”) shall be free of material defects, and that the Premises do not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law. If a non-compliance with said warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Building. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense. Lessor also warrants, that unless otherwise specified in writing, Lessor is unaware of (i) any recorded Notices of Default affecting the Premise; (ii) any delinquent amounts due under any loan secured by the Premises; and (iii) any bankruptcy proceeding affecting the Premises.

 

2.3 Compliance . Lessor warrants that to the best of its knowledge the improvements on the Premises comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (“ Applicable Requirements ”) that were in effect at the time that each improvement, or portion thereof, was constructed. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 49), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“ Capital Expenditure ”), Lessor and Lessee shall allocate the cost of such work as follows:

 

(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

 

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(b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease or any extension thereof, on the date that on which the Base Rent is due, an amount equal to 1/144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay Interest on the balance but may prepay its obligation at any time. If, however, such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

 

(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not, however, have any right to terminate this Lease.

 

2.4 Acknowledgements . Lessee acknowledges that: (a) it has been given an opportunity to inspect and measure the Premises, (b) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the size and condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (c) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, (d) it is not relying on any representation as to the size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Lessee’s decision to lease the Premises and pay the Rent stated herein, and (f) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

 

2.5 Lessee as Prior Owner/Occupant . The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

 

3. Term.

 

3.1 Term . The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

 

3.2 Early Possession . Any provision herein granting Lessee Early Possession of the Premises is subject to and conditioned upon the Premises being available for such possession prior to the Commencement Date. Any grant of Early Possession only conveys a non-exclusive right to occupy the Premises. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such Early Possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such Early Possession shall not affect the Expiration Date.

 

3.3 Delay In Possession . Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or change the Expiration Date. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

 

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3.4 Lessee Compliance . Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

 

4. Rent.

 

4.1 Rent Defined . All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“ Rent ”).

 

4.2 Payment . Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent, Insurance and Real Property Taxes, and any remaining amount to any other outstanding charges or costs.

 

4.3 Association Fees . In addition to the Base Rent, Lessee shall pay to Lessor each month an amount equal to any owner’s association or condominium fees levied or assessed against the Premises. Said monies shall be paid at the same time and in the same manner as the Base Rent.

 

5.    Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount already due Lessor, for Rents which will be due in the future, and/ or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 90 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. Lessor shall upon written request provide Lessee with an accounting showing how that portion of the Security Deposit that was not returned was applied. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. THE SECURITY DEPOSIT SHALL NOT BE USED BY LESSEE IN LIEU OF PAYMENT OF THE LAST MONTH’S RENT.

 

6. Use.

 

6.1 Use . Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

 

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6.2 Hazardous Substances .

 

(a) Reportable Uses Require Consent . The term “ Hazardous Substance ” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “ Reportable Use ” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

 

(b) Duty to Inform Lessor . If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

 

(c) Lessee Remediation . Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

 

(d) Lessee Indemnification . Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

 

(e) Lessor Indemnification . Except as otherwise provided in paragraph 8.7, Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

 

(f) Investigations and Remediations . Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

 

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(g) Lessor Termination Option . If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

 

6.3 Lessee’s Compliance with Applicable Requirements . Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the Premises, without regard to whether said Applicable Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises. In addition, Lessee shall provide copies of all relevant material safety data sheets ( MSDS ) to Lessor within 10 days of the receipt of a written request therefor. In addition, Lessee shall provide Lessor with copies of its business license, certificate of occupancy and/or any similar document within 10 days of the receipt of a written request therefor.

 

6.4 Inspection; Compliance . Lessor and Lessor’s “ Lender ” (as defined in Paragraph 30) and consultants authorized by Lessor shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting and/or testing the condition of the Premises and/or for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets ( MSDS ) to Lessor within 10 days of the receipt of a written request therefor. Lessee acknowledges that any failure on its part to allow such inspections or testing will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to allow such inspections and/or testing in a timely fashion the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for the remainder to the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to allow such inspection and/or testing. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such failure nor prevent the exercise of any of the other rights and remedies granted hereunder.

 

7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.

 

7.1 Lessee’s Obligations .

 

(a) In General . Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, roof drainage systems, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g. graffiti removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.

 

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(b) Service Contracts . Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, and (vi) clarifiers. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof.

 

(c) Failure to Perform . If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

 

(d) Replacement . Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay Interest on the unamortized balance but may prepay its obligation at any time.

 

7.2 Lessor’s Obligations . Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises.

 

7.3 Utility Installations; Trade Fixtures; Alterations .

 

(a) Definitions . The term “ Utility Installations ” refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “ Trade Fixtures ” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “ Lessee Owned Alterations and/or Utility Installations ” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

 

(b) Consent . Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Alterations or Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, do not trigger the requirement for additional modifications and/or improvements to the Premises resulting from Applicable Requirements, such as compliance with Title 24, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

 

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(c) Liens; Bonds . Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

 

7.4 Ownership; Removal; Surrender; and Restoration .

 

(a) Ownership . Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

 

(b) Removal . By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

 

(c) Surrender; Restoration . Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if the Lessee occupies the Premises for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises) to the level specified in Applicable Requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

 

8. Insurance; Indemnity.

 

8.1 Payment For Insurance . Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within 10 days following receipt of an invoice.

 

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8.2 Liability Insurance .

 

(a) Carried by Lessee . Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional Insured-Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “ insured contract ” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

 

(b) Carried by Lessor . Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

 

8.3 Property Insurance - Building, Improvements and Rental Value .

 

(a) Building and Improvements . The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee not by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $5,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.

 

(b) Rental Value . The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee shall be liable for any deductible amount in the event of such loss.

 

(c) Adjacent Premises . If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

 

8.4 Lessee’s Property; Business Interruption Insurance; Worker’s Compensation Insurance .

 

(a) Property Damage . Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations.

 

(b) Business Interruption . Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

 

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(c) Worker’s Compensation Insurance . Lessee shall obtain and maintain Worker’s Compensation Insurance in such amount as may be required by Applicable Requirements. Such policy shall include a ‘Waiver of Subrogation’ endorsement. Lessee shall provide Lessor with a copy of such endorsement along with the certificate of insurance or copy of the policy required by paragraph 8.5.

 

(d) No Representation of Adequate Coverage . Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

 

8.5 Insurance Policies . Insurance required herein shall be by companies maintaining during the policy term a “General Policyholders Rating” of at least A-, VII, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates with copies of the required endorsements evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may increase his liability insurance coverage and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

 

8.6 Waiver of Subrogation . Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

 

8.7 Indemnity . Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

 

8.8 Exemption of Lessor and its Agents from Liability . Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

 

8.9 Failure to Provide Insurance . Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

 

9. Damage or Destruction.

 

9.1 Definitions .

 

(a) “ Premises Partial Damage ” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

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(b) “ Premises Total Destruction ” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

(c) “ Insured Loss ” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

 

(d) “ Replacement Cost ” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

 

(e) “ Hazardous Substance Condition ” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance, in, on, or under the Premises which requires restoration.

 

9.2 Partial Damage - Insured Loss . If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee’s responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

 

9.3 Partial Damage - Uninsured Loss . If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

 

9.4 Total Destruction . Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

 

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9.5 Damage Near End of Term . If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

 

9.6 Abatement of Rent; Lessee’s Remedies .

 

(a) Abatement . In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

 

(b) Remedies . If Lessor is obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

 

9.7 Termination; Advance Payments . Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

 

10. Real Property Taxes.

 

10.1 Definition . As used herein, the term “ Real Property Taxes ” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises or the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

 

10.2 Payment of Taxes . In addition to Base Rent, Lessee shall pay to Lessor an amount equal to the Real Property Tax installment due at least 20 days prior to the applicable delinquency date. If any such installment shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee’s share of such installment shall be prorated. In the event Lessee incurs a late charge on any Rent payment, Lessor may estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. Such monthly payments shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sum as is necessary. Advance payments may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any such advance payments may be treated by Lessor as an additional Security Deposit.

 

10.3 Joint Assessment . If the Premises are not separately assessed, Lessee’s liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available.

 

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10.4 Personal Property Taxes . Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

 

11. Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

 

12. Assignment and Subletting.

 

12.1 Lessor’s Consent Required .

 

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “ assign or assignment ”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

 

(b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

 

(c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “ Net Worth of Lessee ” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

 

(d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(d), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

 

(e) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

 

(f) Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

 

(g) Notwithstanding the foregoing, allowing a de minimis portion of the Premises, ie. 20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

 

12.2 Terms and Conditions Applicable to Assignment and Subletting .

 

(a) Regardless of Lessor’s consent, no assignment or subletting shall : (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

 

(b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

 

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(c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

 

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

 

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

 

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

 

(g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

 

12.3 Additional Terms and Conditions Applicable to Subletting . The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

 

(a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

 

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

 

(c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

 

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

 

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

 

13. Default; Breach; Remedies.

 

13.1 Default; Breach . A “ Default ” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “ Breach ” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

 

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(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

 

(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. THE ACCEPTANCE BY LESSOR OF A PARTIAL PAYMENT OF RENT OR SECURITY DEPOSIT SHALL NOT CONSTITUTE A WAIVER OF ANY OF LESSOR’S RIGHTS, INCLUDING LESSOR’S RIGHT TO RECOVER POSSESSION OF THE PREMISES.

 

(c) The failure of Lessee to allow Lessor and/or its agents access to the Premises or the commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee. In the event that Lessee commits waste, a nuisance or an illegal activity a second time then, the Lessor may elect to treat such conduct as a non-curable Breach rather than a Default.

 

(d) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate or financial statements, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

 

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

 

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “ debtor ” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

 

(g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

 

(h) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

 

13.2 Remedies . If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

 

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(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover any damages to which Lessor is otherwise entitled. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

 

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

 

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

 

13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, the cost of tenant improvements for Lessee paid for or performed by Lessor, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “ Inducement Provisions ,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

 

13.4 Late Charges . Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

 

13.5 Interest . Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shall bear interest from the 31st day after it was due. The interest (“ Interest ”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

 

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13.6 Breach by Lessor .

 

(a) Notice of Breach . Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

 

(b) Performance by Lessee on Behalf of Lessor . In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided, however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

 

14.   Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “ Condemnation ”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

 

15. Brokerage Fees.

 

15.1 Additional Commission . In addition to the payments owed pursuant to Paragraph 1.9 above, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee or anyone affiliated with Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the fee schedule of the Brokers in effect at the time the Lease was executed.

 

15.2 Assumption of Obligations . Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.9, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

 

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15.3 Representations and Indemnities of Broker Relationships . Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

 

16. Estoppel Certificates.

 

(a) Each Party (as “ Responding Party ”) shall within 10 days after written notice from the other Party (the “ Requesting Party ”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “ Estoppel Certificate ” form published BY AIR CRE, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

 

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Lessee acknowledges that any failure on its part to provide such an Estoppel Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to execute and/or deliver a requested Estoppel Certificate in a timely fashion the monthly Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to provide the Estoppel Certificate. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to provide the Estoppel Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.

 

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

 

17.   Definition of Lessor. The term “ Lessor ” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

 

18.   Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

 

19.   Days. Unless otherwise specifically indicated to the contrary, the word “ days ” as used in this Lease shall mean and refer to calendar days.

 

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20.   Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

 

21.  Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

 

22.  No Prior or Other Agreements; Broker Disclaimer . This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

 

23.  Notices.

 

23.1 Notice Requirements . All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, or by email, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

 

23.2 Date of Notice . Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices delivered by hand, or transmitted by facsimile transmission or by email shall be deemed delivered upon actual receipt. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

 

24.  Waivers.

 

(a) No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent.

 

(b) The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

 

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(c) THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

 

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

 

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

 

(i) Lessor’s Agent . A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor : A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor : (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(ii) Lessee’s Agent . An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee : A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor : (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(iii) Agent Representing Both Lessor and Lessee . A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

 

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

 

(c) Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

 

26.  No Right To Holdover . Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Holdover Base Rent shall be calculated on monthly basis. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

 

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27.  Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

 

28.  Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

 

29.  Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

 

30.  Subordination; Attornment; Non-Disturbance.

 

30.1 Subordination . This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “ Security Device ”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “ Lender ”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

 

30.2 Attornment . In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited to such new owner.

 

30.3 Non-Disturbance . With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “ Non-Disturbance Agreement ”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

 

30.4 Self-Executing . The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

 

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31.  Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “ Prevailing Party ” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

 

32.  Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect on Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee.

 

33.  Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

 

34.  Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Lease” signs during the last 6 months of the term hereof. Except for ordinary “for sublease” signs, Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

 

35.  Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

 

36. Consents. All requests for consent shall be in writing. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

 

37.  Guarantor.

 

37.1 Execution . The Guarantors, if any, shall each execute a guaranty in the form most recently published BY AIR CRE, and each such Guarantor shall have the same obligations as Lessee under this Lease.

 

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37.2 Default . It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

 

38.  Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

 

39.  Options. If Lessee is granted any Option, as defined below, then the following provisions shall apply.

 

39.1 Definition . “ Option ” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

 

39.2 Options Personal To Original Lessee . Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

 

39.3 Multiple Options . In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

 

39.4 Effect of Default on Options .

 

(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

 

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

 

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

 

40.  Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.

 

41.  Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

 

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42.  Reservations . Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

 

43.  Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” within 6 months shall be deemed to have waived its right to protest such payment.

 

44.  Authority; Multiple Parties; Execution.

 

(a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

 

(b) If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

 

(c) This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

 

45.  Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

 

46. Offer . Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

 

47.  Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

 

48.  Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

 

49.  Arbitration of Disputes. An Addendum requiring the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [  ] is [X] is not attached to this Lease.

 

50.  Accessibility; Americans with Disabilities Act.

 

(a) The Premises:

 

[X] have not undergone an inspection by a Certified Access Specialist (CASp). Note: A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.

 

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[  ] have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises met all applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq. Lessee acknowledges that it received a copy of the inspection report at least 48 hours prior to executing this Lease and agrees to keep such report confidential.

 

[  ] have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises did not meet all applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq. Lessee acknowledges that it received a copy of the inspection report at least 48 hours prior to executing this Lease and agrees to keep such report confidential except as necessary to complete repairs and corrections of violations of construction related accessibility standards.

 

In the event that the Premises have been issued an inspection report by a CASp the Lessor shall provide a copy of the disability access inspection certificate to Lessee within 7 days of the execution of this Lease.

 

(b) Since compliance with the Americans with Disabilities Act (ADA) and other state and local accessibility statutes are dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in compliance with ADA or other accessibility statutes, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

 

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

 

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY AIR CRE OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

 

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

 

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

 

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

 

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

 

Executed at: ____________ Executed at: ____________
On: September 27, 2017 On: September 27, 2017

 

By LESSOR : By LESSEE :
Corbiz, LLC, a California limited liability company Hancock Jaffe Laboratories, Inc., a Delaware corporation
   
By: /s/ Alfonso G. Cordero By: /s/ William R. Abbott
Name Printed: Alfonso G. Cordero Name Printed: William R. Abbott
Title: Managing Member Title: Senior Vice President/Chief Operating Officer
Phone:_____________ Phone: (949) 261-2900
Fax:_______________ Fax: ____________
Email:_____________ Email: billabbott@hjlinc.com

 

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By:__________________________________________ By:________________________________________
Name Printed: _____________ Name Printed: ____________
Title: ___________ Title:___________
Phone: (949) 553-0006 Phone:___________
Fax: (949) 553-0021 Fax:____________
Email: cnhcustomerservice@yahoo.com Email: __________________
   
Address: 17531 Von Karman Avenue, Irvine, CA 92614 Address: 70 Doppler, Irvine, CA 92618
Federal ID No.:________ Federal ID No.: _________

 

BROKER BROKER
 
Lee & Associates®-Newport Beach _______________
   
Attn: Jeff Hirsch Attn:___________
Title: Senior Vice President/Principal Title:__________
   
Address: 100 Bayview Circle, Suite 600, Newport Beach, CA 92660 Address:_______________
Phone: (949) 724-4737 Phone:__________
Fax: (949) 623-6337 Fax:___________
Email: jhirsch@lee-associates.com Email:__________
Federal ID No.: ___________ Federal ID No.:__________
Broker/Agent BRE License #: 00972311 Broker/Agent BRE License #:__________

 

AIR CRE. 500 North Brand Blvd, Suite 900, Glendale, CA 91203, Tel 213-687-8777, Email contracts@aircre.com NOTICE: No part of these works may be reproduced in any form without permission in writing.

Hirsch/Hancock Jaffe Laboratories- 70 Dopper- Net Lease

 

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Addendum to that Standard AIR Industrial/Commercial Single-Tenant Lease – Net
Dated September 20, 2017

By and Between Corbiz, LLC, a California limited liability company (“Lessor”) and
Hancock Jaffe Laboratories, Inc., a Delaware corporation (“Lessee”)

For the Property Located at 70 Doppler, Irvine, CA 92618

 

The following provisions are added to that certain printed Standard Industrial/Commercial Single- Tenant Lease – Net dated for the reference purposes as of September 20, 2017. In the event of any conflict between the terms of the printed Lease and this Addendum, the terms of this Addendum shall control.

 

51. Net Lease; Payment of Expenses by Lessee.

 

  51.1 The Base Rent to be paid by Lessee to Lessor is intended to be absolutely triple net. To the extent that Lessee does not directly contract for the provision of, and pay for, any services relating to the operation, maintenance and repair of the Premises, Lessee shall reimburse Lessor for the cost thereof on a triple net basis. In addition, Lessee shall reimburse Lessor for the cost of its property manager, or if there is no property manager, shall pay Lessor administrative rent of two percent (2%) of Rent for management of the Premises. Finally, Lessee shall reimburse Lessor for any bond assessments paid by Lessor for the Premises.
     
  51.2 Lessee shall pay Lessor for any expenses required to be paid by Lessor under this Lease for which Lessee is required to pay or reimburse Lessor (“ Expenses ”), including, without limitation, insurance under Paragraph 8.1 and Real Property Taxes under Paragraph 10 by paying to Lessor a monthly installment equal to one-twelfth (1/12th) of Lessor’s estimate of such Expenses, which estimate Lessor may revise during the calendar by written notice to Lessee. After its receipt of the revised estimate, Lessee’s monthly payments shall be based upon the revised estimate. If Lessor does not provide Lessee with an estimate of such Expenses by January 1 of a calendar year, Lessee shall continue to pay monthly installments based on the previous year’s estimate(s) until Lessor provides Lessee with the new estimate.

 

52. Paragraph 1.6(e).

 

Lessor is in possession of a portion of October 2017’s rent payment and security deposit. Lessee shall pay the sum of $961.37 for shortage in October’s rent payment.

 

53. Estimated Monthly Payments.

 

Base Rent:   $ 26,838.00  
Estimated Operating Expenses:   $ 7,254.00  
Total Monthly Payment:   $ 34,092.00  

 

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RENT ADJUSTMENT(S)

STANDARD LEASE ADDENDUM

 

  Dated: September 20, 2017
  By and Between  
  Lessor: Corbiz, LLC, a California limited liability company
  Lessee: Hancock Jaffe Laboratories, Inc., a Delaware corporation
  Property Address: 70 Doppler, Irvine, CA 92618
  (street address, city, state, zip)

 

Paragraph: 54

 

A. RENT ADJUSTMENTS:

 

The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately)

 

[  ] I. Cost of Living Adjustment(s) (COLA)

 

a. On (Fill in COLA Dates):_______ the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [  ] CPI W (Urban Wage Earners and Clerical Workers) or [  ] CPI U (All Urban Consumers), for (Fill in Urban Area): ________, All Items (1982-1984 = 100), herein referred to as “CPI”.

 

b. The monthly Base Rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 [  ] months prior to (select one): the first month of the term of this Lease as set forth in paragraph 1.3 (“Base Month”) or [  ] (Fill in Other “Base Month”):

 

_________. The sum so calculated shall constitute the new monthly Base Rent hereunder, but in no event, shall any such new monthly Base Rent be less than the Base Rent payable for the month immediately preceding the Base Rent adjustment.

 

c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

 

[  ] II. Market Rental Value Adjustment(s) (MRV)

 

a. On (Fill in MRV Adjustment Date(s):________ the Base Rent shall be adjusted to the “Market Rental Value” of the property as follows:

 

1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached within thirty days, then:

 

(a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or

 

(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions:

 

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(i) Within 15 days thereafter, Lessor and Lessee shall each select an independent third party [  ] appraiser or [  ] broker (“Consultant”− check one) of their choice to act as an arbitrator (Note: the parties may not select either of the Brokers that was involved in negotiating the Lease). The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

 

(ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor’s or Lessee’s submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

 

(iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

 

(iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, i.e., the one that is NOT the closest to the actual MRV.

 

2) When determining MRV, the Lessor, Lessee and Consultants shall consider the terms of comparable market transactions which shall include, but no limited to, rent, rental adjustments, abated rent, lease term and financial condition of tenants.

 

3) Notwithstanding the foregoing, the new Base Rent shall not be less than the rent payable for the month immediately preceding the rent adjustment.

 

  b. Upon the establishment of each New Market Rental Value:

 

  1) the new MRV will become the new “Base Rent” for the purpose of calculating any further Adjustments, and
     
  2) the first month of each Market Rental Value term shall become the new ‘Base Month’ for the purpose of calculating any further Adjustments.

 

[X] III. Fixed Rental Adjustment(s) (FRA)

 

The Base Rent shall be increased to the following amounts on the dates set forth below:

 

On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be:
October 1, 2018 $27,643.00
October 1, 2019 $28,472.00
October 1, 2020 $29,327.00
October 1, 2021 $30,206.00
________ _______
________ _______
________ _______
________ _______
________ _______
________ _______

 

AIR CRE. 500 North Brand Blvd, Suite 900, Glendale, CA 91203, Tel 213-687-8777, Email contracts@aircre.com NOTICE: No part of these works may be reproduced in any form without permission in writing.

Hirsch/Hancock Jaffe Laboratories- 70 Dopper- Net Lease

 

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OPTION(S) TO EXTEND

STANDARD LEASE ADDENDUM

 

  Dated: September 20, 2017
  By and Between  
  Lessor: Corbiz, LLC, a California limited liability company
  Lessee: Hancock Jaffe Laboratories, Inc., a Delaware corporation
  Property Address: 70 Doppler, Irvine, CA 92618
  (street address, city, state, zip)

 

Paragraph: 55

 

A. OPTION(S) TO EXTEND:

 

Lessor hereby grants to Lessee the option to extend the term of this Lease for one (1) additional sixty (60) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions:

 

(i) In order to exercise an option to extend, Lessee must give written notice of such election to Lessor and Lessor must receive the same at least__________ but not more than________ months prior to the date that the option period would commence, time being of the essence. If proper notification of the exercise of an option is not given and/or received, such option shall automatically expire. Options (if there are more than one) may only be exercised consecutively.

 

(ii) The provisions of paragraph 39, including those relating to Lessee’s Default set forth in paragraph 39.4 of this Lease, are conditions of this Option.

 

(iii) Except for the provisions of this Lease granting an option or options to extend the term, all of the terms and conditions of this Lease except where specifically modified by this option shall apply.

 

(iv) This Option is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and without the intention of thereafter assigning or subletting.

 

(v) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately)

 

[  ] I. Cost of Living Adjustment(s) (COLA)

 

a. On (Fill in COLA Dates):_______ the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [  ] CPI W (Urban Wage Earners and Clerical Workers) or [  ] CPI U (All Urban Consumers), for (Fill in Urban Area):________ . All Items (1982-1984 = 100), herein referred to as “CPI”.

 

b. The monthly Base Rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 months prior to (select one): [  ] the first month of the term of this Lease as set forth in paragraph 1.3 (“Base Month”) or [  ] (Fill in Other “Base Month”):________ . The sum so calculated shall constitute the new monthly Base Rent hereunder, but in no event, shall any such new monthly Base Rent be less than the Base Rent payable for the month immediately preceding the rent adjustment.

 

c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

 

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[X] II. Market Rental Value Adjustment(s) (MRV)

 

a. On (Fill in MRV Adjustment Date(s)) October 1, 2022 the Base Rent shall be adjusted to the “Market Rental Value” of the property as follows:

 

1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shall attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached, within thirty days, then:

 

(a) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the Parties, or

 

(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV and submit such determination, in writing, to arbitration in accordance with the following provisions:

 

(i) Within 15 days thereafter, Lessor and Lessee shall each select an independent third party [  ] appraiser or [  ] broker (“Consultant” - check one) of their choice to act as an arbitrator (Note: the parties may not select either of the Brokers that was involved in negotiating the Lease). The two arbitrators so appointed shall immediately select a third mutually acceptable Consultant to act as a third arbitrator.

 

(ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises is, and whether Lessor’s or Lessee’s submitted MRV is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which is determined to be the closest to the actual MRV shall thereafter be used by the Parties.

 

(iii) If either of the Parties fails to appoint an arbitrator within the specified 15 days, the arbitrator timely appointed by one of them shall reach a decision on his or her own, and said decision shall be binding on the Parties.

 

(iv) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, ie. the one that is NOT the closest to the actual MRV.

 

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2) When determining MRV, the Lessor, Lessee and Consultants shall consider the terms of comparable market transactions which shall include, but not limited to, rent, rental adjustments, abated rent, lease term and financial condition of tenants.

 

3) Notwithstanding the foregoing, the new Base Rent shall not be less than the rent payable for the month immediately preceding the rent adjustment.

 

  b. Upon the establishment of each New Market Rental Value:

 

  1) the new MRV will become the new “Base Rent” for the purpose of calculating any further Adjustments, and
     
  2) the first month of each Market Rental Value term shall become the new “Base Month” for the purpose of calculating any further Adjustments.

 

[  ] III. Fixed Rental Adjustment(s) (FRA)

 

The Base Rent shall be increased to the following amounts on the dates set forth below:

 

On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be:
________ ________
________ ________
________ ________
________ ________
________ ________
________ ________
________ ________
________ ________
________ ________
________ ________

 

[  ] IV. Initial Term Adjustments

 

The formula used to calculate adjustments to the Base Rate during the original Term of the Lease shall continue to be used during the extended term.

 

B. NOTICE:

 

Unless specified otherwise herein, notice of any rental adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease.

 

C. BROKER’S FEE :

 

The Brokers shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease or if applicable, paragraph 9 of the Sublease.

 

AIR CRE. 500 North Brand Blvd, Suite 900, Glendale, CA 91203, Tel 213-687-8777, Email contracts@aircre.com NOTICE: No part of these works may be reproduced in any form without permission in writing.

Hirsch/Hancock Jaffe Laboratories- 70 Dopper- Net Lease

 

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LOAN AGREEMENT DRICBDH0615

 

This AGREEMENT is made June 30th, 2015

 

BETWEEN

 

BYODINE HOLDING SA, a company incorporated under the laws of SWITZERLAND and whose registered office is situated at c/o GRF Fiduciaire SA, Rue de la Gare13, 1110 Morges, Switzerland (hereunder referred to as “the Lender”).

 

And

 

HANCOCK JAFFE LABORATORIES, INC. a company incorporated under laws of Delaware with an address at 70 Doppler, Irvine, California, 92618 (hereunder referred to as “the Borrower”).

 

WHEREAS:

 

  1. The Lender, Byodyne Holdings, SA and;
     
  2. The Borrower Hancock Jaffe Laboratories Inc. (HJL);
     
    Wish to enter into an agreement whereby the Borrower shall enter into a loan from the Lender for the following purpose:

 

  a. To provide HJL with the financial means to:

 

  i. The financing of all necessary steps to complete an Initial Public Offering including, but not limited to, a reverse Take Over followed by a PIPE.
     
  ii. Daily operations including, but not .limited to, the manufacturing of biological devices for pre-clinical and clinical trials (e.g. heart valves, venous valves).
     
  iii. To proceed to the necessary actions (including FDA filings and clinical trials) to receive approvals for. the early and late stage product developments

 

  3. The Lender is aware that the Borrower, HJL and its affiliates, are doing business in research and development in life sciences (e.g. development of biological valves and tissue engineering, dermal fillers etc.)

 

IT IS HEREBY AGREED AS FOLLOWS:

 

1. PURPOSE AND DEFINITIONS

 

  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 over a period of eight months.
     
  1.2. In this Agreement the words and expressions specified below shall have the meaning attributed to them below:

 

“Borrower” being the said Hancock Jaffe Laboratories Inc., its heirs and successors in title, assigns administrators, executors and personal representatives.

 

“Business Day” being a day on which in each country or place banks or other relevant financial institutions are open for the transaction of business of the nature concerning any act is required to be effectuated under this Agreement.

 

1    
     
   

 

“US Dollars” being the legal currency, and at any relevant time hereunder, the sign “USD” refers to the currency of the United States of America.

 

“Date of Advance” refers to the Business Day upon which the Lender advances or makes available the Loan to the Borrower.

 

“Event of Default” refers to any one of the events mentioned in Clause 9 of this Agreement.

 

“HJL” being the said Hancock Jaffe Laboratories Inc. of Irvine, California.

 

“Lender” being the said Biodyne Holding SA its heirs in title, successors, assigns, administrators, executors and personal representatives.

 

“Loan” being the sum of up to USD 2,200,000 (two million two hundred thousand United States Dollars) to be advanced in parts over a period of eight months as per the terms of the present Agreement or the balance thereof outstanding at any relevant time.

 

“Loan Period” being the period from the Date of Advance lasting for so long as this Agreement shall subsist and have effect.

 

The headings in this Agreement are inserted for convenience only and shall be ignored when construing this Agreement. Clause 1.1 hereof is descriptive only and shall have the legal effect of a recital. Unless the context otherwise requires, words denoting the singular number only shall include the plural and vice versa and words denoting persons shall include corporations and partnerships. The words “written” and “in writing” include printing, engraving, lithography, photography or other means of visible reproduction. References to Clauses, Clauses and paragraphs are to be construed as references to Clauses, Clauses and Paragraphs of and to this Agreement.

 

2. REPRESENTATIONS AND WARRANTIES

 

  2.1. The Borrower hereby represents and warrants to the Lender that:

 

  2.1.1. The Borrower is a validly existing Corporation under the laws of Delaware and it has full power to carry on its business and to enter into and perform its obligations under this Agreement and has complied with all statutory and other requirements relative to its business, and will throughout the Loan Period, maintain its good standing;
     
  2.1.2. The Borrower shall not during the Loan Period issue to any person any Power of Attorney authorizing such person to sell, transfer, let, charge, mortgage or otherwise alienate or encumber HJL or its assets without the prior written consent of the Lender;
     
  2.1.3. All necessary consents and authorizations for the Borrower to enter into and perform this Agreement have been obtained and will be maintained in full force and effect throughout the Loan Period and at the date of this Agreement no further consents or authorizations are necessary for the repayment of the Loan and the payment of interest and other monies hereby secured;
     
  2.1.4. This Agreement constitutes or will when executed constitute the valid and legally binding obligation of the Borrower and the other parties thereto enforceable in accordance with their respective terms;

 

2    
     
   

 

  2.1.5. The execution, delivery and performance of this Agreement by the Borrower will not exceed any power granted by or violate in any material respect any provision of (1) any law or regulation or any order or decree of any governmental authority, agency or court to which the Borrower is subject or (2) any mortgage, charge, deed, contract or other undertaking or instrument .to which the Borrower is a party or which is binding upon it or its assets;
     
  2.1.6. No action, suit or proceeding is pending or threatened against the Borrower before any court, board of arbitration or administrative agency which could or might result in any material adverse change in the business or condition (financial otherwise) of any of them;
     
  2.1.7. The Borrower is not in default under any agreement to which it is a party or by which it may be bound and no litigation, arbitration or administrative proceedings are presently current or pending or, to the knowledge of the Borrower, threatened which might have a material adverse effect on the Borrower or on the ability of the Borrower to perform its obligations under this Agreement;
     
  2.1.8. All information supplied by the Borrower to the Lender in connection with this Agreement shall at the time such information is supplied be true and accurate;

 

3. CONDITIONS PRECEDENT
   
  The obligation of the Lender to make available the Loan (or any parts thereof) shall be conditional upon:

 

  3.1. The representations and warranties stated in Clause 2 thereof being true and correct;
     
  3.2. Every six months, HJL shall provide the Lender with a business report describing achievement and milestones.

 

4. AGREEMENT TO LEND
   
  The Lender, relying upon each of the Representations and Warranties set out in this Agreement and in particular Clauses 2 & 3 above, hereby agrees with the Borrower, subject to and upon the terms of this Agreement, that it will grant the Loan to the Borrower on June 30th, 2015.
   
  As collateral, HJL shall provide to the lender a transferrable Promissory Note.

 

5. REPAYEMENT

 

  5.1. The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated as from the date the Lender will remit the Loan (June 30th, 2015)
     
  5.2. The above interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to be deferred until November 1 st , 2016.
     
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruin g thereo n b y Novembe r 1 st ,   2016.
     
  5.4. The Borrower Is entitled to repay the loan and the accrued Interests at any time before November 1 st , 2016 without any prejudice.

 

3    
     
   

 

6. EVENTS OF DEFAULT

 

  6.1. The Lender may without prejudice to any of its other rights, terminate its obligations under this Agreement and all outstanding repayment of the Loan together with all monies costs and expenses payable by the Borrower hereunder shall immediately become repayable and the Lender shall immediately become entitled to resort to its remedies or actions hereunder (all or any and in whichever order of realization the Lender may choose) and to exercise all or any rights and remedies thereunder if:

 

  6.1.1. any repayment of the Loan, accrued interest or any other amount to be paid under this Agreement is not received within 30 days from the due date at the appointed place of payment, or
     
  6.1.2. any of the representations and warranties contained in this Agreement hereof are untrue or inaccurate or at any time during the Loan Period become untrue or inaccurate, or
     
  6.1.3. the Borrower commits a breach of the Covenants contained in Clause 8 below or makes default under any other provision of this Agreement, or
     
  6.1.4. there has been in the opinion of the Lender a material adverse change in the financial condition of the Borrower, or
     
  6.1.5. the Borrower becomes bound to repay prematurely any other loan or similar obligation by reason of a default in their obligations in respect of the same and in any such case the default is not remedied by the Borrower within 30 days after written notice from the Lender requesting remedial action, or
     
  6.1.6. any governmental license, authorization, consent or approval at any time necessary to enable the Borrower to comply with their respective obligations hereunder shall be revoked or withheld or materially modified or shall otherwise fail to remain in full force and effect, or
     
  6.1.7. any proceedings are threatened or commenced against the Borrower, which in the opinion of the Lender may materially adversely affect the financial condition of the Borrower or
     
  6.1.8. any decree or order shall be made by any competent Court adjudging the Borrower insolvent or bankrupt under the insolvency or bankruptcy laws of the United States or any similar legislation of any jurisdiction or any subdivision thereof or any order shall be made for the appointment of .any receiver, trustee, curator, or sequestrator (or similar official) of the Borrower in respect of all or a substantial part its assets, or
     
  6.1.9. the Borrower shall be unable to, or shall admit inability to, pay its respective debts as they fall due, or shall enter into any composition or arrangement with its or her creditors generally, or
     
  6.1.10. the Borrower shall without the consent in writing of the Lender stop payment to creditors. generally or cease or threaten to cease to carry on its business or any substantial part thereof or shall threaten to dispose of the whole or a substantial part of its undertaking or assets, or
     
  6.1.11. the business of the Borrower is wholly or partially curtailed by any seizure or intervention by or under authority of any government or if all or a substantial part of the undertaking, property or assets of the Borrower are seized, nationalized, expropriated or compulsorily purchased by or under authority of any government.
     
  6.1.12. if current liabilities of the Borrower exceed its current assets over a continuous period equaling or exceeding 90 days, or if he the Borrower shall suffer an operating loss which in the opinion of the Lender materially affects the Borrower’s ability to earn profits or income at the level earned over the 12 months immediately preceding such loss and which operating loss is not offset by further profits and gains within the period of 90 days next occurring.

 

 

4    
     
   

 

  6.1.13. If the Lender considers that market conditions are such that there is a risk of default by the Borrower or the Borrower may not be able to fulfill any of its obligations.

 

7. INDEMNITY

 

  7.1. Without prejudice to the Lender’s rights, on the occurrence of an Event of Default the Borrower shall indemnify the Lender against and pay to the Lender on demand such amount or amounts as shall be sufficient to cover all costs and expenses of collection of all outstanding repayment monies and/or the loan and all other amounts payable hereunder including (without limitation) all legal fees.

 

8. COVENANTS

 

  8.1. As long as any part of the Loan or any other monies hereunder shall remain outstanding the Borrower hereby covenants and agrees that :

 

  8.1.1. the Borrowers shall provide the Lender with such financial and other similar information relating to the Borrower as the Lender may from time to time reasonably request;
     
  8.1.2. The Borrower will procure that at all times all governmental consents required by law for the validity, enforceability and legality of this Agreement and of all matters herein contemplated and of the performance thereof by the Borrower remain in full force and effect;
     
  8.1.3. The Borrower will promptly advise the Lender on becoming aware of ·the occurrence of (1) any Event of Default or condition, act or event which on the giving of notice, the lapse of time or any other fulfillment would become an Event of Default and (2) any material adverse factor which may inhibit the Borrower in the performance of this obligations herein;

 

9. ASSIGNMENT

 

  9.1. This Agreement shall be binding upon and shall ensure to the benefit of the Borrower and the Lender and their respective successors and assigns, provided that the Borrower may not assign its rights or liabilities herein without the prior written consent of the Lender. Provided always that the Lender may assign the present agreement to any third party and said assignment shall be binding on the Borrower as if the third party was on original party to this Agreement.

 

10. EXPENSES

 

  10.1. All expenses (including legal fees and stamp duties) incurred in connection with the drafting execution and enforcement of this Agreement shall be shared equally between the Lender and the Borrower.

 

5    
     
   

 

11. FORCE MAJEURE

 

  11.1. The Lender shall not be liable for any failure to perform the whole or any part of this Agreement resulting directly or indirectly from the action or inaction or purported action of ·any government or govemmental authority or any strike, boycott, or blockade.

 

12. APPLICABLE LAW

 

  12.1. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF CANTON DE VAUD, SWITZERLAND AND THE PARTIES HEREIN. HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF CALIFORNIA. PROCESS SHALL BE DEEMED PROPERLY SERVED IF LEFT AT OR SENT BY RECORDED MAIL TO THE REGISTERED OFFICE OR PRINCIPAL PLACE OF BUSINESS OF THE RELEVANT PARTY OR THEIR LAST KNOWN PLACE OF BUSINESS.

 

13. NOTICES, ETC

 

  13.1. Save as otherwise provided herein, every notice or demand under this Agreement shall be in writing but may be given or made by letter, facsimile or telegram. Notwithstanding anything herein contained, to be valid, any such notice or demand must contain sufficient references and/or particulars to render it readily identifiable with the subject matter of this Agreement.

 

Every notice or demand to be given by the Borrower to the Lender hereunder shall be sent to Biodyne Holding SA. c/o GRF Fiduciaire SA, Rue de la Gare13, 1110 Morges, Switzerland.

 

Every notice or demand to be given by the Lender to the Borrower hereunder shall be sent to Hancock Jaffe Laboratories, Inc., 70 Doppler, Irvine, California 92618.

 

  13.2. Every notice or demand given or made hereunder shall in the case of a letter, be deemed to have been received 48 hours after dispatch and, in the case of a fax or e-mail, at the time of dispatch thereof.

 

14. WAIVER

 

  14.1. Save as may be expressly otherwise provided herein, time is of the essence of this Agreement but no failure or delay on the part of the Lender to exercise any power or right under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise by the Lender of any power or right hereunder preclude any other or further exercise thereof or the exercise of any other power or right.
     
  14.2. The remedies provided herein are cumulative and are not exclusive of any remedies provided by law.

 

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15. INVALIDITY OF PROVISIONS

 

  15.1. If at any time any one or more provisions hereof is or becomes invalid, illegal or unenforceable in any respect under any law the validity, legality and enforceability of the remaining provisions hereof shall not thereby in any way be affected or impaired.

 

SIGNATURE PAGE FOLLOWS

 

 

7    
     
   

 

IN WITNESS whereof the Parties hereto have caused this agreement to be duly executed by them or their duly authorized officers as of the day and year first written above.

 

LOCATION AND DATE: 70 Doppler, Irvine, California 92618

 

NAME OF SIGNEE: Norman Jaffe, President

 

SIGNATURE: /s/ Norman Jaffe  
     
For and on behalf of:  

 

Hancock Jaffe Laboratories, Inc.

 

Borrowers Bank: Comerica Bank

6540 Irvine Center Drive, Irvine, California 92618

SWIFT: MNBDUS33

Routing Number: 121137522

Account Number: 1892625623

 

LOCATION AND DATE: ______________________

 

NAME OF SIGNEE: _______________________

 

SIGNATUR E /s/ Yury Zhivilo    

 

For and on behalf of:

 

Biodyne Holdings SA

 

Lenders Bank: Raiffeisenbank

Engiadina Val Muster, Stradun, 7550 Scuol, CH- Schweiz

SWIFT: RAIFCH22844

IBAN: CH5681144000030960798

 

8      
   

 

 

AMENDMENT No. 4

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement DRICBDH0615 (the “ Amendment ”) is made and entered into as of March 27, 2017, 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 June 30, 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 June 30, 2017.
     
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by June 30, 2017. The Borrower is entitled to repay the loan and the accrued interests at any time before June 30, 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: /S/ YURY ZHIVILO
    Yury Zhivilo, Managing Director
     
  BORROWER
     
  HANCOCK JAFFE LABORATORIES, INC.
     
  By: /S/ WILLIAM ABBOTT
    William Abbott, Chief Financial Officer

 

2
 

 

 

AMENDMENT No. 5

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement DRICBDH0615 (the “ Amendment ”) is made and entered into as of June 26, 2017, 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 January 31, 2018.

 

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 January 31, 2018.
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by January 31, 2018. The Borrower is entitled to repay the loan and the accrued interests at any time before January 31, 2018 without penalty.

 

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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: /S/ YURY ZHIVILO
  Yury Zhivilo, Managing Director
     
  BORROWER
     
  HANCOCK JAFFE LABORATORIES, INC.
     
  By: /S/ WILLIAM ABBOTT
  William Abbott, Chief Financial Officer

 

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Services and Material Supply Agreement

 

This Services and Material Supply Agreement (the “Agreement”) is made and entered into effective March 4, 2016 by and between Hancock Jaffe Laboratories, Inc. (“Client”), a Delaware corporation having a business address at 70 Doppler, Irvine, California, 92618, and ATSCO, Inc. (“Supplier”); a Nevada corporation, having a business address at 3117 Kingston Drive, Plano, Texas, 75074.

 

RECITALS:

 

WHEREAS, Client is involved in the manufacture of medical devices for vascular surgery indications employing certain Materials anatomically defined and derived from abattoir sources; and

 

WHEREAS, Supplier is experienced in and able to provide abattoir derived Materials, and;

 

WHEREAS, the Materials referred to in this Agreement are defined in the Client’s purchase orders.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, the Client and Supplier as may be referred herein singularly and/or jointly referred to as the Party/Parties hereby agree as follows:

 

1. Definitions:

 

1.1 The term “Material(s)” shall mean Bovine Veins as specified in Clients Specification for Vein (MD010038).

 

2. Tenn of Agreement. Subject to the provisions for termination set forth in Section 10 hereof, the term of this Agreement shall be from March 4, 2016 through 12:00 midnight on March 3, 2019 unless extended or sooner terminated as provided under Sections 7, 8 and 9 herein below. In the event this Agreement is extended as provided in Section 9 hereof, its terms shall continue in full force and effect, subject to any amendments or modifications mutually agreed upon by the Parties.

 

3. Services to be Performed. Supplier agrees to provide Client with certain animal derived Materials from abattoir sources and when applicable comply with the most current revision of the Client’s specifications and procedures. Client shall promptly notify Supplier in writing regarding any revisions to these specifications and procedures. The term “when applicable” shall pertain to material supplied for devices fabricated and/or processed for commercial use and/or controlled by certain quality and regulatory documentation; the term shall not apply to Materials for research and development.

 

Services and Material Supply Agreement
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3.1 Supplier will train personnel collecting the Materials.

 

3. 2 Supplier will audit the operations of the abattoir.

 

3.4 Supplier will notify Client in the event the abattoir is not in compliance.

 

3.5 Supplier will fill out and maintain associated forms and records as required by Client.

 

4. Equipment, Supplies and Expenses. Supplier, at Supplier’s expense, will provide all equipment, tools, supplies and other expenses necessary to perform the services.

 

5. Time for Performance. Supplier will perform the services at the request of the Client subject to the terms of Section 6 herein below.

 

6. Material Orders.

 

6.1 Client agrees to purchase a minimum of 700 (seven hundred) pieces of the material on a monthly calendar basis (“Monthly Minimum”).

 

6. 2 Delivery details and apportioning of the Monthly Minimum will be mutually agreed upon by Client and Supplier.

 

6. 3 In the event that Client issues a Purchase Order for more than the monthly minimum, Supplier will use all reasonable effort to meet the Purchase Order request.

 

7. Price of Materials. Client will pay Supplier as follows;

 

7.1 For the Monthly Minimum, 700 pieces, Client agrees to pay $28,000.00 (twenty-eight thousand dollars).

 

7.2 On a monthly basis Client will pay $21.00 (twenty-one dollars) per piece for each piece of material above the Minimum PO up to and including 1,000 (one thousand) additional pieces.

 

7.3 On a monthly basis Client will pay $17.00 (seventeen dollars) per piece for each piece of material beyond 1,000 (one thousand).

 

Services and Material Supply Agreement
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8. Terms of Payment.

 

8.1 Supplier will provide Client an invoice for all Materials provided under the Monthly Minimum and any amounts above the Monthly Minimum.

 

8.2 Payment for the Monthly Minimum will be made to Supplier via a funds transfer to Supplier’s specified banking account on or before the fifth business day of each month for that month’s Minimum. Payment will be made in good faith and that when applicable the Materials will be delivered in accordance with and comply with the most current revision of the Client’s specifications and procedures.

 

8.3 Payment for any amount in accordance with the provisions of Sections 7.2, 7.3 hereinabove will be made via Client’s business check or other mutually acceptable means within 10 business days of receiving Supplier’s invoice.

 

9. Extension of Agreement. During the fifth year of this Agreement and no later than 6 (six) months prior to the termination of the Agreement under the provision of Section 2 herein above, the Parties will in good faith mutually agree to terms for extension of the Agreement .

 

10. Termination of Agreement. This Agreement will become effective on the date written herein above and will terminate on the earlier of the date Supplier completes the services required by this Agreement or the date a Party terminates the Agreement. Either Party with reasonable cause may terminate this Agreement by giving 90 day written notice of termination for cause. Reasonable cause includes:

 

10.1 In the event and solely at the fault of the Client the payments are not paid in accordance with the provision of Section 8.2 and 8.3 hereinabove.

 

10.1.1 Section 8 will not apply in the event that payment is not paid or delayed as a fault of banking operations and/or services; such fault to be remedied in a timely fashion.

 

10.2 When applicable the Supplier solely and or willfully does not comply with the most current revision of the Client’s specifications and procedures.

 

10.3 The Parties mutually agree to terminate the Agreement without cause or penalty.

 

10.4 The Client fully ceases manufacturing of the products pursuant to the Post Acquisition Supply Agreement with LeMaitre Vascular. Inc.

 

Services and Material Supply Agreement
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11. Termination under Section 10.1 In the event that Supplier exercises the option to terminate the Agreement for non-payment, Section 10.1, Client will prepay to Supplier any remaining amount equivalent to the sum of the Monthly Minimum equivalent to the number of months beyond the termination date up to the date of termination in Section 2 herein above. Said prepayment must be made within 30 (thirty) business days of Supplier providing written notice of termination pursuant to Section 10.

 

12 . Exclusivity. For the term of this Agreement and for any and all applicable extensions Supplier agrees to provide the Materials as part of Section 3 herein above only to Client; Supplier shall not provide the Materials to any person(s) or business entity for similar use whether, but not limited to, for commercial or research and/or development without the express written permission of the Client.

 

12.1 This section 13 shall apply to anatomically defined Materials presently supplied by Supplier to Client for vascular devices; Materials other than those presently supplied by Supplier as part of this agreement which may be requested by client under the provisions of this agreement will not be subject to this Section.

 

12.2 For the purposes of this Agreement the nature of the Materials and other information related to the Materials shall be considered as confidential property of the Client and subject to the provisions of the Nondisclosure Agreement appended as Attachment A.

 

13. Independent Supplier Status. The Parties intend Supplier to be an independent Supplier in the performance of the services. Excepting the provisions of Section 13 herein above and within the stipulations and specifications of the Approved Supplier Specification:

 

13.1 Supplier has the right to perform services for others during the term of this Agreement.

 

13.2 Supplier has the right to hire assistants or to use employees to provide the services required by this.

 

13.3 Client shall not require Supplier or Supplier’s employees to devote full time to performing the services required by this Agreement.

 

13.4 Neither Supplier nor Supplier’s employees are eligible to participate in any employee pension, health, vacation pay, sick pay or other fringe benefit plan’ of Client.

 

14. Disputes. If a dispute including but not limited to the actions provided for under Section 8 herein above arises, the Parties will try in good faith to settle it through mediation.

 

Services and Material Supply Agreement
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15. Indemnification. The Parties indemnify each other for all cause and actions which may be brought or caused to happen either as part of litigation or other action including but not limited to regulatory actions. Neither Party shall be held accountable for any expenses of the other Party associated with such actions.

 

16. No Partnership. This Agreement does not create a partnership relationship. Neither Party has authority to enter into contracts on the other’s behalf.

 

17. Entire Agreement. This is the entire Agreement between the Parties. It replaces and supersedes any and all oral agreements between the Parties, as well as any prior writings.

 

18. Successors and Assignees. This Agreement binds and benefits successors and assignees of the Parties.

 

19. Notices. All notices must be in writing. A notice may be delivered to a Party at the addresses herein above or to a new address that a Party designates in writing. Notices may be delivered in person, by certified mail, or other mutually acceptable means.

 

20. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the state of California.

 

21. Counterparts. This Agreement may be signed by the Parties in different counterparts, including emails and facsimiles, and the signature pages combined will create a document binding on all Parties.

 

22. Modification. This Agreement may be modified only by a written agreement signed by the Parties.

 

23. Waiver. If one Party waives any term or provision of this Agreement at any time, that waiver will be effective only for the specific instance and specific purpose for which the waiver was given. If either Party fails to exercise or delays exercising any of its rights or remedies under this Agreement, that Party retains the right to enforce that term or provision at a later time.

 

24. Severability. If any court determines that any provision of this Agreement is invalid or unenforceable, any invalidity or unenforceability will affect only that provision and will not make any other provision of this Agreement invalid or unenforceable and such provision shall be modified, amended or limited only to the extent necessary to render it valid and enforceable.

 

Services and Material Supply Agreement
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THIS SPACE LEFT INTENTIONALLY BLANK

 

SIGNATURE PAGE FOLLOWS

 

Services and Material Supply Agreement
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CLIENT  
   
For: HANCOCK JAFFE LABORATORIES, INC.  
   
/s/ Norman Jaffe  
Norman Jaffe, President  

  

SUPPLIER  
   
For : ATSCO, INC.  
   
/s/ Richard Forbes  
Richard Forbes, President  

 

Services and Material Supply Agreement
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FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

 

This First Amendment to Employment Agreement (this “ Amendment ”), dated as of June 1, 2017 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Hancock Jaffe ”) and William Abbott (“ 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 recognize the Employee’s continued contribution as the Company’s Interim President through an increase Employee’s base salary.

 

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 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.
   
2. 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.
   
3. 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.
   
4. 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 ]

 

     
   

 

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.   WILLIAM ABBOTT
     
/S/ YURY ZHIVILO   /S/ WILLIAM ABBOTT
Yury Zhivilo   William Abbott
Chairman   Interim President and Chief Financial Officer

 

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SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

 

This Second Amendment to Employment Agreement (this “ Amendment ”), dated as of June 12, 2017 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Hancock Jaffe ”) and Steven Cantor (“ Employee ” and/or “ Executive ”) 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 “ 7/1/2016 Employment Agreement ”), as amended by the First Amendment to Employment Agreement by and between the Parties, dated as of December 2, 2016, (the “ First Amendment ”, and together with the 7/1/2016 Employment Agreement, collectively, the “ Employment Agreement ”).

 

RECITALS

 

WHEREAS , pursuant to the Employment Agreement the Employee is the Company’s Chief Business Development Officer;

 

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 or director as may be designated by Hancock Jaffe; and

 

WHEREAS , Hancock Jaffe has requested the Employee to relocate to Orange County, California to enable the Employee to be closer following such relocation to Hancock Jaffe’s corporate headquarters in Orange County, California and as an inducement to the Employee to agree to such relocation, Hancock Jaffe has agreed to, among other things, reimburse and/or pay Employee or vendor for certain relocation and related expenses as set forth in this Amendment.

 

NOW, THEREFORE, in consideration 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.        Amendments to Section 6--. Employee Benefits. Section 6 Employee Benefits of the Employment Agreement is hereby amended by adding the following new paragraphs (f), (g), and (h) to Section 6 Employee Benefits as follows:

 

     
   

 

(f) RELOCATION EXPENSES . At the request of Hancock Jaffe, Employee agrees and shall relocate Employee’s primary residence to within fifteen (15) miles of Hancock Jaffe’s principal offices located in Orange County, California (the “ Designated Area ”), by no later than August 1, 2017. In connection and as an inducement thereto, and, in addition to all other expenses payable to Employee pursuant to this Agreement, Amendment or otherwise, including, but not limited to, Section 6(e) - 6(h) of this Agreement, Hancock Jaffe shall reimburse or pay, all of Employee’s expenses (i) to relocate Employee and Employee’s household to the Orange County, California area by August 1, 2017, and (ii) to move the Employee and Employee’s household back to New York when requested by Employee, but in no event prior to twelve months from the date of this Amendment, or at such time as the Employee no longer spends a substantial portion of his daily working day working on Hancock Jaffe matters that reasonably can be determined at Employee’s sole discretion to be in Orange County, California. In connection with the expenses of Employee pursuant to this Section 6(f) , Hancock Jaffe shall (x) reimburse Employee within thirty (30) days following the date Employee submits receipts for any such expenses, deposits or leases that Employee elects to pay and have Hancock Jaffe reimburse him for; and (y) pay within thirty (30) days of receipt of any invoice for any such expenses of Employee that Employee elects Hancock Jaffe to pay directly to vendor. If the Internal Revenue Service or any state or local taxing authority takes the position that the relocation expenses paid or reimbursed subject to this Agreement results in the receipt of taxable income to Employee, such expenses shall include an amount equal to the aggregate Federal, state and local income and employment taxes imposed on Employee as a direct result of such payment or reimbursement in advance.

 

(g) CERTAIN EXPENSES INCURRED AS A RESULT OF RELOCATION . In addition to the payment of the expenses set forth in Section 6(e) and Section 6(f) of this Agreement or otherwise, Hancock Jaffe shall also pay and/or reimburse, at the option of the Employee, during the period commencing on the Effective Date through and including the date 30 days following the last day that Employee is working for Hancock Jaffe in California, all payments for (i) a furnished primary residence selected by Employee in the Designated Area, and (ii) an automobile selected by the Employee for the sole use and benefit of Employee, which amount of ongoing payments including both the residence and the automobile shall not, based on the average of twelve months, exceed five thousand dollars ($5,000) per month, which Hancock Jaffe agrees to pay and/or reimburse the Employee for as provided herein. In connection with the expenses of Employee pursuant to this Section 6(g) , Hancock Jaffe shall (x) reimburse Employee upon Employee submission of receipts for expenses; and (y) pay, upon Employee submission of any invoice for any such payments that Employee elects Hancock Jaffe to pay directly to vendor for such residence or automobile. If the Internal Revenue Service or any state or local taxing authority takes the position that the relocation expenses paid or reimbursed subject to this Section 6(g) results in the receipt of taxable income to Employee, such expenses shall include an amount equal to the aggregate Federal, state and local income and employment taxes imposed on Employee as a direct result of such payment or reimbursement in advance.

 

     
   

 

(h) RELOCATION SALARY REDISTRIBUTION. Upon Employee relocation as described herein this Agreement or Amendment, Employee shall receive from Hancock Jaffe, net of withholdings and deductions, a lump sum payment in an amount that is the total of the gross salary that would be due to Employee under Employment Agreement for the last twelve months of Employment Agreement (“Lump-Sum Payment”). Upon Employee receiving such Lump-Sum Payment upon Employee relocation, the last twelve months due Employee under Employment Agreement (including Renewal Term), shall be reduced in the same amount as the Lump-Sum Payment paid to Employee. Accept the last twelve months under Employment Agreement being reduced by the Lump-Sum Payment paid to Employee as described herein, there shall be no other reduction in salary due Employee under Employment Agreement. If and when such Lump-Sum Payment is paid, Hancock Jaffe shall also pay Employee withholdings and deductions associated with such payment. Notwithstanding the terms set forth in this Section 6(h) of this Agreement; (i) such Lump-Sum Payment is subject to claw back if Employee relocation is less than twelve months from the date of this Agreement or Amendment, and (ii) such Lump-Sum Payment and Employee withholdings and deductions shall be paid when Hancock Jaffe raises at least three million dollars ($3,000,000) in one or more closing(s) or fundraisings following the date of Amendment.

 

2.        Effect on the Employment Agreement; Reaffirmation . The Employment Agreement is not modified or amended other than as expressly set forth in this Amendment, 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 by this Amendment. Hancock Jaffe represents, warrants and agrees that commencing on the Effective Date (as defined in the 7/1/2016 Employment Agreement), Hancock Jaffe (i) hereby expressly and knowingly waives any right to terminate the Employment Agreement or Employees’ employment thereunder for any actions and/or lack of actions of Employee or otherwise prior to the Effective Date pursuant to Section 6 of the Employment Agreement (entitled “ Termination ”)” including, but not limited to, Sections 6(b), 6(c), 6(d) and/or 6(e ) thereof, or otherwise, through and including the Effective Date including, but not limited to, for and/or related to facts it may not know on the Effective Date, but subsequently learns of, and (ii) has no claim and hereby expressly and knowingly waives any claim including, but not limited to, pursuant to Section 7(i) of the Employment Agreement, to recover or claw-back any compensation, expenses and/or other payments paid, accrued and/or otherwise due to Employee through and including the Effective Date, whether in cash, securities and/or otherwise including, but not limited to, for and related to facts it may not know on the Effective Date, but subsequently learns of. From and after the Effective Date, all references to the term (i) “ Agreement ” in this Amendment or the Employment Agreement shall include the terms contained in this Amendment, and (ii) except as otherwise expressly provided in this Amendment, “ Effective Date ” in this Amendment shall have the meaning set forth in this Amendment.

 

     
   

 

3.        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.

 

4.        Counterparts . This Amendment may be executed (i) 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 (ii) by facsimile or other electronic transmission of signatures.

 

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 Amendment, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   STEVEN CANTOR
     
/S/ YURY ZHIVILO   /S/ STEVEN CANTOR
Yury Zhivilo, Chairman    

 

     
   

 

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “ Agreement ”) is dated as of June 15, 2017, between Hancock Jaffe Laboratories, Inc., a Delaware corporation company (the “ Company ”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “ Purchaser ” and collectively, the “ Purchasers ”).

 

WHEREAS, the Company is offering Senior Secured Convertible Notes with Warrants to acquire up to that number of Common Shares as is determined in accordance with the terms of the Warrants (the “ Offering ”);

 

WHEREAS, the Company has engaged Alexander Capital for this Offering; and

 

WHEREAS, the Company is conducting this Offering and shall conduct future offerings with a current intention, subject to a number of factors, to effectuate an initial public offering of its shares of Common Stock; and

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “ Securities Act ”), and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:

 

Article I
DEFINITIONS

 

1.1        Definitions . In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Notes (as defined herein), and (b) the following terms have the meanings set forth in this Section 1.1:

 

Acquiring Person ” shall have the meaning ascribed to such term in Section 4.7.

 

Action ” shall have the meaning ascribed to such term in Section 3.1(j).

 

Affiliate ” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

 

Board of Directors ” means the board of directors of the Company.

 

Business Day ” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

     
   

 

Closing ” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.

 

Closing Date ” means the Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the Company’s obligations to deliver the Securities, in each case, have been satisfied or waived.

 

Commission ” means the United States Securities and Exchange Commission.

 

Common Share ” means the common share of the Company, and any other class of securities into which such securities may hereafter be reclassified or changed.

 

Common Share Equivalents ” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Shares, including, without limitation, any debt, preferred share, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Share.

 

Conversion Price ” shall have the meaning ascribed to such term in the Notes.

 

Conversion Shares ” shall have the meaning ascribed to such term in the Notes.

 

Disclosure Schedules ” shall have the meaning ascribed to such term in Section 3.1.

 

Effective Date ” means the earliest of the date that (a) a registration statement covering the Underlying Shares has been declared effective by the Commission, or (b) all of the Underlying Shares have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions.

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

FCPA ” means the Foreign Corrupt Practices Act of 1977, as amended.

 

GAAP ” shall have the meaning ascribed to such term in Section 3.1(h).

 

Indebtedness ” shall have the meaning ascribed to such term in Section 3.1(v).

 

Intellectual Property Rights ” shall have the meaning ascribed to such term in Section 3.1(n).

 

Liens ” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

 

Material Adverse Effect ” shall have the meaning assigned to such term in Section 3.1(b).

 

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Material Permits ” shall have the meaning ascribed to such term in Section 3.1(l).

 

Maximum Rate ” shall have the meaning ascribed to such term in Section 5.15.

 

Notes ” means the Senior Secured Convertible Notes issued by the Company to the Purchasers hereunder, in the form of Exhibit A attached hereto.

 

Interest Rate ” means 15%.

 

Person ” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

Principal Amount ” means, as to each Purchaser, the principal amount of the Note, set forth below such Purchaser’s signature block on the signature pages hereto next to the heading “Principal Amount,” in United States Dollars.

 

Proceeding ” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

Public Information Failure ” shall have the meaning ascribed to such term in Section 4.3(b).

 

Public Information Failure Payments ” shall have the meaning ascribed to such term in Section 4.3(b).

 

Purchaser Party ” shall have the meaning ascribed to such term in Section 4.9.

 

Required Approvals ” shall have the meaning ascribed to such term in Section 3.1(e).

 

Requisite Holders ” shall mean those Purchasers holding Notes having a majority of the aggregate principal amount of all Notes issued pursuant to this Agreement.

 

Required Minimum ” means, as of any date, the maximum aggregate number of Common Shares then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise in full of all Warrants or conversion in full of all Notes, ignoring any conversion or exercise limits set forth therein, and assuming that the Conversion Price is at all times on and after the date of determination 75% of the then Conversion Price on the Trading Day immediately prior to the date of determination.

 

Rule 144 ” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

 

Rule 424 ” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

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Securities ” means the Notes, the Warrants, the Warrant Shares and the Underlying Shares.

 

Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

Short Sales ” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Share).

 

Subscription Amount ” means, as to each Purchaser, the aggregate amount to be paid for Notes and Warrants, which shall equal the Principal Amount, set forth below such Purchaser’s signature block on the signature pages hereto next to the heading “Subscription Amount,” in United States dollars and in immediately available funds.

 

Subsidiary ” means a subsidiary of the Company, as set forth in Section 3.1.

 

Trading Day ” means a day on which the principal Trading Market is open for trading.

 

Trading Market ” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE MKT (formerly NYSE AMEX), the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the Pink OTC Markets (or any successors to any of the foregoing).

 

Transaction Documents ” means this Agreement, the Notes, the Warrants, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.

 

Transfer Agent ” means any transfer agent the Company in the future retains with respect to its shares of Common Stock.

 

Underlying Shares ” means the Common Shares issuable upon conversion or redemption of the Notes and upon exercise of the Warrants.

 

Warrants ” means, collectively, the Common Share purchase warrants delivered to the Purchasers at the Closing, which Warrants shall be exercisable immediately following the Closing Date and have a term of exercise equal to five years, in the form of Exhibit B attached hereto.

 

Warrant Shares ” means the Common Shares issuable upon exercise of the Warrants.

 

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Article II
PURCHASE AND SALE

 

2.1        Closing . On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchasers, severally and not jointly, agree to purchase, the Notes. Each Purchaser shall deliver to the Company, via wire transfer or a certified check, immediately available funds equal to such Purchaser’s Subscription Amount as set forth on the signature page hereto executed by such Purchaser, and the Company shall deliver to each Purchaser its respective Note and a Warrant, as determined pursuant to Section 2.2(a), and the Company and each Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction or waiver of the covenants and conditions set forth in Sections 2.2 and Section 2.3, the Closing shall occur at the offices of Alexander Capital, 17 State Street, New York, NY 10007, or such other location as the parties shall mutually agree. At the Closing, the Company shall execute and deliver the Security Agreement (in the form attached hereto as Exhibit C ) and file a UCC-1 financing statement with the appropriate division of the Secretary of State of Delaware and the Company shall execute, deliver and/or file such other documents as the Purchasers shall reasonably require.

 

2.2        Deliveries .

 

(a)       On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:

 

(i)       this Agreement duly executed by the Company;

 

(ii)       a Note with a principal amount equal to such Purchaser’s Principal Amount, registered in the name of such Purchaser; and

 

(iii)       a Warrant registered in the name of such Purchaser with an exercise price per share equal to the lesser of (a) $7.20 or (b) 120% of the Conversion Price, and to purchase up to a number of Common Shares equal to 50% of the number of Common Shares issuable upon conversion of such Purchaser’s Note at a conversion price per share determined in accordance with the terms of the Note; provided, however, in the event (a) the Company does not consummate an IPO or become public in some other manner on or before January 11, 2018 or (b) an Event of Default (as defined in the Note) occurs and is not cured, the Warrant coverage shall increase from 50% to 75%.

 

(b)       On or prior to the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:

 

(i)       this Agreement duly executed by the Purchaser; and

 

(ii)       such Purchaser’s Subscription Amount by wire transfer to the account specified in writing by the Company.

 

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2.3        Closing Conditions .

 

(a)       The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

 

(i)       the accuracy in all material respects on the Closing Date of the representations and warranties of the Purchasers contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);

 

(ii)       all obligations, covenants and agreements of each Purchaser required to be performed at or prior to the Closing Date shall have been performed; and

 

(iii)       the delivery by each Purchaser of the items set forth in Section 2.2(b) of this Agreement.

 

(b)       The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

 

(i)       the accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);

 

(ii)       all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

 

(iii)       the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement; and

 

(iv)       there shall have been no Material Adverse Effect with respect to the Company since the date hereof.

 

Article III
REPRESENTATIONS AND WARRANTIES

 

3.1        Representations and Warranties of the Company . Except as set forth in the Disclosure Schedule attached hereto (including the exhibits attached to the Disclosure Schedule, collectively, the “ Disclosure Schedule ”), which Disclosure Schedule shall be deemed a part hereof, the Company hereby makes the following representations and warranties to each Purchaser as of the Closing Date:

 

(a)        Subsidiaries . The Company owns, directly or indirectly, all of the Common Shares or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding Common Shares of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.

 

    6  
   

 

(b)        Organization and Qualification . The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, operating agreements, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “ Material Adverse Effect ”; and provided, that changes in the trading price of the Common Share shall not, in and of itself, constitute a Material Adverse Effect) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

 

(c)        Authorization; Enforcement . The Company has the requisite power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s shareholders in connection herewith or therewith other than in connection with the Required Approvals. This Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(d)        No Conflicts . The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Securities and the consummation by it of the transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, operating agreement (including the Operating Agreement), bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

 

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(e)        Filings, Consents and Approvals . The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the filings required pursuant to Section 4.6 of this Agreement and (ii) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “ Required Approvals ”).

 

(f)        Issuance of the Securities . The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents.

 

(g)        Capitalization . Set forth as Schedule 3.1(g) in the Disclosure Schedule is the capitalization of the Company. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. No further approval or authorization of any shareholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no shareholder agreements, voting agreements or other similar agreements with respect to the Company’s Common Shares to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s shareholders

 

(h)        Financial Statements . The Company has delivered to each Purchaser its (i) audited financial statements for the years ended December 31, 2014 and 2015 (the “ Audited Financials ”), and (ii) its unaudited financial statements for the year ended December 31, 2016 (the “ Unaudited Financials ,” and together with the Audited Financials, collectively, the “ Financial Statements ”). The Audited Financial Statements have been prepared in accordance with generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods indicated. The Audited Financial Statements fairly present in all material respects the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities or obligations, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 2016; (ii) obligations under contracts and commitments incurred in the ordinary course of business; and (iii) liabilities and obligations of a type or nature not required under GAAP to be reflected in the Financial Statements, which, in all such cases, individually and in the aggregate would not reasonably be expected to have a Material Adverse Effect.

 

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(i)        Material Changes; Undisclosed Events, Liabilities or Developments . Since the date of the latest Financial Statements, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any Common Shares, and (v) the Company has not issued any equity securities to any officer, director or Affiliate. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Securities contemplated by this Agreement or as set forth on no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its Subsidiaries or their respective businesses, properties, operations, assets or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one Trading Day prior to the date that this representation is made.

 

(j)        Litigation . There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “ Action ”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. Except as set forth on Schedule 3.1(j) , there has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.

 

(k)        Compliance . Neither the Company nor any Subsidiary: (i) has received notice of a claim that it is in default under, or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.

 

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(l)        Regulatory Permits . The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as currently conducted, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“ Material Permits ”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

(m)        Title to Assets . The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for (i) Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries, and (ii) Liens for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.

 

(n)        Intellectual Property . To the Company’s knowledge, the Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights as necessary or required for use in connection with their respective businesses and which the failure to so have could have a Material Adverse Effect (collectively, the “ Intellectual Property Rights ”).

 

(o)        Insurance . The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

 

(p)        Transactions With Affiliates and Employees . None of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from providing for the borrowing of money from or lending of money to, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, shareholder, shareholder or partner, in each case in excess of $150,000 other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits.

 

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(q)        Private Placement . Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby.

 

(r)        Investment Company . The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to registration under the Investment Company Act of 1940, as amended.

 

(s)        Registration Rights . Subject to the lead underwriter, the Company shall use its best efforts to register the Conversion Shares.

 

(t)        Disclosure . All of the disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company, its business and proposed business and the transactions contemplated hereby, including the Disclosure Schedule, to the knowledge of the Company is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

 

(u)        No Integrated Offering . Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act which would require the registration of any such securities under the Securities Act.

 

(v)        Solvency . The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. The Disclosure Schedules set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “ Indebtedness ” means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary received notice of a claim that it is in default with respect to any Indebtedness.

 

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(w)        Tax Status . Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has no material tax obligations for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim.

 

(x)        No General Solicitation . Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

 

(y)        Foreign Corrupt Practices . Neither the Company nor any Subsidiary, nor to the knowledge of the Company or any Subsidiary, any agent or other person acting on behalf of the Company or any Subsidiary, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of the FCPA.

 

(z)        No Disagreements with Accountants and Lawyers . There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s ability to perform any of its obligations under any of the Transaction Documents.

 

(aa)        Acknowledgment Regarding Purchasers’ Purchase of Securities . The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

 

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(bb)        Office of Foreign Assets Control . Neither the Company nor any Subsidiary nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”).

 

(cc)        No Bad Actor Disqualifying Event . No “bad actor” disqualifying event described in Rule 506(d)(1)(i)-(viii) of the Securities Act (a “ Disqualification Event ”) is applicable to the Company or, to the Company’s knowledge, any Company Covered Person, except for a Disqualification Event as to which Rule 506(d)(2)(ii–iv) or (d)(3), is applicable.

 

3.2        Representations and Warranties of the Purchasers . Each Purchaser, for itself and for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein):

 

(a)        Organization; Authority . Such Purchaser is either an individual or an entity duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership, limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by such Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(b)        Own Account . Such Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting such Purchaser’s right to sell the Securities in compliance with applicable federal and state securities laws). Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.

 

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(c)        Purchaser Status . At the time such Purchaser was offered the Securities, it was, and as of the date hereof it is, and on each date on which it exercises any Warrants or converts any Notes it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

 

(d)        Experience of Such Purchaser . Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and is able to afford a complete loss of such investment.

 

(e)        General Solicitation . Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

 

(f)        Certain Transactions and Confidentiality . Other than consummating the transactions contemplated hereunder, such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, executed any purchases or sales, including Short Sales, of the securities of the Company during the period commencing as of the time that such Purchaser first received a term sheet (written or oral) from the Company or any other Person representing the Company setting forth the material terms of the transactions contemplated hereunder and ending immediately prior to the execution hereof. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser’s assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement. Other than to other Persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction).

 

(g)        No Bad Actor . Such Purchaser hereby represents that neither it nor any of its Rule 506(d) Related Parties is a “bad actor” within the meaning of Rule 506(d). For purposes of this Agreement, “Rule 506(d) Related Party” shall mean a person or entity covered by the “Bad Actor disqualification” provision of Rule 506(d).

 

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(h)        Foreign Purchaser . If Purchaser is not a United States person, such Purchaser represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Notes or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Notes, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Notes. Such Purchaser further represents that its payment for, and its continued beneficial ownership of the Notes, will not violate any applicable securities or other laws of its jurisdiction.

 

(i)        Access to Information . Purchaser acknowledges that it has carefully and fully reviewed the Disclosure Schedule and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of representatives of the Company concerning, among other items, those set forth in “ii” below of this Section 3.2(i), that the Purchaser deemed relevant in making a decision to purchase the Securities, the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to all information about the Company including, but not limited to, the terms of the Securities, the Offering, the Company’s business and proposed business, its FDA status with regard to the Company’s products, clinical trials and related items (and any other information regarding the same), its capitalization, the Disclosure Schedule (including exhibits thereto), the Company’s products, the Financial Statements, the financial status and conditions of the Company, the Company’s prospects, management and controlling shareholders and the terms of its outstanding securities to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment including with regard to the items in “ii” above. Purchaser acknowledges that no third party has made or will make any representation or warranty to such Purchaser regarding the adequacy or completeness for such Investor’s purpose of the information such Purchaser as requested.

 

The Company acknowledges and agrees that the representations contained in Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any express representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transaction contemplated hereby.

 

Article IV
OTHER AGREEMENTS OF THE PARTIES

 

4.1        Transfer Restrictions .

 

(a)       The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser, the Company may require the transferor thereof to provide to the Company an opinion of corporate counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall make the representations set forth in Section 3.2, and then shall have the rights and obligations of a Purchaser under this Agreement.

 

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(b)       The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:

 

NEITHER THIS SECURITY NOR ANY SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF CORPORATE COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

4.2        Acknowledgment of Dilution . The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding number of Common Shares, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including, without limitation, its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other shareholders of the Company.

 

4.3        Furnishing of Information; Public Information .

 

(a)       Until the earliest of the time that (i) no Purchaser owns Securities or (ii) the Warrants have expired, and so long as the Company is a reporting company pursuant to the Exchange Act, the Company covenants to maintain the registration of the Common Shares under Section 12(b) or 12(g) of the Exchange Act and to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date thereof pursuant to the Exchange Act even if the Company subsequently is no longer then subject to the reporting requirements of the Exchange Act.

 

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(b)       Following the date that the Company becomes a reporting company pursuant to the Exchange Act and the Securities are eligible to be resold pursuant to Rule 144 and ending at such time that all of the Securities may be sold without the requirement for the Company to be in compliance with Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144, the Company shall fail for any reason to satisfy the current public information requirement under Rule 144(c) (a “ Public Information Failure ”), then, in addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, by reason of any such delay in or reduction of its ability to sell Underlying Shares, an amount in cash equal to two percent (2.0%) of the aggregate Subscription Amount of such Purchaser’s Securities on the day of a Public Information Failure and on every thirtieth (30th) day (pro rated for periods totaling less than thirty days) thereafter until the earlier of (a) the date such Public Information Failure is cured and (b) such time that such public information is no longer required for the Purchasers to transfer the Underlying Shares pursuant to Rule 144. The payments to which a Purchaser shall be entitled pursuant to this Section 4.3(b) are referred to herein as “ Public Information Failure Payments .” Public Information Failure Payments shall be paid on the earlier of (i) the last day of the calendar month during which such Public Information Failure Payments are incurred and (ii) the third (3rd) Business Day after the event or failure giving rise to the Public Information Failure Payments is cured. In the event the Company fails to make Public Information Failure Payments in a timely manner, such Public Information Failure Payments shall bear interest at the rate of 1.5% per month (prorated for partial months) until paid in full. Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Public Information Failure, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The Company shall promptly notify Purchaser of the occurrence of a Public Information Failure.

 

4.4        Integration . The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market such that it would require Common Share holder approval prior to the closing of such other transaction unless Common Share holder approval is obtained before the closing of such subsequent transaction.

 

4.5        Conversion and Exercise Procedures . The form of Notice of Exercise included in the Warrants and the conversion feature included in the Notes set forth the totality of the procedures required of the Purchasers in order to exercise the Warrants or convert the Notes. No additional legal opinion, other information or instructions shall be required of the Purchasers to exercise their Warrants or convert their Notes. The Company shall honor exercises of the Warrants and conversions of the Notes and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents. Each Purchaser agrees and acknowledges that upon written consent of the Company and the Requisite Holders, the aggregate principal amount of all the outstanding Notes shall convert into Common Shares at the Conversion Price. For clarity, such consent by the Requisite Holders shall be binding upon all Purchasers.

 

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4.6        Securities Laws Disclosure; Publicity . The Company and each Purchaser shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby, and neither the Company nor any Purchaser shall issue any such press release nor otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not issue a press release disclosing the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except: (a) as required by state or federal securities laws, (b) to the extent requested by the Commission and (c) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this clauses (b) and (c).

 

4.7        Shareholder Rights Plan . No claim will be made or enforced by the Company or, with the consent of the Company, any other Person, that any Purchaser is an “ Acquiring Person ” under any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers.

 

4.8        Use of Proceeds . The Company shall use the net proceeds from the sale of the Securities hereunder for working capital and general corporate purposes and expenses including related to any IPO the Company is able to undertake. The Company shall not use such proceeds: (a) for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), (b) for the redemption of any Common Share or Common Share Equivalents, (c) for the settlement of any outstanding litigation or (d) in violation of FCPA or OFAC regulations.

 

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4.9        Indemnification of Purchasers . Subject to the provisions of this Section 4.9, the Company will indemnify and hold each Purchaser and its directors, officers, shareholders, shareholders, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, shareholders, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling persons (each, a “ Purchaser Party ”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against the Purchaser Parties in any capacity, or any of them or their respective Affiliates, by any shareholders of the Company who is not an Affiliate of such Purchaser Party, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser Party’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser Party may have with any such shareholder or any violations by such Purchaser Party of state or federal securities laws or any conduct by such Purchaser Party which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents. The indemnification required by this Section 4.9 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, in a commercially reasonable manner. The indemnity agreements contained herein shall be in addition to any cause of action or similar right of any Purchaser Party against the Company or others and any liabilities the Company may be subject to pursuant to law. For the avoidance of doubts, no officers, directors, employees, or shareholders of the Company shall be held personally liable under this Section 4.9.

 

4.10        Reservation and Listing of Securities . The Company shall, if applicable: (i) in the time and manner required by the principal Trading Market, prepare and file with such Trading Market an additional Common Shares listing application covering a number of Common Shares at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such Common Shares to be approved for listing or quotation on such Trading Market as soon as commercially reasonable thereafter, (iii) provide to the Purchasers evidence of such listing or quotation and (iv) maintain the listing or quotation of such Common Shares on any date at least equal to the Required Minimum on such date on such Trading Market or another Trading Market.

 

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4.11        Equal Treatment of Purchasers . No consideration (including any modification of any Transaction Document) shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration is also offered to all of the parties to this Agreement. Further, the Company shall not make any payment of principal or interest on the Notes in amounts which are disproportionate to the respective principal amounts outstanding on the Notes at any applicable time. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.

 

4.12        Short Sales and Confidentiality After the Date Hereof . Each Purchaser, severally and not jointly with the other Purchasers, represents and covenants that neither it, nor any Affiliate acting on its behalf or pursuant to any understanding with it, has executed any purchases or sales, including Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced. Each Purchaser, severally and not jointly with the other Purchasers, represents and covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company, such Purchaser will maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents and the Disclosure Schedules.

 

4.13        Form D; Blue Sky Filings . The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the Closing under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly upon request of any Purchaser.

 

4.14        Initial Public Offering; Resale Registration Rights . The parties acknowledge that the Company intends to file a registration statement on a confidential basis for its underwritten initial public offering (“IPO”), which it intends to pursue as soon as reasonably practicable and subject to applicable legal requirements and market conditions. Promptly following the date of the Company’s IPO or the date of the Company’s public listing but no later than 90 days following such date (subject further to any required underwriter lock-ups or restrictions but in no event later than 180 days following the date of the Company’s IPO or the date of the Company’s public listing), the Company shall prepare and file with the U.S. Securities and Exchange Commission a registration statement on Form S-1 or other applicable form (the “Registration Statement”) providing for the resale of all of the Underlying Shares. The Company will pay all expenses associated with such registration, including filing and printing fees, the Company’s counsel and accounting fees and expenses, costs associated with clearing the Underlying Shares for sale under applicable state securities laws, listing fees, fees and expenses of one counsel to the Holders up to a maximum amount of $5,000 and the Holders’ reasonable expenses in connection with the registration, but excluding discounts, commissions, fees of underwriters, selling brokers, dealer managers or similar securities industry professionals with respect to the Underlying Shares being sold. The Company shall use commercially reasonable efforts to have the Registration Statement declared effective as promptly as practicable. The Company shall notify the Holders by facsimile or e-mail as promptly as practicable, and in any event, within forty-eight (48) hours, after any Registration Statement is declared effective and shall simultaneously provide the Holders with copies of any related Prospectus to be used in connection with the sale or other disposition of the securities covered thereby.

 

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Article V
MISCELLANEOUS

 

5.1        Termination . This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before June 30, 2017; provided , however , that such termination will not affect the right of any party to sue for any breach by any other party (or parties).

 

5.2        Fees and Expenses . Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all Transfer Agent fees (including, without limitation, any fees required for same-day processing of any instruction letter delivered by the Company and any conversion or exercise notice delivered by a Purchaser), stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchasers.

 

5.3        Entire Agreement . The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

 

5.4        Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via e-mail or facsimile at the e-mail address or facsimile number set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail or facsimile at the e-mail address or facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.

 

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5.5        Amendments; Waivers . The Transaction Documents shall not be amended, and no provision of the Transaction Documents may be waived, except upon written consent of the Company and the Requisite Holders. Each Purchaser acknowledges that (i) in the event of a conflict, this provision controls all Transaction Documents regarding the subject matter hereof, and (ii) an amendment of the Transaction Documents (or waiver of any provision of the Transaction Documents) may occur by consent of the Requisite Holders and shall be binding upon all Purchasers.

 

5.6        No Short Sales . For as long as any Purchaser holds Securities, neither the Purchaser nor any of its Affiliates nor any entity managed or controlled by each such Purchaser will, directly or indirectly, or cause or assist any Person to (x) enter into any Short Sale or (y) trade in derivative securities to the same effect. For instance, no Purchaser shall engage in any Short Sale which would prevent the Company from exercising its rights under Section 6 of the Note.

 

5.7        Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Purchasers.”

 

5.8        No Third-Party Beneficiaries . This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.9 and this Section 5.8.

 

5.9        Governing Law . All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

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5.10        Survival . The representations and warranties contained herein shall survive the Closing and the delivery of the Securities until the earlier of (i) one year following the Closing Date and (ii) the date the Notes are no longer outstanding.

 

5.11        Execution . This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to each other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

 

5.12        Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

5.13        Replacement of Securities . If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and an indemnification relating thereto. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.

 

5.14        Remedies . In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in the Transaction Documents and hereby agree to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

 

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5.15        Payment Set Aside . To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

5.16        Usury . To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the “ Maximum Rate ”), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date thereof forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser’s election.

 

5.17        Independent Nature of Purchasers’ Obligations and Rights . The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in its review and negotiation of the Transaction Documents.

 

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5.18        Liquidated Damages . The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.

 

5.19        Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.

 

5.20        Construction . The parties agree that each of them and/or their respective counsel have reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments thereto. In addition, each and every reference to Common Share prices and Common Shares in any Transaction Document shall be subject to adjustment for reverse and forward Common Share splits, Common Share combinations and other similar transactions of the Common Shares that occur after the date of this Agreement.

 

5.21        WAIVER OF JURY TRIAL . IN ANY ACTION, SUIT, OR PROCEEDING IN ANY JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER TRIAL BY JURY.

 

(Signature Pages Follow)

 

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

HANCOCK JAFFE LABORATORIES, INC   Address for Notice :
       
      70 Doppler
      Irvine, CA 92618
By: /S/ WILLIAM ABBOTT   Fax : (949) 261-2992
  William Abbott   Email : billabbott@hjlinc.com
  Chief Financial Officer    

 

with a copy to (which shall not constitute notice):    
Michael Hedge   1 Park Plaza, 12 th Floor
K&L Gates, LLP   Irvine, CA 92614
      Fax: (949) 623-4454
      Email: michael.hedge@klgates.com

 

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SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

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IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

Name of Purchaser:

 

Signature of Authorized Signatory of Purchaser: __________________________________________________________

 

Name of Authorized Signatory: _______________________________________________________________________

 

Title of Authorized Signatory: ________________________________________________________________________

 

Email Address of Authorized Signatory: ________________________________________________________________

 

Facsimile Number of Authorized Signatory: ______________________________________________________________

 

Address for Notice to Purchaser: _____________________________________________________________________

 

Address for Delivery of Securities to Purchaser

(if not same as address for notice): ____________________________________________________________________

 

Subscription Amount (dollar amount paid for the Notes): $ _________________________________________________

 

Principal Amount (Subscription Amount): $ _____________________

 

Conversion Shares: (Principal Amount / $6.00): __________________Conversion Shares

 

Warrant Shares: (50% of Conversion Shares):________________ Warrant Shares

 

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[INSERT DISCLOSURE SCHEDULE HERE]

 

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Exhibit A

 

Form of Note

 

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Exhibit B

 

Form of Warrant

 

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Exhibit C

 

Form of Security Agreement

 

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PROMISSORY NOTE

 

$160,000.00 June 15, 2017

 

For value received, the undersigned Hancock Jaffe Laboratories Aesthetics, Inc., (the “Borrower”), located at 70 Doppler, Irvine, California 92618, promises to pay to the order of Hancock Jaffe Laboratories, Inc (the “Lender”), located at 70 Doppler, Irvine, California 92618, (or at such other place as the Lender may designate in writing) the sum of $160,000.00 (the “Principal”) with interest from June 15, 2017, on the unpaid principal at the rate of 15% per annum.

 

The unpaid principal and accrued interest on this Promissory Note (the “Note”) shall be due and payable in full on September 15, 2017 (the “Due Date”).

 

The Borrower reserves the right to prepay this Note (in whole or in part) prior to the Due Date with no prepayment penalty.

 

If payment under this Note is not paid when due, the Borrower promises to pay all costs of collection, including reasonable attorney fees, whether or not a lawsuit is commenced as part of the collection process.

 

If any of the following events of default occur, this Note and any other obligations of the Borrower to the Lender, shall become due immediately, without demand or notice:

 

  1. the failure of the Borrower to pay the principal and any accrued interest in full on or before the Due Date;
  2. the death of the Borrower or Lender;
  3. the filing of bankruptcy proceedings involving the Borrower as a debtor;
  4. the application for the appointment of a receiver for the Borrower;
  5. the making of a general assignment for the benefit of the Borrower’s creditors;
  6. the insolvency of the Borrower
  7. a misrepresentation by the Borrower to the Lender for the purpose of obtaining or extending credit.

 

If any one or more of the provisions of this Note are determined to be unenforceable, in whole or in part, for any reason, the remaining provisions shall remain fully operative.

 

All payments of principal and interest on this Note shall be paid in the legal currency of the United States. The Borrower waives presentment for payment, protest, and notice of protest and nonpayment of this Note.

 

No renewal or extension of this Note, delay in enforcing any right of the Lender under this Note, or assignment by Lender of this Note shall affect the liability or the obligations of the Borrower. All rights of the Lender under this Note are cumulative and may be exercised concurrently or consecutively at the Lender’s option.

 

 

 

 

This Note shall be interpreted and governed in accordance with the laws of the State of California, United States of America without regard to principles of conflict of laws. The parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of the state and federal district courts located in California, waive any objection to forum or venue and agree to accept service of process by mail in any action arising out of this Note. In the event of litigation relating to this Note, the prevailing party shall be entitled to recover from the other party its costs and expenses (including, without limitation, legal fees and expenses) incurred in connection with such litigation.

 

IN WITNESS WHEREOF, the parties have caused this Note to be executed as of the day and year first above written and agree to the above terms and acknowledge receipt of a copy of this Note.

 

Lender:

Hancock Jaffe Laboratories, Inc.

 

/s/: William R. Abbott

 

William R. Abbott

Chief Financial Officer

 

Borrower:

Hancock Jaffe Laboratories Aesthetics, Inc.

 

/s/: Vitaly Suslov

 

Vitaly Suslov

Chairman of the Board

 

2

 

 

 

 

 

 

 

PROMISSORY NOTE

 

$11,350.00 August 22, 2017

 

For value received, the undersigned Hancock Jaffe Laboratories Aesthetics, Inc., (the “Borrower”), located at 70 Doppler, Irvine, California 92618, promises to pay to the order of Hancock Jaffe Laboratories, Inc (the “Lender”), located at 70 Doppler, Irvine, California 92618, (or at such other place as the Lender may designate in writing) the sum of $11,350.00 (the “Principal”) with interest from August 22, 2017, on the unpaid principal at the rate of 15% per annum.

 

The unpaid principal and accrued interest on this Promissory Note (the “Note”) shall be due and payable in full on September 15, 2017 (the “Due Date”).

 

The Borrower reserves the right to prepay this Note (in whole or in part) prior to the Due Date with no prepayment penalty.

 

If payment under this Note is not paid when due, the Borrower promises to pay all costs of collection, including reasonable attorney fees, whether or not a lawsuit is commenced as part of the collection process.

 

If any of the following events of default occur, this Note and any other obligations of the Borrower to the Lender, shall become due immediately, without demand or notice:

 

  1. the failure of the Borrower to pay the principal and any accrued interest in full on or before the Due Date;
  2. the death of the Borrower or Lender;
  3. the filing of bankruptcy proceedings involving the Borrower as a debtor;
  4. the application for the appointment of a receiver for the Borrower;
  5. the making of a general assignment for the benefit of the Borrower’s creditors;
  6. the insolvency of the Borrower
  7. a misrepresentation by the Borrower to the Lender for the purpose of obtaining or extending credit.

 

If any one or more of the provisions of this Note are determined to be unenforceable, in whole or in part, for any reason, the remaining provisions shall remain fully operative.

 

All payments of principal and interest on this Note shall be paid in the legal currency of the United States. The Borrower waives presentment for payment, protest, and notice of protest and nonpayment of this Note.

 

No renewal or extension of this Note, delay in enforcing any right of the Lender under this Note, or assignment by Lender of this Note shall affect the liability or the obligations of the Borrower. All rights of the Lender under this Note are cumulative and may be exercised concurrently or consecutively at the Lender’s option.

 

 

 

 

This Note shall be interpreted and governed in accordance with the laws of the State of California, United States of America without regard to principles of conflict of laws. The parties hereby irrevocably and unconditionally submit to the exclusive jurisdiction of the state and federal district courts located in California, waive any objection to forum or venue and agree to accept service of process by mail in any action arising out of this Note. In the event of litigation relating to this Note, the prevailing party shall be entitled to recover from the other party its costs and expenses (including, without limitation, legal fees and expenses) incurred in connection with such litigation.

 

IN WITNESS WHEREOF, the parties have caused this Note to be executed as of the day and year first above written and agree to the above terms and acknowledge receipt of a copy of this Note.

 

Lender:

Hancock Jaffe Laboratories, Inc.

 

/s/: William R. Abbott

 

William R. Abbott

Chief Financial Officer

 

Borrower:

Hancock Jaffe Laboratories Aesthetics, Inc.

 

/s/: Vitaly Suslov

 

Vitaly Suslov

Chairman of the Board

 

2

 

 

 

 

 

 

Independent Registered Public Accounting Firm’s Consent

 

We consent to the inclusion in this Registration Statement of Hancock Jaffe Laboratories on Form S-1 Amendment No. 1 [File No. 333-220372] of our report dated September 6, 2017, except for Note 16, as to which the date is ___________ , 2017, which includes an explanatory paragraph as 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.

 

Marcum LLP

New York, NY

_________, 2017

 

The forgoing consent is in the form that will be signed upon the completion of the reverse stock split described in Note 16 to the financial statements.

 

/s/ Marcum LLP  
   
Marcum LLP  
New York, New York  
November 3 , 2017